Emerging

Prepared for (soft) landing?

EcoEmerging// 2nd quarter 2020  
9
economic-research.bnpparibas.com  
Turkey  
Prepared for (soft) landing?  
The Turkish economy is facing problems of a sort it has dealt with in the past: a global crisis, that will trigger a sharp fall in exports,  
coupled with a contraction of external financing. Unlike in 2018, Turkey’s economy does not appear to be overheating, whilst the fall  
in oil prices and the emergence of a current account surplus are two factors that will reduce the risk. That said, the relatively weak  
levels of currency reserves, the high level of external debt and the recent rise in non-performing loans are all significant risk factors.  
In front of the current shock, the economic policy response will have to address foreign currency liquidity needs properly in a  
context of dwindling capital flows.  
The second shock in two years  
1- Forecasts  
Turkey is one of the last European countries to be hit by partial  
economic paralysis from COVID-19. Before the pandemic struck,  
economic growth had been accelerating including during the first  
quarter of 2020 (industrial production rose 7.3% y/y in the three  
months to end-January), as the country recovered from the  
2
018  
2.9  
2019  
0.9  
2020e  
-2.0  
2021e  
4.5  
Real GDP growth (%)  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
Current account balance / GDP (%)  
16.2  
-1.4  
15.5  
-3.5  
10.0  
-7.0  
9.0  
-4.5  
-2.4  
1.1  
3.0  
1.0  
nd  
recession experienced in the 2 half of 2018 and responded to the  
e: BNP Paribas Group Economic Research estimates and forecasts  
rescue measures introduced since then.  
2
- Inflation and policy rate  
This does not mean that the country will avoid a shock, as  
demonstrated by the first signs of deterioration of economic  
indicators in March. For example, the index of expected production  
levels at companies has slipped back to the low points seen during  
the 2018 crisis. At the same time, consumer surveys saw no  
deterioration in March, with consumer perceptions still dominated by  
the on-going disinflation.  
30%  
Policy rate  
Inflation (Y/Y)  
25%  
20%  
1
5%  
0%  
5%  
nd  
The shock in the 2 quarter of 2020 will be severe in two ways:  
1
-
Turkey will not escape the major shock to international trade  
that the pandemic has triggered. It is likely that there will be a  
substantial fall in exports (-20% in the second quarter), most  
notably in exports of goods and particularly vehicles (15% of  
total goods exports). Turkey will probably also see a fall in  
tourist numbers in the summer of 2020; tourism represents  
0
%
11  
12  
13  
14  
15  
16  
17  
18  
19  
20  
Source : Central Bank, Turkstat  
2
0% of exports of goods and services.  
Meanwhile, inflation is likely to fall in line with the sharp drop in oil  
prices. It is likely to average 10% over the year, slowing from 12.2%  
in the first quarter to around 8% at the year-end, before picking up a  
little again. However, a return to stronger growth in 2021 is likely to  
come too late to prevent a fresh rise in non-performing loans. These  
had already doubled between mid-2018 and the end of 2019,  
reaching 5.4% of total bank lending.  
-
Secondly, as the COVID-19 pandemic affects the country,  
Turkey will see a sharp fall in domestic demand, with a  
contraction in household consumption. Investment will return  
to a downtrend, and could close the year 25% below its mid-  
2018 level.  
In the end, Turkish GDP is likely to decrease by -2% in 2020. With a  
high carry-over at the end of Q1 2020 of close to 4%, this implies  
strongly negative growth over the remainder of the year. Once the  
shock is over, we expect growth to rebound fairly strongly as of  
Whatever it takes in Turkish motion?  
The assumption that Turkish growth will prove relatively resilient is  
based on the country’s rapid economic policy response, with the  
2
021. As shown in the 2018 crisis, the depreciation of the lira in  
th  
announcement on March 17 of an arsenal of measures by the  
difficult times helps absorb the shock. A weaker currency pushes up  
the prices (and thus reduces the level) of imports, helping support  
local production. The sudden narrowing of the trade deficit (from  
Central Bank backed by the announcement of a TRY 100 billion  
fiscal package (2.3% of GDP).  
6
.9% of GDP in 2017 to 2.2% in 2019) reflects this. Credit  
The Central Bank was the first to react, acting to protect the liquidity  
of the banking system and prevent both a contraction in credit and  
an increase in business payment defaults. The first element of its  
response was to cut its policy rate by 100 basis points, to 9.75%.  
This marked the continuation of a monetary easing cycle that began  
supportive monetary policy is another fundamental factor expected  
in this rebound, in another parallel with the aftermath of the 2018  
crisis: bank lending grew by 11% in 2019.  
EcoEmerging// 2nd quarter 2020  
10  
economic-research.bnpparibas.com  
in July 2019 (cumulative 1425 basis points cut since then) and is  
now likely to continue.  
3- Decomposition of Turkish foreign exchange and gold reserves  
Central bank gold reserves  
Required reserves in foreign currency  
Required reserves in gold  
Foreign exchange reserves  
The Central Bank then cuts its reserve requirement coefficient on  
foreign currency deposits by 500 basis points for banks that meet  
the credit growth constraints, thus freeing up USD 5.1 billion in  
foreign currency liquidity for the banks. Moreover, banks can use  
the Reserve Option Mechanism, which acts as an automatic  
countercyclical stabiliser allowing taking foreign currency liquidity  
when needed. This mechanism allows banks to keep a certain  
percentage of their lira reserve requirements in foreign currency or  
in gold. If needed, they can draw on these currencies. During the  
USD bn  
140  
1
20  
00  
1
80  
60  
4
0
0
0
2
2018 crisis, this made USD 30 bn available to them (of the  
USD 49 bn of reserve requirement in blocked accounts held in  
foreign currencies). At the end of March 2020, these reserves stood  
at USD 23 bn and were already coming into use by banks.  
10  
11  
12  
13  
14  
15  
16  
17  
18  
19  
20  
Source: Central Bank  
the Central Bank will continue to cut its policy rate, maintaining  
negative real interest rates. The Turkish lira looks set to continue its  
depreciation trend with a significant likelihood that it will once again  
break through the threshold of TRY7 per dollar before the end of  
Meanwhile, the Central Bank has introduced dollar, euro and gold  
swap lines (at a rate 125 bp below its policy rate). It has announced  
TRY 60 bn (USD 9 bn) in credit lines to exporters and a 90-day  
extension of maturities for rediscount credits due to mature before  
2
(
$
020. This would limit the imported disinflation from lower oil prices  
which we expect to average USD 38/barrel over 2020, compared to  
65 on average in 2019).  
30 June (covering a total volume of USD 7.6 bn of credits), among  
other measures. It also announced that it would buy government  
debt in order to help finance the growing unemployment benefit  
system deficit and that it would accept asset-back securities and  
mortgage-backed securities as collateral in TRY and foreign  
currency Central Bank operations.  
Lower oil prices are likely to boost the current account surplus in  
020, taking it to a rarely seen level of about 3% of GDP. However,  
2
a contraction of capital flows is also likely. If the rollover rate of the  
external debt of non-financial and banks is at least 70%, the  
downward pressure on currency reserves should be kept under  
control. This is an important factor given that reserves were only  
USD 43 bn in March 2020, excluding banks’ required reserves held  
in foreign currencies.  
On top of this, the government extended the maturities on bank debt  
at all companies affected by COVID-19 by 90 days. Other major  
measures included the deferral by 6 months of VAT and social  
security contribution payments for the worst affected sectors  
(
tourism, retail, metals, automotive, textiles) and the doubling from  
TRY 25 bn to TRY 50 bn of the loan guarantee fund.  
According to the IIF, with just USD 2 bn of payments on dollar-  
denominated bonds, pressure on foreign currency liquidity will not  
come from the public sector. Instead it could come from Turkish  
banks and non-financial companies, with payments due of  
USD 10.5 bn and USD 12 bn respectively. Any difficulties in  
refinancing future payments could further increase credit risk.  
A relatively contained government debt ratio is an  
asset  
There are no major worries about the public finances, despite the  
expansionist fiscal policy implemented since 2018. Nominal GDP  
growth had been strong (14% in 2019), wiping out the effect of a  
bigger budget deficit on the debt/GDP ratio.  
It is likely that fiscal policy will remain highly supportive, particularly  
in tackling the social impact of COVID-19 (unemployment,  
healthcare costs), given that unemployment remains high (13.7% of  
the active population in the final quarter of 2019). Given the fiscal  
measures announced, and the expected adjustment of the  
automatic stabilisers, the deficit is likely to reach 7% of GDP, taking  
government debt towards 35% of GDP by the end of 2020. Whilst  
this would be a significant increase, the absolute ratio remains  
relatively low. It also remains likely that the government will extend  
its support measures to a larger number of sectors, as the fall in  
business levels spreads across the economy, resulting in a fresh  
increase in the budget deficit.  
The Turkish policy mix is focused on maintaining significant credit  
growth, which helps support nominal GDP growth and facilitates  
public and private debt repayment. As a result, it is highly likely that  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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