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Earthquake to keep Turkish inflation above 40%

President Erdogan has frequently said high borrowing costs lead to high inflation, contrary to common theory
  • Inflation hit 24-year high of 85.5% in October
  • Earthquake set to cost economy some $50 billion
  • Central bank cut policy rate to support growth
  • Employees reluctant to return to work in quake zone

Turkey’s devastating earthquake will keep inflation above 40 percent in the run-up to elections scheduled for June and will necessitate an additional budget, a government official and four economists said.

They predict that the February 6 earthquake, which killed more than 43,000 people in Turkey, will cost the economy more than $50 billion, in line with forecasts from other economists.

A surge in prices of goods and services, including food and housing, due to disruptions caused by the quake means Turkey’s high inflation rate will fall in the coming months by far less than previously expected, they say.

President Tayyip Erdogan was already facing a major challenge on the economy with soaring inflation eating away at his popularity and the quake has added to the difficulties ahead of the presidential and parliamentary elections.

Separately, the lira presents another challenge, with central bank data showing net reserves dropped $7 billion since the quake and bankers expect further steps from the authorities to reduce foreign exchange demand.

Inflation hit a 24-year high above 85 percent in October, stoked by a series of unorthodox interest rate cuts sought by Erdogan, before dropping to 58 percent in January with a favourable base effect.

Inflation had been expected to keep falling to around 35-40 percent by June, but due to the earthquake the four economists, who did not want to be named, now forecast inflation of 42-46 percent at the time of the election.

“With the effect of the earthquake, inflation may now reach somewhere in the range of 40-50 percent,” the government official added, speaking anonymously as he was not authorised to speak publicly on the issue.

“Disruption on the production side and the increase in house prices and rents by nearly 100 percent in some places amid internal migration have extremely negative effects,” he said.

Rising construction costs were also problematic, he added.

More than two million people are estimated to have left the quake zone, pushing up rents in other provinces, economists said. The region also accounted for 16 percent of Turkey’s agricultural production last year, so food inflation will be pushed higher.

The disaster is expected to reduce economic growth by one to two percentage points this year and the central bank lowered its policy rate by 50 basis points on Thursday to provide support.

Additional budget

The quake also gives the government an additional challenge on the budget, long one of the strongest areas of the economy.

Net borrowing of up to 661 billion lira ($35 billion) would be possible under the 2023 budget for this year but the official said that now won’t be enough.

“Completing the year with the current budget does not seem easy. An additional budget will be needed,” the official said.

The Treasury did not immediately respond to a request for comment on the budget issue.

Economists had estimated that the budget deficit to GDP ratio for 2023 would be around 3.5 percent before the earthquake, but predictions are now rising towards five percent.

JPMorgan revised its budget deficit forecast to 4.5 percent of GDP for 2023 from a previous 3.5 percent, drawing attention to increased spending due to the earthquake.

Industry in the quake zone also faces a major problem, with employees reluctant to return to work after the quake as they are still affected by the trauma of the disaster that happened just two weeks ago, said Mehmet Buyukeksi, board member of leading shoe manufacturer Ziylan Group.

He said 1,800 employees were last week invited back to their factory in Sanliurfa province, one of the less affected provinces in the quake zone, but 300 had still not come back.

“There is fear among the employees, there is a psychological discomfort,” he said. “The biggest problem in terms of industry right now is the return of those living in the region.”