July 27, 2018 / 11:11 AM / in 5 months

UPDATE 1-Turkey considers new stimulus as growth seen slowing, officials say

(Adds details, economist note, context)

By Nevzat Devranoglu and Orhan Coskun

ANKARA, July 27 (Reuters) - President Tayyip Erdogan’s government is considering further stimulus measures to address an expected slowdown in growth in coming quarters, two officials said - a move that could raise expectations that fiscal policy will be loosened.

The economy expanded at a breakneck 7.4 percent last year, boosted by government stimulus and domestic consumption, although analysts said growth was uneven and not sustainable. Erdogan, a self-described “enemy of interest rates”, has pushed banks to lend more to boost private spending.

His demands for lower interest rates have exacerbated concerns that the central bank lacks independence and sent the lira currency into free fall - it is down by a fifth this year. That has propelled inflation to a 14-year high above 15 percent last month.

In the aftermath of a failed coup in 2016, the government boosted the size of a fund that backs loans to companies to 250 billion lira ($52 billion). It has also introduced measures to increase employment.

“Certain steps may be taken to realise higher growth. This issue is on the agenda,” one of the officials said, without elaborating on what that could entail.

The officials said the steps were being considered because they now expect a contraction of the economy in the third quarter and full-year growth of around four percent - short of the government’s 5.5 percent target in its medium-term programme.

The officials declined to be identified because of the sensitivity of the issue. No one was immediately available for comment at the treasury and finance ministry.

Even as the economy has kept growing - in the third quarter of last year it expanded at a blistering 11.3 percent - economists are concerned Erdogan is focused on expansion at seemingly any cost. While investors have long admired Turkey’s budget discipline, that perception may be starting to change.

“The government’s reputation for fiscal prudence is coming under increasing scrutiny,” said Jason Tuvey of Capital Economics in a note to clients this week.

“Looser fiscal policy would exacerbate the vulnerabilities that have accumulated in Turkey’s economy in recent years,” Tuvey said, citing the wide current account deficit.

BIG PROJECTS, LOWER RATES

In his 15 years in power, Erdogan has transformed Turkey into a major emerging market, building hospitals, highways and ambitious infrastructure projects.

But his apparent growing influence over monetary policy - and a sweeping security crackdown - have unnerved investors.

This week the central bank left interest rates on hold, confounding market expectations of a rise and weakening the lira sharply. It was the bank’s first policy decision since Erdogan was re-elected last month with new, sweeping executive powers.

More than 160,000 people have been detained, including dozens of journalists, in the crackdown that followed the failed coup. Scores of media outlets have also been shut.

A Reuters poll of 55 economists last week forecast 2018 annual growth at 4.1 percent and 2019 growth at 3.5 percent.

The economy grew at 7.4 percent in the first quarter of this year. The officials said second-quarter growth was seen at slightly more than six percent.

The third quarter would see a contraction, partly due to the base effect given last year’s 11.3 percent growth, they said. ($1 = 4.8047 liras) (Writing by Tuvan Gumrukcu; Editing by David Dolan, William Maclean)

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