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TURKEY ECONOMIC MONITOR - APRIL 2021: NAVIGATING THE WAVES

Core Content

The Turkey Economic Monitor (TEM) for April 2021 provides an in-depth analysis of Turkey's economic performance during 2020, the impact of the COVID-19 pandemic, and the outlook for 2021. It outlines how Turkey navigated the crisis through a combination of fiscal and monetary policies, while highlighting the structural challenges and risks that emerged.

I. TAKING STOCK

A. Impact of the Pandemic

• Global and Local Impact: The pandemic had a significant impact on Turkey, similar to many other countries, with cases peaking in late 2020 (Figure 1).
• Government Response: Turkey implemented a series of control measures, which were re-imposed in late December 2020 to manage the spread of the virus.
• Similar to Europe: The trajectory of the pandemic in Turkey followed a similar pattern to many European countries, with a resurgence in late 2020.

B. Economic Rebound and Pressures

• Strong Rebound: Turkey experienced a sharp economic rebound in late 2020, particularly in the second half of the year (Figure 2).
• Drivers of Recovery: The recovery was driven by both consumption and investment (Figure 4), with the reopening of the economy playing a role, though not the main factor (Figure 3).
• External Pressures: Turkey faced severe external pressures, including currency depreciation and a narrowing trade balance (Figure 6).
• Inflationary Pressures: Inflation accelerated, reaching an 18-month high of 16.2% by March 2021 (Figure 5), driven by both core goods and food prices, as well as international price trends.

C. Policy Adjustments

• Fiscal Policy: The fiscal policy framework remained strong, with a large stimulus package of nearly 12% of GDP, largely through credit channels rather than direct spending.
• Monetary Policy: The Central Bank tightened monetary policy, raising interest rates to bring real rates back into positive territory (Figure 7), and improved transparency with forward guidance and high-frequency data.
• Regulatory Measures: Supportive regulations, such as the "Asset Ratio" requirement, were withdrawn to reduce credit expansion, which had led to increased corporate and bank vulnerabilities (Figure 8).

D. Social and Economic Disparities

• Job Losses: Job vulnerabilities disproportionately affected lower-skilled and female workers, as well as the youth, especially those who were NEET (Not in Education, Employment, or Training) (Figure 113, 114, 115, 116).
• Poverty Increase: The poverty rate in Turkey reached its highest level since 2012, with an estimated increase of 1.6 percentage points, corresponding to 1.6 million new poor (Figure 125, 126).
• Labor Market Disparities: The labor market recovery was unbalanced, with more women and young workers affected (Figure 117, 118, 119, 121).
• Consumption Patterns: Lower income households experienced higher inflation, which had a more significant negative impact on their living standards (Figure 123, 124).

II. LOOKING AHEAD

A. Growth Outlook

• Tentative Recovery: The outlook for growth in 2021 is tentative, with the economy still in a risky environment.
• Global Growth: Global growth is expected to rebound in 2021, but it will remain much lower than the no-COVID baseline (Figure 134).
• Potential Growth Damage: The pandemic is estimated to have damaged Turkey’s potential growth (Figure 136).

B. Major Uncertainties

• Vaccination Progress: While Turkey's vaccination program has proceeded quickly, reaching some of the fastest rates globally (Figure 141), the country still has a long way to go to reach near-full vaccination rates (Figure 139).
• External Risks: Turkey faces a pronounced risk of disruptive external adjustment, with substantial external financing needs (Figure 144) and a need for greater reserve adequacy (Figure 145).
• Inflation and Fiscal Risks: Market-based inflation expectations increased sharply, and the risk of a surge in non-performing loans (NPLs) remains high due to the impact of the pandemic on corporate solvency (Figure 142, 143, 146).

C. Policy Recommendations

• Monetary Policy: Tighter monetary policy should be maintained until inflation is under control.
• Fiscal Policy: Fiscal policy plays an important role in securing recovery, but increases in debt should be limited.
• NPL Resolution: Resolving NPLs and improving corporate insolvency frameworks are crucial to prevent them from becoming a drag on economic growth (Figure 167).
• Financial Sector Reforms: A more diversified and greener financial system would support a resilient recovery.

D. Foundations for Inclusive Growth

• Green Recovery: Turkey has the opportunity to implement green recovery measures that can support sustainable growth across various sectors (Figure 169).
• Trade and Customs Union: Revitalizing the EU-Turkey Customs Union can help realize greater gains from trade and global value chains (GVCs) (Figure 166).
• Youth and Female Employment: Addressing the employment challenge of youth and female workers is critical for recovery (Figure 119, 121, 127).
• Active Labor Market Programs (ALMPs): The coverage rate of ALMPs has not been growing, despite increased unemployment benefits (Figure 167).

Key Figures and Data

• GDP Growth: 1.8% in 2020, the fastest among G20 countries aside from China.
• Credit Growth: Turkey experienced one of the highest credit growth rates globally in 2020 (Figure 2).
• Inflation: Reached an 18-month high of 16.2% by March 2021 (Figure 5).
• Lira Depreciation: The Turkish Lira depreciated sharply, ending the year 30% lower (Figure 6).
• Government Debt: Increased rapidly, with debt levels in Turkey being relatively low but with a higher interest burden (Figure 150, 151).
• NPLs and CARs: NPLs could be significantly higher than reported, and capital adequacy ratios (CARs) may deteriorate due to increased loan defaults (Figure 149, 153, 161).

Conclusion

The report highlights that while Turkey experienced a strong economic rebound in 2020, it also faced significant challenges in terms of inflation, currency depreciation, and social inequality. The policy response, while effective in the short term, has created new vulnerabilities. The path to inclusive and sustainable growth in the medium term requires a focus on financial sector reform, trade liberalization, and targeted support for vulnerable groups, especially the youth and female workforce.