turkish lira

The Economic Outlook of Turkey in June 2021

From humble beginnings Recep Tayyip Erdogan has grown into a political giant, reshaping Turkey more than any leader since Mustafa Kemal Ataturk, the revered father of the modern republic.

But in recent years the economy has deteriorated. Inflation is nearly 12% and the Turkish lira has slumped against the dollar. Coronavirus is exacerbating Turkey’s economic woes.

When he became Turkish leader back in March 2003 the lira rate was 1.6 to the dollar – now it is above 8.0. His early years in power were marked by solid growth and a development boom.

1: Turkish Lira Exchange Rate to US Dollar, Source: XE

The World Bank on April estimated that Turkey’s poverty rate rose to 12.2% last year, from 10.2% in 2019, and said returning to pre-pandemic levels would be a challenge. The World Bank also states that Turkey’s economic and social development performance since the early 2000s has been impressive, leading to increased employment and incomes and making Turkey an upper-middle-income country. However, in the past few years, growing economic vulnerabilities and a more challenging external environment have threatened to undermine those achievements. 

The World Bank said the impact of the pandemic would be a “struggle to shake off” globally but that Turkey’s economy is expected to grow 5% this year due a recovery in exports.

It warned that rising inflation in advanced economies could lead to “destabilising movements in global liquidity away from emerging markets” and added that growth prospects could also be hit by a resurgence of COVID-19 cases.

Analysis

For most of the period since 2000, Turkey has maintained a long-term focus on implementing ambitious reforms in many areas, and government programs have targeted vulnerable groups and disadvantaged regions. Poverty incidence more than halved over 2002–15, and extreme poverty fell even faster. 

During this time, Turkey rapidly urbanized, maintained strong macroeconomic and fiscal policy frameworks, opened to foreign trade and finance, harmonized many laws and regulations with European Union (EU) standards, and greatly expanded access to public services. It also recovered well from the global financial crisis of 2008/09.

The Turkish economy was one of few globally to expand in 2020 despite coronavirus fallout, thanks largely to a credit boom around mid-year.

Overall inflation was around 12% – and near 20% for food – for much of last year before climbing. Tourism revenue sharply declined and exports fell, leading to a large current account deficit.

The government in response topped up employee wages and banned layoffs, keeping a lid on the unemployment rate.

The recent Turkish crisis, started in 2018, was caused by the Turkish economy’s excessive current account deficit and large amounts of private foreign-currency denominated debt, in combination with President Recep Tayyip Erdoğan’s increasing authoritarianism and his unorthodox ideas about interest rate policy.  Some analysts also stress the leveraging effects of the geopolitical frictions with the United States and recently enforced tariffs by the Trump administration on some Turkish products such as steel and aluminum.

The Turkish lira keeps to fall when comparing to the dollar and euro (as strong currencies) and has come under more pressure in recent weeks, in a continuing crisis that started in 2018, as investors try to assess whether the country’s central bank will heed the demands of its president to cut interest rates. But a rate cut could drag the lira down further at the same time that the country’s high inflation rate is already diminishing the currency’s buying power.

The overall macroeconomic picture is more vulnerable and uncertain, given rising inflation and unemployment, contracting investment, elevated corporate and financial sector vulnerabilities, and patchy implementation of corrective policy actions and reforms. There are also significant external headwinds due to ongoing geopolitical tensions in the subregion. 

COVID has deepened gender gaps and increased youth unemployment and the poverty rate. The risk of inequalities has also been increasing. The COVID-19 crisis is expected to have severely negative consequences for Turkey, further weakening economic and social gains.

There is an “exchange rate illusion” in Turkey’s economic growth data, according to Enver Erkan, chief economist at Istanbul-based Tera Yatirim, who’s ranked by Bloomberg as the most accurate forecaster on Turkish GDP data.

Noting that the GDP per capita in U.S. dollar terms dropped nearly 40% since 2013 to around $7,700 last year, Erkan said Turkey’s recent economic model isn’t sustainable as the growth is mainly driven by consumption supported by government spending and loan campaigns.

A stronger dollar would also add further pressure to the Turkish lira. Turkey’s currency hit a record low on June 4, when it fell to 8.7532 lira to the U.S. dollar, after Turkish President Recep Tayyip Erdogan called for lower interest rates by July or August. That has left investors to assess whether the country’s central bank will heed Mr. Erdogan’s demands.

Mr. Erdogan has fired three central bank chiefs in less than two years, and he prefers low rates as a part of a strategy to encourage growth. His reluctance to have higher interest rates could mean that investors’ returns are eroded. A recent rise in the cost of oil past $70 a barrel is also likely to boost inflation in Turkey.

Turkey’s consumer price inflation eased to 16.59 percent year-on-year in May 2021, from a near two-year high of 17.14 percent in the previous month and below market expectations of 17.25 percent. Still, the rate remined well above the central bank’s medium-term 5 percent target, with upward pressure coming from food and non-alcoholic beverages (17.04 percent vs 16.98 percent in April), transport (28.39 percent vs 29.31 percent), housing and utilities (14.08 percent vs 13.60 percent), furnishings, household equipment and routine maintenance (21.79 percent vs 22.27 percent), hotels, cafes and restaurants (17.73 percent vs 16.81 percent), clothing and footwear (5.75 percent vs 11.03 percent), and miscellaneous goods and services (17.92 percent vs 18.27 percent). The core consumer price inflation rate, which excludes volatile items such as energy, food and non-alcoholic beverages, alcoholic beverages, tobacco and gold, slowed to 16.99 percent in May from 17.77 percent in April.

2. Turkish Inflation Rate, Source: Trading Economics

Turkey’s Industrial Output

3.Turkey’s Industrial Output in March 2021

Turkey grew faster than all Group of 20 nations except for China in the first quarter after nearly stalling a year ago when Covid-19 struck. It’s been bolstered by robust consumption on the back of last year’s government-led push to cut interest rates and boost lending.

Gross domestic product rose 7% from a year earlier and 1.7% from the fourth quarter. The median of 22 forecasts in a Bloomberg survey was for 6.3% growth compared to the same period in 2020.

“This comes at the expense of lira and price stability,” he said.

The government pushed banks to ramp up lending to help businesses and consumers ride out last year’s Covid-19 emergency. The credit boom was coupled with a front-loaded easing cycle that helped prime the economy. That growth push weakened the currency by 20% last year and kept headline inflation in double digits. The size of the economy dropped to $717 billion last year from $760.8 billion a year earlier.

  • Automotive Industry

Turkey’s automotive production, including light commercial vehicles, tractors, and automobiles, amounted to 532,441 million units in January-May, a sectoral report revealed on Monday.

The sector posted a strong recovery with a 28.2% increase year-on-year in the January-May period, after dramatic falls last year due to the COVID-19 pandemic measures.

Last year, the automotive production narrowed by 11% versus 2019 and decreased by 34% year-on-year in the first five months.

While the sector surpassed 2020 figures, it could not reach 2018 and 2019 figures yet, when the production was 712,022 and 625,946 units, respectively.

4. Turkey’s economy Outperforming in first quarter of 2021, Source : Bloomberg
  • Exports

According to the country’s Trade Minister ,Turkey’s foreign sales powered ahead as exporters achieved their second-best May ever.

Exports surged 65.5% year-on-year to reach $16.6 billion (TL 142.48 billion) last month, Muş told a news conference in the capital Ankara.

Sales were up from nearly $10 billion a year ago, battered by the fallout from the coronavirus pandemic that had temporarily shut borders.

They increased despite the strictest lockdown yet that covered part of May. Turkey remains a big trade power in the world as its trade continues rising.

Turkey shipped US$169.5 billion worth of goods around the globe in 2020. That dollar amount reflects an 18.8% increase since 2016 but a -0.9% drop from 2019 to 2020. That figure also represents roughly 0.9% of overall global exports estimated at $18.709 trillion one year earlier during 2019 (calculated as of February 17, 2020).

Applying a continental lens, 55.7% of Turkey’s exports by value were delivered to European countries while 26% were sold to Asian importers. Turkey shipped another 9% worth of goods to Africa. Smaller percentages went to North America (6.9%), Latin America excluding Mexico but including the Caribbean (1.7%) then Oceania led by Australia, Marshall Islands and New Zealand (0.7%).

5.Turkey’s Trade with the European Union, Source: EUROSTAT
6.Turkey among the world’s largest traders of goods, 2019, Source: Eurostat
7. Turkey’s Top Trade Partners, 2019 , Source: Eurostat
8. Turkey among the EU’s main partners for trade in goods, 2020, Source : Eurostat
9. EU trade with Turkey by product group, 2010 and 2020, Source Eurostat

The breakdown of EU trade with Turkey by SITC groups is shown in Figure 6. The red shades denote the primary products: food & drink, raw materials and energy, while the blue shades show the manufactured goods: chemicals, machinery & vehicles and other manufactured goods. Finally, other goods are shown in green. In 2020, EU exports of manufactured goods (84 %) had a higher share than primary goods (12 %). The most exported manufactured goods were machinery & vehicles (44 %), followed by other manufactured products (22 %) and chemicals (18 %). In 2020, EU imports of manufactured goods (87 %) also had a higher share than primary goods (12 %). The most imported manufactured goods were other manufactured products (43 %), followed by machinery & vehicles (39 %) and chemicals (6 %).

10. EU trade with Turkey by group, 2010-2020, Source: Eurostat
11. EU imports of goods from Turkey, 2020 Source Eurostat
12. EU exports of goods to Turkey, 2020, Source: Eurostat

Sources:

1; The Wall Street Journal: Turkey’s Troubles Point to Emerging-Market Risks as Economies Recover, Accessed: 19th of June 2021

2. World Bank. Country : Turkey : Overview. Accessed : 19th of June, 2021

3. Wikipedia: Turkish Currency and Debt Crisis, Accessed : 19th of June, 2021

4. Bloomberg: Turkish Economy Likely Outperformed Most Peers But at a Cost, Accessed : 19th of June, 2021  

5. Borzou Daragahi (25 May 2018). “Erdogan Is Failing Economics 101”. Foreign Policy.

6.“Inflation rise poses challenge to Erdogan as election looms”Financial Times. 5 June 2018.

7.  Matt O’Brien (13 July 2018). “Turkey’s economy looks like it’s headed for a big crash”Washington Post.

8. “Turkey’s Lessons for Emerging Economies – Caixin Global”http://www.caixinglobal.com. Retrieved 20 August 2018.

9. Goujon, Reva (16 August 2018). “Making Sense of Turkey’s Economic Crisis”Stratfor. Archived from the original on 16 August 2018.