COVID-19 and Turkey: Take I
We take a first look at the impact of COVID-19 on Turkey, assuming that the pandemic will not be over by the summer, but that its spread in Turkey will be relatively contained. These may be relatively strong assumptions, but we thought it’s better to shed a dim light on the future of the Turkish economy and start thinking about the issue, than to say, “let’s wait and see”.
We’ve identified five broad channels of transmission through which Turkey would feel the impact of the shock, namely: 1) the goods trade, 2) tourism flows, 3) terms of trade (read: oil price), 4) confidence-cum-domestic demand channel, and 5) finance. In a nutshell, the terms of trade bit would, needless to say, be a positive for the economy, while almost all others, we would argue, would carry negative consequences.
Apropos, the financial channel, the spread blow-outs in the US and Euro Zone credit markets, coupled with huge outflows from EM and stories of dollar hoarding by corporates and financial intermediaries bode ill for Turkey, which is heavily reliant on foreign capital flows and rollovers -- a need that might become more dire, as the government is almost certain to roll out aid packages for several industries.
Regarding policy response, we think Ankara enters the episode with rather limited policy space, which does not mean that it will sit back and watch, if and when the economy comes tumbling down. First, we would not at all be surprised, if the CBRT/MPC reduced the policy rate by another 50 bps at least, which was more or less the consensus view at this writing, with state banks being called in to the defense of the lira as usual. If things get completely out of hand, declaring a national emergency and more draconian measures cannot be ruled out, though it is hard to fathom, and tricky to speculate on, what that sort of a package would exactly entail.
At the end, we reach the tentative conclusion –for the purposes of this brief--that the longer COVID-19 epidemic lasts, the worse the economy will fare. Even if the pandemic were to end by late spring or early summer, the economy will come out a major loser.
Note that there will be no additional, weekly report today.
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