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Economic Effects of Corona Virus on Turkey’s Economy
Dr. Merve Karacaer Ulusoy
28 Şubat 2020 14:10
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Today, the second largest economy in the world and therefore the whole world is under threat of a virus, named corona. The uncertainty created by the virus quickly disrupted the global trade and supply chains, lowered commodity prices, and forced multinational companies to take critical decisions with limited information. This health crisis is actually testing the entire economic system. But most of all, while testing the strength of China as a consumer, it also tests the acceleration ability of US with China's slowdown.

According to an article published by the World Economic Forum (WEF) in 2018, China accounts for more than 50 percent of the world's demand in some commodities. For example, 59 percent of cement consumption in the world, 57 percent of nickel consumption and 50 percent of copper, steel and coal consumption are made by China.

After the virus, copper and oil prices decreased significantly on a monthly basis, while the barrel of Brent oil decreased by 15 percent and the pound of copper decreased by 8.4 percent. We should note that especially the decline in copper prices may have important effects on the economy. Because the copper is used mostly in the production process of many products. As a result, the decline in copper prices may cause damages in the economic activity. Moreover, if the outbreak could not be quickly taken under control, we will continue to see downward movements in oil prices. According to the report of the Organization of Petroleum Exporting Countries (OPEC), while the demand for oil fell by 19 percent in a week, the main reason for the drop-in demand was China.

Many of the global brands have partially or completely suspended their activities in China and have shrunk in Asian markets. At this point, we may say that new direct investment opportunities emerged for Turkey while at the same time the decrease in oil demand due to the decline in the production process of China and the decrease in oil / natural gas prices accordingly will decrease the production costs of Turkish manufacturers. Also, A 15% decrease from January. Each $6 decline in oil prices reduce Turkey’s current account deficit by $1 billion.

Moreover, new opportunities arise for Turkish exporters also. Increasing global demand as a result of the temporary reduction of production capacity in China may attract global importers to invest Turkey both in the medium and long run

The most important of all these opportunities is the increasing global demand as a result of the decrease in the production capacity of China in the short term, in the short term, in the medium and long term. The permanent work that may be made in Turkey in the following sectors global importers may lead to new opportunities for Turkish exporters.

These negative developments weaken the stock markets, borrowing capacities of developing countries and increase the fragility of the sensitive balances of economic stability. On the other hand, foreigners have been taking advantage of Turkey's weak currency to buy up properties. It is now above 6,10

When we look at the statistics, housing sales have increased by %55,8 in January compared to same month of 2019. Housing sales to foreign people also increased by 24%. Mostly Iraq, Iran and Russia respectively. With 1,98%, as China has a low share on our sales our hosing sales would not be adversely affected.

The automotive industry is one of the five strategic sectors in our economy. Turkey is not dependent on China in the automotive sector as EU and as US. But The problem in China can affect us through these countries. Today, China is the world's largest automotive market and also the largest manufacturer in this sector. According to 2018 figures, 27 million vehicles were produced in China. The total market was 28 million units. Even though production and sales figures declined in 2019, China remains the number 1 in the world. On the other hand, Turkish supplier companies produce the most strategic parts of the world's top-quality brands, with exports worth $11 billion. Our supply industry companies also have a structure that can be part of production projects in more than one country with co-designer competence. Yes, the Chinese market, which also imports $30 billion in the supply industry, is important for us. But, maintaining our strong position in the EU market and providing market diversity with many regions and countries from China to USA, Russia to North Africa are among in our primary priorities.

Our mining sector may be affected most, because out of $4,3 billion we export $1,3 billion to China. Because of the corona we already had an approximately %60 decrease in mining exports in the first week of February compared to last year.

The world's largest plastic producer is China. Turkey is the 6th largest producer. China is also the world's largest plastic raw material buyer. It sells 50 percent of the product it produces to the US. However, many plastics factories are closed in China due to the korona. The demand for raw materials has dropped a lot. These issues led to a decline in raw material prices which is positive for countries like Turkey. This is very important for our export volumes at the same time we have been receiving a serious demand from US recently, which would have positive effects if it happens. 

Particularly in some industries like textiles, furniture, iron and steel and fruits and vegetable sectors global demand may shift to Turkey. For example, Russia is turning the new routes to Turkey and Morocco; the furniture industry is estimated to be $1 billion contribution of additional orders. In textiles, 1% order increase can contribute 1.5 billion dollars for Turkey. Also, our domestic production may rise in some sectors such as glassware.

Moreover, China has 80 million visitors each year. Because of the virus some visitors may shift to Turkey especially from Europe. When we look at the distribution of foreign visitors that arrived to our country in between 2017-2019, top 5 countries are Russia (%16), Germany (%11), Bulgaria (%6), UK (%5,7) and İran (%4,7). Specifically, in 2019, totally 45 million of people visited Turkey and 426.000 (approximately (four hundred twenty-six thousand) were Chinese. (%0,95). As from the statistics, our tourism sector may be stronger if the number of visitors from those 5 top countries increase.

On the other hand, Turkey and many other countries like Europe will enter to summer, but there is an hemisphere that will enter to winter. If the coronavirus manages to leave the Wuhan region of China, it may survive in those countries. If this happens, the virus may not be easily prevented after this stage.

If corona cannot be taken under control in one or two months, approximately 2-3 billion dollars of ready to-wear orders may shift to Turkey from China. Our ready wear sector reached to a $17,7 billion in exports with a symbolic growth rate of 0,4% in 2019 due to the slowness in our economy. On the other hand, China, is in a position to dominate this sector with exports of $170 billion in many segments, especially outwear, raw materials and women’s ready-to wear. It is obvious that China is a very important player in all around the world, including Turkey with cheap labor force, high volume of production and being dominance in raw material markets. As China orders are placed in the medium and long term, the situation will be clear for deliveries over two months.

Turkey’s top 10 ready to wear export countries are German, Spain, UK, Netherlands, France, Iraq, US, Italy, Denmark and Israel respectively. At the moment, international textile buyers see Turkey as a preferable and profitable market due to its quality and fast production at affordable prices. The price difference between Turkey and China in the same product group is 20% excluding taxes. So large purchasing groups will ask for price reductions. If they pay this price difference, we need to provide this service with a competitive exchange rate. By this way we would at least get that 15% increase in our labor cost.

Several fashion retailers in China are having contacts with Turkey about shifting their production to Turkey. Rising Chinese manufacturing costs and a 36% slide in the value of the Turkish lira in the last two years, because of the currency crisis in 2018, has already made Turkey an affordable option. If any share of this $170 billion shifts to Turkey, our textile industry will benefit. Approximately 70% of Turkey’s exports are going to Europe. Our strongest rival in this field is Portugal but if this shift happens, it will decrease our current account deficit and support our government’s 5% economic growth forecast for 2020.

Also, the increase in demand from international business are would help the Turkish textile and garment sector work at full capacity. China is currently the world’s biggest textile exporters, employing over 4.6 million people, and textile exports from China reached 37.6% of the world’s total in 2018, reporting a 3.5% increase from the previous year.

Not only Turkey, there are other attractive countries like India, Cambodia or Vietnam especially for labor intensive products like ready-to wear. But at the moment the situation is like this. Big companies do not immediately change suppliers or transfer orders. At least six months is needed to increase the capacity by 25%. So, they’re watching carefully whether this virus outcome will last long and whether it will spread.

China is one of the world’s largest vegetable and fruit producers and due to the corona virus, countries importing foods (especially fruits and vegetables) are looking for new suppliers. Russia is one of them. They largely import food products from China which are vegetables, fruits and seafood and at the moment their demand from Turkey is increasing in this field.

According to this graph of Financial Times, GDP of 23 countries out of 24 is decreasing while only Turkey’s increasing. 1% of economic slowdown in china will increase Turkey’s GDP by 0,05%. The worst effected country seems to be an industrial country; South Korea.

Automotive

New year holidays have been extended in 11 Chinese states to prevent the spread of the virus. These 11 states are responsible for more than two-thirds of vehicle production in China. Wuhan's Hubei Province is China's fourth largest automobile production center. Due to the virus, major automakers, such as Toyota and Honda, stopped production for a while. The downward trend in the automobile market in China for the last two years already existed. Therefore, the economic effects of the virus can narrow China's automotive market by 10% or more by the end of the year, not just for the first quarter.

In addition, in the automotive industry, Hyundai Motor plans to incrementally suspend its factory in South Korea, mentioning problems in the supply chain due to the corona virus. Given the current share of Turkish exports in the automotive industry, it possible that capacity utilization rates may rise, while the foreign direct investments in this sector may also rise in the long-run.

Economic Profile of Hubei

Its capital, Wuhan, is has the highest population in the center of China (11 million of people) and has strong economic and regional advantages. The state's exports had increased by 12% and imports by 18% and has 1.3% share in total exports of China. For this reason, countries that export seriously to the quarantined region are also losing money at the moment. Hubei is an important piece of China’s One Belt One Road, while Wuhan is the center of China in terms of industry, finance, business, science and technology and education.

Considering the GDP components of Hubei province, the distribution of agriculture, industry and service sectors was 35.1, 38 and 26.9 percent in the 1990s, while the distribution in 2017 was 10.3, 44.5 and 45.2 percent, respectively. In other words, Hubei province has become an important industrial base of China over the years. Metallurgy, automobiles, chemicals and building materials, foodstuffs, machinery construction, textiles, electronics and shipbuilding are among the leading industries in the province. Hubei has abundant hydroelectric supply, and 66 percent of industrial production is covered by the hydroelectric resource there.

Conclusion

Turkey is such a country that always give support in any emergency case for any country. Evaluating the opportunities that arise with the virus does not mean rejoicing to this important problem. As markets have become more integrated in today’s world, any disruption can easily affect the whole system. If we consider the financial crises of 2008, it started at US, which was and is the strongest economy, but spread nearly all over the world, with a cost of more than $22 trillion to the economy. On the other hand, corona is an health crisis, started at China, and now spreading to many other countries. From households to big companies, we are all dealing to manage this issue, but at the same time life is going on. We all have daily needs to sustain our lives and as people continue to demand, companies should also continue producing to meet those demands. If nobody substitutes the standing production of China, because of the disruption in the supply chain and scarcity of resources it would be more difficult to meet our daily needs, many people may become unemployed, commodity prices may increase sharply, and at the end again we may face with a new financial crisis. As a result, it is important to see this process as a natural balance of life and of course should continue to support China to fight with this virus, while we should also support the balance of the economic system for again humanity.