Standard & Poor's chief economist says weakness of Turkey's currency has caused high inflation.
Frank Gill, senior director of sovereign ratings at S&P Global Ratings, said a weaker Turkish lira weighed on prices in the country.
“Now the negative affects of a weaker lira for one thing is higher inflation. Some of the nominal depreciation seems to have already been inflated away,” he said in an interview to Anadolu Agency.
One dollar traded for 3.86 Turkish liras on Thursday, up from 3.57 as of Sept. 29 marking a 5.6 percent monthly hike in the USD/TRY exchange rate. The average USD/TRY 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.
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 policy makers spar over interest rates.
"There is no change. We have reaffirmed the government bond ratings, Turkey is one of our most stable sovereign ratings; since 1994,Turkey has been rated within the BB category," Gill said.
Accommodative fiscal stance
"We have been flagging the same concerns for quite a long time [...] the large current account deficit, the low savings rates, dependency on potentially unpredictable capital flows, to finance that current account deficit [...]Those continue to be in our view the credit weaknesses. The growth data were strong, we revised [upwards] our expectations for GDP 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, through measures taken to push up credit growth such as the credit guarantee scheme and new incentives to stimulate mortgage lending, alongside macroprudential 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 a young population and high investment requirements, at the same time, 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 that 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.
4.5 percent of GDP in 2017
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 was expected to be 4.5 percent of its GDP in 2017 and 2018, he said.
Gill said private investment was absent from economic development of the country.
"I think what has been absent with the 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 does seem to have benefited from the depreciation of the lira," he said.
Gill said smaller companies that have foreign currency loans including in tourism, were however 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 [...] that are starting to show some signs of stress from a 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 has been non-resident purchasing of government securities. [Should there be an external shock] You could see a large outflow from the emerging markets, local bond markets. But this is not just for Turkey. We flagged this for Egypt which has been attracting a lot of portfolio inflows, or South Africa."