Powerful earthquakes pile pressure on Turkey's slowing economy

Cost of restoring critical infrastructure set to increase from the initial $1 billion estimate, analysts say

Smoke billows from the site of a collapsed building in Turkey. EPA

Live updates: follow the latest news on the Turkey and Syria earthquake

Turkey’s decelerating economy, marred by multi-decade high inflation, is expected to take another blow this year as the cost of restoring critical infrastructure and rehabilitation rises following the deadly earthquakes that devastated the south-eastern part of the country and neighbouring Syria.

The first 7.8 magnitude earthquake on Monday hit areas that generate about a tenth of Turkey’s national income, severely damaging critical infrastructure, including airports in Adiyaman, Kahramanmaras, Malatya and Hatay. This was the world’s deadliest since the 2011 earthquake and subsequent tsunami that killed about 20,000 people in Japan.

Some hospitals and a port also partially collapsed in Hatay and major motorways across several cities were damaged, according to initial reports.

The area was struck again by a 7.5 magnitude earthquake on Monday and a 5.6 magnitude tremor on Tuesday.

Estimates of human and economic devastation wrecked by the natural catastrophe are still coming in.

So far, more than 12,000 people have been reported dead in Turkey and Syria.

More than 38,200 people have been injured in Turkey and at least 11,000 buildings in 10 provinces have been destroyed due to the quakes, the country's Disaster and Emergency Management Authority said on Wednesday.

The US Geological Survey says there is a high probability that economic losses from the earthquakes could rise to more than $1 billion.

“The key impact, apart from the human devastation, is that it is going to result in higher government spending related to rebuilding of lost homes for millions and infrastructure,” says Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“This will add to government expenditure requirements. With natural disasters, two factors are generally critical: the economic importance of the area and the degree of the damage.”

Millions of people have been left without fuel and power on both sides of the Turkey-Syria border.

Farooq Pasha, economist for Mena region and Pakistan at Standard Chartered Bank, says it is too early to assess the real impact of the earthquakes on the country’s economy.

Maya Senussi, senior economist at Oxford Economics, says the costs “will most certainly be higher” than the $1 billion estimate.

“This is, first and foremost, a human tragedy but it will compound economic distress as Turkey navigates the biggest cost-of-living crisis in over two decades,” she says.

The Turkish economy, which made a strong rebound from the coronavirus-induced slowdown to grow by more than 11 per cent in 2021, according to official data, has faced serious challenges in recent quarters.

Economic expansion decelerated to about 5 per cent in 2022 and is expected to moderate further to 3 per cent this year, according to the International Monetary Fund.

The country’s current account deficit widened due to an increase in energy imports and rising consumer price inflation, which hit a 24-year high of 85.5 per cent in October, against the 5 per cent medium term target of the country’s central bank.

Since September 2021, the country's central bank has lowered its key reference rate by a cumulative 700 basis points despite raging inflation, according to S&P Global Ratings, which lowered Turkey’s sovereign rating to “B”, from “B+” in September last year.

While inflation slowed to 57.7 per cent in January, the decline was less than expected and could be much lower than what Ankara estimates for 2023.

The Organisation for Economic Co-operation and Development expects inflation in Turkey to remain at 44.6 per cent in 2023 and 42.1 per cent next year, as opposed to Ankara’s projection of 24.9 per cent for 2023 and 13.8 per cent for 2024.

Standard Chartered expects average inflation to decline to about 50 per cent this year, compared with 72 per cent last year.

“External account [will] remain under pressure on trade imbalance, despite improving tourism,” Mr Pasha says.

Turkey was already facing a “serious economic crunch” before the earthquake, says Nasser Saidi, president of Nasser Saidi & Associates and former chief economist of the Dubai International Financial Centre.

“The nation had already reported a 0.1 per cent quarter-on-quarter decline in [the third quarter of] 2022, given weak exports and demand, and the earthquake will only add to its economic woes.”

The economic loss from the 1999 Izmit earthquake in Turkey, which killed 17,000 people and left more than 250,000 homeless, stood at about $23 billion, according to the UN Office of Disaster Risk Reduction.

Turkey is heading into elections this year and the country’s opposition is trying to agree on a joint candidate to face President Recep Tayyip Erdogan, who is a proponent of cutting interest rates despite rampant inflation and the declining value of the Turkish lira.

The bigger issue for the economy is “when the counterproductive policy on interest rates is reversed, and, for politics, if the opposition is able to effectively unite behind a single presidential candidate”, says Hasnain Malik head of equity research at Tellimer Research.

The country’s currency touched a record low on Monday of 18.85 against the US dollar in early trade before clawing its way back to end flat.

Meanwhile, Turkey’s stock market also plummeted on Monday as the scale of devastation unfolded. The shares of construction companies helped the benchmark to recover some losses.

“The Turkish construction stocks rose before the horrified eyes of those who were watching the earthquake news, along with the market news, as more than 6,000 buildings collapsed, killing thousands,” according to Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Trading on the Istanbul stock market was halted on Tuesday and on Wednesday morning after stocks fell by 5 per cent, triggering a market-wide circuit breaker.

The Turkish lira was trading flat at 18.83 against the greenback at 12pm UAE time on Wednesday.

The earthquakes and constant aftershocks forced the Turkish government to stop oil flows to its Ceyhan export terminal on the Mediterranean coast as a precaution on Monday.

Iraqi Kurdistan also suspended oil exports sent through the Turkish terminal, according to the Ministry of Natural Resources in Kurdistan.

Ceyhan is a vital centre for oil sales from northern Iraq and Azerbaijan. The port exported more than 1 million barrels a day in January, or 1 per cent of global oil supplies.

The shutdown of the export terminal pushed global crude prices higher as traders awaited more clarity.

“The devastating earthquake situation in Turkey is a major focal point among investors and traders as the natural disaster has threatened the supply equation due the shutdown of a major export terminal in the country,” Naeem Aslam, chief market analyst at Avatrade, said in a note to investors on Tuesday.

No leaks were detected on the pipelines feeding crude to the terminal, and oil flows to the terminal resumed late on Tuesday, Bloomberg reported, citing sources.

Overall, the country's economy will take time to recover from the natural disaster.

“Once it begins, reconstruction of infrastructure, buildings and housing will add jobs, support consumer spending and contribute to growth,” says Mr Saidi.

“But, in the meanwhile, there is much uncertainty, especially given the coming elections over the summer [likely in May, but could be delayed if rebuilding takes longer].”

Economic output is also unlikely to suffer "dramatically" as unlike Izmir, the affected region accounts for a relatively small share of GDP, says Adeline Van Houtte, senior Europe consultant at the Economist Intelligence Unit.

"Bear in mind reconstruction will probably weigh on the public finances but could also provide a fillip to growth if/when reconstruction gets under way."