
November 5, 2019: 3rd issue of the Turkey Economic Monitor
The Turkish economy has experienced major external adjustments over the past 12 months, including declining current account imbalances, reduced external debt of banks, and a recovery in portfolio flows. These adjustments have reduced the country’s external financing needs and contributed to a more stable Lira. Even so, foreign exchange reserves have eroded over the past two years, exposing Turkey to external market pressure.
The real sector remains deeply affected by the persistence of macro-financial vulnerabilities. Investment has collapsed, while industrial production points to a weak turnaround. The disinflation process has begun, after exchange rate pass-through sharply increased inflation, averaging 18% in the first three quarters of 2019.
Stagnating output levels, rising costs of production, and high consumer prices have led to significant job losses and falling real wages in 2017-2018. Turkey's economy lost around 840 thousand jobs from May 2018 to May 2019, amounting to 2.9% of total employment. Poorer households have been the most impacted, as many low-income workers are employed in construction and agriculture – two sectors that saw the biggest decline in jobs.
Corporate debt burden remains high, despite a gradual deleveraging. Total credit to corporates declined slightly from a peak of 72 percent of GDP to 68 percent between September 2018 and June 2019. This gradual decline was driven mainly by reduced domestic borrowing by Small and Medium Enterprises.
Corporate debt challenges have contributed to a deterioration in asset quality in the banking sector. Non-Performing Loans have risen from 3% in September 2018 to 4.7% in September 2019. An additional indicator of stress on asset quality is the rise in the share of Stage 2 loans, which are classified as having elevated credit risk. Stage 2 loans account for around 12% of outstanding credit in the system. Banks have responded rationally by significantly cutting lending activities. The authorities have extended credit guarantees and relaxed macroprudential rules - providing some credit impulse from state banks. But private banks have been cautious in a weak economic environment with high interest rates, avoiding further deterioration in asset quality.
The overall policy response over the past year has been reasonably effective in restoring short-term stability, though there is still room for improvement. The analysis (using big data techniques) in this Turkey Economic Monitor shows that:
Tunya Celasin
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