Turkey's annual inflation rate for 2017 is expected to reach 10.8 percent this year and 7.9 percent next year, a senior Standard & Poor's (S&P) analyst said yesterday.
Frank Gill, senior director of sovereign ratings at S&P Global Ratings, said a weaker Turkish lira weighed on the prices in the country.
"Now, one of the negative effects of a weaker lira is higher inflation. Some of the nominal depreciation seems to have already been inflated away," he said in an interview with Anadolu Agency (AA).
One U.S. dollar traded for 3.86 liras yesterday, up from the 3.57 seen on Sept. 29, marking a 5.6 percent monthly hike in the dollar-lira exchange rate. The average dollar-lira exchange rate was 3.66 in October and 3.47 in September, while the 10-month average rate was 3.61.
The country's annual inflation rose to 11.9 percent in October from 11.2 percent in September according to a report from the Turkish Statistical Institute (TurkStat).
Turkey's credit rating outlook was cut to negative from stable by S&P on Feb. 7, 2014, citing a growing risk of a "hard economic landing," as reserves continue to decline and policymakers spar over interest rates.
"There is no change. We have reaffirmed the government bond ratings. Turkey has been one of our most stable sovereign ratings since 1994 and rated within the BB category," Gill said.
"We have been flagging the same concerns for quite a long time ... the large current account deficit, low savings rates and dependency on potentially unpredictable capital flows to finance the current account deficit. ... Those continue to be our concerns in relation to credit weaknesses. The growth data was strong, and we revised our expectations [upwards] for the GDP [gross domestic product] this year," he explained.
Gill said the acceleration of growth in 2017 compared to last year was explained by a more accommodative fiscal stance, including other tax incentives that stimulate consumption.
"And number two, measures have been taken to push up credit growth, such as the credit guarantee scheme and new incentives to stimulate mortgage lending alongside macro-prudential easing. So it's a combination of credit growth and fiscal stimulus," he added.
Gill noted that S&P expects the economy to start slowing down again in 2018 and 2019.
"While we understand why a large current account deficit exists given the young population and high investment requirements, when we compare different credits, we often generally consider a large deficit on the current account as the early indicators of economic volatility," he stated.
Gill said they forecasted Turkey to grow by 5 percent in 2017 and 3.5 percent next year. He added that Turkey's growth rate was projected to stand at 3.2 percent in 2019 and 2020.
Turkey's economy grew 5.2 percent in the first quarter of this year and 5.1 percent in the second quarter, compared with the same periods in 2016, according to the Turkish Statistical Institute (TurkStat).
Turkey's current account deficit is expected to be 4.5 percent of its GDP in 2017 and 2018, he said.
Gill said private investment was absent from the economic development of the country.
"I think what is lacking in economic development is private investment. What has been happening over the last few years is a fairly significant increase in public investment," he said.
Gill also pointed out that there were some indicators for a stronger tourism season next year.
"So that it does seem to have benefited from the depreciation of the lira," he said.
However, Gill said the smaller companies with foreign currency loans, including in tourism, were hurt by the weaker lira. "We think that the weaker lira is starting to hurt their ability to pay their loans. It's not showing on the data yet, but we think that there are parts of the SMEs [small and medium-sized enterprises] ... that are starting to show some signs of stress from the weaker currency," he stated.
"I would argue that, especially in the last 12 months, most of the capital inflows funding Turkey's current account deficit have been nonresident purchasing of government securities. [Should there be an external shock] you could see a large outflow from the emerging markets and local bond markets. But this is not just for Turkey. We flagged this for Egypt, which has been attracting a lot of portfolio inflows, and South Africa."