Credit rating agency Moody’s has slashed its forecasts for Turkey’s economic growth, citing deepening market pressure and growing risks.
Moody’s said in its global macroeconomic outlook report on Wednesday that its forecast for Turkey’s gross domestic product growth has been dropped to 2,5 percent this year from 4 percent.
The agency also decreased the forecast for 2019 to 2 percent from 3,5 percent. The Turkish economy grew 7,4 percent last year.
President Recep Tayyip Erdoğan’s recent remarks on increasing his control over monetary policy after the presidential and parliamentary elections on June 24 “further damaged the credibility of the Turkish Central Bank’s inflation-targeting framework,” Moody’s said.
Erdoğan’s remarks to investors in London earlier this month also “weakened the Central Bank’s independence, another blow to the rule of law,” the report said.
“Turkey’s lira came under greater pressure than other emerging market currencies over the last few weeks, with the delayed policy response from the central bank exacerbating the fall,” it stated.
“A worsening of internal and external imbalances, along with a reliance on short-term funding, has increased susceptibility to rising global interest rates and currency depreciation. Foreign currency exposure of the banking sector as well as corporate sectors present additional financial stability risks,” it added.
The lira has lost 19 percent of its value against the greenback since the start of April. The central bank boosted its lending rate from 13,5 percent to 16,5 percent on May 23 in a bid to defend the lira, which later recouped some of its losses.
The lira kept surging this week after the central bank announced on May 28 that it had decided to complete a simplification process for the operational framework of its monetary policy. “The one-week repo rate will be the policy rate of the Central Bank. This rate will be equal to the current funding rate (16,5 percent),” the bank stated.
The Turkish lira gained value and firmed to 4,55 against the US dollar after a central bank decision on Monday “to complete the simplification process regarding the operational framework of monetary policy.”
According to the new model, the one-week repo rate will be the policy rate and equal to the current funding rate, which is 16,5 percent. In addition, the overnight borrowing and lending rates will be 150 basis points above or below the one-week repo rate. The central bank was previously using a model called multiple rates, which made monetary policy less predictable for investors.
“The new operational framework will take effect on 1 June 2018,” the central bank’s statement said.
This move led the Turkish lira to rebound quickly on Monday, making it the best performing emerging market currency for the day. On May 24, the Turkish lira hit a record, falling to 4,92 against the US dollar.
Meanwhile, Turkey’s economic confidence slid to the lowest level since February of last year after the lira slumped to record lows against the dollar and the central bank increased interest rates. Confidence dropped to 93,5 in May from 98,3 in April in a fourth month of declines, data from the Turkish Statistics Institute showed on Wednesday. A reading below 100 shows pessimism about the future.
Consumer, services, manufacturing, retail trade and construction confidence all fell. Confidence in services led the declines, dropping to 92 from 97,1. Confidence in manufacturing, or the real sector, was the only sub index to remain in positive territory, edging down to 106,7 from 106,8.
Manufacturers have received tens of billions of dollars in loan guarantees and investment incentives from the government over the past year as it sought to stimulate economic growth ahead of elections. Exporters are also benefitting from the cheaper lira, which makes their goods more competitive in terms of price. Retail trade confidence fell to 97,1 from 100,3.
The economic confidence index is a composite index that encapsulates consumers’ and producers’ evaluations, expectations and tendencies about the general economic situation in Turkey.