Türkiye

Public finances are set to deteriorate further amid the ongoing financial crisis. Fiscal prudence, a policy anchor for many years, had already weakened since 2016 and was abandoned in 2020-2021 as the Turkish government announced a large fiscal stimulus package to mitigate the impact of the Covid-19 pandemic on the economy and the people. Further substantial expenditure increases have been announced for 2022-2023, including a 50% rise in the minimum wage, a rise of at least 25% in pensions and public sector wages, the elimination of income tax on the minimum wage, credit subsidies and compensation for exchange rate losses to holders of lira-denominated bank deposits. We forecast annual fiscal deficits of more than -6% of GDP in 2022-2023 (we use the broader IMF definition, which gives higher ratios than the authorities’ definition). Total public debt is forecast to increase to around 45% of GDP by 2023. At first glance, such a ratio still appears moderate compared to that of peers. However, the sustained rise in debt and uncertainty over the possible scale of contingent liabilities and potential debt rollover pressures cause concerns about the country’s public finances. Contingent liabilities are mainly related to state-owned banks, which have engaged in a major credit expansion since 2019 to support growth. In contrast, private banks have cut back on their lending. Moreover, owing to the continued strong TRY depreciation since 2018, the share of FX-denominated debt in total public debt has risen from 38% in 2016 to 52% in 2021. Overall, if the unfavorable trajectory of public finances is not corrected in the near future, potential adverse effects for external financing of the sovereign and banks will mount, adding to already high external financing risks for corporates.

External imbalances will remain very high and a key concern for doing business with Turkish corporates. Türkiye has a history of persistently large current account deficits which are mostly financed through new short-term external debt, mainly net portfolio investment inflows and net external bank borrowing which are subject to sudden reversals in events when investor sentiment deteriorates. Turkey has experienced a series of such events since 2018 (homemade political crisis 2018, Covid-19 in 2020, return to unorthodox monetary policies in September 2021 and the war in Ukraine in 2022). This has contribute to the country’s ongoing and worsening financial and economic crisis over the past years.

Meanwhile the stock of total external debt falling due within the next 12 months has risen to an extremely high level of around USD200bn. This compares with gross FX reserves of just USD60bn as of mid-2022, a very critical ratio (analysts usually consider FX reserves exceeding short-term external debt as adequate).

Even more worrisome, net FX reserves (this excludes all FX deposits parked at the CBRT by local banks) have dropped from recent peaks of USD42bn at the end of 2019 and USD34bn in October 2021 to just USD7bn in June 2022. Overall, the CBRT’s FX reserves are way too low to defend the TRY. Hence we expect severe financial market turbulence to continue in 2022-2023. The CBRT may at some point need to revert to capital controls in order to defend the TRY or release the currency into free fall.