Turkish lira pares gains as new economic plan comes out

Summary:

• Turkey vows to slash public spending by nearly $10 billion, GDP projections have been cut considerably as well

• Inflation seen to be double-digit this and the following year and then to fall modestly below 10%

• Lira trims previous gains as investors were looking for yet more conservative GDP forecasts

The lira pared most of its previous gains after Turkey’s finance minister unveiled the country’s new economic plan aimed at dealing with the currency crisis. Even as the presented plan showed much slower GDP growth assumptions as well as some cuts of public spending, it turned out to fall short of investors’ expectations who had had yet more conservative demands. Below we present the major points coming from the speech delivered by Turkish finance minister Berat Albayrak:

GDP:

• 2018 seen at 3.8% compared to 5.5% previously

• 2019 at 2.3% vs. 5.5%

• 2020 and 2021 seen at 3.5% and 5% respectively

CPI:

• 2018 seen at 20.8% compared to 7% previously

• 2019 at 15.9% vs. 6%

• 2020 at 9.8% vs. 5%

Budget deficit:

• 2018 seen at 1.9% compared to 1.9% previously

• 2019 at 1.8% vs. 1.9%

• 2020 at 1.9% vs. 1.6%

On top of that, the current account deficit is forecast to shrink gradually from 4.7% this year through 3.3% in the following year and 2.7% in 2020 reflecting the currency depreciation and slower economic growth. Finance minister also said that public spending will be cut by $10 billion whereas large infrastructure projects, which have yet to be tendered out, will be suspended. The plan looks doable but still economic growth projections may be seen as too optimistic given a giant blow to the economy which has come from the currency’s plunge. Why has the lira declined? Investors’ expectations had been yet more demanding as they had looked for even more conservative GDP assumptions. In addition, they also thought that Turkey would set up a “bad bank” to transfer bad loans to the state from banks. Instead, Albayrak said that banks would undergo “health assessment studies” to identify their financial structure and asset quality.