The Turkish economy has already derailed

12 Sep 2018 15:51|Marcin Lipka

"The Turkish economy grew by 5.2% in the second quarter of this year. This surprisingly fast GDP growth will soon go down in history. Turkey is on the verge of a recession, as suggested by leading indicators, rampant inflation and a powerful currency crisis. It’s unlikely that anything can stop the coming collapse," writes Marcin Lipka, Conotoxia Senior Analyst.

The Turkish Central Bank (TCMB) will decide on interest rates on Thursday. Economists are bidding how large the increase will be and whether the monetary authorities will finally start fighting inflation seriously, raising interest rates above the 20% limit.

Unfortunately, at this point, regardless of the TCMB decision, the crisis in Turkey cannot be avoided. The collapse is visible in the majority of the leading indicators. The economic sentiment index for businesses and consumers fell to 83.9 points, according to data from the Turkish Statistical Office (TUIK). This is the lowest level since the global financial crisis that started a decade ago.

PMI for the Turkish industry, which is also popular in Poland, fell in August to 46.4 points. A reading below a level of 50 suggests that this economy sector is shrinking. Lower values were recorded only during the 2008-2009 financial crisis and just after the coup d'état in mid-2016. IHS Markit, which conducts the PMI survey, also pointed out that the price component in the index has increased most since June 2005, when Markit started publishing PMI.

Consumers are shocked

Since the beginning of the year, the dollar or euro expressed in lira has become more expensive by about 65-70%. Trying to compare it to Polish conditions, it would mean that the European currency would cost over 7 PLN instead of the current 4.30 PLN. This dramatic weakening of the lira is already partly visible in prices.

According to the TCMB Inflation Report, passenger cars increased by 33% y/y in the second quarter of this year, which is probably not the end of the rises, as the data doesn’t include the collapse of the lira in August. However, car sales in Turkey fell by 25.3% y/y. Light truck sales fell even more (by 50.4% y/y), which perfectly shows how companies are starting to cut investments in anticipation of the economic collapse.

The currency weakening also has a disastrous impact on import costs. This is particularly with respect to energy resources, for which no substitutes can be found. A year ago, a barrel of oil cost 186 liras and now exceeds 500 liras. The state is taking on part of the increases by adjusting taxes to fuel prices. Apart from the temporary relief for consumers, it does not in any way solve the structural problem of currency weakening. In addition, of course, tax revenue will be lower, which in the end will hit citizens anyway.

The dramatic behaviour of the lira also makes imports extremely expensive for consumers in the event of disturbances in domestic food production. Floods and hailstorms from the first quarter of the year caused a decrease in vegetable production. As a result, onion and potato prices increased from about 1.5 liras per kilogram to less than 3.7-3.8 liras in only a few months, according to TCMB data.

President's unfulfilled announcements

Contrary to the announcements made by President Recep Erdogan about the need to keep interest rates unchanged and to directly influence the central bank decisions, the market has its own rules.

TCMB data shows that still in May the weighted average interest rate on loans from commercial banks was about 17%. At the end of August it was already over 32%. Such a significant increase in financing costs for the economy will drastically worsen the economic situation in the following months.

In the case of loans, it is also worth noting how GDP growth has been driven in recent quarters. Subsidised loans for companies have often been used in major infrastructure projects (e.g. the world's largest airport, large road investments), which may never yield the expected returns.

In mid-2017, the value of commercial loans grew every month by almost 4% (45% on a yearly basis, according to TCMB). Now, it is clearly below 1% and is likely to continue to fall, given the economic slowdown and the dramatic increase in financing costs.

There is no help

A stimulated, externally unsustainable economy, plunged into a currency crisis, will now begin to fall into the abyss of mistrust on the part of domestic and foreign investors, reducing consumer spending and a disastrous geopolitical position.

In such a scenario, it does not matter whether TCMB increases interest rates by 2.3 or 5 percentage points on Thursday. For Turkey, every scenario is bad. And even the best possible solution, that is applying for help from the International Monetary Fund and stabilizing contacts with the USA, would probably not protect the country from recession and the dramatic impoverishment of ordinary citizens.


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