Turkey is one of the countries that were hit by the coronavirus (COVID-19). According to the Turkish Ministry of Health, the number of infections reached 15,679 cases, with 277 deaths, as of the beginning of April 2020.
The spread of the corona epidemic is expected to affect the Turkish economy in three different areas: first, the global interruption and slowdown of the movement of goods and services which will affect Turkey’s foreign trade; second, the decline in local demand due to the climate of lack of confidence, uncertainty and unemployment; and third, the increasing difficulty in finding and accessing foreign financiers and investors due to the reduced desire globally to invest and take risks.
This paper looks in detail into all three areas, discusses the government support plan announced by president Recep Tayyip Erdogan, and assesses the extent that this support would be capable of dealing with the adverse effects of the crisis. The paper also attempts to draw a picture of Turkey’s economic situation till the end of this year while taking into account the implications of the spread of corona for the world economy.
Collapse of the goods supply chain and interruption of the transport of commodities and passengers
With the spread of the coronavirus and halt of factories in China, a crisis in accessing goods has started to emerge in Turkish markets. The situation escalated with the spread of the epidemic in Europe as some goods, including some raw materials, became unavailable on the markets.
Meanwhile, the Chinese economy is expected to witness a contraction in the first quarter of 2020, followed by Europe and the US in the second quarter. Unless this epidemic crisis is promptly overcome with the swift discovery of a vaccine or treatment, the European economy will face the threat of remaining under recession until the end of the year. This will generally amount to a huge problem for Turkish exports leading to their decline, especially considering that the EU accounts for the largest share of Turkish exports. For instance, in 2019, 49 percent of Turkey’s exports were destined for EU countries. It is noteworthy that exports accounted for 6.4 percent of the growth of the Turkish economy, which grew by only 0.9 percent in 2019.
On the other hand, in 2019, Turkey depended for its imports on East Asia, which accounted for 23 percent of total imports. Most of those imports were not in the form of oil or energy, but rather raw materials or semi-manufactured goods used by Turkey to operate its factories and subsequently sell its manufactured products abroad. With the emerging difficulty in accessing those products due to the situation of factories and markets in East Asia, particularly in China, Turkey will face a problem in accessing the raw materials on which it depends in industry, local consumption and exports, and their prices will increase.
Due to this global crisis and the ongoing spread of the virus, the services sector in Turkey will also sustain significant losses in terms of transport and tourism. Turkish Airlines, as well as some private Turkish airlines which had started to take over some of the markets in the region, will also sustain significant losses. Because this crisis is expected to last at least until the summer, the real losses in the tourism sector will appear this summer and not currently, given that in 2019, Turkey was visited by nearly 40 million foreign tourists who contributed revenues of 30 billion dollars to the domestic market. Thus, Turkey’s income from tourism is expected to decline this year by 10-20 billion dollars.
Decline in local demand
With the announcement on 10 March 2020 of the first case of infection with coronavirus in Turkey, life has gradually started to slow down due to the precautionary measures taken, such as the reduction of working hours, reduction of worker numbers, and the temporary closure of numerous stores and commercial enterprises. Naturally, this led to a decline in trade and spending and affected all sectors as people were asked to stay at home and refrain from going out except when necessary.
With the decline in sales and production, employees and workers began to be vulnerable, especially that 35 percent of them work informally, i.e. without health insurance, job security or pension. Thus, the poor category of workers, employees and craftsmen was the one to begin to suffer lately, despite the launch of media campaigns demanding that employees be retained and their wages paid uninterruptedly. While many promises may have been given, keeping them will be extremely difficult if the crisis drags on. Economic confidence indexes have declined by 6 percent in March and will continue to do so at a higher rate in April. Recovery will not be close in this respect, nor in the return of domestic or local demand or production.
The crisis of accessing external financing
Turkey’s foreign debt currently stands at 434 billion dollars. It is the sum of all Turkish government and private debts. According to central bank figures, nearly a portion of 172 billion dollars of these debts is due this year. That is they are short-term debts. Before the start of the corona crisis, Turkey witnessed a decline in foreign investment movement, rather a flight of foreign capital from Turkey, which had started at the beginning of this year.
During the last three months, that is since the beginning of this year, foreign investors gave up central bank bonds that they had purchased, Bonds sold by foreign investors leaving Turkey amounted to nearly 5 billion dollars. While nearly 26 percent of central bank bonds belonged to foreign investors in 2013, this percentage declined today to only 7 percent. This figure is even below the one recorded when Turkey suffered from its last economic crises in 2001 and 2008. This means that foreign investor confidence in the Turkish economy, laws and leadership is at its lowest over these two decades.
On the other hand, the central bank has announced that its total holdings of foreign currencies and gold, including local bank deposits, amount to 93 billion dollars. However, the amount owned by the central bank, i.e. its disposable basic reserves, since the rest of the amount belongs to private banks and companies, is only 31 billion dollars. After deducting from this amount temporary assets as a result of currency swap agreements with other central banks, the Turkish central bank’s real dollar reserves would not exceed 4 billion dollars.* Therefore, the Turkish central bank is currently incapable of securing the required dollars that companies will seek to buy to pay their debts this year, amounting to 172 billion dollars. It will also have difficulty in securing dollars for foreign investors who sell their investments in liras, convert their profits into dollar and transfer them to their countries.
Against the decline in domestic growth and the contraction of the local market, the central bank will continue its policy of reducing interest rates on the Turkish lira (which currently stands at 9.75 percent) to encourage spending. On the other hand, the government is expected to seek to sell or privatize some of its institutions which it had brought together under its sovereignty fund in order to access foreign investment and dollars. Yet the sovereign fund does not house any institution that can easily be privatized, thus securing the sufficient or required liquidity in dollars or hard currency so that Turkey can meet its aforementioned needs.
Turkey’s only benefit from the corona crisis is the current significant drop in oil prices. Turkey is expected to save nearly 10 billion dollars of its spending and dollar needs because of the global drop in oil prices. However, this amount, which will ease the burden of the Turkish economy this year, will be offset by an equal loss in the tourism sector which is the main sector for drawing foreign currency into Turkey.
The government economic stability support package
In mid-March, the Turkish government announced a financial support package worth 100 billion Turkish liras (nearly 15 billion dollars) to support financial and economic stability. A quarter of this support, i.e. nearly 25 billion, was allocated to the “Credit Guarantee Fund” which was established in the wake of the 2001 bank bankruptcy crisis to guarantee the deposits and money of depositors by the state. The savings ceiling of the Fund was raised from 25 to 50 billion liras. This will help banks deal flexibly with defaulting clients or those who seek access to new loans without sufficient collateral. In other words, it will allow access to soft loans for companies, workers and employees.
Several free internet packages have also been allocated to citizens to facilitate working from home and support companies which direct their staff to work remotely. Recruitment encouragement has also been extended by extending the exemption period for employers from paying social and health insurance premiums for new employees or workers for the first three months.
In addition, several taxes have been reduced and their collection was deferred for six months. Reductions included taxes on domestic flight tickets, without a clear reason, especially that the situation requires that everybody stay at home rather than be encouraged to travel, as well as the tourism accommodation tax. Finally, the downpayment to obtain a housing loan was reduced from 20 to 10 percent only of the value of the purchased unit.
The fourth package concerned the elderly through the provision of some financial support to nursing homes, bringing forward the date of the yearly allowance for pensioners which the government usually pays at the Feast, from May to April, and the delivery of pensions to the elderly and pensioners at homes instead of expecting them to go to banks.
From among all those measures and packages, what can be said to have a real impact on the ground are the package for supporting the Credit Guarantee Fund and the package for extending tax exemptions for six months. The remaining packages will not have any effect on the economy. They are rather included to send a political message. Yet the figures concerned are modest compared to the Turkish economy which, based on its 2019 size, amounted to nearly 4.28 trillion liras. Nevertheless, only 100 billion liras were allocated to save an economy of that size, that is nearly 2.3 percent. Besides, the government has not explained how this package will be spent (except for the amount of 25 billion liras to support the Credit Guarantee Fund). There are also doubts that the government budget will be capable of bearing this burden in the first place despite its smallness and modesty compared to the size of the economy. In contrast, the US has allocated 2 trillion dollars to counter this crisis, which accounts for nearly 9.3 percent of the size of US economy in 2019.
With regard to the financial source of this package, i.e. 100 billion liras, and how it will be secured, the 2020 government budget is expected to hit a record deficit, especially that a significant portion of the budget was allocated to the payment of urgent short-term debts this year. Expected tax revenues for this year were also exaggerated during the preparation of the 2020 budget last December. This will place the Turkish government in a big crisis to access finance and new loans. The solution could lie in taking one of two steps:
1. The government would again seek to borrow in hard currency from abroad. This has its difficulties as explained at the beginning of the report due to the global circumstances. Yet it is still possible and costly at the same time.
2. The central bank would tend to lend the Treasury directly short-term loans. This would mean that Turkey will print money and financial bonds which would affect inflation and the price of the lira.
A final assessment
Due to the corona epidemic disease in Turkey, its foreign trade and exports are expected to decline strongly this year. It is expected to lose more than 50 percent of tourism revenues. Currently, the only positive aspect is the drop in oil prices which will save the Turkish Treasury nearly 10 billion dollars. In contrast, precautionary quarantine measures and the shift to work from home will reduce the size of trade, money traffic and domestic trade. It will further reduce the confidence of local investors in the future of the Turkish economy.
The Turkish government is still unaware of the legal implications of this epidemic after the interruption of payments and debt default among tradesmen that will turn into big trade issues later this year. With 172 billion dollars of foreign debt due to be paid this year, and in view of the scarcity of hard currency in Turkey and the drop in production, sales and profits, the second half of this year will witness the outbreak of a large-scale economic and financial crisis in this regard.
The financial measures so far announced are considered modest and of an unknown financing source. They are based on assessments by the presidential palace that the crisis will not exceed 45 days in Turkey. Most of those measures are initially meant for political propaganda. They do not have a real effect on the Turkish economy in this crisis, particularly in terms of compensating for the losses from the drop in exports and the contraction of the local market. The Turkish government is expected to announce new financial packages in the future, but its delay in taking this step and the modesty of the announced figures will not have a satisfactory positive effect.
On the other hand, the continuing exit of foreign investments and the flight of dollars from Turkey cannot currently be avoided because of the significant decline in the dollar reserves of the Turkish central bank which will attempt to imitate what has been done by Mexico, South Korea and Brazil. These sought to sign temporary currency swap deals with the US Federal Reserve. In this connection, politics and the relations between Ankara and Washington will be effective with respect to saving the Turkish central bank through the approval or rejection of this deal with the US Federal Reserve. It is also worth mentioning that the government is no longer in possession of high-value enterprises or institutions that it can promptly privatize and obtain sufficient foreign currency from their sale.
The second half of 2020 is expected to witness a deterioration in the value of the Turkish lira against the dollar due to the scarcity of the dollar and the high demand thereon. All the “tricks” of the government and the central bank to secure the dollar have started to be exhausted. Turkey is therefore expected to resort to what Brazil has previously done, by taking gradual steps to restrict money withdrawal from banks, especially the dollar. The government could assume control of some bank accounts. Yet such radical steps would have serious disadvantages. They would make finding an external financier or lender more difficult or impossible. They would make resorting to the IMF the only solution. In view of the government’s rejection to resort to the IMF, Washington will be the one who decides to save Turkey’s economic situation this summer. Nevertheless, in view of the policies of the current Turkish government under president Erdogan, Turkey may well follow the path taken by the Lebanese government that rejected to pay its foreign debts, as a last resort, although it remains the least likely.
In short, Turkey is expected to witness this year an economic crisis that is much bigger than all its previous economic crises (in the years 2002, 2008 and 2018). This is attributable to its foreign debts, the crisis of dollar scarcity at home, the absence of transparency, and the retreat of foreign investors. The coronavirus spread crisis has only accelerated the approach of this crisis. It has reduced the options and tools that the government could have utilized to defer the outbreak of the crisis rather than find a solution to it.
This will have implications on the security and political situation in Turkey. It might eventually lead to a change in the governance system from presidential to parliamentary as a political way out to absorb the anger of voters at the consequences of the expected economic crisis and, unsurprisingly, to the resort to early elections in 2021.
* Currency swap deals, which are temporary dollar deposits, were mainly carried out with Qatar, Libya and China.
EPC | 20 May 2020
EPC | 19 May 2020
EPC | 18 May 2020