Our Opinion: 2020

Recession in Turkey

Having just returned from Turkey, it is clear that it’s currency – the Lira – is back in the firing line. The Turkish tourism industry has been hit hard by the pandemic, reducing crucial foreign-currency earnings.

Consumer debt has increased by 25% percent to more than $100 billion in the past three months as the government moved to help families during the coronavirus pandemic, but the result has been a surge in inflation to 12%.

With the falling lira and increased price of imported goods, the living standards of many Turks who earn in lira but have dollar debts have fallen sharply.

The economy is expected to shrink by about 4% percent this year. The official unemployment rate remains at 12.8% because layoffs are banned, although many experts say the real figures are far higher.

To complete the perfect storm, tourism revenues and exports have been decimated by the pandemic, and foreign capital has fled amid fears over economic trends and the independence of the central bank.

Logic dictated an increase in interest rates but this won’t happen. A mix of controlled devaluation and backdoor policies, such as limiting Turkish lira’s liquidity, is more likely.

There is speculation of snap elections, and Erdogan’s view is that higher interest rates cause inflation, despite considerable economic evidence to the contrary.

Rising tensions with EU member states have also led to talk of economic sanctions. The result is that the lira is down by 14% against the US Dollar this year and has been trading above the eight-to-the-euro level for the first time in two years.

Turkey’s central bank is thought to have spent more than $60bn propping up the lira this year but it is fast running out of options. Exchange reserves are dwindling and the only remaining option – an interest rate hike – isr uled out because of pressure from Erdogan to keep credit easy.

That means that devaluation looks likely, but if the authorities lose control of that process then inflation – already at 11.76% – could spike higher. Foreign investors have pulled $4.3bn out of Turkish shares this year, which is only exacerbating the currency’s problems.

It is only two years since Turkey’s last currency crisis. On that occasion the lira lost more than 25% of its value against the dollar and inflation peaked at 25%, forcing the central bank to hike interest rates to an eye-watering 24%. A series of currency crises have seen the lira lose 83% of its value against the US dollar since August 2008.

Turkey could be on the brink of a significant recession as the economy continues its collapse.

21st August 2020