Spotlight: Risks lie ahead amid Turkey's fast-growing economy

by Burak Akinci

ANKARA, Dec. 14 (Xinhua) -- The Turkish government announced this week that Turkey's economy grew 11.1 percent in the third quarter of 2017, the biggest increase in the world, but it would not yield sustainable fruits with risks of high inflation and increasing public debt, said local analysts.

This jump in growth pushed the Turkish Central Bank to hike interest rates by 50 basic points on Thursday, lower than expected though, in the hope of increasing borrowing costs to curb rising inflation.

But inflation hit its highest annual rate of 12.98 percent last month, while Turkish lira has lost 11 percent of its value since September amid the country's worsening current account deficit.

HOUSEHOLD CONSUMPTION MAIN DRIVER

In this context, the 11.1 percent growth in the third quarter, compared to 5.4 percent in the second quarter, came as unexpected. Household consumption was the main driver of growth, accounting for 7 percent of it.

"It is largely above our forecasts. We didn't expect it to be this high," Enver Erkan from Istanbul-based capitalFX told Xinhua.

"It is mainly the result of government incentives to household consumption in order to sustain the economy from fallouts of a coup attempt in July 2016, which has caused heavy turmoil in the G20-member country," he explained.

President Recep Tayyip Erdogan said this unexpected growth, as a warning to "agitators," proves that Turkey is the world's fastest growing economy.

"Turkey's rising economic growth will silence those who wants to portray it as a weak state. This is the best response to them," said Erdogan, adding that Turkey aims to reach at least 7 percent of growth by the end of this year.

SIDE EFFECTS EXPECTED

However, economists warn that Turkey's impressive growth in the third quarter, which is higher than India and China, will have side effects because this growth is not felt by the population who has to suffer a high inflation and weak local currency.

"It is an obese growth that is not contributing to the overall development of Turkey as it is the result of spending pushed by the government," said Erkan, adding that the Turkish economy, despite establishing good figures on industrial production, is showing signs for overheating.

"We still need to stick to fiscal discipline and push for structural reforms that would make the economy more resilient to any shock from inside and outside factors," said the Turkish expert.

The government is just using its newly created Credit Guarantee Fund to keep the ball running and help the economy recover after the failed coup, which stimulates markets with multi-billion-U.S.-dollar-loan guarantees to companies facing difficulties.

Since the failed coup, Turkey has showed signs of fatigue with a high inflation and unemployment rate coupled with the national currency, the lira, which is losing significant ground against the U.S. dollar and euro.

GROWTH WILL "INEVITABLY" SLOW DOWN

Hatice Karan, a senior economic advisor to President Erdogan, admitted that the growth will "inevitably slow down" in the coming quarters because the government has been employing one-off measures to boost economic confidence after the failed coup.

Karahan argued that no further stimulus is actually needed down the road, aside from some specific incentives to selective and strategic sectors to support employment in a country where 20 percent of young workers are unemployed.

Deniz Cicek, an economist at QNB Finansbank Research, said the inflation is likely to remain above 10 percent next year and because of the widening current account deficit, "uncertainties over the economy will prevail."

The government, on the other hand, will seek new measures to control the increasing public debt which is expected to be a risk factor for the upcoming months.

Camil Ertem, another economic adviser to President Erdogan, wrote in a column in daily Sabah that Turkey will loosen lending for the banks by implementing new regulations that will allow firms to set aside fewer provisions for bad debt.

Banks, particularly the larger banks, are currently making "unnecessarily high provisions" when they issue loans, said Ertem.

But "with this new system, unnecessarily cautious banks will not need this cautious attitude and the system will be more relaxed," he added.

The Treasury is also expected to support economic growth next year through borrowing, which will have a marginal effect on interest rates, argued Ertem.

This comes as some Turkish public banks could face major fines in the line of the New York trial of a Turkish banker accused of violating U.S. sanctions against Iran.

According to economic circles and analysts, if the gold trader Reza Zarrab, who turned out to be a key witness in this high profile case, is found guilty, several Turkish banks could be fined up to 10 billion dollars and this could have a serious blow on taxpayers.

Erdogan and his ministers denounce the trial as a "plot" aiming to destabilize Turkey, which is allegedly orchestrated by circles close to the U.S.-exiled preacher Fethullah Gulen, who is accused by Ankara of masterminding the coup attempt last year.

But Deputy Prime Minister Mehmet Simsek assured markets that Ankara would stand by Turkish banks and would not allow the burden to threaten the financial sector.

"We will continue implementing structural reforms to sustain strong growth and boost Turkey's growth potential," he said on his Twitter account. Enditem