Turkey heading into deep recession, IIF chief economist says

Turkey is heading into a deep economic recession, according to Robin Brooks, the top economist for the Institute of International Finance (IIF).

Brooks, a former chief currency strategist at Goldman Sachs, cited a sharp reversal in a borrowing boom for the prediction, which he said would also steady the embattled Turkish lira and narrow the current account deficit.

A so-called credit impulse in Turkey “is now the most negative ever”, he said in comments on Twitter on Friday. “That means deep recession, but lira stabilisation.”

Turkey’s government has sought to engineer an economic recovery in the country this year by ordering state-run banks to flood the market with cheap loans. The central bank has kept interest rates at below the rate of inflation to help support that policy.

But the tactic has caused a sell-off in the lira, which has slumped to successive record lows, prompting the Turkish authorities to take measures to help rein in the lending. At the same time, the central bank has spent tens of billions of dollars of its foreign currency reserves defending the lira.

Turkish Treasury and Finance Minister Berat Albayrak, the son-in-law of President Recep Tayyip Erdoğan, predicted economic growth for the country of 0.3 percent in 2020 when announcing a three-year economic programme in late September. A monthly central bank survey of economists in October foresaw an economic contraction of 0.8 percent. Economic activity slumped by an annual 9.9 percent in the second quarter of the year.

In June, the International Monetary Fund predicted a 5 percent economic contraction for Turkey this year, putting it among the most pessimistic forecasters. It cited the impact of the COVID-19 pandemic for its forecast.

The lira slid to a fresh record low of 8.3531 per dollar on Friday, taking losses since the start of the year to 29 percent. Investors say the central bank’s failure to raise its benchmark interest rate is contributing to the currency’s collapse.

Brooks says the IIF has set a “fair value” for the lira at 7.5 per dollar, maintaining that a steep reversal in the new lending by banks will narrow the country’s widening current account deficit. The deficit has ballooned as Turks used capital from loans to buy up imports.

But Turkey’s trade deficit almost tripled to $4.83 billion in September from a year ago as imports surged by 23 percent, according to official data published on Friday. This suggests that Turkish businesses and consumers are still finding the funds to buy up imported goods and to potentially support economic growth going forward. Exports rose by 4.8 percent. 

A currency crisis in 2018 forced Turkey’s central bank to increase interest rates sharply in 2018. But the benchmark rate now stands at 10.25 percent compared with 24 percent in July last year. Backed by the government, the bank has preferred to use other tools to tighten monetary policy, including funding banks at varying rates of interest.

Central Bank Governor Murat Uysal said this week that economic activity posted a ‘V-shaped’ recovery in the third quarter of the year across a wide range of sectors. High-frequency data suggested that the recovery continued in October, he said.