Turkey: An economy on the verge of collapse?
The Turkish proverb “Zararın neresinden dönülse kârdır” can be loosely translated as “reducing losses at any point is always profitable ”. Simply put, it means that if one is on the wrong track, then the best course of action is to perform a U-turn, however painful or chastening it may be in the short run.
Economists and investors who have followed the tumultuous developments in Turkey in recent weeks must surely be hoping for the government and Central Bank to take the message to heart. Over the last month the lira has collapsed, driven by geopolitical tension with the U.S. and loose fiscal and monetary policy. This has led input costs to rocket and is saddling corporates with an ever heftier external debt burden.
With many firms likely buckling under the strain, there are fears of a possible knock-on effect on the country’s banking sector, particularly if the number of non-performing loans starts to bubble up and international banks grow wary about lending to their Turkish counterparts.
Such heightened uncertainty is starting to suppress economic activity. In August, economic sentiment darkened, light vehicle sales plummeted and operating conditions in the manufacturing sector significantly worsened. FocusEconomics panelists have taken stock; in the most recent report, they lopped 0.2 and 0.5 percentage points off their 2018 and 2019 GDP growth forecasts respectively.
Yet despite the worsening panorama, the Turkish authorities have been largely missing in action over the last month. The Central Bank has yet to make the big-bang rate hike analysts have been pleading for, instead contenting itself with some changes to macroprudential rules and forcing banks to borrow at its higher overnight lending rate. For his part, Finance Minister Berat Albayrak has championed the importance of fiscal prudence, but concrete policy changes are thin on the ground.
To help navigate the highly uncertain times ahead and analyze the economic situation in Turkey in more detail, we spoke to Michael Langham, Europe Country Risk Analyst at Fitch Solutions.
FE: Do you think the Central Bank’s attempt to raise interest rates by stealth (shifting borrowers to the overnight rate from the one-week repo rate) will be effective in reducing inflation and stabilizing the currency?
ML: The CBRT’s stealth hikes will contribute to a sharp slowdown in domestic demand growth over the coming quarters, which will stem demand-side inflationary pressures. However, it will do little to convince investors that the CBRT is a) independent or b) willing to properly address the country’s problems. It’s our base case that the lira will continue to weaken through 2018 but ultimately bottom out as Turkey’s current account deficit narrows, the economy slows and inflationary pressures subside. However, there remains sizeable downsides stemming from Turkey’s large external financing needs and banking sector. Were the currency crisis to spread into crises in either of these areas, the lira could fall quite dramatically and the Central Bank’s stealth hikes would ultimately be seen as inadequate.
FE: Do you think Berat Albayrak and the Turkish government are serious about fiscal consolidation? What steps need to be taken to assure investors that this is the case?
ML: We believe fiscal policy will be tightened over the coming quarters as the government seeks to reduce inflationary pressures and demands on external financing. I think this forms a key part of the government’s ‘muddle through’ strategy. It needs to be clear that government lending and public-private partnership schemes are being phased out quickly and off-balance sheet assets and liabilities are presented as part of a consolidated government balance sheet. More transparency and a clear outlined planned that investors can follow and see measures being implemented would go a long way to building trust.
Whether the government can actual narrow it’s budget may be difficult however. The economy’s sharp slowdown will put increased pressure on the budget and the government may be forced into taking on private sector debt to reduce systemic risks.
FE: How do you see the lira evolving going forward?
ML: We published an article ‘TRY: Three Scenarios For The Turkish Lira’ outlining our base case and then two other paths for the lira. It’s very difficult to say for sure where it is heading but below is our base case view:
The lira will continue to weaken as investor confidence remains fragile, inflation continues to climb and downside risks remain prevalent. Import demand would fall quickly and the current account deficit would narrow in H218. However, the continued outflow of ‘hot money’ and drop in foreign direct investment (FDI) would add to downside pressures on the lira. Real rates would become increasingly negative and Turkish bond prices would subsequently fall further. We would expect the lira to test its previous low of TRY7.24/USD and could find support at TRY7.50/USD.
The lira would ultimately bottom out in 2019, owing to a sharp contraction in external financing needs and a gradual decline in inflation. As the Turkish economy slows, inflationary pressures would fade, increasing real rates and this would eventually prove attractive to investors. The current account deficit is already narrowing due to lira weakness and import demand will likely slump over the coming quarters. The deleveraging process and continued CBRT intervention via unconventional tools could offer further support to the unit and in this scenario we would expect the lira to retreat to the TRY6.00/USD resistance line.
FE: How will Turkey’s corporates be affected by the marked currency depreciation? Are their debt loads still manageable? Are we likely to see many defaulting on their debt?
ML: Businesses will increasingly see margins squeezed as input prices rise and consumer inflation prices lag producer price growth. Producer price inflation (PPI) rose to 25.0% year-on-year (y-o-y) in June, far above consumer price inflation of 15.9%. This implies producers are facing higher costs, aggravated by lira weakness. They have been slow to pass on rising costs to consumers, with inflation expectations rising at a slower pace. Eventually businesses will feed costs through to consumers but with domestic demand set to slow over the coming quarters and our outlook for external demand to remain somewhat subdued, businesses will be reticent to raise prices and further deter demand. This also dampens the outlook for business investment and further employment growth.
Those with high external debts or reliant on imports to sell to a domestic market will be worst affected. Already we’ve seen and heard stories of large Turkish corporates asking their banks for a restructuring of their debt. Instances like this are likely to rise over the coming quarters and we do expect non-performing loans to rise over the coming years.
FE: How will the Turkish banking system be affected by the currency depreciation?
ML: The banking sector has come under pressure as capital buffers are reduced and liquidity becomes more expensive. If depositors begin to withdraw the holdings en masse and foreign investors envisage capital controls as increasingly possible, the currency crisis could morph into a banking crisis. This would likely require state support for the banking sector and could aggravate the slowdown in credit supply, effectively shutting off borrowing streams for Turkey’s highly leveraged private sector.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Author: Oliver Reynolds, Economist
Date: September 7, 2018
TagsCanada Energy Commodities Eastern Europe Investment UK Forex India United States Latin America Unemployment rate Turkey Italy USA Inflation Housing Market precious metals Australia MENA European Union Tunisia Cryptocurrency South Africa Oil Portugal Emerging Markets Iran Precious Metals Commodities China Base Metals Commodities Commodities Infographic Germany Mexico Gold Exchange Rate Venezuela Russia Brexit Company News Argentina Japan Banking Sector OPEC Major Economies Ukraine Euro Area Sub-Saharan Africa France Spain Africa Healthcare Agricultural Commodities Asia Colombia Consensus Forecast IMF G7 Trade Brazil oil prices Greece TPP Vietnam Nordic Economies Bitcoin United Kingdom Economic Growth (GDP)
1 hour ago
2 hours ago
A more stable political environment coupled with strong growth in the United Statesboosting demand for exportssho… https://t.co/1sn7XyZhMP
3 hours ago
Singapore economic growth cools to a two-year low in the third quarter. Full story + new GDP forecasts:… https://t.co/RZ8kmZYJBW
4 hours ago
Over the next few quarters, Central America and the Caribbean should continue to benefit from solid domestic demand… https://t.co/7OilR3sA7V
5 hours ago
- Which ASEAN countries are most exposed in the event of a U.S.-China trade war?
- 75 Top Economics Influencers to Follow
- Emerging Markets Economic Outlook 2018 and 2019
- The Faces Behind Latin America’s Key Institutions
- 2019 Economic Outlook for the Top Oil Producing Countries
- Is your cup of coffee about to get more expensive going in to 2019?
- The Economic Implications of an Aging Global Population
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Venezuela's Electoral Conundrum
- Gold: The Most Precious of Metals (Part 3)
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit