European development bank slashes Turkey growth forecast

European Bank for Reconstruction and Development also says hike in interest rates will make it far more expensive for companies to refinance any loans that are coming due

Ankara in Turkey. The country faces a tougher time ahead, says the EBRD. AFP

The European Bank for Reconstruction and Development (EBRD) slashed growth forecasts on Thursday for Turkey, its biggest lending market, but left the rest of its region largely unscathed despite growing pressures.

The development bank still expects all 38 of the economies where it works to grow this year and next, but cutting Turkey's forecast a combined 4 percentage points, along with a possible recession there, will lower the region's overall growth rate by 0.6 per cent points to 2.6 per cent next year.

The cut comes after turmoil in Turkey, where the lira has lost about a third of its value and forced the country's central bank to nearly double domestic interest rates to fend off a full-blown currency crisis.

"We have downgraded our Turkey forecasts to 1 per cent [for 2019] and that of course has a major impact on our overall forecast for the whole region," said Sergei Guriev, EBRD's chief economist.

Turkey has seen tentative signs of stabilisation in recent weeks, Mr Guriev said, the year ahead was still going to be "very difficult". Growth is set to nosedive and the hike in interest rates will make it far more expensive for companies to refinance any loans that are coming due.

Elsewhere, the picture was more stable. Excluding Turkey, growth for the EBRD's region of operation, which stretches from Morocco to Mongolia, is forecast to stay around 3 per cent. Direct spillovers from Turkey's troubles are expected to be limited.

Economies including Poland, Hungary, Armenia, Mongolia and Turkmenistan all received forecast upgrades for 2018 and 2019. Russia is expected to grow 1.5 per cent in both years. Romania, Jordan and the Kyrgyz Republic all saw small or medium-sized reductions for both years. The EBRD also echoed the International Monetary Fund's recent warning of a growing set of pressures. "Escalation of trade conflicts is a major risk to the outlook," it said.

"Other risks include disruption to cross-border supply chains in the case of a no-deal Brexit, high levels of corporate indebtedness and geopolitical instability." An escalation in the trade war between the United States and China that slowed the global economy could cut "several decimal points" of growth from the EBRD's region, Mr Guriev said.

If big European economies like Germany get dragged into the feud, it would be significantly worse. "The good news for our countries is that they are part of European value chains ... and there is no foreseeable risk of a trade war within Europe or against Europe," he said.

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"But if for some reason Europe's trading partners introduce tariffs against Europe, or even west Europe, our countries will be very badly hit."

A no-deal Brexit, where Britain exits the European Union without a replacement trade deal, would hit south-eastern European countries hardest, the report said. Unless other member states increased their contributions to the EU, Brexit would lead to a 10 to 15 per cent decline in structural and accession funds available to countries in central and southeastern Europe. That would amount to a reduction of up to 0.4 percentage points of GDP in EU-supported investment.

Slovakian and Hungarian exports to the UK add an estimated 1.5 to 3 per cent to their gross domestic product, mainly in the automotive and machinery sectors.

Poland and Lithuania also have sizwable exports of food products, worth 1 to 2 per cent of their GDP.

"An additional impact may arise due to disruption in value chains that link the EBRD regions’ economies with advanced economies in Europe, which are in turn linked to the UK," the report said.