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Capital Economics’ Chief Emerging Markets Economist William Jackson in London April 30, 2020: Turkey’s coronavirus outbreak is the worst in the emerging world, but the authorities have remained steadfast in their refusal to impose the draconian lockdown measures seen in other parts of the world. Even so, the movement of people and goods around the country has slowed sharply in recent weeks.
There are growing signs of the scale of the resulting economic downturn. April’s fall in capacity utilisation points to a 25% y/y decline in manufacturing output. And survey measures point to similar-sized falls in retail sales. In a bid to support the economy, and with inflation falling back, the central bank (CBRT) cut interest rates by 100bp, to 8.75%, this month. In order to help with financing the budget deficit, the CBRT also commenced a bond purchase programme, which has pushed down sovereign bond yields.
The lira has remained under pressure, although a concerted effort by the CBRT and state banks has prevented it falling through 7/$. But the authorities’ ability to prop up the currency is limited – short-term external debts are larger than FX reserves. Speculation has grown that the government will turn to the IMF but this seems highly unlikely. Instead, import compression is now being adopted – tariffs of up to 50% were introduced on a range of imports. Capital controls may soon follow.
In the bond market, the 10-year bond yield has fallen sharply in Turkey and Russia, reflecting growing expectations that the Russian central bank will ease policy further and the Turkish central bank’s intervention in the sovereign bond market. That said, this masks some weakness in Turkey’s markets as CDS premia have increased by 100bp over the past month, their highest level since 2008.
Most currencies have either stabilised or gained ground over the past month. The Russian ruble is up more than 5% against the dollar despite the continued fall in the price of oil to a two-decade low. In contrast, the Turkish lira has depreciated almost 8% against the dollar and the authorities appear to be intervening in the foreign exchange market to prevent the currency slipping through 7/$.
5.2.4​ Gross intl reserves
Leading emerging market countries including China, Hong Kong, Brazil and Turkey have burned through $240bn in FX reserves over the past two months, Bank of America said on May 11.
33​ TURKEY Country Report​ June 2020 ​ ​www.intellinews.com