Debt
Debt

Turkish industrial production has plummeted to a nine-year low, according to the latest published figures.  The data was part of a swath of negative economic results released Monday, as Turkey continues to be impacted by this year’s collapse in its currency. 

Turkey’s Statistical Institute (TurkStat), recorded industrial production falling in October 5.7 percent year-on-year.  The fall follows a 2.4 percent decline in September.  The latest figures took many international financial institutions by surprise. 

“Horrendous,” was analyst Atilla Yesilada of Global Source Partners reaction to the economic data.  

“Industrial production was the most disappointing visa vie the consensus,” he added.  ”We’ve seen annual production contraction by more than five percent.  It looks like despite success in exports, domestic demand is weak, or producers are very hesitant to start domestic production.”

“Before these figures, I had penciled in a 2.5% contraction in GDP (size of the economy) for Q 4 (October to December),” said economist Inan Demir of Nomura Securities,  

“I would say today’s numbers have forced some downsize risk to those predicted GDP numbers.  More important the momentum carrying forward to 2019 is shaping up to be quite weak.  On current trends we see GDP contracting five percent year on year.”

Turkey Economy
FILE - A man shops in a market in Istanbul, Monday, Aug. 13, 2018.

Looking for work

Monday, also saw the jobless rate rising to more than 11 percent and more than 21 percent for youth unemployment.  Since the start of the year, the number of unemployed has leapt from three to nearly 3.8 million. 

The Turkish economy is reeling from the currency losing nearly a third of its value, which resulted in inflation soaring to more than 20 percent and forcing the central bank to hike interest rates to 24 percent.

Turkey is no stranger to economic shocks caused by sharp falls in the currency.  In the past, the economy, after a severe recession, usually recovered quickly.  But analysts warn this time it may be different. 

“In the past, Turkey had much lower debt burden in general,” said economist Demir.  “So this time round Turkey is facing an exchange rate shock, and in general financial market shock with much more elevated leverage (debt) levels.  Given that the debt overhang is a significant factor that typically slows down the recovery phases in other countries, there is the risk the Turkish recovery this time around will be much slower.”

During the past 15 years of economic boom, Turkish companies took advantage of worldwide low-interest rates and borrowed heavily, both in local and foreign currency.  Now with Turkey widely predicted to be facing a painful recession, analysts warn corporate debt is becoming a significant problem for Turkey’s banks.

“I understand through my conversations with bankers, AKP (Turkey’s ruling party) or government officials are intervening in favor of large companies, for the banks to restructure their loans,” said analyst Yesilada.  “The problem is shifting from corporate balance sheets to bank balance sheets.”

Turkish President Tayyip Erdogan addresses his sup
Turkish President Tayyip Erdogan addresses his supporters in Konya, Turkey, Dec. 17, 2018.

Erdogan rules out help

“As a result of which banks cannot issuing new loans,” he added, “so this is a vicious circle from which there is no way out.  The solution you have to inject fresh cash, fresh resources, fresh capital into the economy.  We are talking $50-60 billion to fill the tank and get the car going.  No one has that kind of money, except the IMF (International Monetary Fund).”

Turkish President Recep Tayyip Erdogan has ruled out IMF assistance.  Analysts say with crucial local elections for control of Turkey’s main cities in March, Erdogan will be reluctant to look for international help, given ending Turkey’s dependence on IMF support is one of his most significant achievements.

But with Turkey facing recession, analysts warn Erdogan’s AKP Party is facing an uphill struggle in March’s local polls.

“All the (opinion) polls show me, the main concern for the voters is the economy, and they are going to register their protest in local elections,” said Yesilada. “My estimate, AKP will lose five percentage points; I expect AKP to suffer great losses, I would not be too surprised if they lose Istanbul or Ankara.”

Turkey’s main cities are the only place where opposition parties can exercise power.  Erdogan has declared winning the local elections a priority.  Analysts suggest Turkey's central bank could face growing presidential pressure to cut punishingly high-interest rates of 24 percent to ease the economic pain before the March polls.

Turkey’s small business community, a key backer of the AKP, is lobbying hard for an interest rate cut.  Last month’s better than expected inflation figures, which recorded a modest fall is emboldening calls for a rate cut. 

But international investors warn against a premature cut in rates before inflation is tamed.  “I think that concern (cutting interest rates) will be with us all through the first quarter of next year,” said Demir, “I think an early cut concerns the markets.”

The repercussions of such a move could be severe. “There is no patience right now, internationally speaking, with emerging nations that resort to popularism or make mistakes, every country’s punished severely and Turkey is a repeat offender,” said Yesilada.