Analysts see Turkey as still having some unspent fiscal capacity to absorb more shocks to an economy shaken by the coronavirus (COVID-19) health and economic crisis—but at the same time Ankara has not yet shown an ability to find a foreign funding source to address the nation’s high external debt of around $170bn this year and the country appears set for a recession with the Turkish lira and the central bank’s dwindling reserves remaining under severe pressure.

State lenders have this week continued to sell dollars into the market in an apparent bid to keep the Turkish lira (TRY) below the psychologically important 7-to-the-dollar threshold, but despite the strenuous efforts the currency by around 20:00 local time on April 24 had weakened 0.7% on the day to 6.99 versus the USD. Turkey’s central bank on April 22 left the lira and country’s financial stability further exposed when it cut its benchmark interest rate by 100bp—twice as much as the market consensus anticipated—to 8.75%, compared to the latest official Turkish annual inflation figure of 11.86%, in a bid to keep credit flowing despite the country’s COVID-19 pandemic, the worst in the Middle East.

On the fiscal side, both David Hauner at Bank of America Merrill Lynch and Douglas Winslow, Fitch Ratings’ director for European sovereign ratings, have said Turkey has room for more fiscal stimulus.

Steps announced so far—including the central bank ramping up a bond-buying programme to include nearly TRY27bn ($3.64bn) of government debt, the postponement of debt payments and cutting the tax burden on various sectors as part of a 100-bn lira package of measures that has also involved doubling the limit of the state’s credit guarantee fund—were equivalent to around 2% of GDP, Winslow told a webinar, Reuters reported.

“If you look across the piece this is a pretty moderate package for countries being similarly affected by coronavirus," he said, adding that there was, however, little scope for further interest rate cuts.

Still no feasible ‘Plan B’

Turkey has set its face against going to the International Monetary Fund (IMF) for bailout funds. Analysts widely see that move as something that would severely undermine President Recep Tayyip Erdogan politically as he has always boasted that the country would never find itself requesting rescue capital from the Fund on his watch, and, that being the case, they would like to see Ankara outline a feasible ‘Plan B’. Though Hauner agreed that there was still fiscal capacity available to Turkey, he said in a note that the Turkish economy “remains vulnerable to market volatility and a stronger dollar in particular with high external financing needs. A lack of policy clarity further holds back the credit profile”.

Winslow estimated that the Turkish economy would shrink by 2% in 2020. The IMF anticipated a 5% contraction in its latest forecasting released earlier this month.

The collapse in world oil prices will help Turkey, almost entirely reliant on imports to meet its energy needs, to hedge against the COVID-19 devastation hitting its key tourism industry, but, said Winslow "Turkey's main exposure to the crisis is through its large external financing requirements, low foreign exchange reserves and weak monetary policy credibility, which make it vulnerable to market sentiment. This is where we are seeing some stresses."