Mar 11 2019

Turkey's economy slides into recession before key election

Turkey entered its first economic recession in a decade just prior to municipal elections, which are the first test of President Recep Tayyip Erdoğan’s popularity since he enhanced his powers last year.

The economy shrank by 2.4 percent on a quarterly basis in the three months to December, the Turkish Statistical Institute said on Monday. The contraction followed a slump of 1.6 percent in the previous three months.

The construction sector shrank an annual 8.7 percent, consumer expenditure fell 9 percent and industry contracted 6.7 percent, the data showed.

Erdoğan and his Justice and Development Party (AKP) are battling to keep control of Turkey’s biggest cities of Istanbul and Ankara in campaigning for the March 31 municipal elections. Erdoğan has blamed the economic downturn on foreign powers and has threatened some opposition figures with jail in mass rallies across the country.

"The question or risk factor is the government’s response," said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London. "Any unorthodox response (early monetary policy easing) at this stage will make things much worse."

erdoğan
Turkish President Recep Tayyip Erdoğan on the campaign trail

The fourth-quarter annual GDP contraction was the worst in nine years and pared total growth for 2018 to 2.6 percent. The economy had expanded 7 percent in 2017, fueled by government stimulus including tax cuts and loan guarantees for businesses.

Economists had warned the government early last year that the economy was overheating. Then Erdoğan became embroiled in a political spat with the United States over the imprisonment of Andrew Brunson, a U.S. pastor. The crisis led to economic sanctions, lifted by President Donald Trump in September after Brunson was released, that exacerbated a decline in the lira. The currency lost almost 30 percent of its value last year.

Economic output totaled $784 billion last year, down from $851 billion in 2017, after the lira's decline against the dollar.

Turkey’s consumers and businesses are also reeling from inflation, which stands at almost 20 percent. The economic downturn has also brought a slump in industrial production, consumer confidence and in sales of items such as cars and home appliances. Despite that, the central bank has vowed to keep benchmark interest rates steady at 24 percent until inflationary pressures ease.

The lira fell 0.2 percent to 5.44 per dollar at 12:07 p.m. in Istanbul, taking losses this year to 2.6 percent. The currency had hit a record low of 7.22 per dollar in August as investors sold Turkish stocks, bonds and other assets because of concerns the economy was going into meltdown.

Erdoğan and his son-in-law Treasury and Finance Minister Berat Albayrak say the worst of Turkey’s economic troubles are over. But economists and investors fear that a protracted recession is in store as consumers and businesses pay down their debts, which have become more expensive to service.

The government is pressuring state-run banks to increase lending as well as restructure credit card debt and other borrowing held by consumers and businesses at other banks. Ratings agencies Moody’s and Standard & Poor’s have warned the government that this unorthodox approach threatens banks' credit profiles.

"There are much easier ways out, including a more proactive and transparent approach to dealing with problems in the banks and ideally backstopped by an IMF programme, which does not need to be that large in size or that intrusive," Ash said. 

Erdoğan has repeatedly ruled out financial aid from the IMF.