BEC 2340: Macroeconomics

“COPING STRATEGIES FOR THE

ECONOMIC CRISIS DRIVEN BY COVID-19
PANDEMIC”

Group No: 99
Department: Information Technology
Country: Turkey
Sector: Monetary

This report was submitted to the Department of Business Economics,

Faculty of Management Studies and Commerce, University of Sri
Jayewardenepura, as a partial fulfilment of the requirement of BEC 2340:
Macroeconomic course.

Department of Business Economics

Faculty of Management Studies and Commerce
University of Sri Jayewardenepura

Date of Submission: 17.07.2022

 Declaration

We certify that this report does not incorporate without acknowledgement, any material
previously submitted for a course or a degree in any university/institution, and to the best of
our knowledge and belief it does not contain any material previously published or written by
another person, except where reference is made in the text.

Group Members

S. No. Name CPM MC

1. G.A Gayan Akila 20870 98711

2. T. Gangulel Samaraweera 20816 98744

3. Herath Mudiyanselage Hasitha Wimantha

20818 98734
Bandara
4. A. Thanusmithan 20867 98716

5. W.K.G Dineth Nadeera Weerasinghe 20904 98710

6. Nowfeer Mohamed Aslam 20915 98704

7. Karunaawantha Mudhiyanselage
20975 98767
Maneesha Aadhithya Sooriyabandara
8. W.M.S. Indunil Wijekoon 20993 98701

9. H.L.G Kaveen Shethmina 20999 98739

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 Acknowledgement

I would like to express my deepest appreciation to all those who provided me with the
possibility to complete this report. Special gratitude toward all the teammates whose
contribution in stimulating suggestions and encouragement, helped us to coordinate our
project especially in writing this report.

Furthermore, I would also like to acknowledge with much appreciation the crucial role of the
staff of the Department of Economics, who permitted to use of all required equipment and the
necessary materials to complete this assignment. I must appreciate the guidance given by
other supervisors as well as the panels, especially in our project presentation which has
improved our presentation skills thanks to their comments and advice.

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 Table of Content

Declaration.............................................................................................................................................i
Group Members.....................................................................................................................................i
Acknowledgement.................................................................................................................................ii
Chapter 1 Introduction..........................................................................................................................1
Chapter 2 Impact of the Pandemic........................................................................................................4
Chapter 3 Effectiveness of strategies followed in mitigating the crisis..................................................6
Chapter 4 Comparison with strategies followed by Sri Lanka................................................................8
Chapter 5 Conclusions and recommendations....................................................................................10
References...........................................................................................................................................12
Link for Video Presentation.................................................................................................................13
Contribution Sheet..............................................................................................................................14

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 Chapter 1
Introduction

1.1. Introduction to the country

Turkey is a nation that holds a distinctive geographic position, straddling both Asia and
Europe. It has served as both a barrier and a bridge connecting the two continents
throughout its history. Turkey is located at the intersection of the Caucasus, the Middle
East, the Balkans, and the eastern Mediterranean. In terms of people and territory, it is
one of the bigger nations in the area, and its land area is larger than any nation in Europe.
Most of the nation is in Asia; it is made up of the rectangular Asia Minor peninsula, also
known as Anatolia (Anadolu), and, in the east, a portion of the hilly area commonly
referred to as the Armenian Highlands. Turkish Thrace (Trakya), the last portion of an
empire that had included much of the Balkans, is in the far southeast of Europe. The
country covers roughly 1,000 miles from west to east and between 300 and 400 miles
(480 and 640 km) north to south. Turkey’s borders are as follows: the Black Sea to the
north, Georgia and Armenia to the northeast, Azerbaijan and Iran to the east, Iraq, and
Syria to the southeast, the Mediterranean Sea and the Aegean Sea to the southwest and
west, and Greece and Bulgaria to the northwest. Istanbul is its largest city and seaport,
and Ankara serves as the nation's capital.

1.2. Introduction to the sector

Commercial banks make up the majority of Turkey's Monetary sector, accounting for
91% of all assets as of the end of 2020. Five percent of the assets in the financial sector
are held by asset management companies, while other institutions including leasing,
factoring, insurance, and financing corporations are often modest and have minor impact
on the country's financial intermediation.

Over the past ten years, Turkey's banking industry has grown quickly and taken up a
sizable portion of the economy. By the end of 2020, the ratio of assets in the banking
industry to GDP will have climbed from 80% in 2010. One of the largest percentages of
GDP in the BSTDB Region, outstanding loans provided by banking institutions in
Turkey amount to 71% of GDP. Since state-owned banks own more than 40% of the
total assets in the banking sector, Turkey's banking industry is characterized by
significant state involvement. The level of state involvement has climbed recently from
below 30% in 2016 when the sector's growth over the previous four years was mostly
fueled by the expansion of the balance sheets of state-owned banks. Three of Turkey's
top four banks are state-owned at the moment. Turkey's banking industry has adequate
capital. The CAR ratio has risen over the past ten years and is expected to reach 19% by
the end of 2020, showing that banks have capital buffers that are significantly higher
than the mandated minimum of 8%.

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1.3. Pre-Covid Situation
 Financial Sector

Before COVID 19, consumer loans accelerated, while term TL corporate loans
experienced a mild recovery, and loan growth initiated by state banks spread
throughout the sector. The improvement in banks' liquidity conditions and strong
capital structure, the decrease in risk perception and uncertainties, the
improvement in expectations, the fall in loan rates, and the recovery in economic
activity all played a role in the apparent pickup in TL loans. Moreover, the link
established between loan growth and reserve requirement implementation has
encouraged sector-wide TL loan growth.

The decrease in the external debt rollover ratio continued due to favorable FX
liquidity indicators and the declining need for financing in the banking sector. The
decrease in the external debt balance is a positive development in terms of banks'
short-term debt repayment capacities, as well.

 Credit Developments and Credit Risk

Credit growth rates increased in the current Report period after declining since
mid-2018 because of the macroeconomic outlook, base effects, and tight
financial conditions. Before September 2019, public banks' proactive behavior
and pricing in the credit market more than made up for the cautious stance of
private banks on credit stock. In fact, as of mid-August 2019, public banks'
annual TL credit expansion had reached 14.3 %, while private banks' credit stock
had decreased by 5.1 %. Therefore, public banks contributed to the easing of the
economic rebalancing as well as the decline in the credit market.

Even before COVID-19, selective loan policies that aided the real sector in
gaining access to funding at more advantageous terms also strengthened the
dynamics of corporate loans.

 Liquidity Risk

The banking industry's short-term liquidity situation is still strong. The minimum
legal thresholds of 100% for total assets and 80% for foreign exchange (FX)
assets, respectively, are far exceeded by the liquidity coverage ratios (LCRs),
which measure the capacity of high-quality liquid assets on banks' balance sheets
to offset net cash outflows over 30 days. The sector's LCRs, which were
calculated for both total and FX assets, were slightly higher due to the rise in FX
liquid assets since early 2019 and were at 165 per cent and 293 per cent,
respectively, as of November 2019. The rises in banks' unencumbered GDDS

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 accounts and FX reserve requirement items were the primary causes of this
increase in LCRs.

 Interest Rate and Exchange Rate Risk

On and off the balance sheet interest-rate-sensitive FX open positions for the
banking sector increased by 2% to TRY 273 billion from 2018 levels, while TL
excess positions increased by 1% to TRY 650 billion. The decline in the loans and
derivatives position caused the interest-rate-sensitive FX open position to
increase, whereas the slight increase in the TL excess position was caused by loan
developments.

Based on the economic value approach, the probable loss to capital ratio was
calculated by subjecting the sector's interest-rate-sensitive TL and FX positions to
a positive interest rate shock. As a result, exposure to a positive interest rate shock
of up to five percentage points on interest rate-sensitive TL positions results in a
probable loss of capital of about 12 per cent. On the other hand, exposure to a
positive interest rate shock of up to two percentage points on interest rate-sensitive
FX positions results in a likely capital loss of 3%. The probable loss to capital
ratio caused by the positive interest rate shock showed a significant decrease for
the TL position but a slight increase for the FX position when compared to 2018.

Chapter 2
Impact of the Pandemic

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Covid-19 has had a significant impact on daily life and routine from the lower-lower class to
the upper-upper class and from the daily wage workers to the businesses. It affects the supply
chain of all the businesses and every sector. The pandemic has changed the norms of society
and businesses as well. Many workplaces have made significant changes in their operations
and the work ethics of the businesses have also changed. Because of the pandemic,
companies and organizations rapidly adapt and change their businesses. Many businesses
enforced work-from-home to sustain in the market and to continue doing business operations
effectively. But some operations requirements are different and need to be done in the field.

On March 11, 2020, the first case was reported in Turkey. The Turkish Government had
adopted several SOP measures to address the situation like social distancing, Lockdown,
Airport closed, and returning nationals from various parts of the world being quarantined.
Covid-19 crisis was increasing day by day and there was a forecast that household income
and growth would drag down. The global pandemic would impact Turkish trade, exports and
tourism, inflation, currency stability, current account deficit and investment are expected to
fall 

Therefore, considering all the facts above, the impact of Covid-19 on the monetary policy and
the banking sector in Turkey can be identified from four main perspectives.

1. Operational impact

Banks, like all other institutions, should develop emergency/crisis management action
plans, implement them, and ensure that employees continue to work safely, and that
the technical infrastructure supports this. They should communicate with all internal
and external shareholders regularly. All actions should be coordinated by a crisis
management team led by the CEO and comprised of expert managers from various
functions. The funding need of the system increased throughout the year by
approximately TL 18.6 billion to TL 111.7 billion as of 4 December 2020 from TL
93.1 billion in 2019.
 
2. Credit risk, loss of income and liquidity

Banks are having difficulty collecting loans as a result of declining trust as the crisis
becomes worse. Income is also expected to fall as a result of lower transaction
volumes. All of this will have a negative impact on liquidity, the number of risky
assets, profitability, and capital adequacy. Under these conditions, banks should
conduct scenario analyses under various assumptions to manage potential financial
consequences that may arise in the future.
 

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3. Customer Behavior Changes

COVID-19 will significantly change customer needs, consumption, and behavior.

With decreasing spending, alternative distribution channels are expected to be used
more actively. Banks should categorize their customers based on various criteria,
change their fields of service in response to changing customer behavior, and offer
special benefits to their customers.
 
4. Funding structure and cost

The impact of the crisis on Turkey and foreign economies, individual/corporate

customers, and financial institutions' risk perceptions, as well as their investment
preferences, will change funding structures and costs. Banks should take certain steps
to better manage their balances at this time.

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 Chapter 3
Effectiveness of strategies followed in mitigating the crisis

The government announced a phased approach to lifting lockdown measures on May 4, 2020.
Retail stores were reopened, travel restrictions between major cities were lifted, retail
facilities were reopened, and domestic flights resumed. International flights resumed on June
10, and most land borders reopened. Schools reopened in late August, mostly virtually.
Following the onset of the second wave of infections, containment measures were enforced in
September and tightened further in late 2020. These included mandatory mask wear in public
places, stay-at-home orders, curfews, retail closures or limited hours, closing pre-schools, and
restricting gatherings. A gradual reopening process began in early March 2021, categorizing
regions into four risk groups. This risk analysis was used to determine when weekend
curfews are lifted, cafes and restaurants reopen (with capacity and operating hours
restrictions), and in-person school classes resume. Following the third wave of infections,
restrictions were tightened once more in late March, and a full "lockdown" was declared in
late-April 2021, lasting into May. The government announced a phased normalization
process that would begin in mid-May and last until June 2021. In May 2021, Turkey's Health
Minister announced that the country had signed multiple vaccine supply agreements totaling
more than enough to cover the entire population. Against the backdrop of increased supply
agreements, authorities have continued to implement their national vaccination plan,
including workers in the tourism sector, teachers, and additional cohorts of the adult
population.

As for the monetary sector in Turkey, the government has implemented various monetary
actions to mitigate the impact of COVID-19. Below are some examples.

To mitigate the impact of the virus, Turkey has implemented several monetary and
fiscal policy stimulus packages.

 From 25 to 50 million TL have been added to the credit guarantee fund (KGF).
 Affected businesses have been given an additional three months to repay the principal
and interest on their bank loans.
 Exporter businesses can quickly obtain financing assistance to address slowing
exports.
 The base pension amount was raised to 1500 TL.
 Easy availability of financial assistance for a household's needs.

The Turkish Central bank has decreased the reference interest rate by 300 bps.

The policy rate was decreased by 300bps in response to the coronavirus shock; these
reductions were later undone, and the current policy rate is 19%. Furthermore, the CBRT

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significantly increased its liquidity facilities for banks on March 31 and launched a program
of outright purchases of sovereign bonds.

 The one-week repo rate has been discounted from 10.75% to 9.75% 
 The central bank ensures that it will reach all liquidity requirements for banks
 Required reserve ratios have been reduced by 5% for foreign-dominated reserves.

Other macro-financial measures include

 Debt collection and bankruptcy proceedings were temporarily halted (aside from
alimony cases)
 limitations on bank and company dividend payments in 2020
 To support trade finance, a new Turkish Lira lending facility for SMEs in the export
sector was established.

Furthermore, forbearance measures for banks implemented during the coronavirus pandemic
have been announced to be withdrawn once the pandemic has subsided, according to the
chairperson of the BRSA. And, to reduce the accounting impact of the depreciation of the
Turkish Lira and the decline in securities prices, the bank regulator announced several
forbearance measures. A new regulatory ratio was put in place by the regulator to encourage
banks to support the real economy; it was removed at the end of 2020. The maximum term
for retail auto loans and credit card instalment plans for certain types of purchases was
tightened by the bank regulator in December.

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 Chapter 4
Comparison with strategies followed by Sri Lanka

Overview of the Sri Lankan Monitory Sector

The Central Bank of Sri Lanka (CBSL) is responsible for monetary policy in Sri Lanka,
which primarily entails setting policy interest rates and managing the economy's liquidity.
The Central Bank's monetary operations influence interest rates in the economy, influencing
the behavior of borrowers and lenders, economic activity, and, ultimately, the rate of
inflation. As a result, the Central Bank employs monetary policy to control inflation and keep
it on track.

As for the COVID- 19 situation in Sri Lanka The COVID-19 pandemic had a significant
impact on Sri Lanka. When the first domestic cases of COVID-19 were reported in March
2020, the government stepped up containment efforts immediately. Tourist arrivals have been
halted, and an island-wide curfew has been imposed from mid-March to June 2020.

Comparison Of Measures
The Central Bank of Sri Lanka (CBSL) has lowered interest rates by two hundred basis
points (bps) since March 2020, just like the Turkish government. Again, just like the Turkish
government, the interest rate on CBSL advances to banks has been lowered by 650 bps, the
liquidity coverage and net stable funding ratios have been lowered to 90%, and the statutory
reserve ratio of commercial banks has been reduced by 300 bps. But unlike Turkey, the Sri
Lankan government imposed red tape measures, such as the end-2020 ban on dividend
declarations, share buybacks, and increased director compensation.

A debt repayment moratorium on bank loans for COVID-19-affected sectors was

implemented in March 2020 and extended through September 2021 in both Sri Lanka and
Turkey, just as mentioned above. Additionally, small-value personal banking and leasing
loans were prohibited for three months.

The CBSL recently introduced priority sector lending targets for bank credit to MSMEs and
offers refinancing and concessional lending facilities of 1% of GDP, partially guaranteed.
Additionally, banks are willing to lend money to the construction industry in exchange for
government guarantees.

There will be a cap on the interest rates charged on credit cards, overdrafts, and pawn
facilities. Along with being asked to reschedule non-performing loans, financial institutions
are also being asked to relax loan classification guidelines and capital conservation buffer
requirements.

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Effectiveness of strategies

Though we can see similarities in the strategies followed by both Turkey and Sri Lanka, there
are major differences in the effectiveness of those said strategies. There were major monetary
flaws in Sri Lanka even before the COVID-19 pandemic. This caused the strategies
implemented during Covid to not be as effective as they were in Turkey. Several of those
reasons can be mentioned below.

 It has been nearly two years since money printing and the ensuing foreign reserve
losses began in August 2019, and no corrective action has been taken.
 This is the longest period of inappropriate central bank policy that this columnist has
observed without any corrective action.
 Usually, corrective actions are taken when there is a BOP deficit due to money
printing in one year, and the deficit decreases in the following year.
 In 2020, after a portion of the printed money was consumed by an internal drain
involving an increase in the public's cash holdings, enough money was printed to
cause a 2.3 billion US dollar balance of payments deficit.
 As reported elsewhere, Sri Lanka printed 650 billion rupees in 2020, reduced reserve
ratios twice, and transferred twenty-two billion rupees of central bank profit.
 Out of these, a rise in real money demand (raising the amount of money in circulation
from 678 billion to 834.8 billion rupees) absorbed 156.8 billion rupees, which is
something about which no one can complain.
 However, the BOP deficit of 2.3 billion dollars caused the credit system to lose
money. By the end of 2020, there were 206.8 billion rupees remaining as
"remunerated excess reserves," or overnight excess liquidity, where 4.5 per cent
interest is paid.
 Sri Lanka appears to exclude renumerated overnight excess reserves from reserve
money calculations, which is unfortunate for several reasons.
 By August, the BOP deficit will be approaching the deficit for the entire 2020 year.
 If no action is taken soon to raise rates so that money printing is stopped, increase the
value-added tax, and cut spending to lower the necessary corrective interest rate,
monetary instability will rapidly worsen after exactly two years of inaction in August.
 If a debt restructuring can be accomplished with the support of the International
Monetary Fund to lower the gross re-financing needs (GFN), Sri Lanka can avoid a
greater economic collapse, failure of businesses, and failure of banks than it would
otherwise.

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 Chapter 5
Conclusions and recommendations

In considering all the facts, points strategies and effects discussed above. Our team has
produced five primary areas that need to be improved and restructured to improve this
dreaded situation in Sri Lanka.

To ensure operational and financial stability

 The activation of teams and plans for business continuity or crises.

 Ensuring operational resilience on an internal level, evaluating the readiness of

partners, channels, and customers, and managing the operational and security
burden on alternative distribution channels

 Ensure long-term funding stability

 Crisis communication with all parties involved, including their employees

Perform credit portfolio scenario analysis.

 An immediate analysis of loan portfolios using models

 Put more emphasis on exposing particularly affected industries, regions, and
products (e.g., project financing activities and covenant breaches)
 implementation of stress tests and scenario analyses
 Finding critically valuable loans

Adapting market strategies

 Examine potential effects on various businesses (e.g., payments volume decrease)

 Find potential solutions (business, as usual, origination stop, balanced approach)
 Analysis of options by market sector and clientele (client profitability, acceptable
level of covenant breaches)
 Speed up the implementation of digital sales and service capabilities in
anticipation of social alienation and decreased branch traffic.
 

Develop portfolio strategies

 Identifying critical loans and/or groups of loans that need to be addressed

 Development of potential risk-reduction strategies (such as exit, sale,
restructuring, maturity or limit extension).
 Evaluation of alternatives and development of policies to deal with potential
future scenarios
 Put portfolio strategy into action.

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Cost and liquidity management

 Estimation of potential balance sheet and P&L impact of the current situation
based on the scenario and other analyses.
 Finding ways to reduce costs (such as by optimizing expenses and channels) and
control cash flow to maintain a profitable business
 If a debt restructuring can be done with International Monetary Fund backing, to
reduce the gross re-financing needs (GFN), Sri Lanka can get away with less of an
economic implosion, business failures, and bank failures than otherwise.

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 References

Central Bank of Sri Lanka. 2020. The Financial System Stability Review. [online] Available
at: <www.cbsl.gov.lk> [Accessed 30 June 2022].

imf.org. 2021. Responses to COVID-19. [online] Available at: <Policy Responses to

COVID19 (imf.org)> [Accessed 30 June 2022].

Kearney.com. 2020. COVID-19 and the effects in Turkey. [online] Available at: <COVID-19 and Effects
on Turkey (kearney.com)> [Accessed 30 June 2022].

PWC. 2020. Implications of the COVID-19 crisis for the Turkish banking sector. [online]
Available at: <https://www.pwc.com.tr/covid-19-banking-sector> [Accessed 28 June 2022].

Tcmb.gov.tr. 2022. Financial Stability Report. [online] Available at: <Financial

(tcmb.gov.tr)> [Accessed 30 June 2022].

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 Link for Video Presentation

https://drive.google.com/file/d/188XGqeGwV256DHaPU Wv-eBZAIgWYoGhi/view?usp=sharing

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 Contribution Sheet

Group Number 99

Department Department of Information Technology

Ref. Name CPM contribution to the group % of

No. assignment contribution
to the
report
1 Report writing, 100%
G.A Gayan Akila 20870
presentation video editing
2 Report writing, 100%
T. Gangulel Samaraweera 20816
Presentation script writing
3 H.M Hasitha Wimantha Bandara 20818 Presenting video 100%
4 A. Thanusmithan 20867 Presenting video 100%
5 W.K.G Dineth Nadeera Weerasinghe 20904 Presenting video 100%
6 Nowfeer Mohamed Aslam 20915 dropout from university 0%
7 K.M Maneesha Aadhithya Presenting video, report 100%
20975
Sooriyabandara writing
8 W.M.S. Indunil Wijekoon 20993 Presenting video 100%
9 Presenting video 100%
H.L.G Kaveen Shethmina 20999

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