Turkey slides into recession ahead of elections

Expansion that lifted the economy by an average of nearly 7 per cent each quarter since late 2009 has fizzled out

Supporters of the Justice and Development Party (AK Party) wave in front of a portrait of Turkish President Recep Tayyip Erdogan displayed on a building during a local election rally in Diyarbakir, eastern Turkey, on March 9, 2019. Local elections in Turkey's capital and the country's overall 81 provinces are scheduled for March 31, 2019. / AFP / Ilyas AKENGIN
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Turkey fell into its first recession in a decade, dealing a blow to President Recep Tayyip Erdogan as the country heads toward bellwether municipal elections this month.

Gross domestic product shrank 2.4 per cent in the previous quarter on a seasonally adjusted basis from three months earlier, when it declined a revised 1.6 per cent, according to data released on Monday. From a year earlier, GDP dropped 3 per cent. Economists surveyed by Bloomberg predicted a 2.4 per cent quarterly decrease and a contraction of an annual 2.5 per cent, according to median forecasts compiled by Bloomberg.

An era of record monetary stimulus around the world supercharged Turkish companies as capital came pouring in, more than doubling corporate credit in the past 10 years. But an almost uninterrupted expansion that lifted the economy by an average of nearly 7 per cent each quarter since late 2009 has fizzled out following a currency crash, policy missteps and an unprecedented diplomatic rift with the US.

For investors, the worry is that Turkey will face a long slog to recovery as the torrent of foreign capital dries up while households and companies begin paying down debts. Turkey’s GDP per capita fell to $9,632 from a little over $10,000 in 2017. In the full year, the economy grew 2.6 per cent.

“Unlike Turkey’s past V-shaped recoveries, there’s the significant risk that the recovery will be much slower this time round,” said Inan Demir, an economist at Nomura International in London. “The entire Turkish economy may be facing deleveraging pressures.”

The lira declined as much as 0.5 per cent after the data release and traded at 5.4590 per dollar as of 10:03am in Istanbul. It’s the third-worst performer in emerging markets this year, with a loss of about 3 per cent against the US currency.

The undoing of Turkey’s growth model comes at a sensitive time for Mr Erdogan, who first became prime minister in 2003, as he braces for his first test at the ballot box since assuming vastly expanded executive powers last year. After the March 31 vote, Turkey isn’t scheduled to hold another election for four years.

In an effort to restart growth, the government has heaped pressure on state banks to ramp up credit, helping annualised lending turn positive last month for the first time since August. It recapitalised three of its lenders by selling bonds to Turkey’s unemployment fund, and is working on a new plan to further bolster state-owned banks’ capital.

For now, the outlook remains bleak. GDP may be in contraction through the first half of 2019, followed by four quarters of tepid growth that will average less than 3 per cent from a year earlier, according to Bloomberg polls.

As the central bank holds interest rates high to stabilise the lira and keep inflation in check, the engine of Turkey’s economy is misfiring. Real banking credit shrank by 7.2 per cent on a quarterly basis in the last three months of 2018.

With total debt at 121 per cent of GDP, the ratio of non-performing loans may climb to about 7 per cent this year from around 4 per cent, according to a February report by Morgan Stanley, which cited the guidance it received from lenders. The World Bank in December put the share of what it called “distressed assets” at closer to 13 per cent.

Industrial production capped 2018 with its biggest plunge in more than nine years, while economic confidence languishes near the lowest level since the 2009 crisis. Turkey’s largest companies have either completed or sought almost $24 billion of loan restructurings.

“We expect a recovery, but slower than in the earlier episodes,” said Magdalena Polan, an emerging-markets economist at Legal & General Investment Management. “ Fortunately for Turkey, potential growth is high.”