NEWS ARTICLE        29/08/2019

Where is the Turkish economy going ?

There is a worrying scarcity of reliable statistical data available about the Turkish economy. Such is the dearth of information that it is really almost impossible to assess the real state of the economy. We know for a fact that the economy has been under severe strain since the beginning of 2018 when it started to overheat prior to the June 2018 parliamentary and presidential elections. The currency crisis in August of 2018 was a devastating blow which forced up the Turkish lira to TL 6.55 against the US dollar at the end of August 2019, the Turkish Central Bank’s policy interest rate to 24% in September 2018, the annual inflation rate up to 25.24% in October 2018 and the unemployment rate to 14.7% in January 2019.

 

Though the above economic indicators have fallen back, with Turkish lira revaluing to TL 5.55 against the US dollar in mid-August 2019, with the policy interest rate back to 19.75% in August 2019, with the annual inflation rate down to TL 16.65% in July 2019, and the unemployment rate down to 12.8% in May 2019, the Turkish economy is now entrenched in a severe economic recession.

 

Over the last four years, the Turkish government as led by the Justice and Development Party, has been continually faced with an election atmosphere with three general parliamentary elections, a referendum, a presidential election and finally the municipal elections completed on June 24th, 2019. This same period has seen a steady but certain decline in the health of the Turkish economy. Under normal circumstances, in light of the warning signs emanating from the economy, the government would have been expected to take precautionary measures to balance the economy by for example introducing tighter fiscal policies and structural reforms. However, the government, accustomed to the previous long years of economic growth, and under pressure to maintain the support of the electorate, wanted to ensure a continuation of high growth rates. The government achieved a growth of 7.4% in 2017 through the initiation of mega and other construction projects and through other measures to support the already heavily indebted private sector at the expense of the banking sector and long-term financial stability. This high growth rate would have also been achieved in 2018 if it was not for the foreign currency crisis in August of 2018.

 

Signs that the Turkish government was pursuing an erroneous policy were evident in 2015. This policy which was consumption driven may have been workable in the previous ten years when cheap international financing was readily available, when foreign direct investments in Turkey were high, when the privatisation programme was in full swing, and when interest rates were relatively low. However, it had become irrelevant during the economic environment prevalent from 2015 onwards. Perhaps the real turning point was the failed coup attempt in July of 2016, which knocked the wind out of the Turkish economy. Economic activity briefly came to a standstill and many companies suspected of supporting the Fethullah Güven organisation which is believed to be behind the coup, were taken over by the government. The Turkish government thereafter started to take desperate measures to support the private sector by introducing tax incentives, offering state guaranteed loans to companies facing difficulties in rolling over their bank loans, and pressuring Turkish banks to reschedule their loans to the private sector. This policy continued through 2017 until the beginning of 2018 when concern was widely expressed regarding the mounting and maturing foreign currency debt of the private sector.  

 

Despite the fact that the economy was showing signs of overheating in the early months of 2018, the Turkish government had its eyes on the parliamentary and presidential elections on June 24th, 2018, and was reluctant to introduce tighter fiscal policies. The bubble finally burst in August 2018 thanks to US President Donald Trump’s sanctioning of Turkey over the detention of Pastor Andrew Brunson. The resultant financial crisis played havoc with the already ailing Turkish economy, sending all economic indicators into freefall. Subsequent intentions to introduce economic discipline were declared, but the Turkish government’s hand was again restrained by the up-and-coming municipal elections on March 31st, 2019. With the rerun of the Istanbul municipal election on June 23rd, 2019, it was only from this date that we could at last look forward to a more open and responsible handling of the Turkish economy, since there were not to be any elections for another four years.

 

However, it appears that bad habits die hard. The Turkish government still appears to be in denial, and there have been no signs that it is willing to introduce much needed structural reforms and monetary policies. The government’s success in recent months in manipulating the value of the Turkish lira against the US dollar to below TL 5.50 and its cut by 425 base points of the policy interest rate to 19.75% on July 25th, 2019, together with the improved liquidity in international markets, have given the government the courage to continue with its growth policies. The prodding of banks to increase loan lending by changing the criteria for reserve requirements was a major reason for the fall in the value of Turkish lira against the US dollar to TL 5.76 by the week ending 23.08.2019. There is also every indication that the government will cut the policy interest rate by a further 300 base points in September 2019.  

 

One of the main justifications behind the government’s belief that the economy is improving is the decreasing annual inflation rate, which officially is 16.65% in July 2019. This figure was calculated by the Turkish Statistical Institute (TurkStat) which reports to the Turkish Treasury. There have been many doubts expressed regarding the correctness of TurkStat’s method for calculating this rate, which has widely been regarded as well below the true rate. Recent energy, tobacco and other price rises should see a rise in the rate, but the government is confident that inflation will continue to fall in coming months. The Turkish President Recep Tayyip Erdoğan has long argued for the reduction of interest rates at all costs to ensure higher growth. He apparently does not see any major risk of increasing inflation and weakening the Turkish lira, and he will soon nevertheless have the inflation rate he needs to justify a further cut in the interest rate. There will be no objection from the Turkish Central Bank, which is now widely accepted as no longer being independent since the removal of the Bank’s governor on July 6th, 2019.

 

Over the last four years since the economy started to show signs of faltering and especially since the failed coup attempt on July 15th, 2016, the Turkish government has taken on a more autocratic stance. It has made it known that it will no longer tolerate talk of recession and criticism of its economic policies. This has meant that business associations and businessmen have had to be very careful in choosing their words when discussing the economy, and often do not express their opinions openly in public. Criticism in the past from the largest businessmen’s association in Turkey, TÜSİAD, has in particular been met by fierce and scornful rhetoric from Erdoğan.

 

Over the last four years especially, the Turkish government has also taken a new close interest in the statistical data prepared relating to the Turkish economy. TurkStat announced on 13.12.2016 its revision to the methodology it used to calculate Gross Domestic Product (GDP), resulting in Turkey’s GDP for 2015 being increased overnight by USD 141 billion from USD 720 billion to USD 861 billion, GDP growth for 2015 being revised accordingly from 4% to 6.1%, and GDP per capita for 2015 being increased from USD 9,130 to USD 11,019. In line with the new calculation method, the first quarter growth figure for 2016 was revised from 4.7% to 4.5% and the second quarter from 3.1% to 4.5%. The contraction for the third quarter was lowered to -1.8% from a previously much higher calculated figure estimated to be close to -8%. On 31.03.2017, TurkStat announced a growth rate for the fourth quarter of 2016 as 3.5% and the overall rate for 2017 as 2.9% in line with the new calculation method. GDP per capita was given as USD 10,807. On 11.09.2017, Turkstat again revised its growth figures relating to all quarters of 2015 and 2016. The first quarter of 2016 was revised up from 4.5% to 4.8%, the second quarter up from 4.5% to 4.9%, the third quarter up from -1.3 to minus -0.8%, and the fourth quarter up from 3.5% to 4.2%. The overall growth rate for 2016 was revised up from 2.9% to 3.2%.

 

In the early months of 2017, international financial institutions such as IMF were forecasting GDP growth for Turkey in 2017 as below 3%. However, it was clear they did not as yet fully comprehend Turkey’s new growth calculation method. After Turkey’s first and second quarter growth figures for 2017 came in at 5% and 5.1% respectively, these institutions scrambled to revise their forecasts. The final revised figures for 2017 were 5.4%, 5.4%, 11.3% and 7.3% for the four quarters, with an overall growth rate of 7.4%. GDP given for 2017 was USD 851 billion, and GDP per capita was USD 10.597.

 

As a result of the financial crisis in the summer of 2018, and the ongoing economic crisis, Turkey’s growth rate for 2018 was clearly going to take a hit, no matter which calculation method used. The growth rate for that year was announced by Turkstat on 12.03.2019 as 2.6% (with 7.4%, 5.3%, 1.8% and -3% for the four quarters). GDP was given as USD 784 billion and GDP per capita as USD 9,632. If the old calculation method had been used, the Turkish economy would most definitely have shown to have contracted in 2018.

 

The Turkish government’s experiments with statistical figures were not just limited to GDP growth figures. Ruhsar Pekcan was appointed the Minister of Trade on July 9th, 2018 in the new Justice and Development Party government following the June 2018 parliamentary elections. Pekcan was very much aware that Turkey’s foreign trade figures would be used to judge her success in her position and she took a close interest in boosting Turkish exports which had stood up well despite the ongoing economic crisis. The financial currency crisis in August 2018 had an immediate effect on imports which fell dramatically, reducing overall economic activity but correcting the previous imbalance in foreign trade. TIM, the Turkey’s Exporters Assembly, was an organisation established in 1993 to support Turkish exporters and had to-date been at the forefront of the monthly presentation of Turkey’s export figures. This role was taken over by the Ministry of Trade under Ruhsar Pekcan who now headed press conferences at the beginning of each month announcing the trade figures for the previous month. The chairman of TIM was regulated to a supporting role at her side during these and other press conferences.

 

It was not long before the Ministry of Trade realised that there was an alternative and more lucrative method available for calculating foreign trade figures. TurkStat had to-date prepared foreign trade figures according to the special trading system (STS). With pressure from the Ministry of Trade, it was decided that as from January 2019 these figures would also be prepared according to the general trade system (GTS) which additionally includes customs warehouses, all types of free zones, free circulation area and premises for inward processing, whereas the special trade system (STS) is a narrower concept which only comprises imports and exports of the free circulation area. Some 117 countries use GTS, including the USA, China, Canada, Japan, Russia, South Korea, and India, whereas a total of 74 countries, including Turkey, have been using STS for calculating their foreign trade figures. European Union countries generally use STS, with the exception of a few countries such as the UK.

 

The Ministry of Trade first published the higher GTS figures followed by STS figures on its website. It then changed their position so that the GTS figures were prominent. At press conferences and other public announcements, it then subsequently started to summarise and publicise the foreign trade figures in terms of GTS figures only. TurkStat was clearly not impressed by the change in calculation method, and though it does now add a brief summary of GTS figures on its monthly bulletin of foreign trade figures published at the end of the following month, its detailed statistical tables do not include GTS statistics.

 

Over the last two years, TurkStat has changed the methods for calculating economic indices. As of January 2019, TurkStat changed its presentation of Turkey’s consumer confidence index and overall economic confidence index were changed to allow for seasonal adjustments, recalculating past index calculations for 2018 to adjust for seasonal adjustments. As from January 2018, TurkStat changed the calculation of the industrial production index with the reference year now being 2015 rather than 2010, claiming that the new calculation base comprises more comprehensive data from a larger number of companies. TurkStat has also from time to time changed the way data is compiled for its annual inflation rate published every month, such that there is now little confidence in the accuracy of this rate, which is much lower than the inflation rate as perceived by the average citizen in the street. TurkStat’s unemployment rate is also met with much cynicism.

 

Turkish government institutions are in general now shying from preparing detailed and regular statistical reports. For example, the Social Security Institution (SGK), which apparently is updating its reporting systems, has not produced monthly statistical reports on revenue and expenditure so far this year. Key data on employees and workplaces, healthcare services and the number of those without any social security as well as the agency’s revenues, spending and deficits have remained inaccessible for more than seven months. The SGK’s revenues are as much as half of the central government budget, and the institution is the largest recipient from that budget. The SGK, which serves about 70 million citizens, among them insured employees, pensioners and their dependents, has some of Turkey’s most extensive databases, including the largest database on registered employment. The data collection relies on a long-established mechanism whereby employers notify the SGK of newly hired and departing employees electronically.

 

The suspension of SGK data means that researchers and analysts have become unable to review and evaluate key issues such as the impact of the economic crisis on employment in specific sectors, average salaries, the characteristics of new hires, the SGK’s performance in terms of premium collection and the gap between the agency’s revenues and spending. There may however be a more serious underlying reason behind the disruption of SGK data. The ongoing economic crisis may have caused SGK revenue to fall significantly as unemployment increases and employers facing liquidity crises fail to pay premiums on time. SGK may as a result be an increasing burden on the central budget.

 

In addition to the above, there is a difficulty in obtaining details of the latest foreign direct investment to Turkey. Confusion is also apparent relating to the real state of the Turkish Central Bank’s foreign currency and gold reserves.

 

Perhaps more worrying are the budgets and forecasts produced by the Turkish Treasury and Central Bank. The government’s attempts to paint a more positive picture of the current state of the Turkish economy and over optimistic expectations for the future means that its budgets and forecasts lack credibility. 100 day plans, medium term plans and five year plans are prepared and offered, but none of them offer a realistic projection of the way forward for the Turkish economy based on realistic current economic indicators. The deficit projected in the Treasury’s 2019 budget of TL 80 billion has almost been reached in the first half of 2019. The Central Bank cut its 2019 inflation forecast to a lower 13.9% on 31.07.2019 despite the fact that it must have been aware of the flurry of price increases (including electricity, natural gas, and transportation) awaited in the following months.

 

The Turkish government is still pre-occupied with finding short-term solutions. The transfer of the Central Bank’s TL 46 billion (USD 8.1 billion) in legal reserves to the Treasury in order to help narrow the budget deficit will help alleviate this year’s budget deficit, but this does not offer a genuine solution to the country’s growing budget deficit caused by the ongoing and deepening economic crisis’ adverse effect on revenues. Unless the Turkish government introduces the necessary reforms and measures to address the root problems facing the economy, no end of short-term temporary solutions, statistical massaging and rule changing will provide an effective solution and Turkey will find it locked in to a crisis from which it will take many years to extract itself.

 

However, in order to identify reforms and strategies to create a healthy economy, accurate and reliable data must be made available. The need for example to support Turkey’s value-added but neglected sectors, such as industry and agriculture, rather than concentrating solely only on construction, energy and services has been widely accepted for some time, but no determined and centrally planned strategies based on sound date have been produced to this end. Turkey cannot  move forward if it does know where it is right now.

 

Turkey’s net minimum wage has been raised 26.05% to TL 2,020 (USD 381) as of 01.01.2019       Migration communication helpline 157 available for foreigners in Turkey       Read our homepage articles on developments in the Turkish economy       Turkey’s annual inflation rate drops to 9.26% in September 2019       Turkey’s unemployment rate increases to 14% in August 2019       Read our BUSINESS section for latest sectoral and corporate news       Turkey’s population is 82,003,882 as of 2018 yearend       Number of foreigners visiting Turkey in 2018 increases by 21.8% to 39.5 million       Turkey’s private sector foreign debt is USD 225.8 billion as of 2018 yearend       Turkey’s economy contracted by 2.6% in the first quarter of 2019       Turkey shows surplus of USD 538 million in its 12 month rolling current account balance in June 2019