Turkey's policy response to the coronavirus crisis
The EBRD is monitoring Turkey's policy response to the coronavirus pandemic. Our biweekly publication identifies the major channels of disruption as well as selected impact and response indicators.
Current EBRD forecast for Turkey’s Real GDP Growth in 2020 -3.5%
Current EBRD forecast for Turkey’s Real GDP Growth in 2021 6.0%
The Turkish economy grew by 0.9 per cent in 2019, as significant policy loosening and credit growth drove a consumption-led recovery from the recession of 2018. Relative
macroeconomic stability was achieved over the course of 2019. Inflation has come down to the lower double digits, allowing policy rates to be slashed from 24 per cent to 8.75 per cent in the past nine months. At the same time, the current account moved into surplus in late-2019 before returning to deficit more recently due to stimulus-driven domestic demand growth.
While leading indicators suggest the recovery was sustained in the first months of 2020, domestic and external demand will be hard hit by the pandemic. The significant decline in
tourism revenues and weaker export demand will put more pressure on the external balance, although if sustained, the lower oil price will provide limited support given Turkey’s dependence on imported energy. Likewise, the lower oil price, alongside the sharp slowdown in domestic activity, will help offset the inflationary impact of the weakening lira.
Until recently, Turkish financial markets had been remarkably stable, particularly given the low and now-negative real policy rates, and ongoing concerns about the sufficiency and
quality of foreign exchange reserves held by the Central Bank relative to the economy’s external liabilities. This period of calm reflected the supportive global policy stance but can also be attributed to extensive interventions by the authorities. However, coronavirus concerns have resulted in financing costs and risk premia rising in Turkey, as in other emerging markets, and have caused a recent sell-off of Turkish assets.
With the non-performing loan ratio standing at a 10-year high of 5.3 per cent, the weakness of the lira and contractions in tourism, retail and export sectors are likely to
put further stress on the already strained asset quality of banks, particularly in light of the large foreign-exchange-denominated debt overhang in the corporate sector.
Meanwhile, government efforts to spur bank lending may lead to further asset quality deterioration down the road.
Growth is likely to be heavily impacted by the coronavirus pandemic in 2020. We expect GDP to contract by 3.5 per cent in 2020, followed by a robust recovery to 6.0 per cent growth in 2021. There are significant risks surrounding this forecast, which is heavily dependent on the duration and extent of the social distancing measures.