Turkey’s economic slump laid bare as data shows sectors in COVID-19 crisis

Turkey’s acute financial malaise sparked by the coronavirus pandemic was laid bare on Friday by figures showing a massive decline in the outlook for sectors across the economy.

In services and retail, a government survey showed confidence among shop owners for sales over the next three months more than halving to 50.5 points in April from 102.5 in March. In the services industry, overall confidence shrank to 46.1 from 92.5. Any reading below 100 reflects pessimism.

In construction, a mainstay of economic growth in Turkey during the rule of President Recep Tayyip Erdoğan, confidence dived to a record low of 44.7 points from 77.2 in March. Some of the country’s construction firms have grown exponentially in recent years as Erdoğan’s government dished out tens of billions of dollars for construction projects.

Meanwhile, manufacturers used just 61.6 percent of their capacity this month, the least since the global financial crisis of 2008. The rate stood at 75.3 percent in March. Capacity usage among producers of durable consumer goods slid to 51.2 percent from 72.2 percent a month earlier.

The scale of the economic downturn in Turkey, which has relied on exports, tourism and a surge in consumer borrowing to fund growth, may at first glance resemble slumps in many other nations. But prior to the coronavirus outbreak, the government had used up much of its financial firepower to combat a currency crisis in the summer of 2018 that led to a painful recession.

The government has earmarked 100 billion liras ($15 billion) to help companies and workers deal with the impact of COVID-19. The sum reflects a small fraction of the measures taken in Europe, the United States and several other major emerging markets.

Attempting to soften the virus’s impact, Erdoğan has kept many businesses open and placed limits on population lockdowns, saying the wheels of the economy must keep turning. But company owners have expressed concern that the policy may result in a protracted period of uncertainty and hence losses in sales.

A central bank monthly survey of manufacturers published on Friday showed confidence slumping to 66.8 points this month from 99.7 in March, reflecting the scale of Turkey’s industrial malaise.

Cases of the coronavirus in the country now stand at 102,000, the seventh-highest figure in the world. Among emerging markets, Turkey tops the list of infections. China comes in second with 84,000 cases.

The World Health Organisation expressed cautious optimism this week that the infection rate and death toll in Turkey was slowing. But several academics and analysts have raised questions about the accuracy of official data.

Turkey needs a clean bill of health more than many nations because it relies on its tourism industry for much-needed foreign currency revenues. The country earned a record $34.5 billion from tourism last year, providing hard currency needed to make up for a slump in foreign investment.

Narrowing the country’s financial options, Erdoğan has ruled out a rescue deal from the International Monetary Fund, labelling the institution as a tool of Western imperialism. Short of a large loan programme, Turkey could get $6 billion of funding with virtually no conditions attached

Instead, the government is talking about possible currency swap deals with other countries and easing restrictions on the population by the end of the holy month of Ramadan in late May. Meanwhile, Erdoğan is maintaining that the pandemic presents a unique opportunity for Turkey because it will result in a realignment of the Western-dominated world order.

Mindful of the 2018 currency crisis and government demands for financial support, a compliant central bank has spent a significant proportion of its foreign currency reserves defending the lira. It has partnered with state-run banks in the lira swaps market to bolster the currency’s value. Its net reserves, when subtracting the hard currency borrowed via the swaps, stand at less than $1 billion, according to the latest data.

Despite the central bank’s frequent interventions in the market, the lira is trading at the lowest levels since the currency crisis peaked in August 2018. The bank is engaged in a latest lira defence at levels just stronger than 7 per dollar.

The lira fell 0.4 percent to 6.97 per dollar on Friday, taking losses this year to almost 15 percent. An all-time low, which the currency very briefly touched in 2018, stands at 7.23. The lira traded at 3.78 per dollar at the start of that year.

The central bank’s meddling in the currency markets and its sharp reduction in interest rates have led foreign investors to sell up their stock of local bond holdings, exacerbating problems for the lira and making it more difficult for the government to raise capital through debt sales.

Turkey’s benchmark interest rate is 8.75 percent after policymakers announced a latest 1 percentage point cut this week. That is well below annual inflation of 11.9 percent. Rates stood at 24 percent last July.

Turkey’s financial problems – its 12-month rolling budget deficit already stands at some 4 percent of GDP - are reflected in the levels of compensation provided to workers laid off during the pandemic.

The country’s poorest 2.1 million families are receiving less than $150 a month in extra government financial support, hardly enough to cover rent and utility bills in major cities such as Istanbul, Ankara and Izmir, even in low-income neighbourhoods.

The government has pledged to pay 60 percent of the salaries of some 3 million people so far included in a so-called “short-term working allowance” for a period of three months – more than a quarter of a million companies have applied for the aid. But the money is capped at a notional maximum salary of 4,381 liras ($630) and carries quite strict conditionality.

The government has barred employers from laying off workers during the pandemic. However, unpaid leave is permitted and those forced to take it will get $5.70 a day.

The extent of the crisis now facing the Turkish retail, services and manufacturing sectors is set to bring a surge in already high unemployment. In turn, joblessness is set to hit businesses in a vicious circle.

The unemployment rate in Turkey stood at 13.8 percent, or 4.36 million people, in January, the latest official figures. More than a quarter of Turkey’s youth were without a job and not in education. While the government’s ban on layoffs is poised to supress an increase in the figures, employee unions are predicting that the real rate of unemployment could double.