Conversely, consumer confidence has been deteriorating continuously since October 2021, reaching a record low in April/May. Yet the labour market situation has improved. Employment was 7% higher than it was at the end of 2019 and the unemployment rate has fallen to 11.3% in April compared with 13.4% at the end of 2019 (without a drop in the working population). The main reason was households’ loss of purchasing power due to the acceleration of inflation (+5.1% per month on average between February and June 2022 after 12% on average in December-January, bringing the year-on-year rise in consumer prices to 78.6% in June). On average between Q4 2021 and Q1 2022, real wages were down 6% compared to their average level between Q2 2021 and Q3 2021, despite the 50% hike in the minimum wage on 1st January. The increase in household credit (+36% year-on-year at the end of June) is almost half that of commercial credit (+70%). However, credit card debt and general purpose loans, which are generally used to deal with unforeseen expenses, or even to make it through to the end of a difficult month, have picked up again sharply since April. In short, inflation is exacerbating household budgetary constraints.
Budget support
The inflation burden suffered by the population has pushed the government to introduce an additional budget of TRL 880 billion for extra expenditure, i.e. USD 50 billion (around 6.5% of 2021 GDP). Most of the extra expenditure is on staff expenses, social transfers and subsidies for coal and gas importers in order to limit the rise in energy prices. The revised budget nevertheless foresees an unchanged deficit of around TRL 280 billion, or just 2.5% of GDP forecast for 2022 thanks to an upward revision of tax revenues. In fact, over the first 5 months of the year, tax income increased by 25% in real terms. On average since the beginning of the year, the budget deficit has thus reduced to 2% of GDP with a primary surplus of 0.6% of GDP. However, the deficit does not take into account the potential cost of the fx-protected lira deposit scheme introduced in November 2021[1]. At the current exchange rate, this cost is in the region of 0.5% of GDP[2] and could increase to 1% if the depreciation of the lira reaches 30% over the year.
Interest payments are stable at 2.6% of GDP. They have increased by only 0.3 percentage points since the end of 2019 while the debt ratio has increased from 30% to 38% of GDP. The debt burden could even reduce as yields on 10-year government bonds, which had stretched from 17% to 25% between the end of September 2021 and the end of March 2022, have since fallen slightly below 20%. In real terms (based on underlying inflation), the cost of borrowing in local currency for the State is dramatically negative (-30%) while it was still slightly positive in 2020–2021. If the exchange rate were to strengthen again, the debt ratio would reduce automatically and considerably, as the proportion of foreign-currency debt is 68%. The success of budgetary support, which is part of the government’s macroeconomic strategy (negative real interest rates, competitive real exchange rates), therefore depends closely on the evolution of external accounts.
Dwindling external liquidity
Unsurprisingly, the current account deficit and the trade balance have widened since the beginning of the year. The 12-month cumulative current account deficit reached USD 26 billion in April and the trade deficit reached USD 71 billion in May. This deterioration is only the result of the ballooning energy bill and net gold purchases. Excluding oil and gold, by contrast, the current account surplus widened, reaching almost USD 40 billion in April, reflecting the improvement in corporates’ competitiveness on both external and domestic markets. However, the CBRT’s international reserves continued to dwindle to USD 101.9 billion at the end of June 2022 compared to USD 128.5 billion at the end of November[3], as a result of the widening of the current account deficit but also strong portfolio investment outflows[4]. But, for the time being, corporates and banks are not experiencing any external refinancing difficulties (the rollover rate of medium- and long-term debt for non-financial enterprises remains well above 100% and that of banks remains between 90% and 95%).
In an attempt to curb the haemorrhage of foreign exchange reserves, the monetary and banking regulatory authorities have introduced new measures since the start of the year which strengthen or complement those taken at the end of 2021[5]. The ones aiming to rapidly support dollar liquidity are deliberately coercive[6]. Others are macro-prudential measures aiming at structurally improve the external balance[7].
Since the beginning of June, the lira has stabilised at around 17 TRL to 1 USD. However, this stabilization remains precarious because restoring financial stability via the rebalancing of external accounts is presently being counteracted by:
(i) the rise in commodity prices which fuels the inflation spiral,
(ii) the accelerated tightening of US monetary policy which generates general distrust among investors towards emerging countries, and (iii) the specific distrust of the economic policy being followed in Turkey.
