A daunting economic landscape will exacerbate the humanitarian catastrophe wrought by a pair of earthquakes on Turkey, as early estimates of the damage point to mounting inflation and budget risks.
(Bloomberg) — A daunting economic landscape will exacerbate the humanitarian catastrophe wrought by a pair of earthquakes on Turkey, as early estimates of the damage point to mounting inflation and budget risks.
While it’s too early to gauge the exact impact of Monday’s tremors on the nation’s $819 billion economy, a plunge in equity prices and jump in bond yields indicate fears of a substantial hit to gross-domestic-product growth, along with a loosening of the country’s fiscal stance.
Turkey suspended trade on its main stock stock exchange on Wednesday following a 16% drop. Authorities have coupled unorthodox economic policies aimed at curbing inflation while also slashing borrowing costs with currency-boosting measures, which have so far protected the lira.
“The costs of this disaster strike the Turkish economy at a time when sentiment was already fragile,” said Nick Stadtmiller, head of product at Medley Global Advisors in New York. It “increases the risk of another market meltdown given the pre-existing vulnerabilities in the currency and external account,” he said.
The death toll across Turkey and neighboring Syria surpassed 11,600 as of Wednesday evening, with thousands more trapped inside buildings damaged in the temblors that struck two days earlier. While the immediate focus is on saving lives, the need to make plans for rebuilding before elections due in May is likely to put President Recep Tayyip Erdogan’s government under even more pressure to unveil enhanced spending plans.
Read More: Erdogan Wants Elections in May Despite Earthquake Fallout
Signs of changes to economic policy and what’s likely to be a massive spending increase were already evident on Wednesday when Erdogan visited the affected areas. He said a rebuilding blitz across 10 provinces would be completed within a year, announced a handout of 10,000 liras ($531) to each family affected, and said survivors staying in tents and other temporary housing could be transferred to hotels on the coast.
“We make an initial rough estimate that public spending on Monday’s quakes may be equivalent to 5.5% of GDP,” wrote Bloomberg economist Selva Bahar Baziki. “A likely government-backed credit scheme could result in a higher number,” resulting in a break of budget targets.
EuroEco Brief: Turkey Quake Spending May Reach 5.5% of GDP
The task of estimating the exact impact of the quakes is complicated by the region’s role in Turkey’s economy. On the surface, the 10 provinces most affected by the quakes account for a relatively small part of the GDP by themselves.
However, some of them also form an industrial and agricultural corridor that plays a key role in the prosperity of Istanbul and other larger cities. Oxford Economics said near-term disruptions to activity in the 10 provinces will alone shave off 0.3% to 0.4% of GDP.
“A relevant recent natural disaster precedent might be the floods in Pakistan, which may have erased 5%-10% off GDP and, obviously, had a negative knock-on impact on external-account vulnerability,” said Hasnain Malik, a strategist at Tellimer in Dubai. “The impact is likely significantly less in Turkey in GDP terms but it exacerbates the existing pressure on its external account and currency.”
This could drive a food shortage and increase inflation in a country where the consumer-price index hovers just under 60%, one of the highest rates in the world. The human tragedy could make this worse, especially given Erdogan’s support for looser monetary policy.
The quakes’ impact on the lira has been muted as the currency remains in a tight range as authorities install supportive measures to contain the impact of monetary policy that many investors consider too loose.
“The lira is not the most accurate barometer of market sentiment toward Turkey, given that it remains supported by backdoor interventions,” said Piotr Matys, a senior analyst at In Touch Capital Markets. “The central bank is likely to be under even stronger pressure from the Erdogan administration to cut rates to finance recovery.”
Inflation Hedge
For equity investors, the plunge in the benchmark Borsa Istanbul 100 Index takes away a key hedge against inflation. Local buyers have been parking funds in the equity market to tide over runaway price growth that exceeded an annual 85% in October. A three-year rally driven by that desperate demand came to an end in 2023, sending the gauge to the world’s worst performance.
Turkey Suspends Trading in Stock Market After Rout Deepens
“The earthquake is amplifying the overall bearish tone on Turkish equities,” said Nenad Dinic, an equity strategist at Bank Julius Baer.
The long-term outlook for the country’s stocks will hinge on inflation, Erdogan’s “unorthodox policies” and elections in May, he said.
“It will take a number of months to determine the economic impact, given the unknown direct and indirect losses from the earthquake,” said Simon Quijano-Evans, chief economist at Gemcorp Capital Management. “In the short-term, the country will need to see emergency fiscal and monetary policy measures, with international support a must in order to secure stability in the wider region.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.