Page 9 - DMEA week 23

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in the early 2000s.”
Turning to Turkey, hit by a currency crisis
last summer which some observers fear could be repeated this year, the report said: “In Tur- key, growth is expected to be weighed down by increased in ation and associated pressure on real incomes, banking and corporate sector deleveraging following several years of rapid credit growth, and low business and consumer con dence.
“Activity is expected to bottom out in 2019, with annual growth contracting 1 percent, but the recent are up in nancial market pressures highlight that downside risks remain sharply ele- vated. e recovery is assumed to strengthen in 2020 through gradual improvement in domestic demand and continued strength in net exports, provided that scal and monetary policy avert further sharp falls in the lira and corporate debt restructurings help avoid serious damage to the nancial system.”
e report also noted that the nancial stress in Turkey has had limited spillovers to other economies in Europe and Central Asia region.
“however, the experience of Turkey is a stark reminder of the risk of sudden shi s in investor sentiment—in particular for countries with large current account de cits or reliance on potentially volatilecapitalin ows,highexternaldebtloads, 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 re ected: “Further escalation of inter- national trade restrictions could have a nega- tive impact on the region, given its openness to trade and capital ows. A reversal of structural reforms remains a risk in many countries, espe- cially 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 Eco- nomic 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 previ- ous World Bank forecast. It reflected “weak- er-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 pros- pects, central banks in major economies have provided additional monetary policy accommo- dation since the start of 2019, resulting in easing global nancing conditions.
e tightening cycle in monetary policy in 2018 has paused in ECA, with some economies cutting policy rates (Armenia, Azerbaijan, Geor- gia, Kazakhstan, Kyrgyz Republic, North Mace- donia, 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 exacerbatedbypolicyuncertainty”.
It added: “This led to significant pres- sure on nancial 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 cur- rent account de cits and policy developments, which led to sharp falls in investment and private consumption.”
e report added: “ e baseline projection for regional growth is predicated on the assump- tion that Turkey’s economy bottoms out in 2019 and that spillovers from slowing growth in the Euro Area are limited. e 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 su ered acute nancial stress—mainly Turkey.”™
Week 23 13•June•2019 w w w . N E W S B A S E . c o m P9