The economic consequences of the coronavirus on Turkey
The rapid spread of the COVID-19 virus in Turkey raises the question of how badly the outbreak will affect the country and its economy. Analysts appear divided.
Turkey was the last major economy in the world to report its first case of the highly contagious infection on March 11. It was also the only nation with a population exceeding 50 million people not to confirm a single case until that date.
Since then, the contagion has spread rapidly through the country, with 3,629 confirmed cases and 75 deaths as of March 26. It is upsetting the government’s plans to grow the economy by 5 percent this year and the lira has fallen sharply in a decline reminiscent of a currency crisis in 2018.
Like most other countries, Turkey is shutting down public places and calling on people to stay at home to reduce the spread of COVID-19. But despite a 100 billion lira ($15 billion) government rescue package announced last week, factories are inevitably closing too, raising the spectre of a sharp economic slowdown and a slump in much-needed revenue from exports.
Timothy Ash, senior emerging markets strategist at BlueBay Asset Management in London and a veteran Turkey-watcher, says the economic consequences for Turkey are heavily dependent on how long the virus, and the accompanying measures to prevent its spread, will last.
As with most economies around the world, the coronavirus will likely have a significant impact on Turkey’s economy.
The tourism industry, which generates approximately $30 billion in sales and foreign currency revenue for the country, will undoubtedly be hit hard. But, in an optimistic scenario, it could still rebound should the virus peter out by the start of the all-important summer season in June.
While Turkey is set to suffer – the currency crisis of two years ago has already led to a spike in unemployment and a slump in the lira’s value – the country also has notable advantages which might help it weather the storm, Ash said.
Turkey imports nearly all the energy it consumes. While a rise in energy prices increases costs for the country, when prices decline Turkey reaps the rewards, unlike oil and gas producers such as Russia.
“The lower oil prices really help, as Turkey is a huge energy importer,” Ash said. “The 30-buck drop in oil prices could save $12 billion in energy imports which might cover lost tourism receipts.”
Unlike many other emerging markets, Turkey also has room to borrow and therefore spend more, Ash said.
“Turkey has some fiscal space to loosen with a public sector debt to GDP ratio of only 30-odd percent, half the emerging market average,” he said.
Furthermore, the Turkish government is “not averse to rolling out means to stimulate growth and the economy is typically quick to respond,” he said.
But the present economic situation is unprecedented for Turkey. Time is of the essence and some economists say the government has yet to grasp the reality.
Güldem Atabay, a prominent Turkey-based economist and regular columnist for Ahval, is pessimistic about the economic outlook as production and consumer demand slow rapidly.
She said she cannot recall “a similar Turkey specific case in terms of a pandemic-related sudden stop from the demand and production side happening simultaneously.
“In previous cases when Turkey’s economy contracted it was due to an external shock such as the 2008 global financial crisis, which was well weathered by Turkey as it was just out of an IMF program and the fiscal balance, monetary policy was in the best shape it could ever be,” Atabay said.
Other economic contractions, such as those in 2001 and 1994, were homegrown and the result of economic and political mismanagement, she said.
“I think what Turkey is going through is non-comparable, just as is the case for all the nations in the world,” Atabay said. “Given the change of political system and the centralised way everything is being managed from justice to the economy, it is going to make the current economic shock more lasting in my opinion.”
Turkish President Recep Tayyip Erdoğan and Treasury and Finance Minister Berat Albayrak’s obsession with maintaining economic growth suggests that they are detached from the dire reality of what is happening in the world today, Atabay said.
“They are still trying to stimulate demand through tax postponements and subsidies directed for consumption,” Atabay said. “Yet, households are lacking the basic income they need to consume, and there is no rational support scheme to prevent that.”
Additionally, revenue was already recklessly spent by Erdoğan’s Justice and Development Party (AKP) in its attempt to alleviate the effects of the August 2018 currency crisis, when the United States sanctioned Turkey for its detainment of U.S. Pastor Andrew Brunson on terrorism charges.
The cost of creating six percent growth in the country’s gross domestic product (GDP) in the fourth quarter of last year was a high one. The budget ended up in deficit to the tune of 4 percent of GDP.
Consequently, some analysts argue that stimulating positive economic growth, as Ankara was poised to do throughout this year, is just no longer possible.
“Now that the world is different economically after the coronavirus lockdowns, the AKP needs even more resources to spend which they simply do not have as they tapped them over the last three years,” Atabay said.
Consequently, Turkey’s economy is set to contract this year, she said.
While some companies in the health sector, which are capable of making much-needed ventilators and masks to help victims of the coronavirus, can benefit from government support, many others could go bankrupt if the lockdown persists beyond the second quarter.
Economic difficulties Turkey has faced since 2018 will also be worsened by the events of this year. Unemployment will spike and have inevitable political ramifications.
Furthermore, the Turkish economy is not demonstrating that it can withstand the pandemic even in the short-term since the government lacks resources to support the most vulnerable parts of society, which is a crucial requirement in dealing with this particular crisis, Atabay said.
Consequently, Erdoğan is trying to prevent a full-scale national lockdown of the kind other countries have begun implementing.
Atabay predicts that if the situation necessitates even partial company closures in the next few months the country’s “GDP growth will sink deeper into the contraction range.”
Furthermore, even if the coronavirus did not happen, Turkey’s annual GDP growth would likely have slowed and perhaps even turned negative in the fourth quarter of this year, she said.
“Now with the virus and its effects, negative growth will hit in the coming three quarters,” she said.