TURKEY: Erdogan’s poorly conceived economic package

● Ankara announced on 19 March that the number of confirmed cases had nearly doubled over the previous 24 hours to 191. ● The lack of transparency and the government’s efforts to tighten the control of information over the Covid-19 outbreak raise concerns about the country’s ability to tackle the pandemic. ● The size and design of the package to help the economy mitigate the impact of the outbreak suggest that the authorities underestimate the risks ahead. On 19 March, eight days after they first acknowledged that someone in the country had tested positive for the coronavirus, the Turkish authorities announced that the number of confirmed cases had nearly doubled over the previous 24 hours to 191 and that the death toll had risen to two. The announcement came hours after President Tayyip Erdogan, in a public address detailing government measures to address the potential economic repercussions of the pandemic, devoted nearly all of his 55-minute speech to praising his administration’s response to the coronavirus, which he described as being better and more effective than any other country in the world. The reality appears to be very different. The government claimed that the first positive test result on 11 March was an individual who had just returned from abroad and that previously there had been no cases in the country – even though foreigners traveling from Turkey before 11 March had tested positive on arrival in countries such as the US, UK and Taiwan. Even though they have now admitted to a growing number of cases, the Turkish authorities are still refusing to provide details of the number of tests that have been carried out or the location and identity of those who have tested positive. On 18 March, in a video that rapidly went viral on social media, a doctor at Ankara University Hospital was recorded telling her colleagues that there were now thousands of confirmed cases across the country, particularly in Istanbul and Ankara, and that the hospital had been forced to revise its emergency plans to cope with the rise in patients needing to be hospitalized. A judicial investigation into the doctor on suspicion of spreading “fake news” designed to destabilize the country was immediately launched. But doctors in hospitals all over Turkey, particularly in the larger cities, are also reporting a massive increase in people – alarmed by rumours and distrustful of their government’s statements – arriving at A&E and asking to be tested, with the result that services are becoming overwhelmed and personnel are having to suspend treatment of those with non-life-threatening complaints. In recent years, the Erdogan administration has increasingly resorted to the provision of misleading information as a substitute for actual achievements – most strikingly in its announcements of hugely inflated figures for the number of Kurdistan Workers’ Party (PKK) militants and, most recently, Syrian regime forces it claims to have killed. Now the process has been inverted as it tries to hide the full extent of the spread of the coronavirus in Turkey. Not only are the actual numbers unclear but there is a risk that, by fueling panic and uncertainty, the deception will make the pandemic even more difficult to contain. Erdogan’s “Economic Stability Shield” The government announced on 18 March a USD 15.5bn stimulus package to support the country's economy and ease financial burdens on businesses and individuals impacted by the pandemic. Key measures of the 21-point plan, dubbed the Economic Stability Shield, include: A six-month deferral for the payment of taxes and social security contributions that applies to 11 economic sectors, including retail, steel, automotive, textile and logistics. Firms facing cash flow problems will be able to postpone their loan payments (both principal and interest) for three months and may receive additional financial support. The down payment for mortgage loans up to TL 500k will be reduced to 10% from 20%. The guarantee program of the Treasury-backed Credit Guarantee Fund will be expanded from TL 25bn to TL 50bn. State-owned Halkbank will postpone credit interest and principle payments of SMEs in financial difficulty for three months at no cost. The lowest pension will be increased to TL 1,500 per month and additional funding worth TL 2bn will be allocated for financial aid to households in need. VAT on domestic air travel was reduced from 18% to 1% for three months, and the hotel accommodation tax canceled until November. The package seems prepared with the assumption that the shock will be limited, and that macroeconomic activity will recover after a short period – a rather questionable approach given the profound uncertainty ahead. In multiple ways, this looks like one of the many packages the government has enacted in the past to boost demand rather than helping firms and workers with the losses accumulated during the shut-down. It is also doubtful that a package worth USD 15.5bn can make much of a difference for an economy of USD 750bn. The limited fiscal space available is the price to pay for the government’s heavy spending spree over the past few years. The bottom line is that Turkey is facing this unprecedented crisis without significant monetary and fiscal space given the government’s poor handling of the economy for a sustained period. Banks are being asked to extend payment terms and help borrowers go through this difficult period, utilizing liquidity and regulatory support provided by the CBRT and BRSA announced earlier this week. The burden on the banks could be rather substantial. Puzzling is the inclusion of the VAT reduction for domestic flights and the cut in the new hotel accommodation tax given the imperative to keep Turkish citizens at home to tackle the pandemic.

March 19, 2020

TURKEY: Erdogan’s poorly conceived economic package

BY Wolfango Piccoli

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March 19, 2020

TURKEY: Erdogan’s poorly conceived economic package

BY Wolfango Piccoli

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