11.08.2020 World Bank has published its economic update report for Turkey
The World Bank has published its Turkey Economic Monitor. August 2020. Adjusting the Sails”. The bank emphasizes that Turkey is facing a difficult year in 2020. It projects a 3.8% growth contraction this year and expects inflation to be in double digits for 2020. Its analysis of Turkey’s medium-term outlook is as follows:
“II. LOOKING AHEAD
The global economy and Turkey face a difficult year in 2020 followed by an uncertain rebound in 2021. The Turkish economy is projected to contract by 3.8 percent in 2020 in the baseline scenario. Important sectors in the Turkish economy are highly vulnerable to COVID-linked economic strains, which could further lower employment, reduce labour force participation and increase the poor population by 1.2 million in 2020. Like other emerging market economies impacted by the crisis, Turkey will likely experience a decline in potential output, which is estimated to have fallen below 4 percent in 2019, its lowest level in 15 years. Though short-term external debt obligations seem manageable, a growing current account deficit and the sharp decline in reserves have heightened external vulnerabilities. Policy measures have provided important relief to households and businesses – the challenge now is to build resilience and accelerate recovery. This may require: (i) maintaining fiscal responsiveness and flexibility, whilst containing further monetary easing; (ii) scrutinize impact of forbearance measures and adjust to maintain financial sector stability; (iii) expand household support programs to protect livelihoods and human capital; and (iv) rebuild better by accelerating structural reforms.
A difficult year in 2020 followed by an uncertain rebound in 2021
Bracing for a challenging road ahead
The 2020 baseline growth projection for Turkey estimates a sharp contraction in GDP. The economy is projected to contract by 3.8 percent, followed by an uncertain rebound in the medium term (5 percent in 2021 and 4 percent in 2022). The baseline projection assumes: (i) the need for ongoing restrictions, albeit more targeted and less stringent than in the first phase; and (ii) continued social distancing measures for the remainder of the year and most likely until a vaccine is found. The forecast is also grounded in the World Bank’s latest global economic forecasts, which estimate a deep global recession.
All demand side drivers of GDP are expected to contract in 2020 except for public consumption amid large fiscal support. Public consumption is projected to increase by 6.2 percent in 2020. The general government fiscal deficit is forecast to peak in 2020 (5.6 percent of GDP). As growth picks up and the crisis subsides, public consumption growth is projected to decelerate and revenue growth to accelerate. Despite a big spike in credit growth and decline in borrowing cost, investment is projected to remain depressed in 2020 and first half of 2021 amid cash shortage needs, debt overhang and high level of uncertainty.
Private consumption, which tends to be more resilient during, and rebound more quickly after, crises is projected to be more muted. Unlike other crises, private consumption has understandably been weaker due to containment measures. This creates pent up demand, which will rebound. However, the pace of the rebound may be a little slower as households could increase precautionary savings due to uncertainty and difficult labour market conditions. Credit stimulus measures, lower interest rates and measures to protect households’ income will help to contain some of the drop in private consumption. This is evident in some pick up in durable consumption (car, white goods or furniture purchases), but this makes up only 10 percent of private consumption. The big bulk of private consumption is in services. Leisure, travel and tourism constitute more than half of services consumption. Such discretionary spending could be affected due to necessary social distancing and travel restrictions. While a strong pickup in services consumption was observed during the recovery periods in previous downturns, the nature of this health crisis is expected to hinder recovery in services consumption.
Investment in the short-term is likely to pick up as companies restore production capacity but debt overhang will be an important drag on new investments. After mid-2018, corporates started deleveraging. The corporate debt to GDP ratio declined slightly to 66 percent at the end of 2019 but remained high compared to peer countries (Figure 120). The pandemic hit against a backdrop of already high corporate debt and falling investment. Although leverage helped some of the sectors to improve their solvency ratios to some level in the recent past, corporate stress 44 has been accumulating particularly in sectors most hit by the pandemic. Accommodation and food, transportation and storage and construction sectors have the highest debt overhang, mostly driven by rising corporate debt rather than decline in earning or equity. Hardest hit construction and accommodation and food sectors have also the highest NPL ratios. Given the pressure on balance sheets coupled with a high degree of uncertainty, corporates might prefer to alleviate cash shortages than expand capacity.
CPI inflation is projected to decelerate though remain in double digits in 2020 and with upside risks. 47 Inflation is projected to average 10.5 percent in 2020 supported by a negative output gap, relatively low energy prices and a high base effect in Q3. However, strong monetary expansion, the depreciation in the Lira, administrative and customs tax rises, and a surge in production costs associated with the pandemic and containment measures are likely to add pressure on prices. CPI inflation is expected to gradually decline and projected to average 9.5 percent in 2021 and 9 percent in 2022.
There is a large band of uncertainty around the baseline forecast, with both upside and downside risks. On the downside, reopening too much too soon could trigger a second wave of infections in Turkey – risks of which remain very real – that could necessitate a new lockdown and further dent domestic demand and production capacity, exacerbate uncertainty, and erode policy space. A similar flaring up of COVID-19 in important partner markets for Turkey, such as the EU, would also lower growth for Turkey via reduced exports and a possible new wave of supply chain disruptions. On the upside, the contraction in the global economy could be less severe than projected, there could be progress on prevention and treatment of the coronavirus, and/or effective policies could lead to a more rapid recovery. Turkey’s experience to date provides important lessons on responding quickly and in a targeted manner, which should help limit the likelihood of a downside scenario.”
Click here for full report