Turkey emerges with ‘Pyrrhic growth’ from pandemic-hit 2020

Turkey’s statistics agency announced Monday that the Turkish economy grew 1.8% in 2020 despite the COVID-19 pandemic, beating all forecasts and estimates, including Ankara’s own. The positive growth rate, however, came at the expense of major fragilities that continue to haunt the economy, as evidenced by the fact that the country’s gross domestic product (GDP) has actually decreased in terms of dollars.

In a revised economic program announced in September, President Recep Tayyip Erdogan’s government had projected the economy would grow 0.3% in 2020, while others, including international bodies such as the Organization for Economic Cooperation and Development and the International Monetary Fund, had anticipated a contraction of up to 5%.

The 1.8% growth rate puts Turkey next to China as countries whose GDPs grew last year even as the global economy contracted an estimated 4% and that of the European Union 6.4% due to the pandemic. The Turkish economy had grown by about 1% in 2019.

Turkey’s achievement, however, is sort of a Pyrrhic victory, with hefty costs underlying the veneer of growth. As many observers note, the growth rate was achieved through a slew of enforced conditions and at the expense of augmented fragilities.

The coronavirus hit Turkey at a time when its economy was already ailing from a severe currency crisis in mid-2018. Under the initial impact of the global pandemic, especially lockdowns paralyzing the services sector, the Turkish economy shrank nearly 10% in the second quarter. Despite the risk of refueling the contagion, Ankara relaxed the restrictions in June to warm up the economy, pinning hope also on the tourism season. The government directed public banks to further loosen credit taps and prodded private lenders to follow suit. The loan volume expanded 40% over a year.

The central bank, meanwhile, stepped up moves to prop up the lira and suppress foreign exchange prices through “back-door” hard-currency sales that lacked transparency and continue to stoke political rows between the government and the opposition. The sales, which had begun in 2019, resulted in a $128 billion drain in the central bank’s foreign reserves, forcing the bank to seek currency swaps to make up. As of Feb. 19, the bank had a negative reserve of $45 billion; that is, not even a dollar of its own.

The abundance of cheap credit proved effective in stimulating domestic demand in the second half of the year, reviving the housing market and the sales of durable goods in particular. As a result, the country’s GDP increased 6.7% from the same period the previous year. Yet the economy was already overheating in September, with both inflation and the current account deficit increasing. The risky outlook stoked a fresh rush for hard currency and gold, sending the lira to a record low of about 8.5 versus the dollar. Despite a number of moves to cool the economy, the resurgent demand and investment spending led to a GDP increase of 5.9% in the last quarter, bringing the overall rate for 2020 to 1.8%.

Nevertheless, Turkey began the new year with deeper fragilities, including a 15% consumer inflation and a 25% producer inflation. While the official unemployment rate stands at 13%, an alternative calculation based on a broader definition encompassing those who have stopped looking for jobs out of despair puts the rate at nearly 30%. In other words, the country’s GDP grew without any real job creation.

Loan repayments after the credit bonanza loom as another serious issue down the road. On the current account front, Turkey posted a deficit of $37 billion last year in a sharp turnabout from a $6 billion surplus in 2019. Some $25 billion of the deficit came from a boom in gold imports as Turks saw gold as a safe haven for their savings amid the slump of the lira. Such level of mistrust in the currency is another red flag under the veneer of growth.

The cooling of the economy began only in November after Ankara replaced its central bank governor and treasury minister. The central bank hiked interest rates several times, leading the lira to regain ground and rise to about 7 versus the dollar. Turkey's risk premium also improved, falling to the region of 300 from more than 500 basis points. Foreign investors began to return to the Istanbul stock exchange, contributing further to the recovery of the lira. Yet neither inflation nor the current account deficit relented.

In a reminder that such fragilities should not be underestimated, global economic jitters in the last week of February caused the Turkish lira to tumble faster than the currencies of peer emerging economies and fall back to about 7.45 versus the greenback.

Finally, the devaluation of the lira means that Turkey’s GDP has decreased in terms of dollars. The price of the dollar increased 18% in 2019 and about 24% in 2020. Accordingly, the country’s GDP was worth $717 billion last year, $43 billion less than what it was worth in 2019, and GDP per capita amounted to $8,599. It was the third year in a row in as many years under Erdogan’s executive presidency that the country’s GDP decreased in terms of dollars, with GDP per capita shrinking by some $2,000 since 2017. Whether Turkey retains its place among the world’s 20 largest economies remains to be seen, pending on the GDP data of other nations.