Another year comes to an end and we all have certain expectations from Turkish economy. Firstly, let me offer you my GDP growth forecast:
Contrary to others’ expectations, I expect a GDP growth rate around 4 percent, provided nothing bad happens domestic/external relations-wise. But, the performance in the first quarter is the key. I’m sure expectations survey and indices will guide us through when making more accurate forecasts.
I find it unlikely that inflation rate will hit single digit yet, but this might happen anytime now, which means we could finish the year with an inflation rate around 10 percent. The only reason why I’m telling this is because so far the trend hasn’t give me the impression that inflation will touch single digit. On the other hand, as the positive aspect of the basis effect was recently over, it will be quite hard for the economy to achieve its year-end goal if we face an inflation rate above 1% in any given month. As I have mentioned in my previous reports, I anticipate that average monthly inflation will not exceed 0.7%.
Obviously, projections for the current account deficit are calculated based on growth expectations. As I expect the deficit to turn out to be one point higher than the expected rate when compared to other economists’ expectations, I naturally think the ratio of the current account deficit to GDP will turn out to be higher than expected. Given the fact that foreign currency earning activities are likely to increase in 2020, I expect the ratio of the current account deficit to GDP will not be higher than 3%. However, as Turkish economy continues to grow, current account deficit may become a recurring problem, because the government hasn’t yet taken any step to solve structural issues.
As for the calculation of budget deficit/GDP ratio: Turkey’s budget deficit/GDP ratio exceeds the ratios specified in the previous economic plan. That is to say, Turkey is running a budget deficit one point higher than expected. But our new redline for budget deficit is apparently 3%. I just hope it stays that way.
I am rather concerned about the primary surplus. If we can manage to restrain real interest payments within a three-point limit and then we achieve a GDP around 4%, we can say goodbye to 2020 with a minimum ratio of primary surplus to GDP approximately 1%. But my conscious tells me that if public spending keeps rising, the government will have to invent new ways to achieve primary surplus. To be perfectly honest, Turkey will face some great challenges achieving budget discipline, unless it brings government spending under control. By the way, I need to remind you that budget discipline primarily aims to avoid unnecessary spending by abiding by the budget, not to generate revenue to finance government spending.
“Let’s not be too hasty! Patience is key…”
Obviously, unemployment is an important issue that needs urgent attention. However, the present growth model isn’t useful in anyway, especially in terms of helping unemployment fall to single digit. I regret to say that we might witness unemployment to grow even larger as GDP growth continues to increase. I notice that some experts are still insisting that there is a direct correlation between GDP growth rate and unemployment. However, no one seen such correlation through the course of last three years. Government must understand that they won’t be able to reduce unemployment rate by trying to create jobs only in construction industry and other conventional sectors. I project an unemployment rate of 11-12% for 2020.
Now, it’s time for my FX rate predictions: As I mentioned above, if nothing bad happens domestic/external relations-wise, I don’t think that 2020 will be a rough year in terms of FX rate volatility. This year the maximum level of tolerance for USD/TRY exchange rate was 6.35. Luckily, the duo didn’t even hit this level now we’ve only got a few days left before the New Year. Always remember that, in Turkey, it is the politics that determine the direction of FX, but the trend takes shape depending on economic fragilities.
Before I conclude, I’d like us to take a quick look at interest rates: I don’t suppose CBRT will lower interest rates to single digit in 2020 even though the central bank will have every chance to do it. I’m pretty sure that CBRT would first look at inflation rate and then decide what to do with interest rates. But, we should know that the government will be eager to interfere with the CBRT’s decision. So, there’s a high likelihood that interest rates will hit double digits again even though they are lowered to single digit for a short while using the trial and error method.