The inevitable has arrived: Turkey is in recession. For the first time in a decade, as a chart from Citi's Ilker Domac shows:
By all accounts, it was just a matter of time.
Since last summer's currency crisis, which saw the lira lose 40 per cent of its value until its central bank finally heeded to economic orthodoxy in September and raised interest rates, Turkey's economy has rebalanced, and hard.
Alphaville has written before about the sharp contraction of economic activity hamstringing Turks thanks to ultra-tight monetary policy. One standout stat from that November article: through September, motor vehicle registrations dropped 47.7 per cent year-on-year.
GDP has since shrunk 3 per cent year-over-year, with seasonally adjusted GDP decreasing by 2.4 per cent on a quarterly basis, the slowest since the global financial crisis.
Turkey has benefited from this short-term pain, however. Given the swift contraction of domestic demand, which slashed imports, the country's once-gaping current account deficit has now narrowed, per Domac again:
And ex-energy and gold, the current account balance has entered a surplus.
With it, investor confidence has returned. In fact, Turkey recently saw its highest inflows ($6.1bn) since April of last year. As a result, official reserves have increased by $3.5bn. That's a relief for Turkish policymakers, who once feared a potential funding gap given its large external liabilities, an ever-weakening lira and waves of capital outflows.
Still, Turkey's economy is not in the clear just yet. According to Tim Ash of BlueBay Asset Management, "[Turkey's] recession will be deeper and longer than previously given the balance sheet nature of this recession.”
Rather than a V-shaped recovery, the private sector's high level of short-term dollar-denominated debts could pose added stress.
Turkey's contraction comes at a terrible time for the government, with all-important local elections approaching at the end of the month. However, easing monetary policy too soon in the hopes of shoring up political support will probably backfire.
Any unorthodox response, ie easing too early, says Ash, will make things worse and raise the likelihood of another balance-of-payments crisis.
Instead, Ash sees “easier ways out,” including:
A more proactive and transparent approach to dealing with problems in the banks and ideally backstopped by an IMF programme which does not need to be that large in size or that intrusive.
Last Alphaville checked, President Erdogan seems to have some choice thoughts about the IMF. As recently as February he said:
Turkey closed its IMF chapter in May 2013 and, God willing, it will not be reopened.
Well, that seems to settle that.
Related Links:
Turkey's central bank can't cut interest rates just yet — FT Alphaville
Can Turkey's central bank avoid another rate hike? — FT Alphaville
Turkey's economy doesn't need higher interest rates — FT Alphaville
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