Turkey to cut growth forecasts, sources say, in difficult balancing act with markets

By Orhan Coskun and Nevzat Devranoglu

ANKARA (Reuters) - Turkey will on Thursday cut its growth forecasts for this year and next amid a deep currency crisis, although the extent of next year's revision is still being debated by top government officials, sources said.

The discussion over the growth targets underscores the delicate balance between President Tayyip Erdogan's long-standing emphasis on credit-fuelled economic expansion and investors' calls for greater austerity.

Finance Minister Berat Albayrak is due to announce the forecasts in a new medium-term program on Thursday, after a 40 percent plunge in the lira this year that has eroded confidence in what was once a star emerging market.

Albayrak, Erdogan's son-in-law, has promised "realistic macro targets" and "right action plans".

Investors want to see signs the government is moving away from a decade and a half of growth driven by credit and big infrastructure projects. They are, therefore, hoping for big reductions to the current targets of 5.5 percent annual expansion in 2018 and 2019.

The outlook for 2018 growth is likely to be cut to 3.5-4 percent, said three sources, all of whom declined to be identified because the information is not yet public.

"There will be almost zero growth or a contraction in the third quarter, and a contraction in the fourth quarter. It is probable that growth will be 3.5-4 percent this year," one of them said.

Yet the forecast for 2019 - likely to be a major focus for financial markets - is still being hashed out.

"The 2019 growth forecast is one of the most controversial and sensitive numbers in the medium-term program," one of the sources said. "It could be cut to around 2.5 percent, although this number may change."

Two of the sources said the government may want to see a "slightly higher" number than 2.5 percent, given that it faces local elections in March 2019. Next year's growth is likely to be helped by an increase in exports and strong tourism revenues, government officials have said.

LIRA CRISIS

"The government needs to show they understand the consequences of the present lira crisis," said Per Hammarlund, chief emerging markets strategist at SEB.

"They need to show they are realistic about their budget assumptions for next year, or investors will wonder how big the current account deficit will be, and how much the funding need will be. Unless they are realistic, the lira will quickly come under renewed pressure."

Last week, the central bank hiked its benchmark by a mammoth 6.25 percentage points in an attempt to put a floor under the lira and rein in 18 percent inflation, the highest in a decade and a half. The currency crisis has been driven by concerns about Erdogan's control over monetary policy and a bitter row with the United States.

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Next year's inflation forecast is likely to remain in double digits, two of the sources said, with one putting this year's inflation number at around 20 percent.

Authorities were taking steps to curb non-mandatory public investments to boost savings, they said.

"The resources available in the budget will mainly be used to finish projects that are close to completion. Projects that will be carried out with the public-private sector cooperation will not be impacted by this decision," one of the sources said.

But it was not clear whether any steps would be announced to help the banking sector, which is grappling with a potential wave of non-performing loans, given its exposure to foreign-currency debt.

One of the sources said every measure would be taken to prevent the real sector and financial sector from being damaged and added that certain projects were being prepared in this regard.

"I'd like to see very conservative economic assumptions for the next few years, meaning persistent high inflation and low growth assumptions. Also I'd like to see some sort of contingency plan in terms of an acknowledgement of potential defaults," said Koon Chow, an emerging markets strategist at UBP.