The Turkish economy continues to suffer from the effects of the financial crisis that began in 2018 and worsened with the coronavirus pandemic. Among the most prominent manifestations of the crisis are the collapse of the value of the Turkish lira (TL) despite all the measures taken by the Central Bank (TCMB), the decline in foreign investment and foreign financing, and the inability to pay the debts owed by the Turkish government and companies.
This paper reviews the reality and indicators of the Turkish economy until the end of September 2020.
Lira fluctuations and TCMB decisions
During September 2020, the Turkish government failed to control what has become the most important indicator of the health of the Turkish economy, namely the stability of the price of the TL against the dollar, as the price of the dollar reached a new record of 7.71 liras. In its meeting on 24 September 2020, the TCMB was forced to raise interest rates by 200 basis points to reach 10.25 percent, which prompted the strengthening of the price of the TL, so the price of the dollar fell against it to 7.57 liras. This triggered the appetite of foreign investors to buy the dollar at a cheaper price in order to exit the Turkish market. It also triggered the appetite of the Turkish citizens who want to convert their savings into dollars, as well as the companies that want to pay their external debts. Thus, demand for the dollar increased even as its price fell against the TL, so that the TL – according to the supply and demand process – fell again at the end of September 2020, reaching this time 7.8 liras to the dollar, a new record that confirms the irrelevance of the TCMB’s move and the approach of the point when things would get out of control.
Thus, it became clear that the effect of the TCMB’s intervention by raising the interest rate did not last for more than two days only. This increased the conviction that the government's intervention mechanisms to control the financial situation have become extremely limited. With the increase of the interest rate at home and easing restrictions on the exit of the TL to foreign markets through the mechanisms of financial exchange (swaps), the Turkish government is deemed to have announced its acknowledgement of the error of its previous steps of reducing the interest rate and preventing the exit of the TL. This means that the Turkish financial market wants reconciliation with investors abroad and at home and the rectification of the situation.
In addition to the scramble that took place to purchase the dollar in the last week of September 2020 after the decline in its price, the Turks rushed to convert their savings into gold stocks. The biggest proof of this is that Turkey imported gold worth 4.2 billion dollars in August 2020. These are all strong indications of a significant decline in confidence in the TL and in the ability of the government and of the TCMB to fulfill its obligations and its ability to intervene to control the market, especially with the decline in its real reserves to minus 32 billion dollars, and the rate of rollover of Turkish foreign debts having reached 75 percent.
After the interest rates had increased on Turkish bonds at the beginning and middle of September 2020, the interest rate on Turkish government bonds decreased by 1 percent after the decision of the TCMB. The interest rate on ten-year government bonds became 13 percent, and the insurance rate on Turkish foreign debts (credit default swaps, CDS) also decreased from 560 points to 520 points. The stock market index also rose, based on the TCMB’s decision in the last week of September 2020, from 1076 points to 1124 points. However, despite this, foreign investors continued to exit the Istanbul Stock Exchange (BIST), while the appetite local investors for buying shares of Turkish banks increased. Attention should be drawn to the fact that the due dates of repayment of the soft loans that the government offered to merchants through government banks with a six-month delay in repayment have begun in September 2020 and the following months. Therefore, merchants are expected to be preoccupied more with paying their loan instalments than expanding their business. This would also negatively affect growth during the fourth quarter of 2020.
On the other hand, the rise in real estate prices continued, due to government concessions in housing loans and interest cuts in previous months. While the rise in real estate prices increased during September 2020 by 1.4 percent, and annually by 25.8 percent, with the rise in interest rates again and the increase in the dollar price (the decline in the price of the TL), the demand for real estate purchases is also expected to decline. The number of real estate sales decreased from 229,000 properties in August 2020 to only 170,000 in September 2020. The number is expected to decline in the coming months to 120,000, returning to its normal size. The share of new properties from those sales continues to be at 30 percent only.
External and internal payments balances
In July 2020, Turkish exports reached 15 billion dollars compared to 17.7 billion dollars in imports. Thus, the deficit in the foreign trade balance reached 26.6 billion dollars during the seven months of 2020, but is expected to decrease during the coming months due to the rise in oil prices, the decline of the TL, and the imposition of more taxes in Turkey. The number of tourists visiting Turkey also decreased in August 2020 compared to 2019, to 70 percent, and annually to 74 percent. While the tourist season in Turkey continues until the end of October, it is not expected to witness an improvement with the increase in the cases of infection with the Covid-19 virus in both Europe and Turkey.
Because of the TCMB’s policy to support the TL, the TCMB’s foreign currency reserves declined to minus 31.5 billion dollars, while Turkey is required to pay foreign debts over the next twelve months worth 176.5 billion dollars.
On the other hand, the annual government budget deficit continued. However, with the decline in interest rates in the previous months and the resulting car sales and the raising by the government of taxes on the sale of cars, the outcome of those taxes in August 2020 prompted an increase in the monthly budget by a difference of up to 28 billion liras. Therefore, the annual budget deficit reached 109 billion liras, and is expected to reach a record high of 140 billion liras by the end of 2020.
However, the ratio of the dollar-denominated debt to the state treasury in its total debt rose to 54.5 percent, which brings Turkey back to the 2003 figures. However, this figure of internal dollar debts does not include government payments to private companies contracting with the government for large projects. With the possibility of a decline in the price of the TL in the coming months, the ratio of internal debt in dollars will increase. Thus, the ratio of government debt to national income rose to 40.5 percent, the highest rate since 2009. This percentage is expected to rise to 42 percent during 2021, in light of the government’s policy with regard to the payment of the bad debts of government banks and transferring those payments to the Ministry of Finance.
The Turkish economy contracted in the second quarter of 2020 by 9.9 percent. However, with the easing of restrictions on commercial movement in the third quarter, growth is expected to increase again in the third quarter. Indicators point to an increase in the sales of retail trade, real estate, construction materials and industrial products. During August 2020, an increase in the inflation rate was announced by 0.86 percent, which brings the annual inflation rate to 11.77 percent. It is expected to reach 12.8 percent at the end of 2020.
Furthermore, the unemployment rate during the past three months of 2020 reached 13.4 percent, which is approximately 4.1 million people. This number rises to 10.2 million people if the number of unemployed people who stopped submitting job applications is added. It is also possible to add another 3.5 million people whose wages were suspended due to the pandemic. These are expected to lose their jobs in October 2020 after the expiry of the deadline set by the government to prevent the dismissal of any employee from work due to the pandemic.
The Turkish Statistical Institute (TÜİK) announced an improvement in the consumer confidence index (CCI) from 60 to 82 points out of 200. This increase in the CCI is due to the change made by the TÜİK in the way the CCI is calculated, leading to an increase by 20 points at once as a result of this change that was sought by the government to improve the economic figures. Despite this rise, the CCI numbers continue to be negative, i.e. below 100 points for two years with the onset of the current economic crisis.
In its report on the credit status of the Turkish economy, Moody's reduced the investment status in Turkey to B2, which is Turkey's lowest rating since 1990. This figure warns against investing in Turkey, and indicates the possibility that Turkey may resort to declaring a moratorium on its foreign debts or imposing restrictions on dealing with the dollar in Turkey. Furthermore, the US Embassy in Ankara has announced that Turkish pharmaceutical companies were unable to pay their debts to US pharmaceutical companies for a year, worth 2.3 billion dollars, and that if payment was delayed further, the US pharmaceutical companies would stop their exports to the Turkish companies. This was dismissed by the Turkish Health Minister Fahrettin Koca who considered that the statement does not conform to diplomatic language and promised to solve the problem soon. On the other hand, the debts of the Health Ministry to the Turkish health and pharmaceutical companies have exceeded 20 billion liras.
Conclusion and expectations
In the event that the Turkish government does not find a solution to the TL crisis and external financing soon, the TL would face a new crisis that may drop its price to 8.5 liras to the dollar. If the situation continues in the same manner, this would lead to the bankruptcy of a greater number of companies that would not be able to pay their external debts due to this price of the dollar, the economic recession, and the coronavirus pandemic, which would increase the unemployment crisis.
This situation would have negative repercussions for banks whose percentage of non-performing loans has increased. It would also have strong repercussions for the political situation and the government’s stability. Therefore, the Turkish government seems obliged to make diplomatic concessions in foreign policy, especially in its relations with Washington, in order to find a solution to its current economic crisis.
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