Turkey's first-quarter contraction was not the worst in Europe, with Latvia and Estonia suffering 18 percent and 15.1 percent contractions, respectively. (Why Turkey's contraction has been so steep relative to most other countries is an intriguing and important question that is the potential subject of another column.) The strong Turkish financial system, thanks to its restructuring following the 2001 banking crisis, has avoided the global crisis, but the real economy has not. Actually, the banking sector, which has been unfairly accused of starving the private sector of credit, preferring to invest largely in government bonds, closed the first quarter with exceptionally high profits.
Last year, the real GDP growth rate was 1.1 percent for the whole year, with consecutive quarterly growth rates of 7.3 percent, 2.8 percent, 1.2 percent, and -6.2 percent, which indicated a sharp economic slowdown turning into a steep downturn. The precipitous fall in this year's first quarter real GDP was primarily due to the sharp drops in wholesale and retail trade (25.4 percent), construction (18.9 percent) and manufacturing (18.5 percent) by sector, and in private investment (35.8 percent), exports (11.9 percent) and private consumption (9.2 percent) by expenditure. The bad real GDP news finally put to rest the Turkish government's baseless and increasingly ludicrous claim that Turkey would escape the global crisis relatively unscathed.
As late as last April, some government officials were still insisting that the economy would actually grow by 4 percent in 2009, before offering their new forecast that it would instead contract by 3.6 percent. The Organization for Economic Cooperation and Development (OECD), the World Bank, and the International Monetary Fund (IMF) forecasts for the rate of real GDP contraction for 2009 vary between 5.9 percent and 5.1 percent. Some private forecasts, however, are as high as 7 percent. The government now expects a contraction of around 5 percent. Whatever the rate of contraction turns out to be at the end, the good news, based on both domestic and international suggestive evidence discussed below, is that the worst seems to be fortunately already behind us, with most signs to pointing to a nascent recovery under way, with decreasing rates of quarterly real GDP contraction in the rest of 2009.
The Turkish lira barely moved after the bad real GDP news last week, trading at narrowly around 1.53 against the US dollar and closing the week at 1.5320. Turkey's sovereign risk premium indicators, such as EMBI+Turkey and Emerging Market Credit Default Swaps spreads, which have been narrowing in recent months, did not widen in reaction. The financial markets, encouraged by the emergence of cautious optimism about the global crisis (see my last column), interpreted the widely expected double-digit contraction in real GDP as an inducement for the Justice and Development Party (AK Party) government to conclude a long-delayed new stand-by agreement with the IMF.
Two weeks ago, Prime Minister Recep Tayyip Erdoğan had said his government would resume negotiations with the IMF in the coming weeks and that reaching an agreement would strengthen Turkey; however, the government might for political reasons delay the agreement until after the annual IMF-World Bank Oct. 6-7 meetings in Istanbul. The government has been negotiating on and off for more than a year a loan agreement estimated at around $40 billion. The negotiations have been complicated since last January by disagreements over public spending limits and freeing tax collection from political control. Last week, the IMF's director of the external relations department, Caroline Atkinson, said at a press briefing, “Discussions are continuing, and there is a broad convergence of views on what are the necessary economic measures for Turkey.”
The easing of the global crisis is a two-edged sword for the Turkish government in dealing with the IMF. The IMF's financial support will become less urgent for Turkey as the country's economic crisis eases, but it will also become more difficult to get as the IMF feels less urgency to prevent a systemic collapse in emerging market economies. In other words, the IMF will demand more conditions for its money than it would have at the nadir of the global and Turkish crises. We are already seeing the IMF getting tougher in its dealings with those countries such as Hungary that have received its support during the earlier, worse, stages of the global crisis.
The economic crisis has led to a drastic contraction in Turkish foreign trade. The US dollar FOB value of exports shrank by year-on-year annual rates of 25.8 percent in January, 23.8 percent in February, 28.6 percent in March, 33.3 percent in April and 41.0 percent in May. The fall in imports was even more drastic. The US dollar CIF value of imports dropped by 43.2 percent in January, 43.4 percent in February, 37.4 percent in March, 43.4 percent in April and 43.9 percent in May. The result was a whopping year-on-year 64.6 percent decrease in the trade deficit during January-May, easing the current account deficit foreign financing requirements and hence lessening the urgency of IMF support.
In my next column, I will conclude, after reviewing the remaining suggestive evidence, the argument that although the current Turkish economic crisis has been bad, its worst part seems to be fortunately already behind us.
