Turkish lira crisis a boon for tourism, curse for other sectors

“Because one reason is the economic crisis in Turkey is now structural, which means Turkey, to overcome this problem, should immediately make some reforms in politics, in foreign policy, in rule of law, so I am not [optimistic that] the government is ready to do so right now,” Bacik told Gulf News.

The economic crisis in Turkey is now structural, which means Turkey... should make reforms.

- Gokhan Bacik | Professor at Palacky University

The economic problem is “really a big headache” for Turkish President Recep Tayyip Erdogan and a “complex” concern for the Turkish government, said the Turkish political scientist.

However, it is unclear which direction the Turkish government is going to take in handling the economic crisis, and until then, the leadership in Ankara “should realise either some reforms [should be taken] or speaking directly with the IMF, because definitely Turkey needs some kind finance, [and] some kind of consultation,” Bacik said.

The drop in the relative value of the lira, which started in 2018, has benefited the country’s tourism sector.

But other sectors, including imports, exports and foreign direct investments (FDI), have either suffered or are expected to.

The Turkish economy is expected to continue to contracting throughout 2019.

The lira lost nearly 30 per cent of its value against the US dollar in 2018, in response to concerns over the central bank’s independence and deteriorating relations between Ankara and Washington.

The devaluation of the Turkish currency pushed inflation high, thereby limiting companies’ abilities to repay foreign debts, and multiplying the number of bad loans, economic reports said.

Only a few developing markets have seen the weakness that the Turkish lira has experienced.

- Jameel Ahmad | head of currency strategy at FXTM

The Turkish economy contracted by 3 per cent in the fourth quarter of last year, and the contraction is expected to continue this year.

The International Monetary Fund (IMF) has put its estimate at around 2.5 per cent. Turkey’s lira was the second worst performing currency in an emerging market, after the Argentine Peso, which fell 57 per cent last year, said economists.

Among other currencies, the Brazilian real lost 15 per cent, the South African rand shed 12 per cent and the Russian rouble slid 11.74 per cent, said Jameel Ahmad, global head of currency strategy and market research at FXTM, a global foreign exchange broker.

“Emerging market currency weakness has been a widespread theme on a global level since early last year, but only a few developing markets have seen the weakness that the Turkish Lira has experienced during this period,” Ahmad told Gulf News.

Though the currency weakness encouraged an economic recession, one sector in the Turkish economy came out as a winner in the crisis, he said.

“When it comes to tourism, you would naturally expect the sector to benefit from such abrupt weakness in a currency. Visitors to Turkey for tourism are now getting approximately a 30 per cent discount on their trip [priced in US Dollar terms] when compared to what the valuation of the Lira would have been before 2018,” Ahmad said.

The Turkish lira weakness reflects macro uncertainties that are going to also impact the inflows.

- Monica Malik | Chief economist at Abu Dhabi Commercial Bank

Nevertheless, it is still too early to comment on the impact of the currency crisis on the competitiveness of other sectors in the Turkish economy, including exports and Foreign Direct Investments (FDI).

“The Turkish lira weakness reflects macro uncertainties that are going to also impact the inflows, especially long-term investment. So while exports of goods and services are becoming more competitive, we do not envisage many companies moving to Turkey at this point,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“Until there is a greater clarity on the economic and political backdrop, we see foreign investors remaining cautious,” she told Gulf News. “An external weakness of the Turkish economy has historically been the reliance on portfolios flows, with FDI levels weak.”

Ankara’s exports depend on foreign currency, and the fact that Turkey imports energy resources, namely oil, and some parts for its industrial sectors, increases the impact of the currency crisis on the economy, experts said.

“The third point, if you analyse the Turkish debt in detail, it mostly belongs to the private sector,” Bacik said. “So having this very bad currency crisis is really troubling [for those] financing the debt. It is not going to work for them.”

Some reports and websites say Turkey has become a hub for plastic surgery in the Middle East region, a fact that many observers relate to the currency crisis, which has boosted the competitiveness of Turkey in the field.

However experts, including Bacik, say such attractiveness is not sufficient to deal with the crisis.

Bacik said although Turkey has also become a hub for dentistry, the country “needs billions of dollars” to deal with its economic crisis.