Turkish economy - coronavirus stalls engines of recovery
The coronavirus outbreak is hitting the Turkish economy just when it began to show signs of recovery after a prolonged recession.
The economic impact for Turkey is likely to be felt most via a decline in foreign trade and tourism revenue, which helped return the country to growth in the latter part of last year. Turkey will also need to deal with the cost of emergency measures such as tax subsidies to help businesses and households affected by the outbreak, along with increased healthcare costs.
While rate cuts in developed countries may help Turkey roll over its debt at a reasonable cost, increased regional political and military tensions over issues such as migrants, Syria, Libya and Cyprus and questionable economic policies increase risks and create volatility in financial markets.
The coronavirus outbreak has led to a wave of de-globalisation as international travel and trade falls across the world. Tourism is the most affected sector - up to 50 million jobs are at risk, according to a report by the World Travel & Tourism Council (WTCC). The World Tourism Organisation has revised its estimates for tourists in 2020 from 3 to 4 percent growth to a 1 to 2 percent contraction, predicting for now that worldwide tourism revenue will decline by between $30 billion and $50 billion.
Against this backdrop, the coronavirus will hit Turkey mainly through international trade and the tourism industry. The Turkish economy contracted between the fourth quarter of 2018 and the second quarter of last year.
Annual growth in 2019 was 0.9 percent, well below potential. Positive economic growth for the year was eventually reached with the help of a 6 percent year-on-year expansion in the fourth quarter, which was partly due to a low base effect from the same quarter of 2018. For 2020, the OECD has decreased its growth estimate for Turkey to 2.7 percent, 0.3 percent less than its previous forecast published in November.
Increased tourism revenues - which grew by 17 percent in 2019 to reach $34.5 billion - and a 2.1 percent rise in exports to $171.5 billion were the primary reasons for recovery in the second half of 2019.
The improvement in other areas of the economy, on the other hand, was dampened by weak domestic demand. Net service revenues from travel and transport were the positive items in the balance of payments, with a surplus of $25.7 billion and US$16.7 billion, respectively. The deficit in the trade balance for goods amounted to $16.6 billion. Thus, the current account deficit turned into a surplus for the first time in 18 years due to the increase in exports of services.
At a time when the Turkish economy is in the early stages of recovery, the global effects of the coronavirus outbreak will likely hit service sectors previously at the heart of the economic revival.
Should emergency measures last until June, tourism and international transport revenue could fall by around 80 percent in the period. The WTCC points out that the average recovery period for tourism numbers in countries may be approximately 19 months, decreasing to 10 months with the right response and management. The likely impact on service revenues is less easy to predict, but will serve as a basis to assess the effects of the coronavirus outbreak on Turkey’s economic growth.
To contain the outbreak of the coronavirus, Turkey restricted flight connections with many countries, including its major export destinations and tourist providers. The number of international travellers is expected to plummet between March and June. In the same period of last year, the total number of visitors to Turkey was 14.9 million. Visitors from now restricted countries totalled 5.4 million. As average expenditure per tourist has stood at $666, the decrease in tourism revenues during the period is expected to reach approximately $7 billion.
The tourism sector also creates substantial employment in Turkey with nearly 1.2 million jobs. That makes it politically very significant, especially given the current unemployment rate in Turkey of 13.7 percent. The seasonal hiring of 200,000 people is likely to be postponed for three months, a situation which could increase unemployment by as much as 0.8 percentage points.
A decline in economic confidence will also decrease domestic and international demand. There are no alternative markets to offset the decline in exports to major trading partners such as Germany, China, Italy, Spain, Iran, and Iraq, to which exports reached $46.3 billion in 2019, or 27 percent of total exports.
Germany was the top export destination, just as in previous years, with $15.4 billion of sales in 2019. Italy was the third largest market for exporters with $9.3 billion and Spain was sixth with $7.7 billion. Recessions in these economies will have a direct impact on the Turkish economy through these international trade channels.
Trade with neighbours Iran, Iraq and Georgia has already dropped drastically as borders have been closed. Transport costs tripled within the last two weeks for exporters, since the disinfection processes of trucks and containers is prolonged. This has also led to a truck shortage in the region.
The freight rate of a truck to Iraq, which was $1,500, has increased to $5,000. Furthermore, some truckers have been stranded. For instance, Turkmenistan has closed its borders with Iran and thousands of Turkish trucks traveling to Central Asia were trapped there. Furthermore, the increase in transport costs does not translate into a rise in revenue for transport companies. Both exporters and transport firms are losing money because of the situation in the region.
On the fiscal side, the government’s expenses will increase not only because of a rise in public health spending. They will also rise due to growing cash transfers to vulnerable sectors of the economy, the provision of tax relief for households and businesses and of wage subsidies to firms to contain unemployment.
Furthermore, budget revenue will decrease along with shrinking economic activity. While rate cuts in advanced economies may help debt rollovers, a decrease in the risk appetite of investors looking for safe havens during the turmoil could offset this.
Capital inflows to Turkey have remained weak since political tensions with the United States heightened in 2018. There is no sign of a change in negative perceptions regarding Turkey’s political and economic management. Its divergence from free-market principles and democratic values undermines its financial credibility. Moreover, the high level of non-performing loans and volatility in exchange rates raise concerns for rolling over the private sector’s foreign debt.
The only positive outcome of the coronavirus outbreak for Turkey is a decrease in oil prices. The decline will reduce energy imports this year by around $10 billion from $41 billion in 2019 should current price levels persist until the end of the year.