ECONOMIC OUTCOME OF THE EARTHQUAKE

Undoubtedly, the catastrophic disaster that occurred on February 6 in Türkiye is a great human tragedy in the first place. In addition, economists should calculate the amount of damage in order to assess the feasibility and period required to reconstruct what has been destroyed, as millions of people are left homeless and without basic necessities to continue a normal life...

US investment bank JP Morgan predicted that the direct damage from the earthquake to the Turkish economy will be at least $25b. Other international and Turkish analysts believe the country will lose between 1-3% of GDP in 2023.

At the same time, short-term negative trends in the global economy have also been recorded. According to experts, the crisis in Türkiye may have a multiplier effect on its trading partners as well.

Different estimates

Exact estimates of the amount and scale of damage caused by the disaster with epicentre in Kahramanmaraş and Gaziantep are not yet available. But a Morgan Stanley report says the direct losses in Türkiye's residential sector alone will be around $24b. The bank estimates that the figure could be as much as $38b, including some additional costs. It does not take into account the economic damage to businesses in the disaster zone hosting about 13.5 million people, which is almost 10% of the country's economic activity.

Karen Clark & Company, a disaster modelling company, has announced that earthquake insurance losses could reach about $2.4b.

In a preliminary report published four days after the disaster, the Turkish Confederation of Entrepreneurship and Business TÜRKONFED estimated the damage at more than $84b, or about 10% of the country's GDP. The business group estimates that damage to residential structures in Türkiye is equivalent to $70.8b. The effects of earthquakes will also reduce the country's budget revenues by $10.4b, while losses in the workforce will cost $2.9b.

According to the estimate of the European Bank for Reconstruction and Development (EBRD), the Turkish economy can lose up to 1% of GDP. Analysts of the bank believe this is "a reasonable estimate because of the expected increase in recovery efforts later this year, which will offset the negative impact on infrastructure and supply chains".

"The earthquake has largely affected agricultural areas and areas with light industry. The spillover effects in other sectors are limited," EBRD Chief Economist Beata Jaworczyk told Reuter.

Meanwhile, the bank has already lowered its GDP growth forecast for Türkiye, the EBRD's largest recipient of funds, from 3.5% to 3% in 2023.

Earlier IMF experts expected the Turkish economy to grow by 3% in 2023. Many of them have now reduced this figure by at least a third.

According to the US media, economists at the World Bank pointed out that the recovery of the private and public sectors from major natural disasters and calamities is usually considered an investment. Thus, nominally, it will mean maintaining the country's GDP levels. However, the last WB report estimates a loss of $34.2b to the Turkish economy, which is equivalent to 4% of the Turkish GDP in 2021. However, this amount can increase due to the aftershock effects.

Disaster recovery and rehabilitation can cost Türkiye even more. "Recovery and reconstruction costs will be much higher, perhaps double. GDP losses due to economic disruption will also be added to the cost of earthquakes," the WB explained.

Multiplier effect

On the other hand, the affected region was not, in fact, home to leading Turkish businesses and tourist destinations, despite covering a large area with a population of almost 14 million people. According to the Turkish Statistical Institute (TUIK), the region (11 provinces) provides 9.8% of the Turkish GDP. The economy in the disaster area is a combination of both agriculture and animal husbandry, as well as industrial production, especially textiles, metallurgy and energy.

For example, Kahramanmarash alone produced 36% of the yarn produced in Türkiye. Gaziantep, which is an export hub for the Middle Eastern markets, accounts for 60% of global solid carpet production. One-third of the country's citrus fruits are produced in Adana, while Hatay is home to Türkiye's largest steel mill.

According to Turkish economist Erinc Yeldan, since the production facilities in Türkiye are concentrated in the west, industrial and agricultural losses in the affected areas will be limited.

Renowned Turkish economist Hayri Kozanoglu argues that by the end of 2022, the share of the 10 affected provinces in exports was 8.72%, equivalent to $19.76b.

"In terms of secondary effects, the reconstruction costs are expected to be covered mainly by the state budget, which will naturally increase the budget deficit. While the impact of tax losses in the 5 most affected provinces on the budget will be limited, an additional $15b-deficit is nevertheless expected," Kozanoglu said in his study. He said $5b of this is expected to come from foreign aid and loans from international financial institutions. By the way, according to the economist, the final amount of damage, taking all factors into account, could rise to $70b.

Meanwhile, almost all experts agree that the Turkish economy can face currency and inflation crises this year. In particular, economist Murat Kubilay believes that this year's inflation forecast of 20% can double due to investments into the reconstruction.

Analysts believe another vulnerability in Türkiye's economy will be a foreign trade deficit, which already reached $110.2b in 2022.

Incidentally, right after the earthquakes the Turkish government launched a series of measures to contain the negative effect on the economy. On February 8, for the first time in 24 years, the Turkish Stock Exchange suspended trading until the evening of February 14 in order to avoid a panic run on Turkish stocks.

Turkish Central Bank cut its key interest rate by 0.5 percent to 8.5 percent, saying lower borrowing costs would support efforts to deal with the natural disaster even as inflation rages. "Despite the expected short-term impact on economic activity, we do not expect the earthquakes have a sustainable economic impact in the medium term," CBT statement said.

Temporary difficulties

Devastating earthquakes in southern Türkiye have also had an impact on the global economy, in particular rising the prices of oil, cement and concrete.

Oil prices jumped after the closure of the Turkish port of Ceyhan. One of Türkiye's largest refineries is known to be located there. This port also exports Iraqi and Azerbaijani crude oil. S&P Global Commodities at Sea said crude oil exports from these countries via Ceyhan averaged around 1mbd in January.

According to the agency, global oil prices have stabilised a few days after the spike. "Due to Türkiye's important maritime position between the Mediterranean and Black seas, earthquake damage also affects the shipping sector. The Turkish port of Iskenderun on the Mediterranean coast was hit hard by earthquakes and subsequent container fires, leading to a halt in operations and affecting shipments for global logistics companies such as Maersk," S&P reports.

Maersk pointed out that it is not yet known how long the recovery works will take and when the port will be able to undergo a full damage inspection: "We are currently not accepting any new orders to and from Iskenderun."

Meanwhile, according to Gary Jones, BP president for Azerbaijan, Georgia and Türkiye, the operator of the Turkish section of the Baku-Tbilisi-Ceyhan pipeline and the Ceyhan terminal temporarily suspended oil-loading operations in tankers following the earthquakes. It took a week to make sure all loading operations were safe and to restart the process. "During this period, oil continued to flow into Ceyhan and accumulate in our tanks there," Jones said. Gradually, oil shipment from the terminal has been restored to normal.

Because of the situation, the supply of Kazakh oil to BTC has also been suspended. "On February 7, KazTransOil JSC received a notice of force majeure due to temporary suspension of loading operations at Ceyhan sea terminal. Therefore, oil export from Aktau port to Baku with further transportation via BTC was suspended", the company stated.

Experts also note that since Türkiye is now one of Azerbaijan's main trading partners, any and even more significant shocks in the Turkish economy cannot pass unnoticed for Azerbaijan too. At the same time, no particular change is expected for shipments of major commodity groups. Probably, the forecasts for mutual tourism flow will be adjusted accordingly, which is rather based on purely psychological aspects.

Either way, Türkiye is too important and close a partner of Azerbaijan, including in terms of economic relations. And any difficulties in this area will be resolved through mutual support. The main thing is to eliminate the humanitarian consequences of the disaster as quickly as possible and to ensure a normal life for the victims...