The World bank has published its Europe and Central Asia Economic Update Report. Spring 2020, titled “Fighting COVID-19”. In the report, the Bank revised Turkey’s growth rate from 3.5% to 0.5% as a result of risks presented to the Turkish economy by the coronavirus pandemic, and warns that a more negative outlook could result from the uncertainties presented by the pandemic.
The Bank expects investment to fall and for exports, especially tourism, to collapse in 2020, widening the current account deficit. It recognises that declining energy prices may moderate inflation, but with exchange rate pressures and monetary easing, inflation is projected at 11% in 2020, falling to 9% next year and 8.5% in 2022. The Bank also projects Turkey’s fiscal deficit to expand sharply to 4.5% of GDP in 2020 as the authorities combat the pandemic and its impacts on the economy, but to narrow to 2.9% of GDP by 2022.
The World Bank’s entry relating to Turkey in its report is as follows:
Growth in Turkey was positive last year thanks to a strong fourth quarter, driven by private consumption, though investments have remained depressed. External adjustment and deleveraging have reduced Turkey’s external vulnerabilities. But COVID-19 imperils stability and growth prospects. The poverty rate has stagnated as a sluggish labour market has curtailed work opportunities. Strong decreases in labour income are expected in the short term across the income distribution, but more so for low-income households. The social protection system will be challenged to cope with the shock.
After three consecutive quarters of year-on-year contraction, real GDP growth resumed in Q3 and strengthened in Q4 last year, bringing 2019 growth to 0.9 percent. The nascent recovery was aided by rapid monetary easing, with the central bank cutting rates from 24 percent in July 2019 to 12 percent in December 2019 and further to 9.75 percent by March 2020.
Lower borrowing rates, together with regulatory measures, boosted private sector credit growth to 10 percent in 2019 and continued expansion in Q1 2020. A 15- percent minimum wage increase and a gradual decline in the unemployment rate accelerated private consumption.
Turkey recorded a current account surplus in Q2 and Q3 2019 – the first in more than 15 years — before returning to a deficit in Q4. Net outflows of portfolio and other investment continued in 2019 for a second year, while inflows of FDI fell to their lowest level in 15 years. Almost all growth in 2019 came from services, mainly public and financial. Construction contracted for the second consecutive year, while agriculture and other industry growth were near zero.
Annual CPI inflation declined from its peak of 25 percent in October 2018 to 8.6 percent in October 2019 but has been accelerating in recent months, rising from 8.6 percent in October 2019 to 12.4 percent in February 2020, as base effects subside.
Aggregate fiscal policy loosened in 2019, with the general government budget deficit widening to 3.0 percent of GDP in 2019 (from 2.4 percent in 2018). Overall revenues rose slightly to 33.5 percent of GDP in 2019, with weaker indirect tax revenues more than offset by higher nontax revenues. However, expenditures grew at a faster rate, reaching 36.5 percent of GDP over the same period due to household transfers.
The unemployment rate eased to 13.1 percent in December 2019 from a peak of 14.2 percent in July 2019. The economy has created around 200,000 jobs in the six months to January with the strongest job gains in services and industry. However, the recent economic slowdown has left low- and middle-income households more vulnerable, and the unemployment rate for people without a university degree increased significantly. The number of discouraged workers rose by 240,000 in the last year, a 40 percent increase. These trends put upward pressure on the poverty rate, which has hovered around 9 percent since 2016.
The impact of COVID-19 is unfolding rapidly and is projected to put a drag on growth and households’ labour income in Turkey. The global disruption to trade, capital flight to safety, and rapidly rising risk premia will impact Turkish exports and tourism, access to finance, currency stability and inflation.
Baseline growth is projected at 0.5 percent in 2020, over 3 percentage points lower than the pre-COVID-19 estimate. A more negative outturn is equally probable given uncertainties.
What little growth there is in 2020 is expected to be supported by strong government stimulus. Investment is expected to fall further. Exports – especially tourism – are projected to collapse in 2020, widening the current account deficit. Declining energy prices may moderate inflation, but with exchange rate pressures and monetary easing, inflation is projected at 11 percent in 2020. The general government fiscal deficit is projected to expand sharply to 4.5 percent of GDP in 2020 as the authorities combat the COVID-19 pandemic and its impacts on the economy, and narrow to 2.9 percent of GDP by 2022.
The incidence of poverty is likely to increase in the coming months, driven by negative labour income impacts of COVID-19. About 40 percent of households do not have any member working in the formal sector and are particularly vulnerable to the shock. A package with income-support measures has been announced by the authorities to help households cope with income drops, but a stronger response of the social protection system may be needed. Over the medium term, the poverty rate would be expected to remain at around 9 percent of the population, depending on the length of the COVID-19 shock and speed of economic recovery.
Risks and challenges
A worsening of the COVID-19 pandemic, and ongoing geopolitical tensions, pose great risks to the Turkish economy.
Exports and tourism—significant sources of growth—are vulnerable to shocks and could be further affected should the COVID-19 pandemic have an even more disruptive impact on supply chains and exports than anticipated in the baseline. Lower oil prices could lower Turkey’s import bill, but are unlikely to offset shock to exports. Tighter external liquidity conditions will also affect corporates and banks that have high external exposure.
The financial and corporate sectors have deleveraged but remain exposed. The authorities will inject liquidity in the banking system to avoid a private sector collapse. The NPL ratio, which stood at 5.2 percent in February 2020 (up from 3.9 percent at end-2018) was expected to rise further but recent regulatory measures in response to COVID-19 are expected to contain that increase.
To mitigate some of the above risks, the President has outlined a 21-point stimulus package that includes a fiscal and financial sector measures to provide short-term liquidity to private enterprises. The central bank has committed to inject liquidity and lowered reserve requirements to support the private sector. The banking sector regulator has eased NPL criteria and adopted other flexibilities.
A TL 2 billion income-support package will be introduced for vulnerable households, but the response is at risk of being too limited. This would amount to a one-off payment of around 230 TL per person for each household that depends on informal income and social assistance. There are 5.6 million people that rely on informal income and are not included in social assistance or social security systems. If the shock extends beyond a few months, this group would be hard hit and there is a real risk that many households would resort to negative coping strategies with long term consequences for household welfare.“