The World Bank and the IMF forecast that the Turkish economy would shrink by 5-5.5% this year, an estimate the government has come to accept, though until April some officials were still hoping that the country could avoid falling into recession and would post growth of 4% in 2009.
The Organisation for Economic Cooperation and Development (OECD) was somewhat harsher in its latest predictions, forecasting a 5.9% contraction in a report issued on June 24. While saying the Turkish economy could rebound in 2010, posting growth of 2.6% thanks to interest rate cuts and tax relief measures for the private sector, the OECD warned that the government had to keep spending in check, with an IMF loan agreement assisting to lock in austerity measures.
“A new standby agreement with the IMF would also help by providing a reliable funding source and credible monitoring,” the report said.
However, there is no certainty that any agreement with the international lender will be struck. Though Turkey broached the issue of a new loan with the IMF late last year, with a figure of up to $45bn being discussed, there have been a number of sticking points that have prevented any deal being finalised.
In particular, the government does not want to have its hands tied regarding fiscal policy, rejecting IMF demands to implement a wider austerity programme, or to create an autonomous tax administration, a move Prime Minister Recep Tayyip Erdogan has described as unacceptable.
The government has been giving out mixed messages over the standby discussions with the IMF – Erdogan saying in mid-June that a standby arrangement is not essential for Turkey, though earlier in the month he said an agreement would be sealed by autumn at the latest.
On June 25, the deputy prime minister, Ali Babacan, who is also the state minister for the economy, said talks were continuing with the IMF, though the government was making preparations for two different scenarios, one taking into account reaching a loan agreement with the fund, and the other relying on other resources.
A number of Turkey’s leading business groups, including the influential Turkish Industrialists and Businessmen’s Association, have called for the government to finalise an agreement with the IMF, both to provide a cash injection into the economy and bolster confidence.
And confidence, along with liquidity, remains in short supply. Though the latest figures issued by the Turkish Board of Statistics in mid-June show the unemployment rate has eased, falling from 16.1% in February to 15.8% in March, much of this improvement can be attributed to seasonal factors, with the agriculture sector soaking up some of the excess in the labour pool due to planting and harvesting requirements. Since mid-2008, the Turkish economy has shed around 1.2m jobs, with a total of 3.7m workers listed as unemployed.
Turkey’s industrial sector has been especially hard hit by the crisis, with output and capacity utilisation falling for each of the past nine months. Output figures for April, released at the beginning of June, showed production levels fell by 18.5% compared to the same month in 2008, though the rate of decline was slightly slower than for the previous month, prompting some analysts to suggest the crisis in the industrial sector was easing, aided by cuts in sales taxes put in place by the government in March.
Worst affected is the automotive sector, one of the Turkish economy’s growth engines in the past and its leading industrial export earners. Vehicle production was down 59% in the first quarter of the year, with most major manufacturers halting assembly lines for periods over that time and into the second quarter.
Overall exports are also down, falling 39.97% in May and totaling just $35.8bn for the first five months of the year, well off the performance of 2008 that saw Turkey send more than $120bn of goods and services overseas.
There was some good news for Turkish exporters in the OECD’s June 24 reports, with the organisation saying that the European economy will be flat in 2009, an improvement on the expected 4.8% contraction this year. With Europe being Turkey’s largest export market, representing around 50% of all overseas sales of goods and services, an end to the steep downturn in the Eurozone will be seen as a hopeful development for Turkey.
While many of the cornerstones of the Turkish economy have been eroded by the crisis, the tourism sector has shown itself to be remarkably resilient. According to figures released by the Culture and Tourism Ministry on June 23, some 7.37m overseas visitors came to Turkey in the first five months of the year, just 0.7% down on the January to May period in 2008. With tourism being one of the largest foreign currency earners for Turkey, a solid performance in the peak summer season could help mitigate some of the effects of the recession.
To try and stimulate the economy and restart the flow of money into the market, the Turkish Central Bank has instituted a series of cuts to its prime interest rates, the latest on June 16, which saw the bank’s key borrowing and lending rates reduced to all time lows of 8.75% and 11.25% respectively, though the bank struck a cautious note.
“Foreign demand continues to be weak and internal investment demand is regressing,” the bank’s monetary policy board said in a statement announcing the most recent cuts. “We believe recovery in economic activity will take time, employment conditions will stay the same for a while and that inflation will remain low.”
Hopes for a quick recovery of the Turkish economy will be linked in part to its major trading partners bouncing back from the effects of the global recession, as well as an increase in domestic demand. With only limited funds at its disposal and under pressure from the IMF to take a measured approach to spending, the Turkish government’s room for fiscal stimulus remains somewhat limited.
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