Latest Turkish activity data suggest that the plunge in the lira since May and the associated sharp tightening of financial conditions has tipped Turkey’s economy into a steep recession, Capital Economics has concluded.

In an August 29 note, Jason Tuvey, senior emerging markets economist at the macroeconomic research company, said: “Overall, there’s no getting away from the fact that the Turkish economy is experiencing a deep downturn. While we expect GDP growth of 3.0% over this year as a whole, this will entirely reflect a strong start to the year. The economy is likely to contract by 2-4% y/y in Q4 of this year and in the first half of 2019.”

By mid-afternoon, the Turkish lira (TRY) was recording its fourth straight day of losses since Turkey returned to work from its week-long public holiday, sinking 4.33% d/d to 6.7144 against the dollar by around 15:05 local time, taking its loss in the week to date to beyond 10%. The day’s low of 6.7999 was recorded shortly before. At the start of the year, the TRY stood at 3.79 to the USD, while in 2014 a dollar only bought two lira. The currency’s all-time low of 7.24 occurred in early August.

The failure of the government bring forward any more measures to reassure investors it is credibly fighting to prevent the currency meltdown turning into a debt and liquidity crisis appears to be a big factor in the latest phase of devaluation.

Further looking at the hit to economic growth Turkey is taking, Tuvey said: “Things are only likely to get worse and our GDP growth forecasts lie well below the consensus… Earlier falls in the lira had resulted in a sharp pick-up in inflation in recent months—the headline rate hit a 15-year high of 15.8% y/y in July. The latest signs show that higher inflation, coupled with a severe tightening of financial conditions, is filtering through into an abrupt slowdown in economic growth.

“Indeed, the hard activity data paint a grim picture of the economy even before the lira’s leg down this month. In 3m/3m terms, which aligns with the quarter-on-quarter figures from the national accounts, the latest industrial production data point to industry contracting by 0.7% q/q over Q2 as a whole, compared with growth of 1.8% q/q in Q1.

“Low-profile data and survey evidence suggest that things have only got worse in Q3. Figures released earlier today showed that imports contracted by 9.4% y/y in July, a sign that domestic demand has weakened sharply.”

Plumbing record lows
Meanwhile, confidence in the construction, retail and services sector has plumbed record lows. Vehicle sales contracted by more than 30% y/y in June and July and Turkstat’s economic confidence index recorded its weakest reading since 2009 in August. “On past form, it is consistent with the economy contracting by around 3% y/y,” Tuvey said.

Capital’s forecasts for stagnation in 2019 and growth of 3.5% in 2020 lie towards the bottom of the consensus.

In finding a way out of the woods, Turkey has so far rejected the options of capital controls and turning to the IMF—as Argentina did on August 29—and there is no sign of a breakthrough in fixing the rift with the US over issues such as the detention of North Carolina evangelical pastor Andrew Brunson. There is also no indication of the President Recep Tayyip Erdogan ending his unconventional opposition to interest rate hikes which the market consensus says would make absolute sense at this point.

The vagueness of Ankara’s response and its failure to acknowledge the scale of the dilemma are frustrating market players. Erdogan, for instance, on August 30 was cited by state-run Anadolu Agency news service as stating that everyone will see that Turkey has options. Quite what they are, nobody is sure of.

JPMorgan, meanwhile, has confirmed data that some $179bn of Turkish external debt will mature in the year to July 2019, with many substantial payments falling due in the next two months. The total sum is equivalent to nearly a quarter of Turkey’s annual economic output.

The largest share of the huge debt burden, some $146bn, is owed by the private sector and banks.

“Financing needs over the next 12 months are large and access to markets has become problematic,” JPMorgan said.

The investment bank on August 23 cut its 2018 growth forecast for Turkey to 3.5% from 3.7% and slashed its expectation for 2019 to 1.1% from 2.8%.

Finance minister Berat Albayrak, known as “the Groom” in Turkey given that he’s Erdogan’s son-in-law, on August 29 tried to play the calm overseer amid the worsening economic picture, saying that he did not see a big risk either to the economy or the financial system.

 

Chart sources: CEIC, Thomson Reuters, Capital Economics