Turkey Risk of an economic crisis


Turkey faces a potentially severe economic crisis amid poor domestic economic policy decisions and mounting sanctions by the U.S. While Turkey has sustained high economic growth since 2010 of 6.5 percent per year, the recent sharp depreciation of the lira from 3.80 lira to the dollar at end-2017 to 6.01 lira on 17 August risks destabilising the economy and undermine its capacity to service its external debt. An economic crisis would naturally impact Turkey’s bilateral international trade relations.

The actual impact of a severe slowdown in Turkey would depend on exporters’ exposure to Turkey. Turkey has remained in aggregate a relatively small export destination for the largest trading blocs suggesting that even a severe economic crisis in Turkey is unlikely to cause major disruptions in aggregate to its important trading partners. However, sector specific exposures vary significantly and imply that the effect of a sharp slowdown in exports to Turkey would be highly asymmetric. The export sectors most affected would comprise cotton, iron and steel and wool. The E.U. seems more vulnerable to a trade slowdown in aggregate and in particular in its largest exports sectors. The U.S. appears exposed only in a small number of select sectors. Both the E.U. and the U.S. have built exposure fast to Turkey in several key export sectors that risk being most vulnerable to reversals in international trade.

Exports to Turkey

The E.U. had US$64 billion in goods exports to Turkey in 2017 or 1.7 percent of its total exports. This makes the E.U. the largest trading partner of Turkey. China had US$16.7 billion in exports to Turkey in 2016 or 0.8 percent; the U.S. had US$9.8 billion in exports or 0.6 percent, Japan had US$3.1 billion or 0.5 percent of their total exports, respectively (Figure 2).1

The E.U. has expanded its exports to Turkey by 0.4 percentage points of total exports between 2007 and 2017. The U.S. and Japan have broadly maintained stable export shares to Turkey, In China’s exports Turkey declined slighted from represent 0.9 percent in 2007 to representing 0.8 percent in 2016.

Figure 1. Entry Mask

Figure 2. Exports to Turkey

The effect of a crisis-induced slowdown in Turkey will naturally depend on the relative importance of each trading sector. Of the E.U.’s total exports, 7.2 percent of cotton (HS AG2 52), 5.2 percent of pearls and semi-precious stones (71), 4.5 percent of iron and steel (72) and 4.2 percent of wool (51) go to Turkey. The E.U. maintains an average market share in the 20 largest sectors in total E.U. exports to Turkey of 2.9 percent.

The U.S. also maintains an important select exposure to Turkey with 9.6 percent of cotton (52), 6.5 percent of iron and steel (72) and 3.3 percent of food industry residues and waste (23) of those sectors exported to Turkey. The 20 largest sector of China’s and Japan’s exports to Turkey remain relatively small representing 1.3 percent of China’s total exports in those sectors and 0.6 percent of Japan’s total exports. Of China’s total exports in photographic goods (37) 3.4 percent are exported to Turkey, 2.8 percent of man-made filaments (54) and 2.6 percent of tanning or dying extracts (32). For Japan, of total exports of furniture (94) 1.2 percent go to Turkey.

Of the 10 largest export sectors of the E.U. totalling US$,2,324 billion in 2017 including nuclear reactors (84), vehicles (87), electrical machinery (85) and pharmaceutical products (30), 1.9 percent go to Turkey. Of the 10 largest exports of the U.S. totalling US$1,070 billion in 2017 including nuclear reactors (84), electrical machinery (85), mineral fuels (27) and aircrafts (88), 0.5 percent go to Turkey.

Fastest growing market share

Turkey has become a fast growing export destination for the E.U. and the U.S. in select sectors. The 10 sectors where Turkey increased the fastest as an export destination represent 3.2 and 3.1 percent of total exports of these sectors of the E.U. and U.S., respectively. The sectors comprise for the E.U. e.g. natural , cultured pearls (71), zinc (79) and pulp and wood (47) and for the U.S. arms and ammunition (93), fruits and nuts (08) and iron and steel (72) (Figures 2 and 3). The 10 sectors represent for the E.U. US$12.3 billion in exports in 2017 up from US$6.1 billion in 2007 and for the U.S. US$2.0 billion in 2017 up from US$1.2 billion in 2007.

Figure 3. Filter action

Figure 4. E.U. 15 fastest growing exports to Turkey

Figure 5. U.S. fastest growing exports to Turkey

1 All reference to E.U. refers to E.U. of 15 member countries. 2016 in the latest available export data for China.