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Turkey will usher in austerity programmes to mitigate rising inflation

Finance Minister Berat Albayrak says growth will slow and unemployment will increase, then stabilise in 2020
Turkish Finance Minister Berat Albayrak unveils new economic plan on Thursday (Reuters)

Turkey plans to adopt some austerity measures, including reining in public spending by $10bn to mitigate the country’s rapid inflation rate, Finance Minister Berat Albayrak said on Thursday.

Under the "new economic programme" over the next few years, Turkey will reform its economy based on “balancing, discipline, and change," said Albayrak.

Turkey's unemployment rate is expected to rise to 11.3 percent in 2018 and 12.1 percent in 2019 before falling to 11.9 in 2020, Albayrak said.

Turkey's inflation rate stood at 18 percent in August and is expected to rise to 20.8 percent, Albayrak said.

Albayrak said the economy would grow 3.8 percent this year and 2.3 percent in 2019, both revised down from forecasts of 5.5 percent. He did not deliver on big plans for the banking industry that some analysts had been hoping for, particularly the creation of a "bad bank" vehicle to take over non-performing loans.

Markets had been hoping that Albayrak would use Thursday's announcement of a new medium-term economic programme to signal an unambiguous break from the credit-fuelled growth that has characterised Turkey over the last decade and a half under President Recep Tayyip Erdogan's rule.

"At the moment, the programme is a disappointment. First, when you look at the growth forecast, the current account deficit forecast, they are too ambitious," said Guillaume Tresca, a senior emerging markets strategist at Credit Agricole.

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"We don't have anything new, regarding a bad bank, regarding the treatment of (non-performing loans), regarding the foreign-exchange funding of the banking system or the foreign-exchange funding of the corporates. It is lacking details and it is lacking news," he said.

The lira currency has plunged by 40 percent this year on concerns about Erdogan's influence over monetary policy and a rift with the United States. The sell-off has shaken global financial markets and raised the prospect of a banking crisis at home.

Following the presentation, the chairman of Turkey's BDDK banking watchdog said there would not be a transfer of problem loans to another institution.

The currency has failed to sustain many of the gains made since the central bank's mammoth interest rate hike of 6.25 percentage points last week, underscoring the difficulty policymakers face in putting a floor under the lira and restoring confidence.

Sources told Reuters on Wednesday that there was a debate among top government officials about the extent of the growth revisions, highlighting the delicate balance between Erdogan's long-standing drive for economic expansion and investors' calls for greater austerity.

"We will see a gradual growth increase from now on. Our main goal is to establish 5 percent growth from 2021 onwards," Albayrak, Erdogan's son-in-law, said at Thursday's presentation in Istanbul. He did not take questions.

"We are aware of the economy's strong and weak points."

For financial markets, the biggest concerns remain inflation - which Albayrak forecast would be 20.8 percent this year and 15.9 percent next year - and the banking sector.

Turkey's banks face a potential deluge of bad debt as the lira sell-off has driven up the cost for companies to service their foreign currency loans. For years Turkish firms borrowed in dollars and euros, drawn by lower interest rates. JPMorgan estimates that Turkey’s private sector has about $146bn in external debt.

Ratings agencies have sounded alarms about the outlook for banks. Fitch has estimated that banks' foreign-currency lending stood at about 43 percent of all loans. Still, the government has repeatedly said it does not expect problems in the banking sector.

"The lack of 'burden sharing' signs in the restructuring of the real sector debt in Minister Albayrak's speech seemed to have led to a sharp deterioration in sentiment," Gokce Celik of QNB Finansbank said in a note to clients.

Albayrak later told broadcaster CNN Turk that public banks face no financing problems this year.

Albayrak said Turkey would prioritise investments in pharmaceuticals, energy and petrochemicals to reduce its current account deficit, which was seen falling to 2.6 percent of gross domestic product by 2021 from 4.7 percent seen in 2018.

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