Citi warns Turkey's credit guarantee scheme may worsen economic imbalances

Citi analysts warn that Turkey's plan to reactivate its Credit Guarantee Fund to stimulate growth risks worsening the country's external economic performance. Their analysis suggests that Turkey's recent ability to maintain narrow current account deficits alongside high economic growth may not represent a permanent structural change, indicating the current economic balance is fragile. Citi cautions that further expansionary measures beyond the Credit Guarantee Fund scheme could exacerbate both external and internal imbalances in the Turkish economy if current favorable conditions are temporary.

Analysis

Citigroup Inc. has issued a cautionary note regarding Turkey's plan, announced on May 22, 2025, to reactivate its Credit Guarantee Fund scheme, warning that this initiative could negatively impact the country's external economic performance. Citi's analysis questions the sustainability of Turkey's recent achievement of maintaining narrow current account deficits alongside high economic growth, suggesting these conditions may stem from temporary factors rather than a fundamental structural economic improvement. The bank found "insufficient evidence to conclude that the change in the external performance-growth link is a permanent shift," indicating a potentially fragile economic balance. Consequently, Citi warns that further expansionary fiscal measures, potentially extending beyond the Credit Guarantee Fund, could exacerbate both external and internal imbalances within the Turkish economy if the current positive conditions prove transient. The report underscores the need for judicious application of policies aimed at stimulating economic activity to avoid destabilizing effects, reflecting a strongly negative sentiment and cautious tone regarding the potential macroeconomic consequences of these policy decisions.

Key Decisions for Investors

• Investors with exposure to Turkish assets should closely monitor the government's fiscal policy decisions, particularly the implementation and scope of the Credit Guarantee Fund and any additional stimulus measures, given Citi's concerns about potential macroeconomic imbalances.
• Re-evaluate the perceived sustainability of Turkey's recent growth and current account performance in light of Citi's skepticism about a structural economic shift, and consider the risk that these positive trends may be temporary.
• Prepare for potential increased volatility in Turkish financial markets, including the currency and sovereign debt, if expansionary policies lead to a deterioration in external balances as cautioned by Citi.