The Economy of Turkey in 2020!

2019 was a rough year for the humanity and the global economy. Trade wars and geopolitical tensions all over the globe melted down the risk appetite and that led to slowdown in an already slowed down global economy. The world has changed dramatically since January 2020. Emerging economies such as Turkey have founded themselves in a tough position as they have a fragile economy.

Old habits never die; Turkey has a type of economy that has been dependent on imports and foreign loans. The cost of imports have risen sharply especially since the covid-19 outbreak as DXY had experienced a hike. DXY’s spike was because of the meltdown in global risk appetite and that ended up parities like USDTRY to soar.

The exchange rate has climbed by more than 15% since January 1. And it goes without saying that USDTRY hit all-time high in May. That was a blow for a country that prefers to grow by the help of imports and loans. The hike in the parity made it hard for Turkey to pull back the cost-push inflation even with the help of ultra-low petrol prices in Q1. Therefore, it makes it hard for the Central Bank to pull back the interest rate to the desired levels. This makes the economy slow down more than before.

That being the case, Turkey desperately needs hot money flow from foreign markets into the economy to be able to keep the USDTRY stable or take it down a little. As the global risk appetite is extremely low for the moment, it does not seem possible for Turkey to access cheap loans with considerable amount.

Major central banks such as FED and ECB have lowered their policy interest rates near/to zero especially to be able to revive their economies. Even the loan rates have been close to zero, the banks do not want to take risks by giving loans during the lean patch. For this reason, Turkey find it hard to access the cheap loan, as CBRT’s net reserves have been critically low.

In addition to that, the income from the tourism and exports has been low too. It makes CBRT to turn on the taps of stimulus packages and that melts away the net reserves of the central bank. This is impossible to keep it that way. That is why CBRT has been looking for swap deals with several central banks to bolster its reserves but there has not been a specific agreement yet other than improving already-signed swap deal with Qatar. It definitely helps to keep USDTRY stable but much more is needed if better outcome is desired. Eurobonds have been an alternative for the short period to keep up the circulation of the economy.

It is for sure that the US has more than doubled its balance sheet in a few months. And it is true that other major central banks follow FED’s path of stimulus. Emerging economies like Turkey have to wait for the US and eurozone economies to recover and then wait for the liquidity. It will be an enormous opportunity for Turkey to have chance to access the liquidity (loan or hot money flow) with low or no cost but the liquidity will be captious this time.

Turkey has to prove that it can perfectly perform the exact rules of the “free market economy” to be able to engage the hot money flow’s attention. Thus, we could see a recovery in Turkey’s economy.

Turkey’s economy may shrink 5% this year according to a report by the International Money Fund (IMF). IMF also expects the economy to grow by 5% in 2021. Now, the main question is; what type of recovery to expect? U-shaped or V-shaped?

I guess the shape will be just like “a check/tick mark”. We will find the bottom first and then it will be a slow recovery that will last around a year.

Turkish lira might experience a quicker recovery in the second half of 2020 if we could have a near miss of the second wave of covid-19 and have a chance to seal new swap deals with major central banks. Nonetheless, it will not go beyond dreaming to say that USDTRY can remain stable or erode in the long run as Turkey has been experiencing trade deficit every year since 1947.