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Turkey: Coming out of

Turkey: Coming out of hot waters, but what next? After two years of economical, political and geopolitical turmoil, finally Turkey seems on the path of recovery. Apart from undergoing reforms domestically, Turkey should also reform its foreign policy, especially with its largest trading partners i.e. European Union. As sour relations with Europe will be counter-productive to its economy. T urkey’s economic and social development performance since the turn of the millennium has been impressive. It has created millions jobs and increased income levels, which in turn has made Turkey an upper middle-income country. For most part of the early 2000s, Turkey has maintained a long-term agenda, implemented ambitious reforms and government programs that have targeted vulnerable groups and regions. As a result, poverty levels more than halved and extreme poverty fell even faster. During this time, Turkey underwent dramatic urbanization, maintained strong macro economic and fiscal policy frameworks, opened itself to foreign trade and finance, expanded access to public services, and harmonized many laws and regulations in line European Union (EU) standards. It also recovered relatively well from the global financial crisis of 2008-09. However, since 2016, there has been a slowdown in economy and the country has been to a exposed a number of economic vulnerabilities, reversing some of the progress that was made in the first 15 years. As we begin the third decade of this century, Turkey finds itself in a very contrasting situation as compared to the start of the century. It’s economic outlook is subject to higher levels of uncertainty than usual, given rising inflation and unemployment, contracting investment, elevated corporate and financial sector risks, and an inconsistent implementation of reforms. There are also significant external headwinds due to weakening relationships with some key trading partners, ongoing geopolitical tensions in the Eurasian region, global trade tensions, and concerns about a global recession. Two years of turmoil Sudden crashing of Turkey’s currency in August 2018 sent shockwaves throughout the country as well as other markets where Turkey is a major player. Currency crash affected the banks’ and corporations’ ability to fulfill external debt obligations in the face of declining economic activity. There were concerns in August 2018 over foreign investors’ willingness to refinance Turkey’s external debt. Turkey experienced a sudden stop in capital inflows and extreme capital outflows as well. From this difficult situation only 18 months ago, Turkey has undergone reforms that have helped re- NEWS AND MARKETS

duce external shocks. Of the many changes, a few of them are worth highlighting. First, a drastic reduction in Turkey’s current account deficit; by limiting the imports and picking up exports. By June 2019 this had even created a small current account surplus. Secondly, banks have worked on strengthening their financial resilience and deleveraging their external debts. The banking sector debt from its peak of US $ 134 billion in August 2018 to US $ 100 billion by end June 2019. While, corporate and central government debt remained were relatively stable. The shock of August 2018 has had a significant negative impact on the internal consumption cycle. The economy went into recession in second half of 2018 with two conse cutive quarters of negative GDP growth. Both private consumption and investments had decreased significantly. It was the exports sector and external demand that helped offset a more significant contraction in GDP. A huge impact on factories, employees and eventually the consumers The currency crash created trouble for turkish manufacturing as well; as it increased the cost of manufacturing suddenly. When prices of commodities and raw materials rise it increases the cost of manufacturing, generally this is passed onto the consumers to help cover the increased costs. As the turkish lira crashed, it increased the cost of intermediate goods that are imported by turkish manufacturers and processers. This contributed heavily to rising inflation and reduced industrial output and also consumer’s spending capacity. Categories that experienced the biggest price rise were the textiles, chemicals, basic metals, and fabricated metal products industries. Another major contributor for this inflation was the cost of energy. The cost of energy for a producer is mainly associated with the international oil prices, but also with the dollar exchange rates. Author: Sushen Doshi, International Correspondent for World of Industries Since, Turkey depends on importing its energy requirements, the prices of electricity, natural gas and petroleum saw a sharp rise, which in turn led to further increase in cost of manu facturing. Rising costs of production and high inflation led to significant job losses and falling wages. Turkey’s economy lost around three quarters of a million jobs from July 2018 to July 2019, amounting to 2.5 % of total employment. The rate of unemployment increased from 11 % to 14 % between July 2018 and July 2019. This was in sharp contrast to the preceding year, where between May 2017 to May 2018, the economy generated employment of 1.9 %. If the trend had continued to 2019, the economy would have produced an additional half a million jobs. Discouraged by the lack of opportunities, the labor force participation also saw a reversal. Given Turkey’s demography, the labor force participation had been consistently growing, but in the 2018 it reversed and started to decrease. SMEs play an important role in the turkish economy. They account for 73 % of turkey’s total employment, 62 % of total sales and 99 % of all firms. Despite their large presence, SMEs’ investments are moderate compared to large firms and highly sensitive to global financial conditions. Negative financial shocks tend to affect SMEs more than larger firms, which in turn leads to a drop in their investment rate and potential. Turkey has faced several geopolitical and external relations challenges since the start of 2019, which could have spiraled into an other financial turmoil. Tensions around country’s elections in March and June 2019, the escalation of conflict in Syria since early 2019, and the delivery of the S-400 defense missile system in July 2019 were all significant pressure points. These and other events caused spikes in market volatility and created loss of investor con fidence. Coming out of hot waters The economic landscape has improved somewhat in recent months as the economy returned to growth on an annual basis for the first time in a year in the third quarter of 2019. This came on the back of solid public and private consumption growth. One of the surprising things in 2019 was the amplitude of the upside rebound in private consumption given the fact that unemployment and labor market trends were negative. Though the private consumption improved, the investment cycle failed to kick-off which was largely anticipated, mainly due to contraction of credit growth and high corporate debt. The turnaround in industrial sector was also weak at the start of 2019, but capacity utilization in the manufacturing sector picked up from a low point in November 2018, and reached close to its 10-year average by the third quarter of 2019. Other important indicators like the purchasing managers’ index (PMI) also gradually picked up, but still its average over the first three quarters remained below the expansion mark. Whilst industrial production has also started to expand in recent months, in annual terms it remained in negative territory. However, recovering domestic activity led to a surge in imports in the quarter, and the external sector consequently weighed on the economy. Turning to the final quarter of 2019, annual economic growth should have accelerated further, partly due to a low base effect. This year the economy should continue growing, but the linge r­ ing geopolitical tensions and market volatility will tilt the economy downwards. In 2020, Turkey is expected to expand by 2.8 %, and 3.1 % in 2021. Looking ahead, industrial production is expected to recover this year partly owing to a supportive base effect and to an improving macroeconomic environment. It is expected industrial production to grow 3.2 % in 2020 and to increase 3.3 % in 2021. Photos: Lead Photo Adobe Stock WORLD OF OF INDUSTRIES 1/2020 11


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