Earthquake will keep Turkish inflation above 40 per cent

Turkey’s devastating earthquake will keep inflation above 40 per cent 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 Feb.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 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 per cent in October, stoked by a series of unorthodox interest rate cuts sought by Erdogan, before dropping to 58 per cent in January with a favourable base effect.

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

“With the effect of the earthquake, inflation may now reach somewhere in the range of 40-50 per cent,” 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 100v 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 per cent of Turkey’s agricultural production last year, so food inflation will be pushed higher.

The disaster is expected to reduce economic growth by 1-2 percentage points this year and the central bank lowered its policy rate by 50 basis points on Thursday to provide support.

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 per cent before the earthquake, but predictions are now rising towards 5 per cent.

JPMorgan revised its budget deficit forecast to 4.5 per cent of GDP for 2023 from a previous 3.5 per cent, 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.”

Turkey was already battling runaway inflation and relying on rich allies for funding to keep its economy afloat when a massive earthquake killed tens of thousands, razed entire cities and left millions needing urgent help.

Now, it must pour billions of dollars into rebuilding 11 southeastern provinces flattened by the February 6 tremor -- the worst disaster of its post-Ottoman history.

That money will have to come on top of the billions of dollars in election promises that President Recep Tayyip Erdogan has made in the run-up to crucial polls still tentatively planned for May 14.

All this cash could turbo-charge consumer spending and industrial production -- two key indicators of economic growth. The problem for Erdogan, however, is that Turkey is very short of funds.

But economists believe that money is only sufficient to keep Turkey’s finances in order -- and the troubled lira from collapsing -- until the May polls. Now, Erdogan must repair some $84.1 billion in quake damage, according to an estimate from a prominent business group. Other experts’ estimates are more conservative, putting the total closer to $10 billion.