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Moody’s sees sharp contractions in Turkey and Argentina

Turkey’s inflation accelerated to 25.2% in October as the weak lira continued to fuel price gains.

Turkey and Argentina will undergo sharp contractions in the coming quarters as economic growth decelerates across advanced and emerging market economies, Moody’s Investors Service said in a report Thursday.

As monetary tightening in major economies and geopolitical trade disputes continue to undermine investment globally, Moody’s is taking an increasingly dim view of the growth prospects of emerging markets like Turkey and Argentina, which “have relatively high exposures to external financing and therefore the most vulnerable.”

Turkey’s economy will likely contract through the first half of next year as the lira’s slump and rising borrowing costs take their toll on the economy, the rating provider said. The Argentine economy will not return to positive growth until 2020 due to severe monetary and fiscal consolidation under the IMF program, it said.

Turkey’s inflation is hovering near the fastest pace since President Recep Tayyip Erdogan came to power 15 years ago, and high borrowing costs are clouding investment outlook. “Double-digit inflation, a steep increase in borrowing costs and curtailed bank lending are likely to weigh on household purchasing power, private consumption” and investment, Moody’s said.

Moody’s expects Turkish inflation to remain at double digits through 2020 on unanchored inflation expectations spurred by exchange rate and oil price pressures. Turkey’s inflation accelerated to 25.2% in October as the weak lira continued to fuel price gains.

Inflation expectations in Argentina continue to rise despite the central bank’s very tight stance and it will take some time before the benefits of a new monetary framework fully materialise, Moody’s said. It expects inflation to gradually fall to 20% by the end of 2020.

Moody’s sees Turkey’s economy growing 1.5% in 2018 and contracting 2% the following year. It predicts Argentina’s economy will contract 2.5% this year and 1.5% in 2019.

© 2018 Bloomberg L.P

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