Page 23 - TURKRptJul19

economies in Europe and Central Asia region. “However, the experience of Turkey is a stark reminder of the risk of sudden shifts in investor sentiment—in particular for countries with large current account deficits or reliance on potentially volatile capital inflows, high external debt loads, or sizeable foreign- currency-denominated debt (Belarus, Croatia, Georgia, Kyrgyz Republic, Moldova, Tajikistan, Ukraine),” it added.
Risk of structural reform reversal. Looking at the worsening trade war situation caused by the Trump administration’s fights with China, Mexico and India, among others, the report reflected: “Further escalation of international trade restrictions could have a negative impact on the region, given its openness to trade and capital flows. A reversal of structural reforms remains a risk in many countries, especially Armenia, Azerbaijan, Belarus, Turkey, and Ukraine. Renewed conflict in the Syrian Arab Republic or Ukraine could trigger new sanctions.” Growth in the Europe and Central Asia region is projected in the June Global Economic Prospects report to sharply decelerate to a four- year low in 2019 of 1.6%, down from 3.1% in 2018, and 0.7pp lower than the previous World Bank forecast. It reflected “weaker-than-expected activity in Turkey and Russia, as well as some smaller economies”. In a note on monetary policy across Europe and Central Asia (ECA), the report observed: “In response to deteriorating global growth prospects, central banks in major economies have provided additional monetary policy accommodation since the start of 2019, resulting in easing global financing conditions. The tightening cycle in monetary policy in 2018 has paused in ECA, with some economies cutting policy rates (Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, North Macedonia, Ukraine) or leaving them unchanged in 2019, but overall policy rates in some large ECA economies remain higher than in 2018 (Russia, Turkey).”
“Corporate fragility”. Recapping on how the Turkish economy slowed sharply and entered a recession in the second half of 2018, the World Bank said in its report that “the downturn was triggered by corporate fragility stemming from rising levels of debt, often denominated in foreign currency, and exacerbated by policy uncertainty”. It added: “This led to significant pressure on financial markets and the value of the lira... The deceleration of activity was partly driven by significant financial outflows from Turkey amid market concerns about high current account deficits and policy developments, which led to sharp falls in investment and private consumption.” The report added: “The baseline projection for regional growth is predicated on the assumption that Turkey’s economy bottoms out in 2019 and that spillovers from slowing growth in the Euro Area are limited. The baseline also assumes no further escalation in trade tensions between the United States and China or other major trading partners, no disorderly exit from the European Union by the United Kingdom, and an absence of policy missteps in economies that recently suffered acute financial stress—mainly Turkey.”
Turkish construction sector expected to shrink more than 10% in Q2.
Turkey’s construction sector, which has been suffering from weak demand, is expected to shrink more than 10% in the second quarter, according to the Construction Materials Producers’ Association (IMSAD). “Producers are having problems collecting their receivables from developers while new orders keep declining,” said Ferdi Erdogan, the head of the association. Erdogan noted that companies are not able to reflect the cost increases in their sales prices because of poor demand. “Prices of natural gas, imported inputs and labour ... they all soared last year. Our costs rose some 45% but we could hike our prices only 25% in 2018,” he said, adding that costs have already gone up 15% in the first five months of 2019. “Demand for our products remain too weak,” Erdogan complained. The country’s statistics authority TUIK repored last month that home sales across the country declined by 16% y/y to 340,836 units in the first four months of the year. Separate data from the country's central bank provided an even gloomier picture. House prices (in real terms) plunged 14% y/y in April. Can Fuat Gurlesel, an economic advisor to IMSAD, predicts that the Turkish economy probably contracted 1.5% in the second quarter of this year. According to Gurlesel, the contraction in the construction
23 TURKEY Country Report July 2019 www.intellinews.com