THE GOOD news for Turkey’s beleaguered economy is that the bad news could have been much worse. The Turkish lira, which spent much of the past summer in a death spiral, has rebounded to its highest level since August, when America slapped asset freezes on two senior Turkish officials and tariffs on the country’s steel and aluminium exports. Investor confidence improved after Turkey released an American pastor who had spent two years behind bars on spurious coup charges. Dialogue with America picked up speed after the murder of Jamal Khashoggi, a Saudi journalist, at his country’s consulate in Istanbul. Inflation, which in October reached over 25% year-on-year, has dipped by five points over the past two months, thanks largely to a series of interest-rate hikes. President Recep Tayyip Erdogan’s son-in-law, Berat Albayrak, whose appointment as finance minister last July provoked the worst run on the lira since a coup attempt in 2016, and who stumbled during his first weeks on the job, has since earned cautious praise from bankers and analysts.
Yet the impact of the currency crisis, exacerbated by years of runaway borrowing and central-bank inaction, is continuing to lay waste to the real economy. Growth in the third quarter of 2018 dwindled to 1.6% year-on-year, down from 5.3% in the three preceding months. On a quarterly basis, the economy contracted by 1.1%. A recession, defined as two consecutive quarters of negative growth, now appears imminent. In November Moody’s, a rating agency, predicted that the economy would shrink by 2% in 2019. The International Monetary Fund expects it to expand by a mere 0.4%.
Despite recent gains, the lira has still lost nearly 30% of its value in dollar terms over the past year, putting a strain on Turkish companies laden with foreign-currency debt. At least 846 firms applied for bankruptcy protection in 2018, according to government figures. Experts say the number may actually be in the thousands. Some of the country’s biggest conglomerates have had to renegotiate debts worth billions of dollars. “From a corporate debt perspective, we’ve not seen the worst yet,” says Zumrut Imamoglu, chief economist at TUSIAD, a business lobby.
Facing a pile of refinancing demands, as well as soaring interest rates (the central bank has raised the main rate by a whopping 7.5 percentage points since last June), the banks are finding it hard to provide new credit. “We’re still strong and we can restructure most of this debt, but if we can’t get interest on loans from one company then we can’t lend to another,” says one Turkish banker.
Mr Erdogan, who once proclaimed high interest rates to be “the mother of all evil”, may be tempted to open the fiscal taps and put renewed pressure on the banks to resume lending ahead of local elections in March. But he has limited room for manoeuvre. The markets are watching more attentively than last year. A big lapse in fiscal discipline or a premature rate cut by the central bank is bound to provoke another lira sell-off. “Erdogan has to juggle voters, geopolitics and the economy,” says Alvaro Ortiz Vidal-Abarca, chief economist for Turkey at BBVA, a Spanish bank. “But at the end of the day he will always look at the response of the lira. It is the most powerful check and balance on his power.”