Zümrüt İmamoğlu

Chief Economist of Turkish Industry and Business Association (TUSIAD) @Zumrut_Imamoglu

Turkey’s economy package to fight the influences of the Covid-19 outbreak was unveiled by President Erdoğan on March 18, did not make everyone happy. (Photo: Presidency)

Almost all countries have announced economic stimulus packages in response to the expected slowdown, or more likely a recession, in their economies. Turkey is no exception. President Tayyip Erdoğan announced the package aimed to alleviate the economic consequences of the pandemic in Turkey on March 18. As expected, the package includes tax breaks for firms affected from containment policies and subsidies for employment. However, the emphasis was on banks and extending lending to the real sector rather than providing fiscal stimulus to support economic growth.
It is not surprising that the government does not want to put too much burden on the budget given that it is already stretched above 5% excluding one-time income revenues. However, these are extra ordinary times that indeed needs extraordinary measures and people’s expectations from the authorities in times like this lie beyond accumulating more debt. Minister of Treasury and Finance Berat Albayrak has repeatedly said that they will be watching developments closely and more steps might be taken. Depending on the severity of the pandemic in Turkey, more stimulus might indeed be awaiting.
The Covid-19 pandemic is one of the hardest challenges global economy has faced over the past decades. A sudden stop in supply and demand at the same time is not a usual economic shock that policy makers are used to tackle with. Corporates are tapping credit limits to maximum while everything is under sell-off in the financial markets as demand for cash skyrocket. People everywhere worry about their health and jobs at the same time. Lock-downs and quarantines are needed to contain the virus and prevent the health systems to be overwhelmed by a huge flow of patients. But the economic consequence is a great number of firms especially SMEs and retailers trying to continue paying debt to creditors and wages to their employees. That of course is impossible without state help.

Will the banks join the game?

The first step in support of the economy came from the Turkish Central Bank. The Bank had an emergency monetary committee meeting on Tuesday and announced its measures to make sure banks will have ample amount of liquidity at discounted rates. The policy rate was cut 100 basis points to 9.75%, single digit for the first time in last three years, although inflation stands at 12.4%. It also increased limits of its FX swap facility to help Turkish banks use their FX funds for TL loans and offered access to a discounted fund if the loans are directed to real sector. All these measures try to make sure that the firms who have cash flow problems due to the pandemic can access cheap credit.
Will the banks join the game? No matter how much liquidity a Central Bank provides to the system if cost of risk is high or if it is too hard to evaluate the risk at all, as it is today, banks may still be unwilling to lend. Afterall, they have responsibilities to their capital owners and more importantly to depositors who trust them in holding their savings. That’s exactly why monetary policy alone is not a solution to the challenges economies are facing today. Fiscal measures that ensure that the households will keep spending are the key to make sure there is enough demand for firms to keep production and employment and be able to pay back their debt. And that’s why the meeting the president had yesterday with his economy team and business organizations was important. Finally, the complete economic package was announced.

Disappointments in the package

If anyone was expecting a broad fiscal stimulus like Hong Kong, Canada or US are considering, they were disappointed. No checks for the household. What we have is some tax breaks to those sectors most affected by the pandemic, some measures to help with employment such as postponed social security payments and partial work subsidies and 2 billion TL transfers to households in need. While the tax breaks are important to help firms managing their cashflow, fiscal stimulus to households is very limited compared to the size of the economy. The government seems to have targeted the group most vulnerable to the pandemic, the elderly. The pensions will be increased to a minimum of 1500 TL [$230] a month. The extra pension payment for the religious holiday will be paid early in April. For those who are older than 80 care at home facilities will be extended.
An important emphasis by the President was that banks should accept all requests from firms for credit whether it be new loans, refinancing or restructuring. He also advised not to decrease credit limits or recall credit and announced the measures that once again relate to bank credit. For those firms that are affected from containment measures loan payments will be postponed for 3 months and more credit will be made available, Halkbank will postpone loan payments of tradesman for 3 months with no interest, stock financing will be provided to exporters, Credit Guarantee Fund will be extended from 25 billion to 50 billion TL for SMEs.
The fiscal package was put at 100 billion TL [$15 bln] in total but the direct effect on households are rather small and it includes credit measures that will not be a burden on the budget immediately. It is not surprising that the government is not willing to dig deeper into the budget this year. The recent crisis in Turkish economy fueled by an exchange rate spike late 2018 has put the budget deficit over 5% of GDP when extraordinary incomes such as retained earnings from the Central Bank are left out. In fact, the government has been using bank credit as its main tool for economic stimulus for a long time. Public banks increased lending, especially before elections and during the recent crisis. Since August the Central Bank is using reserve requirements to increase private bank lending as well. But it was after the coup attempt in 2016 that Credit Guarantee Fund’s limit was increased to 250 billion TL and most of that limit was used in a few months before the referendum on the presidential system. Afterwards, it kept being used as necessary. Now, this facility is much needed considering the uncertainty and risks firms are facing but will 25 billion TL additional limit be enough? Or will the pressure on the banks increase as businesses keep asking for more financing.

What about employment?

The employment incentives provided in the package are useful and indeed much needed. Turkish labor market is one of the most rigid among OECD countries. Part time and partial work regulations are quite tight. The president announced changes to make these facilities more accessible and increase partial work fund. Postponement of social security premiums are good for firms but what about workers? Will firms who suspend operations due to the pandemic be able to bear the cost of employment in those few months? How about the informal sector that is not subject to any of these measures? The unemployment rate is already still high because of the recession last year. The pandemic will no doubt put more pressure. How about providing health measures needed for those who continue to work? Not all people are able to sit home and wait for the pandemic to go away. As anxiety on health issues build on, more tension on labor-employer relations can be expected.
Labor market will no doubt be one of the biggest challenges for the Turkish economy in this crisis but not the only one. Although there has been considerable deleveraging both in the real sector and the banking sector last year, external debt of Turkey is still close to 60% of GDP. Tourism sector will not be able to generate to projected FX income this year. Exports are expected to slow down due to global recession. The good news is the drop in oil and commodity prices. Since Turkey is an importer of these commodities the decrease in prices will help with the current account deficit and inflation. Domestic demand is once again the only way for growth unless a strong recovery in global economy is awaiting in a few months. But that is doubtful given the conditions in the global markets. Emerging market capital outflows are growing and Turkey’s 5-year CDS has reached 586. Creditors will no doubt be considering Turkey’s external financing vulnerability once again when they have time from watching financial markets turning red everywhere.