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Dutch bank forecasts Turkish economy will shrink 3 percent in 2019

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Turkey will face a severe economic crisis in 2019 that will result in a contraction of the economy by 3 percent and further the Turkish lira’s plunge to 8.2 against the US dollar, according to a report published by Dutch bank ABN AMRO on Tuesday.

The report, regularly published by the bank under the title “Turkey Watch,” changed its base case scenario for the Turkish economy in light of recent developments and predicted a deep recession in 2019 as part of the new scenario.

“We expect the US-Turkey relationship to deteriorate further,” the report pointed out, referring to the recent tit-for-tat exchange of sanctions between the two countries over the prolonged imprisonment of American pastor Andrew Brunson in Turkey, which has triggered a sharp decline in the value of the Turkish lira.

According to the report, the US-Turkey relationship will be tested by a number of other issues as well, such as US support for the Kurdish People’s Protection Units (YPG) in Syria, Turkey’s purchase of Russian S-400 missile defense systems and a possible fine by US authorities on Turkish Halkbank, which is accused of violating sanctions against Iran.

“While the proximate cause of the recent sharp currency deprecation may have been the diplomatic spat between Turkey the US, the ultimate cause lay deeper. The country has experienced a decade-long credit boom, largely funded by ‘cheap’ dollars and euros on international markets and funded by the government-backed Credit Guarantee Fund [CGF] loan scheme. According to the latest Article IV consultation by the IMF, a large part of this cheap credit was spent on non-productive investments such as the real estate market,” the report said.

Sharply rising inflation rates that are trending towards 18 percent may push President Recep Tayyip Erdoğan to reconsider his strategy to keep interest rates low and to choose to fight inflation instead. Even so, the annual inflation rate is expected to be around 21 percent by the end of this year.

The report’s other predictions include more FX funding problems to be faced by banks and a worsening of the government’s fiscal position as a result of possible requests of support by banks and corporations.

Turkey is unlikely to request support from the IMF in the near future since Erdoğan will not agree to the conditions the IMF will attach to a loan as these will certainly entail higher interest rates and an independent central bank, the report said. But if Turkey ultimately needs support, the IMF will be open to negotiations while the US will be able to effectively block IMF financial support since it has 17 percent of the votes.

The report pointed out that only $3 billion of the $15 billion provided by Qatar to Turkey has been in cash funding. Other GCC countries, Russia and China are not expected to solve the funding shortage. It also said that a coordinated European bailout is unlikely since it would cause complications with European electorates.

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