Moody’s warns of sharp contraction in Turkey’s economy

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Moody's, leading international credit rating institution, is seen on the photo in New York, United States on 21 May, 2014. Cem Ozdel / Anadolu Agency

Declines in the Turkish lira, one of this year’s worst performers globally, will translate into sharp economic contraction as growth decelerates across advanced and emerging markets, global credit agency Moody’s said in a report published on Thursday, according to Bloomberg.

Turkey’s inflation is hovering near the fastest pace since President Recep Tayyip Erdoğan came to power 15 years ago, and high interest rates are clouding the investment outlook. Despite recouping some losses, the lira is still down 30 percent for the year against the dollar.

“Double-digit inflation, a steep increase in borrowing costs and curtailed bank lending are likely to weigh on household purchasing power, private consumption” and investment, Moody’s said.

The IMF echoed Moody’s warning, predicting that Turkish economic growth would slip to 0.4 percent in 2019 from 3.5 percent this year. “The weaker lira, higher borrowing costs, and elevated uncertainties weigh on investment and demand,” the fund said in a report published Thursday.

Moody’s sees Turkey’s economy growing 1.5 percent in 2018 and contracting 2 percent the following year.

Turkey also has to contend with elevated inflation despite the worsening outlook for its economy. Moody’s expects Turkish price growth, which accelerated to an annual 25.2 percent in October, to remain in double digits through 2020 because of unanchored inflation expectations, spurred by pressure from the exchange rate and oil.

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