By Jonathan Spicer and Ali Kucukgocmen
ISTANBUL (Reuters) – Turkey, which unleashed massive stimulus to recover from a 2018 currency crisis, is poised to stretch its central bank and public finances even more to defend the economy and tourism sector from the global coronavirus pandemic.
The risk of two shocks in less than two years could leave the country with less defensive ammunition than most others as governments around the world slash interest rates and spend big in the face of a possible global recession.
Turkey is the world’s sixth-largest tourist destination but waves of travel restrictions and cancellations could pinch a sector that accounts for some 12% of the import-dependent economy, analysts said.
Economists expect Turkey’s central bank will cut rates by as much as 100 basis points next week, which would take the policy rate, at 10.75%, into single-digits as President Tayyip Erdogan has long urged.
An aggressive easing cycle since July, when the policy rate was 24%, was drawing to a close. But that may have changed now that the rapid spread of coronavirus has sent global financial markets reeling.
“Unfortunately Turkey used all its artillery last year to stimulate growth … and did not save for the rainy days,” said Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum.
The policy rate is already below inflation, at 12.4%, giving Turkish lira depositors a negative yield, she said. “So any further rate cut may trigger significant financial volatility in an environment of panic.”
The crisis that peaked in August 2018 briefly halved the lira’s value and sparked a recession from which the economy only definitively recovered in the second half of 2019.
In the latest sign of distrust in the lira, foreign currency holdings hit another record high last week.
Yet while the currency has fallen more than 5% this year, pushing inflation higher, an emergency rate cut last week by the U.S. Federal Reserve helped the lira stem some losses against the dollar.
Unlike many emerging-market producers, Turkey, which imports virtually all its energy needs, would also benefit from a standoff between Russia and Saudi Arabia that has sent oil prices plunging. Cheap energy imports could ease inflation and convince the central bank to continue its stimulus.
Two of 12 economists polled by Reuters on Thursday predicted the bank would cut rates by 100 points next week, though the median response was for a 50-point cut.
Traders and economists said the bank would cut deeper if the Fed and European Central Bank continue to provide stimulus that support EM currencies including the lira.
But they added the bank could stand firm if the lira tumbles in coming days, after it slid 1% on Thursday.
Guillaume Tresca, senior EM strategist at Credit Agricole, expects a 50-point cut, followed by a mid-year currency selloff and a rate hike by year end. “The central bank doesn’t have a lot of ammunition. That is why I am not comfortable in the medium term (prospects),” he said.
Turkey on Wednesday was the last large, wealthy country to report its first coronavirus case, and its preparations won praise from the top local World Health Organization official.
To prevent its spread, the government advised hotels dotting the Aegean and Mediterranean coasts to delay summer openings by a month. Turkish Airlines <THYAO.IS>, among the world’s top carriers, said ticket cancellations are up 50% since mid-January.
Sinan Oncel, chairman of the United Brands Association of Turkey, said foreigners accounted for more than half of spending in shops in tourist centres like Antalya, Bodrum and Marmaris. “We are worried about the risk of the epidemic,” he said.
Ankara has promised financial support for the sector, which on a net basis added $25 billion in revenues in 2019, when Turkey logged its first current account surplus in 18 years.
But protracted fiscal stimulus could strain the budget after a boost in spending last year sent the deficit up 70%. Adding to costs this year, Turkey has poured troops and military equipment into northwest Syria.
“The government has the ability to support growth with a massive stimulus (and) will always add to growth at all costs, but now it is definitely more difficult than before,” said Tresca.
(Additional reporting by Nevzat Devranoglu in Ankara, and Ceyda Caglayan and Daren Butler in Istanbul; Editing by Alison Williams)