Turkey's economy contracts 9.9% in second quarter

Turkey’s finance minister expects country’s economy to grow 0.3% this year despite coronavirus pandemic.
Economic growth forecast to jump to 5.8% next year
Annual inflation seen at 10.5% this year
Current account deficit set to hit 3.5% of GDP

ISTANBUL - Turkey's economy is set to grow 0.3% this year as it recovers from the impact of the coronavirus pandemic, its finance minister said on Tuesday, pledging more normalisation steps to boost the economy as he set out the country's medium-term plan.

Turkey's economy contracted 9.9% in the second quarter as a lockdown brought activity to a near standstill, its worst year-over-year performance in a decade, but has since begun to recover.

Presenting Turkey's new medium-term programme, Berat Albayrak said GDP growth would slow in the fourth quarter compared to the third quarter, but would accelerate to 5.8% in 2021. However, he warned the economy may shrink 1.5% this year in a worst case scenario and grow 3.7% next year.

In the past two months, daily coronavirus cases have picked up again in Turkey, where there have been a total of more than 315,000 cases. More than 8,000 people have died.

Economic data "points to a strong V-type recovery in the economy from the third quarter and a clear turn to positive growth figures", Albayrak said, adding Turkey was diverging positively from economies of many developed and developing countries.

But areas such as tourism, transport and the services sector generally had not yet recovered to the desired level. "It is of vital importance to revitalise the services sector which employs around 15 million of our people," he said.

Referring to recent steps taken on interest rates, liquidity, swaps and asset ratios, Albayrak said: "Normalisation steps will continue in the coming days and weeks. They will contribute to financial stability and our macroeconomic goals."

Support packages to combat the coronavirus so far had amounted to 494 billion lira ($63 billion), or 10% of gross domestic product, he said.

Gold imports and losses in tourism income due to the coronavirus lockdown prevented a current account surplus in 2020, but Turkey aimed to improve its current account balance and provide sustainable growth, he said.

The programme forecast a current account deficit of $24.4 billion, or 3.5% of GDP this year. The budget deficit was seen at 239.2 billion lira, or 4.9% of GDP.

His presentation had little immediate impact on the lira, which hit a fresh record low of 7.8550 against the dollar on Tuesday on concerns about the Caucasus conflict.

Bankers calculated that the government assumed a much lower exchange rate for its forecasts.

Last week Turkey's central bank unexpectedly hiked interest rates by 200 basis points to 10.25%, tightening policy for the first time in two years to stabilise the lira and address inflation.

The programme showed annual inflation was expected to be 10.5% in 2020, before falling to 8% in 2021 and 4.9% in 2023. Unemployment was seen falling to 10.9% in 2023 from 13.8% this year.