Turkish Economy Sees Payoff From Stimulus That Destabilized Lira

(Bloomberg) -- Turkey’s economy fared better than forecast by analysts as the government contained the damage from the coronavirus pandemic with a campaign of stimulus that came at the cost of destabilizing the lira.

Gross domestic product last quarter shrank 9.9% from a year earlier, the most in over a decade, after a gain of 4.5% in the previous three months, according to data released on Monday. The median of 17 forecasts in a Bloomberg survey was for a contraction of 10.7%.

The severity of the shock was more evident in seasonally and working day-adjusted figures, which showed a decline of 11% in the second quarter from the previous three months, making it the steepest contraction in statistics going back to 1998. The lira maintained losses after the data release and traded 0.3% weaker against the dollar as of 10:45 a.m. in Istanbul.

The $743 billion economy performed better than many of its peers among developing nations, thanks in part to a combination of interest-rate cuts, fiscal spending and a government-sponsored credit push. Restrictions imposed by Turkey to stop the contagion from March were more stringent than in the rest of central and eastern Europe, the Middle East and North Africa, according to a Goldman Sachs Group Inc.

Below are the highlights of the GDP report released by the state statistics institute in Ankara:

• Last quarter’s contraction was driven by a slump in household consumption, which fell 8.6% from a year earlier.
• Exports dropped 35.3% on an annual basis, after growing 0.3% in the preceding three months. Imports fell 6.3% following a 21.9% jump.
• Gross fixed capital formation, a measure of investment by businesses that hasn’t grown since mid-2018, dropped an annual 6.1%

To help businesses and consumers ride out the pandemic, the Turkish government unveiled a 240 billion-lira ($33 billion) stimulus package while state banks ramped up lending. Meantime, the central bank injected liquidity by scooping up government bonds and delivered a series of rate cuts including an emergency decrease of a full percentage point in March.

An economic turnaround started to take hold as lockdown measures began to ease toward the end of the second quarter. Industrial production grew in June for the first time since February and economic confidence improved for four straight months through August.

Stimulus Downside

But the drawbacks of the government’s efforts to juice up the economy have also become more obvious.

Inflationary pressures have reemerged alongside another wave of lira depreciation, prompting the central bank to increase the cost of funding through stealth tightening but without resorting to an outright rate hike.

Turkey’s currency has depreciated about 19% against the dollar this year and is the worst performer in emerging markets in the third quarter.

The stimulus campaign may not save the economy from one of the steepest full-year contractions in history, with the International Monetary Fund predicting it could slump 5%. Treasury and Finance Minister Berat Albayrak is more optimistic, estimating this year’s performance at between minus 2% to a 1% gain.

“Leading indicators confirm that the economy is in the phase of recovery from its bottom point,” said Enver Erkan, an economist at Tera Securities in Istanbul.

©2020 Bloomberg L.P.