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Erdogan Locks In on Chasing Growth That Turkey Saw Before Crisis

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Erdogan Locks In on Chasing Growth That Turkey Saw Before Crisis

Recep Tayyip Erdogan
Recep Tayyip Erdogan Photographer: Michael Nagle/Bloomberg
Recep Tayyip Erdogan
Photographer: Michael Nagle/Bloomberg

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Undaunted by Turkey’s near-certain failure to come close to its economic growth goal this year, President Recep Tayyip Erdogan has set a target for 2020 that’s twice as ambitious.

Gross domestic product must grow 5% in 2020, a target the government is “going to lock in on,” Erdogan told an economy forum on Wednesday. The official goal of 2.3% for this year is all but unattainable after a continuous annual contraction that started in the fourth quarter of 2018. Morgan Stanley estimates Turkey’s potential growth at about 3.7%.

Read more: Behind Erdogan’s Strange Ideas About Interest Rates

Erdogan, who advocates an unorthodox theory that high interest rates cause rather than curb inflation, made clear that easier monetary policy will be the centerpiece of Turkey’s efforts to replicate growth levels last seen before a currency crash last year. Reiterating that he’s “allergic” to elevated borrowing costs, the president said the central bank under its new governor is committed to bringing interest rates lower.

“The policy rate will fall further,” Erdogan said, citing the recent slowdown in consumer inflation. “I’m opposed to elevated levels of interest rates.”

With the economy still fragile but on the mend, a government approach that’s starting to take shape is focused on creating incentives for banks to ramp up credit while lowering the cost of money. But the fixation on growth at all costs risks spooking the market and exposing the vulnerabilities that pushed Turkey to the brink a year ago.

Chasing Growth

In a sign that investors remain on edge, the lira traded weaker against the dollar after Erdogan’s comments, on course for its first drop in five days.

The aim unveiled by Erdogan is comparable to the targets in the government’s medium-term program before the Turkish currency’s meltdown upended its plans in 2018. The goal for economic growth in 2020 was revised to 3.5% a year ago, with new projections due soon.

For now, a slump in investment and subdued bank lending are in the way of faster recovery. The International Monetary Fund sees Turkey’s GDP expansion at under 3% in 2020-2021 and rising to around 3.5% in the following two years. The most upbeat forecasts for next year put growth at 3.5%, according to a Bloomberg survey of analysts, whose median is 2.2%.

Cheaper Money

Erdogan’s call for lower rates also sets the tone for the central bank as it prepares to review borrowing costs a week from now. The second straight cut is probably a given with inflation heading for lows not seen since last year’s currency crash. A more stable lira and the effect of a high base of comparison could push price growth into single digits as early as this month.

Governor Murat Uysal had only been in office a few weeks when he slashed the benchmark by 425 basis points to 19.75% in July, the biggest rate cut in at least 17 years. His predecessor was fired for not cutting rates quickly enough.

The new governor signaled that more cuts were on the cards but also vowed to preserve “a reasonable rate of real return” for investors. Adjusted for prices, Turkey’s rate is now at 4.7%, above peers such as South Africa, Russia and South Korea.

Read more: Turkey Inc.’s Zombie Side Frustrates Latest Push for Credit Boom

Still, stimulus alone may not be enough for an economy more burdened by leverage than in the past, according to Morgan Stanley.

“Monetary and fiscal policy were better equipped to cope with economic slowdowns previously,” Ercan Erguzel, an economist at Morgan Stanley, said in a report. “So, a strong recovery from 2020 onwards may not be a foregone conclusion.”