Turkey Economic Report : The Downturn will continue in 2020

The modern history of Turkey, especially its political landscape, has been marred by unpopular leadership, unsatisfying reforms, and various coups and rebellions, which has contributed to a perplexed economy. Turkish economy lacks an industrial policy and diversification of exports. Turkey is too dependent on the EU market. Everything made and sold in Turkey is about Europe. They tried diversifying to Africa, and it’s not really working. Turkish economy is certainly having a downturn at the moment. But the magnitude of this downturn is big enough to worry some economists that the economy might end up with a secular (i.e., non-cyclical) stagflation, meaning few quarters of low growth with inflation. Turkish Lira has been the worst performer of all emerging market currencies (worse than the Mexican Peso). And the economy performed badly while its major trade partner EU was performing well. Normally, if your buyer is having a good day, that should put the newest clothes on your window. In Turkey’s case, that didn’t happen. There are structural problems with the Turkish economy, such as the chronic import-dependence of the exports, lack of innovation and entrepreneurial skills, lagging legal reforms, etc. The political environment and the government’s ambitious agenda is stressing people out. Trust in institutions is decreasing, so is social capital. People’s energy and focus are directed on political issues. It does not sound like a calm and collected society. Expect a major economic hit to Turkey, a country of 80 million, which sits at the crossroads of Asia and Europe. Welcome to The Atlantis Report. After the record GDP growth recorded in 2017 (+ 7.4%), in which Turkey ranked first among the G20 countries, the Turkish economy slowed significantly in the second half of 2018, which was expected from many sides also in light of the currency tensions of August 2018 and the restrictive monetary policy adopted by the Central Bank to contain inflation. The data published by the Turkish Statistical Institute show that, during the whole of 2018, GDP grew by 2.6%, but in the fourth quarter, the effects of the calendar decreased by 2.4%, following however, a previous decrease 1.6% in the third quarter. Turkey, therefore, entered the technical recession for the first time since 2009. The growth target, indicated by the Government in the latest Medium-term Economic Plan for the 2018-2020 period, is 5.5% and should derive from the development of high-tech economic sectors such as defense, aviation, ICT, pharmaceutical and chemical products and through an incentive policy for foreign investors to relocate their production to Turkey. Forecasts for 2019 also from the main international financial institutions: the World Bank expects growth of 4%, the IMF of 3.9%. In addition to the volatility of the national currency, high inflation and unemployment rates remain among the main problems of the Turkish economy. In 2016, average inflation stood at 7.78%, above the 5% target set by the Central Bank, which has never been achieved. In 2017, however, the average inflation rate - never dropped below 9.58% - stood at 11.14%, while in 2018, the average inflation was 16.22%. However, the Turkish Central Bank has revised downward its inflation outlook for 2019 and subsequent years. At the end of 2019, the new report of the banking institution predicts inflation at 14.6%, which is expected to decrease further in 2020 (8.2%) and 2021 (5.4%). The Bank's goal is to maintain a restrictive monetary policy to support price stability and control the high inflation that continues to register in the country.  The unemployment rate in 2016 and 2017 was 10.9%, with youth unemployment (15-24 years) of 19.6% and 20.8%, respectively. In 2017, the number of unemployed, almost 3.5 million people, tends to increase as the growth of the economy is not sufficient to absorb the increase in the workforce. In particular, about one million young people enter the labor market every year, while female participation also tends to increase. In November 2018, the unemployment rate rose to 12.3% - an increase of 2% on an annual basis - with youth unemployment (15-24 years) of 23.6%. From a sectoral point of view, employment is distributed as follows: 55.8% is attributable to services, 20% to industry, 17.7% to agriculture, 6.5% to construction. As indicated in Turkey's new Economic Program, announced in September 2018, the country aims to achieve an unemployment target of 10.8% in 2021. Finally, the sensitivity of the trade balance deficit to the price of energy resources, which Turkey imports almost entirely, makes the country dependent on foreign capital, the availability of which, abundant in recent years, has become more expensive following the reduction in the sovereign rating Turkish market below investment grade by the three main rating agencies (Moody's, Standard & Poor's and Fitch). During 2016, the positive effect of tourism also disappeared, but in 2017 a recovery of the sector was confirmed with 38,620,346 presences of foreign tourists who visited Turkey. Record tourism in 2018 with 39.5 million foreign visitors with an annual increase of 21.8%, favored by the depreciation of the Turkish Lira against the euro and the dollar. A boom that guaranteed total revenue of $ 29.5 billion, an increase of 12.3% over the previous year. Among foreigners with 6 million arivals are: Russians, Germans, Bulgarians, and British. After an impetuous growth, probably swollen, which, however, rested on not very solid foundations, Turkey fell into recession. In the last quarter of 2018, GDP contracted by 2.4% compared to the previous quarter, which in turn ended with a 1.6% drop. 2018 is thus closed with an anemic growth of 2.6 percent. Compared to 7.6% in 2017, it is very little. Completely insufficient to absorb the one million young people who enter the job market every year. But it is also lower than the government's growth target, adjusted downwards to 3.8 percent. There is worrying drop in private consumption. But even more worrying is the drop in private consumption, which decreased by 8.9 percent in the last quarter of 2018. They had been at the center of the strategy of Turkish President Recep Tayyip Erdogan. Which, in recent years, had facilitated a series of state measures and loans on particularly generous terms aimed at private companies and families. Another figure is significant. The per capita income has returned below the psychological threshold of 10 thousand dollars, to be precise at 9,632 dollars. News that immediately reflected on the Turkish Lira, which depreciated by 30% in 2018 against the US dollar. The local currency thus has lost 3% since the beginning of the year. The standoff between Erdogan and the Central Bank is not a surprise. But Erdogan's blow is still heavy. After being reconfirmed in the difficult presidential election and starting to rule as a "super president" . Erdogan continued to insist on his line: interest rates are enemies of the Turkish economy. The Turkish president had never digested the three rate hikes decided by the Central Bank, which brought them from 17.75% to 24% last September, keeping them unchanged since then. 2018 was precisely characterized by the standoff between Erdogan, determined to condition the country's monetary policy, and the central bank, determined to maintain its independence. The central bank's choices proved wise in the end: it managed to contain the wave of inflation, which flowed in October above 25%, and to regain ground for the Turkish Lira against the dollar, although the devaluation in the year just ended was around 30 percent. It was precisely the increase in rates, together with the contraction of the trade deficit (the latter mainly due to the drop in consumption and imports), which contributed to strengthening the Turkish currency. If this had not happened there would have been the basis for a far worse crisis. It is therefore unlikely that in this context, with the Turkish Lira in danger of a further devaluation, the Bank will reduce rates (moreover confirmed just two months ago). It is not an easy time for Erdogan. At the end of 2018, in an attempt to gain consensus, the president announced a series of measures aimed at buffering the negative effects of the economic slowdown. Measures aimed especially at the poorest sections of the population, the hardcore of its electorate for ten years. The inevitable drop in foreign funding. Turkey's economy remains strong but is still sick. It will take time to heal. The forecasts of a pool of analysts indicate a phase of recession also for the entire first half of 2019. Also, because Ankara will not be able to rely too much on the fundamental foreign private financing. In the second half of 2018, the outflow of foreign capital amounted to 20 billion dollars. Investments instead decreased by 3.6%. And with few foreign capitals, it becomes difficult for Turkey to embark on the path of economic recovery promissed by Erdogan for his electors. Expect the Lira to keep devaluing. But there will be a post-Erdogan ‘bounce’ when he does leave. Then it will carry on devaluing. So long-term, we would expect the Lira to devalue against the US Dollar . If those inflation rates continue [and economists expect that they will], we would expect the Lira devaluation to continue at that rate. Short term, other effects such as FDI [Foreign Direct Investment], Capital Flight, and sectors like Tourism play a larger part. Both FDI [down from $16.8 bn in 2015 to $9.8bn in 2017] and Tourism [down from 42 million in 2015 to 25 million in 2017] have fallen dramatically since the 2016 Coup . And Capital Flight has increased [more particularly since the Coup’s aftermath, in terms of anti-democratic actions and business confiscations by Erdogan. $341 m in Nov-Dec 2017. This has worsened the Foreign Exchange Balance – leading to faster devaluation recently. A return to sensible macro-economic, political, and governance policies in Turkey could reverse these short term effects. But recent actions by RTE, including further business confiscations and restrictions on press freedom [the “state-raiding” and take-over of Dogan Media], and political adventurism [the invasions and occupations in Syria] make such a return unlikely. Moody’s, on 08.03.2018, and Fitch, on 17.04.2018, has downgraded Turkey’s Sovereign Risk Rating, citing Erdogan’s recent actions. This is likely to further encourage Capital Flight and depress FDI. At the moment the situation is pretty bad. They can not pull the interest rates down despite all the efforts. The real estate developers ;especially those doing it within the scheme called urban transformation; can not borrow money from the banks anymore. So one of the locomotives of the Turkish economy for the last decade went down the drain. Huge companies such as Ülker and Dogus are restructuring their debts, which is very alarming (they are in debt in American dollars). Turkish Lira has been breaking record after record in losing value against the Euro and Dollar in the financial markets. The world is much more capitalist than, say, 20 years ago. So the situation is desperate now because 20 years ago the governments had a certain power to limit the amount of money that escaped from the country, this gave them some leverage on both the exchange rates and the interest rates (rather than only one of them). This is not the case anymore. Furthermore, Turkey’s relation with the west (especially with important trading partners such as Germany) is very bad. Turkish economy is too Istanbul centric. About half of the Turkish GNP is generated in Istanbul. It is the financial center. Most of the industry is located around Istanbul. It is the main port for valuable imports and exports. It is the second touristic destination after Antalya. Istanbul has been an important location after its establishment by Constantine the Great during the 4th century, until our time. Erdogan's Turkey is in choppy economic waters. Berat Albayrak, is the son in law of Erdogan. He is currently the one that oversees the country's treasury and economy. So far, his economic policies have been terrible. The only thing that helped Turkey’s economy was the policies of the predecessor government. As uncertainty grows, more and more investors are turning away from Turkey. The economy won’t improve if there is no massive foreign direct investment. Erdogan and his people don’t have the brainpower to draw up new economic policies. After they purged their more intelligent members who were part of the FETO organization, they are now left-brain drained. Turkey’s economy will not improve unless there’s a regime change or if Erdogan becomes benevolent. Berat Albayrak has tried to convince foreign investors, but they remained unconvinced. Many experts are expecting the Turkish Economy to face its greatest collapse since the republican era. There are two problems ahead of Turkey. The first one is INFLATION. The Turkish Lira lost 40% of its value in 2018 because the Turkish economy imports more than it exports. In addition, Inflation is already more than 20%. As a result, foreign investors may pull their money out of Turkish stocks and bonds as their lira investments lose value. Therefore, unemployment will increase in 2019. Eventually, the currency drop will raise the cost of living for Turkish citizens as prices of consumer goods become more expensive. The second one is DEBT. Turkey already has $466 billion in foreign debt (about 78% in U.S. dollars and about 18% in Euros), and if the U.S. Federal Reserve raises interest rates . The Turkish businesses that owe money in dollars or euros will discover that, in 2020, the loan repayment will become much more expensive. Thus corporate bankruptcies or bank failures become a reality. Consequently, many European lenders, Italy’s UniCredit, Spain’s BBVA, and France’s BNP Paribas, exposed to the Turkish Lira, may suffer huge losses on loans (usually in Euros or U.S. Dollar) to the Turkish government and business. The prospects for Turkey in 2020 appear weak due to a combination of problems, including a high level of corporate debt, a weak currency, a drop in foreign investment, a widening current account deficit, high-level inflation, and a struggling export sector. This was The Atlantis Report. Please Like. Share. And Subscribe. Thank You.










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