Turkish economy faces another year of turmoil

Double-digit inflation, a currency in freefall and growing joblessness are creating headaches for Turkey. (Shutterstock)
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Updated 23 November 2020

Turkish economy faces another year of turmoil

  • Ankara’s growth strategy — based largely on easy credit — is well past its expiry date, analysts warn

ANKARA: It has been a tumultuous year for Turkey’s economic management with a currency crisis and interest-rate volatility rattling investor confidence.

The recent dismissal of the central bank governor via an overnight presidential decree and the resignation of Berat Albayrak, the Turkish finance minister and son-in-law of President Recep Tayyip Erdogan, contributed to the mood of trepidation.

Now investors are hoping 2021 will bring an improvement to the country’s economic outlook.

Albayrak, who took the finance reins in mid-2018, has been blamed for defending the currency with foreign exchange interventions and depleting foreign reserves of the central bank with costly policy interference in the currency markets.

Turkey is also running a serious current-account deficit — expected to be as much as $2.7 billion in September.

Turkish state banks are reported to have sold about $100 billion in dollar reserves this year to support the currency. Inevitably, such moves by the central bank triggered a rush for dollars among individual depositors seeking a safe haven throughout 2020.

Foreign currency reserves of the country reached their lowest point for the past two decades, resulting in the credit rating agency Moody’s warning in September that Turkey had “almost depleted the buffers that would allow it stave off a potential balance-of-payments crisis.”

As a move to win the trust of investors following the lira’s plunge, the central bank governor was replaced by Naci Agbal and the
finance ministry position was filled by Lutfi Elvan — two close allies of Erdogan. The Turkish lira rebounded against the euro and dollar after the reshuffle of the economy team, however some experts believe this positive direction may be short-lived.

In his first public appearance on Tuesday, Elvan made assurances that the government’s growth policies would not threaten its fight against double-digit inflation that continues to erode the savings of citizens.

“Turkey’s growth process will be planned and controlled in a way that doesn’t contradict our fight for macroeconomic stability and against inflation,” he said, promising that the country would experience a sustainable growth path in two years’ time.

Amid the prospect of early elections and political shakeouts, the economic turmoil is worsening with the currency sinking to record lows as the central bank, under political pressure for not raising rates, held key interest rates steady at around 10.25 percent.

Erdogan is known as a staunch opponent of raising interest rates, branding such monetary policy as “the mother and father of all evil.”

As a critical moment, the central bank will hold its next meeting today to decide on interest rates in a keenly anticipated decision.

Real rates are considered as much higher than the official figures, with inflation around 12 percent and unemployment rates gradually increasing, especially among youth. More than 10 million people are jobless in Turkey.

The Turkish lira, by far the worst-performing currency, has lost almost 30 percent of its value this year. Under the new Joe Biden administration in the US, the Turkish government may face possible US sanctions over its previous purchase of a Russian missile system.

Wolfango Piccoli, co-president of London-based Teneo Intelligence, said 2020 had shown that Turkey’s model of economic development — largely based on easy credit — was no longer sustainable and was well past its expiry date.




Turkish President Tayyip Erdogan strongly opposes raising interest rates. (AFP)

“Looking ahead, the key question is whether Turkey has officials and politicians able to devise and implement a new economic strategy and whether Erdogan is willing to embrace these changes despite their political cost,” he told Arab News.

With the stakes so high, market watchers expect rate hikes and an end to credit-driven growth of the country that has prevailed for the last three years. The ongoing political pressure on the country’s central bank is also a source of concern for investors.

According to Piccoli — who felt that the new appointments to the economy team did not signal a sudden return to economic orthodoxy — the longer Turkey sticks with the old strategy, the bigger the hole it will find itself in.

As the coronavirus disease (COVID-19) pandemic triggered an annual contraction for the first time in Turkey for more than a decade, Turkey’s economy was this year expected to shrink by 3.4 percent, according to a new Reuters poll. The economy shrank 10 percent in the second quarter.

The last time Turkey’s economy contracted on an annual basis was in 2009, during the financial crisis, when it shrank by 4.7 percent.

Reuters also predicted that the current account balance would post a deficit at around 3.8 percent of gross domestic product this year.

In the meantime, amid the coronavirus outbreak, the latest official figures show Turkey’s tourism income has decreased by more than 70 percent, a slump that has negatively influenced the current account balance.


China launches $28bn loan facility to support manufacturers

Updated 28 September 2022

China launches $28bn loan facility to support manufacturers

  • Yuan ends at weakest since global financial crisis, hits record low

BEIJING, SHANGHAI: China’s central bank said on Wednesday it has set up a relending facility worth more than 200 billion yuan ($27.59 billion) to help manufacturers and other companies upgrade their equipment, as part of a push to revive flagging demand.

The People’s Bank of China said in a statement that it will provide low-cost funds to financial institutions and guide them to lend to firms to support such upgrades. The loans will be issued on a monthly basis, and the interest rate for qualified firms will be no higher than 3.2 percent from Sept. 1, 2022 to Dec. 31, 2022, the central bank added. China’s one-year loan prime rate is currently 3.65 percent.

The lending facility will support sectors including education, health, culture, tourism and sports, electric vehicle chargers, urban underground facilities, new infrastructure and industrial digital transformation, the central bank said.

The PBoC has increasingly relied on structural, or targeted policy tools, including low-cost loans, to support the slowing economy, as it faces limited room to cut interest rates for fear of fueling capital flight and inflation.

The PBoC has rolled out relending facilities to support the transport, logistics and storage sectors that have been hit hard by COVID-19, as well as carbon emission reduction, tech innovation and elderly care.

On Sept. 14, China’s Cabinet announced steps to support equipment upgrades by companies, extending a raft of measures to bolster the COVID-ravaged economy.

Onshore yuan

China’s onshore yuan extended losses on Wednesday to end the domestic session at its lowest level against the dollar since the global financial crisis of 2008, while the offshore yuan hit a record low, pressured by expectations of more US rate hikes.

Currency traders said the yuan was reacting to broad greenback strength in global markets as the dollar hit a fresh two-decade peak against a basket of currencies, buoyed by safe-haven demand and a hawkish Federal Reserve.

In onshore markets, the yuan finished the domestic trading session at 7.2458 per dollar, its weakest such close since January 2008 and down 658 pips or 0.91 percent from previous late night close of 7.18.

The offshore yuan followed suit and weakened 1.15 percent on the day to trade at 7.2635 around 0830 GMT.

Fuel export

China may tweak a proposed sharp increase in refined fuel export quotas for this year by extending the plan into next year, as it weighs the benefits to the economy of higher exports against low domestic stocks and operational challenges, four sources told Reuters.

However, the four sources with direct knowledge of the matter — and three others — said the government was still reviewing the matter.

The market has been widely expecting China to release a fifth batch of fuel export quota of up to 15 million tons for the rest of the year, which would be its largest so far in 2022 and lift China’s sagging exports.

The proposal from refiners’ planning departments, following a government call to boost trade, has led some refiners to ready an increase in output to take advantage of the quota.


Third Jordan-Gulf Economic Forum begins in Amman

Updated 28 September 2022

Third Jordan-Gulf Economic Forum begins in Amman

  • Jordanian minister said value of trade between his country and Gulf Cooperation Council member states reached $6.6 billion in 2021

AMMAN: The third session of the Jordan-Gulf Cooperation Council Economic Forum began in Amman on Tuesday. It brings together officials and business representatives from Jordan and GCC member states to discuss opportunities for the expansion and development of economic relations, the Jordan News Agency reported.

The forum, which is taking place under the title New Horizons for Economic and Investment Cooperation, aims to advance the strategic objectives and interests of all participating nations, according to the Jordanian Ministry of Industry, Trade and Supply.

The delegates at the two-day event include businessmen, investors, the heads of trade federations and chambers of commerce, and representatives of Gulf and Jordanian government stakeholders, according to the ministry.

In his opening remarks, Youssef Shamali, the Jordanian minister of industry, trade and supply, said that the value of trade between his country and GCC member nations reached $6.6 billion in 2021. Jordanian exports to the GCC were worth $1.7 billion of that total, while Jordan’s imports accounted for $4.9 billion.

The minister added that Gulf nations are responsible for the most significant foreign investments in Jordan, and capital from the region has benefited the nation’s economy and created jobs for the Jordanian people.

He added that if Arab nations were to unite to form a powerful economic bloc, it would allow them to boost exports, increase production, create new job opportunities for young people, and achieve greater integration into the global economy.
 


ECB eyes blockchain for settling bank transactions, says official

Updated 26 September 2022

ECB eyes blockchain for settling bank transactions, says official

  • The ECB is among a number of central banks around the world working on digital versions of their currency in response to the popularity of digital tokens

FRANKFURT: The European Central Bank is studying ways of settling transactions between banks on a blockchain in a bid to keep control of money even if lenders switch to distributed ledgers, ECB board member Fabio Panetta said on Monday.

The ECB is among a number of central banks around the world working on digital versions of their currency in response to the popularity of digital tokens such as Bitcoin and the blockchain technology that powers them.

This distributed ledger technology is predicated on market participants verifying transactions and keeping a copy of them rather than relying on a trusted party, such as a central bank.

On top of a digital euro for consumers, the ECB is looking at how it could let banks settle wholesale transactions between them on a distributed ledger, rather than the central bank’s own.

“Despite the uncertainties surrounding DLT’s potential, we want to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement,” Panetta said. 

We want to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement.

Fabio Panetta, ECB official

He added letting banks settle among themselves or use stablecoins, which are crypto tokens pegged to a conventional currency, would result in “trading and liquidity becoming fragmented.”

Meanwhile, giving stablecoins the ECB’s backing would “outsource the provision of central bank money to private entities, endangering monetary sovereignty,” Panetta said.

As a possible solution, Panetta said the ECB might build a bridge between the private sector’s blockchain platforms and its own Target 2 settlement system.

Alternatively, it could make central bank money — the claim against the ECB in which wholesale transactions are settled — available on those platforms or create its own, he added.

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Indian currency seen at record low as dollar, US yields surge; RBI eyed

Updated 26 September 2022

Indian currency seen at record low as dollar, US yields surge; RBI eyed

  • The rupee is tipped to open at around 81.30 per US dollar, down from 80.9900 in the previous session

MUMBAI: The Indian rupee is poised to hit a new lifetime low against the US currency on Monday, as worsening risk sentiment and a tumbling pound lifted the dollar index to its highest since 2002.
The rupee is tipped to open at around 81.30 per US dollar, down from 80.9900 in the previous session.
The local unit had reached a record low of 81.2250 on Friday, prompting the Reserve Bank of India (RBI) to sell dollars, according to traders. The RBI’s intervention had aided the rupee to turn briefly higher on Friday.
“It will be another choppy and volatile session. All eyes will be on state-run banks at open,” a trader at a Mumbai-based bank said, alluding to intervention from the RBI through these banks.
“The intervention by RBI at 81.20 was quite forceful and markets will want to know if that level will be protected again,” the trader said, adding, the RBI may not be too inclined to intervene given the “carnage” across Asian currencies.
The dollar index in Asia trading climbed above 114.50, the highest since May 2002, thanks to demand for safe-haven assets and a collapsing British pound.
The pound tumbled to a record low on Monday on fears the new government’s economic plan will stretch its finances to the limit. The rout prompted speculation of an emergency response from the Bank of England.
Asian equity gauges fell by as much as 2.4 percent and futures pointed to more losses for the S&P 500 Index. The offshore Chinese yuan declined below 7.16 to the dollar and the Korean won dropped more than a percent.
Treasury yields continued to march higher, not benefiting from the risk-off sentiment. The 2-year Treasury yield reached a fresh multi-year high of 4.27 percent on bets that the Federal Reserve will continue to hike rates aggressively despite the mounting growth risks. 


Bahrain’s GDP grows at 6.9% in Q2 2022

Updated 25 September 2022

Bahrain’s GDP grows at 6.9% in Q2 2022

  • The Gulf country will see modest hike in oil production in 2022 to 0.19 mbpd

RIYADH: Bahrain’s gross domestic product grew 6.9 percent year on year in the second quarter of 2022, posting the biggest annual increase since 2011, Bahrain’s Crown Prince Salman bin Hamad Al-Khalifa said on Twitter on Sunday.

In the first quarter, the Gulf country’s GDP grew 5.5 percent year on year at constant prices. The country’s non-oil economy recorded growth of 7.8 percent in the same period.

According to the latest Economic Insight report for the Middle East, commissioned by ICAEW and compiled by Oxford Economics, Bahrain’s oil sector growth will be driven by higher oil production, despite a decline in the first quarter. Since 2015, the annual real growth of Bahrain’s oil sector has only expanded once relative to the previous year, in 2019. Based on the current OPEC+ agreement, Bahrain will see a modest increase in oil production in 2022 to 0.19 million barrels per day from 0.17 million bpd.

This small increase, combined with elevated prices, will return the oil sector to growth in 2022 before stagnating again as the government continues its diversification efforts. The forecast is for oil production to expand by 5.8 percent in 2022, compared to 2.4 percent in 2021.

Scott Livermore, ICAEW economic adviser, and chief economist and managing director, Oxford Economics Middle East, said: “The surge in oil prices and introduction of a 10 percent VAT is supporting Bahrain’s revenues and will help authorities come close to balancing the budget in 2022, two years earlier than the 2024 target set in the Fiscal Balance Program.”

The rise of inflationary pressures and rate hikes by the US Fed will force the Central Bank of Bahrain into more rate increases, beyond the 225 basis points cumulative increase in the key policy rate already this year.

Inflation averaged 3.4 percent in the first half this year, a level not seen since 2016, before rising to 3.9 percent in July.

ICAEW expects inflation to average 3.9 percent this year after prices fell annually in both 2020 and 2021.

Consumer spending is likely to be increasingly constrained going into 2023, leading to a GDP growth slowdown to below 2 percent by 2024.

As of now, the central bank has sufficient reserves to maintain the currency peg with the US dollar and is likely to follow policy moves by the Fed closely so it’s not expected to have significant pressure to devalue the dinar.

The current account returned to surplus in 2021 at 6.7 percent of GDP, the largest surplus since 2013. ICAEW expects the higher price of oil exports and a continued resurgence of international travel to push this surplus above 10 percent in 2022.

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