The earthquakes will shake the Turkish Economy

The earthquakes that devastated Turkey and Syria last week are heaping new stresses on the Turkish economy, posing a challenge for President Recep Tayyip Erdogan who is facing an election this year.

The quakes cut a path of destruction through a core industrial region in Turkey around the cities of Kahramanmaras and Gaziantep, home to factories exporting everything from clothing for Western brands, jewelry, pots and pans, and iron. It also devastated some of the country’s agricultural infrastructure producing fruit, vegetables, grains and seeds. Now, the region is littered with damaged and destroyed industrial facilities.

The earthquakes have caused an estimated $84 billion in losses, the equivalent of about 10% of Turkey’s entire economy in 2022, according to a report from the Turkish Enterprise and Business Confederation. The business association made the projection based on the damage done by the 1999 earthquake that destroyed parts of Istanbul.

The earthquakes, which have killed more than 39,600 people in Turkey, have emptied entire cities and uprooted millions from their homes. The disaster has deepened the economic turmoil in a country that is already reeling from a cost of living crisis, which is threatening to unravel 20 years of economic expansion under Mr. Erdogan. The longtime leader of the country helped lift millions of Turkish citizens into the middle class during the early part of his tenure.

The Turkish state now faces a series of compounding challenges, including making safe parts of cities that have been reduced to rubble and restoring power, water, and heating to swaths of the country. More than two million people lost their homes in the earthquake, dislocating a portion of the country’s workforce.

“We need to solve the problem of jobs and shelter as soon as possible in order not to lose these people. Some people who left will not come back,” said Mikail Utlu, the director of a company that makes metal cookware and the head of the Kahramanmaraş Industrialists’ and Business Association.

Mr. Utlu stood in front of one of three factories he runs in Kahramanmaras that make pots and pans and other metal goods that are sold within Turkey and are exported to about 50 countries, including across Europe and the Middle East. Metal cooking pans were strewn across piles of shattered concrete and twisted metal. More than 20 of his workers were killed. He estimated he suffered $6 million in damages to just one facility.

Paying for the recovery will be difficult because Turkey is already reeling from a currency crisis that has wiped more than half the value off the lira and caused record inflation that peaked at 85% in October. Inflows of money from Russia and the oil-rich Persian Gulf countries, and a postpandemic jump in tourism, have cushioned some of the falls in Turkish foreign currency assets.

Mr. Erdogan’s government has pursued an unorthodox strategy of cutting interest rates despite high inflation, a move he says will encourage growth, particularly exports, that benefit from a weaker national currency. Those interest rate cuts triggered the collapse of the lira in late 2021.

With investors and ordinary people selling the lira, the Turkish central bank spent more than $100 billion to prop up the currency last year, economists say, straining the country’s foreign assets, which are already net negative according to some economists.

The earthquakes also pile on to the political pressures facing Mr. Erdogan, who is expected to face reelection in May. The Turkish president, who came to power in the aftermath of the 1999 earthquake, is also facing a public outcry over the government’s initial response to this year’s disaster, which residents said was slow and disorganized.

Mr. Erdogan is now promising to rebuild housing for everyone displaced by the earthquake within one year. The government said this week that the Turkish public, state institutions, and businesses donated 115 billion Turkish lira, equivalent to around $6 billion, to a fund designated for the government’s disaster relief agency and the Turkish Red Crescent. That includes 30 billion lira from Turkey’s central bank. The World Bank announced another $1.78 billion in assistance last week.

Economists say the earthquake will further strain Turkey’s finances, forcing the government to allow the lira to slide further, or risk a balance of payments crisis.

“Before, they were pumping money into the system to win the election. Now some of that money is going to be directed to the earthquake,” said Bilge Yilmaz, a professor at the University of Pennsylvania’s Wharton School, who is now an official with a Turkish opposition party. “Their challenge is that absent the earthquake, they were trying to sustain something that is not sustainable.”

Some Turkish business owners are also skeptical of the government’s plan to rebuild the country in one year.

Source : PATURKEY