Local and international responses to COVID-19 have impacted key sectors of Turkey’s economy, such as manufacturing, retail and tourism. While the global fall in oil prices will ameliorate some of the country’s current account stress, overall the economy is likely to shrink this year for the first time since 2009. Currency and financial sector weaknesses increase the risk of a protracted downturn.
Lacking the deep pockets or ability to borrow that more developed economies have, Ankara’s strategy for dealing with the economic fallout from COVID-19 has so far been to keep business going as usual – as far as is possible. 
In addition to a less stringent lockdown than in many developed economies and a $14.4bn stimulus package unveiled in March, interest rates are being kept comparatively low; last week the Turkish Central Bank (TMBC) cut the benchmark one-week repo rate by 100 basis points to 8.75% – a larger rate cut than many expected and the second major cut since the start of March. Rules on bank loans have also been relaxed in order to keep money pumping into the economy.
Yet, while the government’s strategy may keep the country’s economic wheels turning until lockdown measures can be eased, it also has severe limitations – both in the public health sphere and the economic.
On the health side, the partial lockdown – a series of stay-at-home orders lasting for periods of two to four days have been issued in 31 provinces, while under-20s and over 65s have to stay indoors at all times – leaves a greater potential for the virus to spread or resurge. On April 27 Turkey recorded the most infections of any country outside of Western Europe and the US.As of that day, there were 110,130 cases with 2,805 deaths.
On the economic side, the measures have been unable to prevent large-scale unemployment and bankruptcy.
The former already stood at 13.8% in February(or around 4.5m people), with estimates for the number of those put out of work since widely estimated at around 3m more.With around one-third of those in employment in the unregistered economy, too, the true figure is likely even higher. Meanwhile, around 270,000 businesses have closed due to anti-coronavirus precautions, with 70,000 businesses in bad straits applying for payments for their workers from the Unemployment Insurance Fund by early April.
Meanwhile, official data released on April 24 showed capacity utilisation in the industrial sector falling from 75.3% in March to 61.6% in April, while business confidence among manufacturers fell from 99.7% to 66.8% over the same period.
Services are also being hit. Shop-closures and restrictions have hit a retail sector already blighted by shrinking per-capita incomes, pre-coronavirus. These have been in decline since 2013, when they stood at around $12,395, reaching just $9,405 in 2018 and an estimated $8,957 in 2019.
Any extension of lockdown into the early summer season, which begins at the end of May, would seriously impact another major FX earner and employer – tourism. Indeed, with Europe, Russia and the Middle East the country’s main tourism source markets, it is an open question as to how many would be able to visit – or, indeed, want to – even if the summer sees a significant decline in transmissions and deaths.
A final sector that is likely seeing strongly negative effects is the already-troubled power industry. While data for the coronavirus period has yet to be released, given the shut-downs in industry and commerce, demand for electricity is likely to have significantly fallen.
As covered in our recent Market Monitor, government strategy sees the nation’s banks as having a key role in easing the pressure on businesses, with an easing of macro-prudential rules to encourage more lending. This has had some effect – loan growth was 7.8% between the beginning of March and April 10 at the state banks and 4.8% at private sector lenders.
Yet, such a relaxation adds to concerns over future asset quality, due to a likely hike in non-performing loans in both the private and state sectors. At the same time, Turkey’s banks face large, short-term foreign exchange (FX) debts due in the next few months. With banks’ borrowing costs high, paying these debts will likely require draw-down of FX reserves held at the central bank. However, the level of external debt now dwarfs the available FX reserves at the TMBC – a result largely of recent efforts by the central bank to prop up the currency – which is now at its lowest levels since the 2018 currency crisis.
Official data shows gross FX reserves at the central bank falling from $81.2bn at the end of 2019 to $53.9bn on April 17, 2020, with the net position widely thought to be much worse.The lira has continued to hover around the TL7.00 to $1 mark, too, depreciating some 5% against the dollar since the start of April and 15% since the start of the year, despite the TMBC’s efforts.
Falling oil prices have been one positive for a net oil importer such as Turkey, with this collapse also helping ease inflationary pressures. The official rate fell from 12.37% in February to 11.86% in March, year-on-year.Indeed, falling demand in general has taken the pressure off one of the constant bugbears of the economy, price hikes, giving room – for now – for monetary easing. At the same time, however, even as inflation has fallen, recent rate cuts have established a negative real interest rate for deposits at Turkey’s banks.
More positively, press pictures of a UK RAF Transporter on the runway at Istanbul Airport awaiting a shipment of personal protective equipment for medical workers also highlighted the strength of the country’s medical equipment industry, some of which consists of textile and ready-to-wear enterprises that have rapidly re-purposed.As elsewhere, too, e-commerce has been boosted, with online sales of food and beverages, cleaning products, toys and other small household items up 200%, year-on-year in mid-April, according to the Union of Chambers and Commodity Exchanges.Meanwhile, anecdotal evidence suggests food and beverage retail has seen surges in demand in parallel with the announcements of new lockdowns.
Nonetheless, with coronavirus acting as a multiplier on underlying weaknesses, the negatives outweigh the benefits, for now – as illustrated by Turkey’s current account, which had been positive in 2019, but recorded a $1.23bn deficit in February.Argument continues to rage in Ankara over whether the country should ask for assistance from the IMF, but this would be highly unpopular with President Erdogan and his base, while the fund also has few friends among Turkey’s largely leftist and nationalist opposition parties.
Much, then, depends on the unknown course of the virus – and in particular, on whether it subsides during the summer and/or returns for a second wave in the autumn/winter. Yet, the hit during the first half of 2020 alone will likely be enough to see the economy annually contract, with a recent Reuters poll showing a median forecast of -1.4% GDP growth for 2020, with the second quarter seeing contraction of -8.6% and the third, -5.3%. In addition, many will be hoping that the crisis does not also tip the banking sector, in particular, into much deeper problems.
Jonathan Gorvett is a journalist and analyst with many years experience researching and writing about the Gulf and the wider Near and Middle Eastern region. His interests include political and economic risk, development and the evolving place of GCC countries in the international diplomatic, political and economic landscape.
Reuters April 21, 2020 “Turkish economy to shrink for first time in a decade this year: Reuters poll” https://www.reuters.com/article/us-turkey-economy-poll/turkish-econ…nk-for-first-time-in-a-decade-this-year-reuters-poll-idUSKCN2231GV
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 Central Bank website: href=”https://www.tcmb.gov.tr/wps/wcm/connect/122c325c-6afd-4718-8573-49f75964ff34/Money_Bank.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-122c325c-6afd-4718-8573-49f75964ff34-n6HYW8D”>https://www.tcmb.gov.tr/wps/wcm/connect/122c325c-6afd-4718-8573-49f75964ff34/Money_Bank.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-122c325c-6afd-4718-8573-49f75964ff34-n6HYW8D
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Daily Sabah, Apr 17, 2020 “SMEs seeking to start online trade up 50%” https://www.dailysabah.com/business/smes-seeking-to-start-online-trade-up-50-as-e-commerce-sales-skyrocket-by-200/news
SeeNews March 23, 2020 “Turkish supermarket chain Migros to hire 1,000 workers” https://seenews.com/news/turkish-supermarket-chain-migros-to-hire-1000-workers-amid-coronavirus-outbreak-report-691961
Ahval news Apr 20,2020 “Anti-western rhetoric forcing Turkey to turn away from IMF” https://ahvalnews.com/ali-babacan/anti-western-rhetoric-forcing-turkey-turn-away-imf-opposition-leader-babacan
Reuters April 21, 2020 “Turkish economy to shrink for first time in a decade this year” ttps://www.reuters.com/article/us-turkey-economy-poll/turkish-economy-to-shrink-for-first-time-in-a-decade-this-year-reuters-poll-idUSKCN2231GV
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