Turkey slashes growth forecasts, but not enough for wary investors

By Ezgi Erkoyun and David Dolan

ANKARA (Reuters) - Turkey sharply cut its growth forecasts for this year and next on Thursday, a reduction that failed to mollify investors who wanted a more sober assessment of the fragile economy and a sweeping plan to help banks.

The lira currency has plunged by 40 percent this year on concerns about President Tayyip 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.

Markets had been hoping that Finance Minister Berat 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 Erdogan's rule.

Albayrak said growth would be 3.8 percent this year and 2.3 percent in 2019, both revised down from forecasts of 5.5 percent. He did not deliver the 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.

"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 EM strategist at Credit Agricole.

"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."

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 lira <TRYTOM=D3> fell as far as 6.3750 after the presentation, from 6.2541 on Wednesday. It later recovered losses and was at 6.1850 in New York trade.

The currency has failed to sustain much 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.

DELICATE BALANCE

Sources told Reuters on Wednesday 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, told 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 hit 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 the private sector has around $146 billion in external debt maturing in the year to July 2019.

Ratings agencies have sounded alarm about the outlook for banks. Fitch has estimated that banks' foreign-currency lending stood at around 43 percent of all loans. But 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 faced no financing problems this year.

INVESTMENT PROJECTS

Albayrak said in his presentation that investment projects for which the tender process has not been finalised will be suspended, a sign that some big-ticket government projects could be put on hold.

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, the presentation showed.

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.

He also said Turkey would suspend all investment projects for which the tender process has not been finalised. He also said Turkey would revise its social insurance schemes and restructure its incentive scheme for exports.

(Additional reporting by Ebru Tuncay, Can Sezer and Tuvan Gumrukcu; Writing by Daren Butler; Editing by Toby Chopra, Gareth Jones, Richard Balmforth)