Turkey pays big price for topping global economic growth rankings

Turkey posted the highest economic growth among major economies in the third quarter of the year.

The economy expanded by 6.7 percent on an annual basis and by almost 14 percent quarter-on-quarter, official data published on Monday showed. On the face of it, Turkey has become the envy of a world struggling with the economic and financial implications of COVID-19.

But the expansion between July and September, which dwarfed China’s 4.9 percent annual growth, has come at a massive financial cost to the country, almost resulting in a second currency crisis in two years.  

Turkish President Recep Tayyip Erdoğan and his son-in-law Berat Albayrak, who resigned as treasury and finance minister in early November, had fuelled Turkey’s economic growth by coercing banks into a lending splurge, which led to a jump in corporate debt, a slump in the value of the lira and the loss of tens of billions of dollars in foreign currency reserves.

By the end of the third quarter, Turkey’s economy was showing severe signs of overheating. Inflation was in double digits, the current account deficit was widening sharply, and the lira had lost nearly 12 percent of its value against the dollar since the start of July. Fears for a hard landing prompted the central bank to almost double interest rates to 15 percent in September and November from 8.25 percent. The rate increases came at a time when other central banks were easing monetary policy. 

Economic growth in the third quarter was spurred by a borrowing boom by Turkish businesses and consumers. As a result, activity in the banking and insurance sector surged by 41 percent, the statistics institute said. The increased borrowing meant household consumption jumped by 9.2 percent from a year earlier, while industrial output rose by 8 percent, according to the growth data. 

Turkey’s credit splurge has resulted in a surge in demand for imports while exports have contracted sharply. Imports of goods and services into Turkey jumped by an annual 16 percent in the third quarter of the year, while exports slumped by 22 percent, the economic growth figures showed.  

The boom in imports peaked in September, when goods purchased from abroad surged by 23 percent. That increase led to an almost tripling in the country’s foreign trade deficit.

The widening trade deficit has brought a sharp deterioration in the country’s balance of payments. The 12-month rolling current account deficit reached $27.5 billion at the end of September, or about 3.7 percent of GDP. 

Turkey must finance the deficit through foreign currency earnings such as tourism revenues or face a downward correction in the value of the lira. But those earnings have slumped during the COVID-19 pandemic, adding to the lira’s woes.

Rather than raise interest rates, Turkey’s central bank has spent tens of billions of dollars of its foreign currency reserves this year defending the lira.

In the third quarter alone, the reserves fell by $12.5 billion, according to central bank data. The bank’s net foreign exchange reserves, minus cross-currency swaps, have slumped to a negative $46.5 billion from $22.7 billion at the end of last year, ratings agency Fitch said on Nov. 20.

Deteriorating finances at the central bank have been accompanied by similar problems in the banking system as companies struggle to repay their debts. While official data shows that bad loans in the industry as a proportion of total loans were flatlining at a little over 4 percent in the third quarter, they do not show the full picture, economists say.

Turkish banks have more bad debt than headline figures suggest, Fitch said in September. It said regulatory forbearance, including the relaxation of rules on what constitutes a bad loan and the deferral of many loan repayments on government orders, hide a murky picture for the industry.

Turkey’s central bank said last week that corporate debt as percentage of GDP in Turkey has increased to 69 percent from 56 percent at the start of the year. Debt levels are now well above the global average, it said. 

Earlier this month, Turkish businessmen called on the government to ensure banks defer repayment of interest and capital on a large swathe of loans to help ease their finances. A waiver on the payment of interest and capital on the lending, put in place earlier this year following the outbreak of COVID-19, is now ending.

As well as a deterioration in the finances of Turkish companies, levels of employment in the country have dipped sharply, hurting consumer finances. Any increases in income for households have failed to keep pace with the rising cost of goods and services, placing heavy financial pressure on many.

The number of people out of work and not seeking a job in Turkey rose by 2.6 million to 31 million in the 12 months to September, according to official data. The labour force has shrunk by 1.4 million to 31.7 million. 

Turkey’s unemployment rate edged up to 13.2 percent in the three months to September from 12.9 percent at the end of June. But the small increase is flattered by a government ban on companies firing workers and the hundreds of thousands of people who have been placed on unpaid leave and who are not included in the official figures.

Losses for the lira and accelerating inflation also mean that poverty in Turkey is also on the rise. 

A four-member family must now spend 2,516 liras ($323) per month to pay for a healthy and balanced diet, the Confederation of Turkish Trade Unions (Türk-İş) said in a report last week, higher than the monthly net minimum wage of 2,324 liras. 

The poverty line in Turkey, which includes money spent on items such as clothing, rent, utility bills, education and health, stands at 8,197 liras, Türk-İş said, more than three times minimum wage levels. 

Because employment in the country is declining, companies who hire new staff are now paying them less, when including increases in the cost of living. 

Wages for Turkish workers increased by 9.7 percent in the third quarter from a year ago, according to Monday’s GDP data. That increase lags inflation of just under 12 percent.

Turkey’s GDP data is also cloaking the erosive effects of lira depreciation. While economic output rose by 6.7 percent in the third quarter in lira terms, it is declining when measured in hard currency.

Growth data in Turkey is calculated in liras and then adjusted to account for the effect of inflation. In dollar terms, Turkey’s economy registered a contraction in the third quarter. Output was $197.4 billion in the three months to September, a decrease of 3.3 percent from the same period of last year.