ANKARA, Turkey — Despite official optimism, the economic outlook for Turkey after the coronavirus pandemic subsides is grim, with top procurement programs experiencing major major delays, economy and procurement officials told Defense News on condition of anonymity.
“The pandemic caught Turkey off guard … when the economy was already sending distress signals,” said one senior economy official. “The post-pandemic fiscal constraints will scrap or delay public spending, including on defense programs.”
A procurement official said that even before the spread of COVID-19, there were challenges in financing defense programs.
“The treasury was unable to allocate funds as early as in 2019," the official said. "The post-[coronavirus] economic downturn will bring new curbs on defense spending, except equipment we regularly procure for combat zones.
“The government will have to reprioritize investment projects and possibly put off most of them.”
The official added that the acquisition of smart and conventional ammunition, armed and unarmed drones, and armored vehicles will remain unaffected. Turkey needs those items for its military campaign against Kurdish militants in northern Iraq and Syria. Turkey also sends drones and other military equipment to the Government of National Accord based in Tripoli, one of the warring sides in the Libyan civil war.
Before the pandemic, the official unemployment rate in Turkey was 12.8 percent. Economists warn that number may double as thousands of small and medium-sized businesses face closure.
In August 2018, the price of Turkey’s credit default swaps, or CDS — an insurance scheme against debt default — rose to an all-time high since 2009. In May 2019, the price of Turkey’s CDS again rose sharply as investors started to price in a default. On Jan. 10, 2020, Turkey’s CDS price measured at 269 basis points, safer than 566 points in 2018 but much worse than 142 points in 2010.
One fundamental problem for Ankara is big foreign exchange liabilities in an economy not quite prepared for a sharp slowdown. After an increase of 20 percent within a year, these gross liabilities have reached $300 billion. That puts Turkey’s net foreign liabilities at $175 billion (after foreign assets of $125 billion are deducted from total liabilities). Mismanagement and a palliative desire to keep the national currency afloat has caused the Central Bank to burn through $65 billion in reserves since January 2019.
Japan’s MUFG Bank forecasts depreciation of the Turkish lira that will make any foreign currency-based acquisition expensive and often unaffordable for the Ankara government. Foreign currency earnings are also expected to be hit hard this year. In 2019 Turkey earned $34.5 billion from tourism. This year, it may stand at a mere $15 billion, a third of the official target of $45 billion.
But in public, Turkish officials sound optimistic about a viable post-pandemic defense industry.
“Our companies keep their production cycles," said Ismail Demir, Turkey’s top defense procurement official. "They continue to receive orders.”
According to Murat Ikinci, general manager of STM, a government-controlled defense technologies business, the company maintains deliveries of naval platforms and drone systems as planned before the pandemic. “We also keep offering cybersecurity solutions to the government sector,” Ikinci said.
Temel Kotil, CEO of Turkish Aerospace Industries, said his company’s work on a fifth-generation, indigenous fighter jet continues without interruption. TAI is struggling to design, develop and produce a new-generation fighter aircraft. Even before the COVID-19 outbreak, TAI had planned for a maiden flight of the aircraft in 2025 or 2026, despite originally aiming for 2023.
“If ever materialized, that aircraft would likely not be in the air before the end of the decade,” said a senior aerospace industry official. “The program is simply not progressing due to numerous [technological] question marks. Fresh fiscal constraints will further delay that program.”
Another potential victim is a multibillion-dollar, indigenous program for the serial production of the Altay, a new-generation tank. BMC, a Turkish-Qatari investment, is to produce the Altay, but it is yet to secure the cash flow from the government needed to start serial production, industry sources say.
“What would cost the Turkish government three liras in September 2016 will cost 7-7.5 liras at the end of this year. This [difference] is not easy to finance,” the senior economy official said.