There are numerous potential triggers for another lira crash
Businesses in Turkey will need to prepare for elevated inflation, this time accompanied by slowing demand into Q4 2022 and Q1 2023. Although H1 2022 GDP grew strongly, economic vulnerabilities and lira volatility risk require executives to build further resilience into their business, protect cash positions and receivables, focus on retaining critical talent, and continue to innovate to support price increases.
Overview
Turkey’s economy grew 7.6% YOY in Q2 2022, slightly higher than the 7.5% YOY seen in Q1 2022. The growth was driven by a 22.5% increase in consumer spending, up from 21.5% in Q1, as well as a 16.4% rise in exports, up from 14.8% in Q1 2022. High consumption was driven by a consistent increase in tourist arrivals and high inflation, incentivizing fast consumption. Imports grew a mere 5.8%, indicating consumption is increasingly focusing on cheaper and locally produced products. Investments grew 4.7% YOY, and within that, investments in construction were negative, while those for machinery and equipment grew strongly. This indicates manufacturing sector investments increased, driven by high export demand. Finally, government spending increased 2.3% only, as the government is trying to keep up with high inflation in its expenditures.
Our View
Such high inflation and falling consumer and business confidence are indicating a slowdown is coming for the Turkish economy in H2 2022. If this slowdown occurs, GDP will likely grow around 2–3%, resulting in an average of around 5% for 2022. However, the government is implementing strategies to prevent this slowdown, with the central bank cutting interest rates (from 14% to 13% in its August meeting) and with government authorities asking banks to reduce their borrowing costs. Since elections are scheduled for next year, the 2023 budget will likely also have a strong minimum wage and public sector wage increase, pressuring similar policies for the private sector.
This, however, is heating up the economy and increasing the vulnerability of the lira to more shocks. With rising interest rates in the US, more pressure on Turkey from the US regarding sanctions on Russia, higher domestic political tensions ahead of the election, and increasing nationalist foreign policy toward the region, there are numerous potential triggers for another lira crash. Alternatively, it is possible that the Turkish economy slows significantly after the elections when the need for stabilizing macro fundamentals comes back to the agenda.
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