Looming coronavirus threat adds to Turkey’s economic woes

The fast-spreading coronavirus has dampened global economic prospects for 2020, a year that many had hoped would see a revival in the fragile world economy. For Turkey, the threat comes atop existing economic woes, coupled with its deepening military involvement in the war in neighboring Syria. Though the deadly virus is not yet officially present in Turkey, it has badly affected another neighbor, Iran, forcing the closure of border crossings in a blow to bilateral trade and tourism.

Of the nearly 89,000 cases reported globally as of March 2, 90% are in China, the epicenter of the outbreak, where the death toll is nearing 3,000. The director-general of the World Health Organization (WHO) warned March 2 that the virus was now spreading faster outside China, singling out South Korea, Japan, Iran and Italy as “our greatest concern.” In Iran, Turkey’s eastern neighbor, the official death toll stood at 66 as of March 2, with more than 1,500 people infected since Tehran announced the first deaths Feb. 19. According to WHO, infection cases have been exported from Iran to at least 11 countries.

The outbreak threatens to further cripple the sanction-hit Iranian economy, which shrank some 9.5% last year, atop a nearly 5% contraction in 2018, according to figures by the International Monetary Fund (IMF). With its oil and gas revenues plunging, Iran’s current account deficit hit $12 billion — or 3.4% of its gross domestic product (GDP) — in 2019, a far cry from the $15 billion surplus in 2017. The country’s unemployment rate has shot up to 17% and its annual consumer inflation to about 30%, while the budget deficit has reached more than 5% of the GDP.

With the coronavirus closing in on Turkey, the Turkish health minister warned March 2 there might already be infected individuals in the country, although no case has been officially confirmed thus far. According to the head of the Turkish Medical Association, “Turkey could weather the disease without any human loss if the necessary measures are enforced.”

The economic impact, however, is hard to escape. On Feb. 23, Turkey closed its border crossings with Iran, a measure that will inevitably hamper bilateral trade, which has already declined to less than $6 billion due to the US sanctions on Iran. Although trade with Iran represents only 1.6% of Turkey’s foreign trade volume, which stood at $374 billion in 2019, the outbreak has emerged as a major threat to any effort to boost international exchanges. The tourism sector is the first in line at a time when the number of Iranians visiting Turkey was booming, reaching nearly 2 million per year.

As gloom descends over the business community, Perihan Fatih, executive chair of the Turkish-Iranian Industrialists and Businessmen's Association, said, “Unfortunately, this situation will have a negative impact on trade. We have trucks [carrying goods] that are supposed to come [to the country] but cannot do so because the border crossings are closed. If not anything else, the shipping of medicines and food should be allowed.”

Fatih warned that protracted border restrictions would deal serious blows to trade. “The trade volume between Turkey and Iran has already shrunk because of the sanctions. It fell to $5.6 billion in 2019 from $9.3 billion in 2018. The figures will unfortunately plunge further if the existing conditions continue for too long,” she said.

Naturally, Iran or other neighbors are not the only sources of coronavirus risks for the Turkish economy. The economic jeopardy is global. According to the IMF, the expected increase in global growth — from 2.9% in 2019 to 3.3% this year — remains “a fragile one” amid downside risks. “The recovery could be derailed by a sharp rise in risk premia, triggered for example by a re-escalation of trade tensions or a further spread of the coronavirus,” the IMF warned in a recent report.

Bank of America has already cut its global growth forecast to 2.8%, which would be the lowest rate since 2009. Under the impact of the coronavirus outbreak, China’s growth rate — on the decline since hitting 6.8% in 2017 — is expected to fall below the IMF’s forecast of 5.8% for 2020.

The travel industry is already taking huge blows as people choose to stay at home and international events are being canceled. The fates of the 2020 Summer Olympics in Tokyo and the European Football Championships remain uncertain.

Some of the worst implications are seen in the global supply chain, in which China is a key actor. The country contributed 16% of the $87 trillion world economy in 2019.

Amid such far-reaching global repercussions, the coronavirus outbreak bodes fresh troubles for the already ailing Turkish economy, coinciding with war jitters from a dramatic escalation in Turkey’s military involvement in Syria over the past several weeks.

The combined impact of those woes is best illustrated by the surge in Turkey’s risk premium, reflected in credit default swaps (CDS). The country’s CDS rose to up to 382 basis points March 2, having fallen to the region of 250 basis points in mid-February. The Turkish lira has taken blows as well, with the price of the dollar rising about 6% over a month.

In sum, a continued global contraction under the impact of the coronavirus outbreak threatens to make it even harder for Turkey to galvanize its economy, which is heavily reliant on foreign funds and already prone to various domestic fragilities and foreign policy tensions.