Toxic sunset cocktail over the Turkish economy
Early hopes that the Covid-19 pandemic would leave Turkey unscathed turned out to be unfortunately, but expectedly, unfounded. Turkey is moving up in the “corona rankings”, both in terms of cases and deaths – it now ranks 9th globally for infections, overtaking Switzerland in recent days.
The impact of the coronavirus on the Turkish economy will depend on how long the pandemic will continue to both affect Turkey and the rest of the world.
Several prominent Turkish medical experts working abroad have argued that Turkey is on the road to becoming like Italy and Spain. It is not surprising that their Turkish counterparts are more reserved, given daily arrests of people “spreading panic in social media”.
My understanding of Turkish and international experts is that corona would not lose its impact before June at the earliest, so I will base all my arguments on this “optimistic” assumption.
Tourism is probably the hardest-hit sector in Turkey. It is true that other services businesses have been shut down as well, but most of the hotels in the Aegean and Mediterranean coast are seasonal, meaning that they are only open from the end of April to the end of October.
For these hotels and other businesses in the sector, corona could not have come at a worse time. Your friendly neighbourhood economist happens to moonlight as a hotelier in the southwestern resort town of Marmaris.
All the hotels here in Marmaris have officially delayed their opening dates from April to May, but unofficially, they all know that they will not able to open before June at the earliest. Groups with several properties have already decided they will open only one of their hotels.
Talks with hotel managers and banks in Marmaris have revealed that there is no immediate concern that hotels, and businesses such as food suppliers that depend on hotels, will go bankrupt - at least not all of them right away. Banks are extremely lenient with extending maturities and deferring payments.
One bank branch manager revealed that President Recep Tayyip Erdoğan and Treasury and Finance Minister Berat Albayrak had talked to bank CEOs when they announced their economic rescue package on March 18, “urging” them to follow state banks’ lead in going easy on firms.
I guess this “new” Turkish economic policymaking model of “persuasion”, as it had been applied before to “convince” banks to extend credit, and firms to lower their prices, does have its benefits.
Even if hotels do not go bankrupt en masse in the short run, the dire straits of the tourism sector will have a large impact on the Turkish economy. For one thing, two thirds of Turkey’s tourism revenues are earned, and a similar share of its 5 percent direct contribution to GDP is made, in the six months from April to September.
It is now certain/almost certain/likely that the first/second/third of these six months will bring in zero revenue. Even if corona dissipated in June, tourism would not pick up immediately, as airlines would start routes and people would gain some confidence (and earn some money) gradually- i.e. life would not return to normal immediately. In fact, hotels have been getting cancellations not only for April and May, but throughout the summer.
The silver lining is that there aren’t many cancellations for September and October, and there are even new bookings - hinting that some people expect life to return to normal by the autumn. But even if Turkish hotels had a great late season, prices are lower at that time of the year, and we could be looking at a loss of at least $10 billion of foreign currency, which would offset the decline in oil prices from a balance of payments (BoP) perspective.
Pencil in the $18 billion of short-term external debt payments due in the next three months, the continued exodus of foreign investors, and that the central bank has already been completely depleted of net reserves, and it suddenly does not seem too bold to claim that Turkey is heading towards external financing problems, if not a full-blown BoP crisis, during the summer months.
That is not all. Total employment in the sector is just short of 1 million, most of whom would add to the 4.4 million already unemployed. Add in the other sectors, and it becomes clear that Turkey is heading towards an employment crisis as well.
Unfortunately, unlike many other countries, Turkey has been caught in the corona crisis with an already-high unemployment rate: The 13.7 percent December figure is only one-percentage-point lower than the high during the global recession a decade ago. Starting from such a high point, unemployment is likely to hit over 20 percent by the summer.
Turkey is also one of the emerging markets (EMs) likely to be affected most by social distancing measures: Economics research and consultancy company Capital Economics has calculated that the share of consumption of goods and services in Turkey vulnerable to social distancing (public transport, entertainment, restaurant, hotels) is around 12 percent of GDP, one of the highest rates in the emerging market world.
So, if Turkey has been caught to the corona crisis in such bad shape, why are government officials taking only half-baked measures?
Sure, the short-term employment allowance, whereby the state is taking up part of wages of employees who would otherwise have been laid off, and limited income support are measures in the right direction, and the central bank has announced several measures as well, but the amounts that have been set aside are nowhere near providing for the approaching army of the unemployed.
At 100 billion liras ($15 billion), Turkey’s economic package is dwarfed by those of other EMs. The government and the central bank have been caught with limited resources. Capital Economics found that Turkey is one of the EMs with the least monetary policy space, as interest rates are already very low, with rates in the negative territory. And in terms of fiscal space, it is more or less in the middle of the pack.
The lack of an adequate arsenal is the reason behind Erdoğan’s reluctance to go ahead with stricter measures, such as a complete lockdown: The state simply does not have the resources to afford a complete lockdown. In fact, I have heard from several sources close to the AKP that there is tension between Health Minister Fahrettin Koca, who is pushing for firmer actions, and Albayrak.
The lack of a war chest to combat the economic impact of corona leaves only one option: The International Monetary Fund. We know that Turkey is not one of the 81 countries that have so far applied to the Fund- which makes sense, given Erdoğan’s distaste for the institution. He will turn to the IMF only when it becomes obvious not only to economists, but to himself and Albayrak as well, that there is no other route.