International News

Turkey Faces A Severe Economic Crisis

Author : Bozhou Marine

Update time : 2020-09-19 09:19:54

According to information published by the Turkish National Bureau of Statistics, the economy in the second quarter of this year actually fell by 9.9% year-on-year, and the month-on-month decline reached 11%. Although Turkey has restarted its economy since June, the epidemic is still serious. Even if the economic decline in the third quarter is less than that in the second quarter, it is likely to have negative growth.

1. The currency has fallen and prices have soared, making life more and more difficult.

Under the dual pressure of the epidemic and currency devaluation, many industries in Turkey have been affected. For ordinary people, the devaluation of the currency and the shrinking income, coupled with the soaring prices, make life increasingly difficult.

At the beginning of this year, 1 U.S. dollar can be exchanged for about 5.8 lire. By the beginning of September, 1 U.S. dollar can be exchanged for about 7.5 lire. The depreciation of the lira against the U.S. dollar has exceeded 22%. The depreciation of the lira has not only brought about soaring prices, but also reduced the real income of the working-class people, affecting the daily lives of ordinary people.

Mobile phone repair shop owner-Emel Tozan: This time last year was our peak season. Every month there will be at least 100 customers for repairs, but this year due to the epidemic and the currency devaluation, at most 25 to 30 customers a month , It is obvious that the consumption power of customers has decreased.

Istanbul citizens: Everything is expensive now. The price of what I bought yesterday may have changed today. It is inevitable that working-class people like us who only have a fixed income will have a harder life.

2 Turkey may break out of a balance of payments crisis, which will affect Europe.

Many people believe that Turkey’s economic problems are caused by themselves and have nothing to do with other countries. But John Floyd, head of macro strategy at currency management company Record Currency Management, doesn't think so. He warned that the Turkish market turmoil will spread to Europe in the next few months and will soon be reflected on the balance sheets of European banks.

Floyd said that during his 25-year career, he successfully predicted the Asian financial crisis and the collapse of the Argentine currency board. He said that now the lira has plummeted and Turkey’s net foreign exchange reserves are negative, paving the way for trading opportunities in developed markets. He is now shorting the government bonds of Spain, France and Italy and the euro.

At the same time, the losses and risks caused by Turkey's non-performing loans are also increasing. Moody's Investor Service recently downgraded Turkey's debt rating to junk, saying that the country is more likely to have a balance of payments crisis.

Crisis warning, Turkey gets an unprecedented downgrade from Moody's.

The analysis believes that the main reason for the continued decline in the lira is that Turkey's foreign exchange reserves are insufficient and unable to stabilize the exchange rate. In addition, the epidemic has hit the tourism industry hard, and foreign exchange income has also been drastically reduced.

In order to stabilize the exchange rate and ease the impact of the epidemic on the economy, the Turkish government has adopted a series of measures. For example, raising banking and insurance transaction taxes, granting aid to low-income families, delaying the payment of taxes in industries severely affected by the epidemic, such as the tourism manufacturing industry, etc., but at present, the results have been minimal.
Last Friday, Moody's Investors Service downgraded Turkey’s debt rating to junk. The company warned that a balance of payments crisis may occur when the country’s lowest rating ever is assigned to the country.

The sovereign credit rating has been reduced to B2, which is five grades lower than the investment grade, on par with Egypt, Jamaica and Rwanda. The company has a negative view on ratings, saying that fiscal indicators may deteriorate faster than currently expected.

London-based Moody's analysts Sarah Carson and Yves Lemay said in a report last Friday: "Turkey's external vulnerability is increasingly likely to materialize in a balance of payments crisis.

The last time Moody's downgraded Turkey's rating was more than a year ago, and its current ranking is one level lower than S&P's global rating and two grades lower than Fitch's rating. Before the coup against Recep Tayyip Erdogan in July 2016, two of Turkey’s three major credit rating agencies held investment grade scores.
With Erdogan’s approach to prioritizing growth, Turkey’s position among investors has been compromised. The reliance on credit stimulus exposed the fragility of the US$750 billion economy and sacrificed inflation and currency instability.

Turkey’s credit default swaps, local currency debt and lira were the worst performers in emerging markets this quarter. Since the beginning of this year, the country’s foreign exchange reserves have been spending faster than any other major developing economy. When the lira exchange rate has continuously fallen to historical lows, state-owned banks have stepped in to intervene in the market to provide support for the lira.

Turkey once again faces an unprecedented currency market crisis and the dual impact of the country’s involvement in the geopolitical crisis in the Eastern Mediterranean region has made it impossible to reverse the trend of the devaluation of the lira.

This seems to be Turkey's domestic economic problem, but it is not. Turkey's foreign exchange transaction risk will most likely affect the entire European market.
The European economy is weakening due to the rise of new crown pneumonia cases in Europe, the high unemployment rate, high debt levels, and the constraints of a single currency.

Data from the Bank for International Settlements shows that since the Turkish currency crisis in 2018, overseas banks’ risk exposure to Turkey has declined; however, as of the end of 2019, the total debts of overseas banks in Turkey are still as high as US$166 billion, of which European banks account for most.

Turkey’s economy is currently at US$740 billion and is expected to shrink by 4% this year. The lira will depreciate by more than 20% in 2020, making it the second largest decliner in emerging markets. Turkey’s sovereign debt insurance costs have almost doubled.

Floyd speculated that due to the depreciation of the lira, Turkish creditors will find it difficult to repay foreign currency debts, which will eventually lead to an increase in non-performing loans of European banks.

"The core issue of the risk transmission mechanism from Turkey to the whole of Europe is the debt exposure of European banks to Turkish banks and companies. The impact of the epidemic and the economic blockade on GDP has far exceeded the tolerable pressure set by the European Central Bank for the banking industry. Standards, the risks facing the banking system are being amplified."

However, the recovery fund in the EU's plan has a potential protective effect on the European banking industry-of which Italy and Spain are the biggest victims of the epidemic and are expected to be the biggest beneficiaries of the recovery fund.

But this does not prevent the deterioration of peripheral economies, and the fund can only meet 10% of Italy's financing needs in the next few years.

As Floyd concluded, "Is the epidemic relief plan moving in the right direction? Absolutely. But can this completely solve the problem? Impossible. Italy, Spain and France are all facing very serious challenges."

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