100-Day Report on rationalization program implemented by Turkey’s new finance administration

After long lasting “heterodox-orthodox” economic debates, the rationalization period that began with Mehmet Şimşek’s promise of “transparency, consistency, accountability, and predictability” on June 7 has now reached 100 days, with interest rates rising to 25%. Uncertainty persists at the Central Bank, and 2024 is expected to be a challenging year for both citizens and companies.

The economic management appointed after the severe damage caused by the policies applied in the pre-election period under the name of “Turkish Economic Model,” which aimed to suppress both the exchange rate and interest rates, left the first 100 days behind with effective transformation decisions. While a high-interest rate increase was implemented to combat inflation, the expansionary fiscal policy, along with a low exchange rate policy, was abandoned. Turkey’s risk rating rapidly improved, and there was a sharp increase in the stock market.

The Presidential Cabinet has completed its first 100 days in office. The economic management led by Deputy President Cevdet Yılmaz and Treasury and Finance Minister Mehmet Şimşek had a busy agenda during this period.

Turkey’s recent economic policies, which have been the subject of the “heterodox-orthodox economic policy” debate, where low interest rates and policies aimed at accelerating investments were predominant, and the budget deficit expanded, were sharply abandoned. One of the most memorable aspects of this period was the Central Bank’s management of banks’ practices with an extremely complex macro-prudential package supported monetary policy. The policy change, signaled by the Justice and Development Party before the elections, began to take effect with the appointment of Mehmet Şimşek, a well-known figure who supports orthodox economic policies, and Hafize Gaye Erkan, who also had a career in banking. Cevdet Yılmaz, with his political experience and development roots, also took his place as Deputy President.

Mehmet Şimşek’s first day in office on June 7 marked the beginning of “rationalization” in economic policies, with his promise of “transparency, consistency, accountability, and predictability” through his personal social media account. Hafize Gaye Erkan was appointed as the Central Bank Governor on June 9.

SHARP DROP IN CDS RATES

While there was some uncertainty about how President Recep Tayyip Erdoğan would react to the appointments and the initial messages of Orthodox policies by Mehmet Şimşek, as confidence in the policy change increased, positive reflections began to be seen rapidly. Turkey’s CDS score, which was hovering around 700 at the end of May, dropped below 500 in early June following the appointments. Support messages also came from international financial institutions.

Starting in June, Mehmet Şimşek’s series of foreign visits attracted attention. One of the most important ones was his visit to the United Arab Emirates and Qatar on June 22. In July, he visited Saudi Arabia. Messages given to the public during these visits, indicating significant financial and economic cooperation, were confirmed during the President’s Gulf tour in July, and the official announcement to the public resulted in the United Arab Emirates signing a long-term agreement with Turkey for a volume of over $50 billion.

CENTRAL BANK STARTED RAISING INTEREST RATES

From the early days of his tenure, Mehmet Şimşek focused on delivering messages to the outside world, including English-language social media messages. While both the Treasury and Finance Ministry and the Central Bank relied on verbal messages that a return to the classic model would occur in economic policies, they announced that a situation assessment would be made first and that the program and policies of the period in which disinflation and healthy growth would begin would be announced through the Medium-Term Program.

However, in June, annual inflation reached 38.21%, and the six-month inflation rate reached 19.77%. The significant increase in the cost of living, which was caused by the increase in the consumption basket of the masses and was much higher than headline inflation, prompted the government to make additional increases in the minimum wage as well as pensions and civil servant salaries in July.

The Central Bank increased interest rates from 8.5% in June to 15% in July, and finally to 25% in August. Starting from June 22, when the interest rate decision for June was made, discussions began about the need for “emergency intervention-strong intervention.” There were serious criticisms that the decision was not sufficient. Initially, clear responses were not provided to these criticisms, but in general, the messages from the economic management emphasized the effort to clearly perceive Turkey’s current outlook and the planned nature of the process. Finally, signs of fiscal deterioration in the public finances, including inflation, additional minimum wage increases, and budget imbalances, were given in July with an additional budget.

CBRT PRESIDENT: 2023 WILL BE A TRANSITION PERIOD

The first clear messages to the public about the current outlook and future steps came during the presentation of the July Inflation Report, a routine report by Central Bank Governor Hafize Gaye Erkan. Hafize Gaye Erkan criticized the macro-prudential package that included more than 100 regulations, and stated that all the steps taken until that date, including the June interest rate decision that was below expectations, were intended for testing and obtaining data. She announced that 2023 would be a transition period, where a situation assessment would be made, policies including interest rates would be planned, and their effects would be measured, and that policies aimed at disinflation and healthy growth would start from the second quarter of 2024. In this meeting, the year-end inflation forecast for 2023 was raised to 58%, while it was set at 33% for 2024. In August, the Consumer Price Index (CPI), which increased by 9.09%, reached an annual rate of 58.94%.

BUDGET DEFICIT IS INCREASING, KKM IS DISCUSSED

The discussion about the Currency Protection Mechanism (KKM) continues in the real sector and the financial sector. Turkey had initiated the KKM (Kur Korumalı Mevduat / Currency Protected Deposits) under extraordinary conditions. After controlling the exchange rate and an extraordinary dollarization, exit strategies are being sought for the regulation that imposes a significant additional burden on the public. The current solution for now seems to be raising deposit interest rates to encourage the return of funds to deposit accounts, but the outcome remains uncertain.

The deterioration in general economic indicators was even more pronounced in the Medium-Term Program (OVP). The year-end budget deficit target, which was set at 659.4 billion TL in the supplementary budget, was increased to 1.633 trillion TL in the OVP, and expenditures were reduced to 6.6 trillion TL. The inflation forecast was set at 65%. For 2024, the Central Bank’s forecast remained unchanged at 33%. The view that 2023 will be a transition year and 2024 will be the main year for disinflation was confirmed. In the 100th day of the economic management, messages for 2024 are predominant. Minister Şimşek indicates that monetary tightening will continue in 2024 and outlines a broad framework, including credit card interest rates, to suppress consumption, sending messages of a challenging period for both citizens and the corporate sector.

For the 4 percent growth determined for 2024, in addition to the outsourcing and public spending policy that will be achieved in the recent period, the main issues that banks’ loans will direct to investments and export financing were the main topics that were processed.

REFERENCE: This article was written by Mehmet KAYA in Turkish and published on ekonomim.com web page on Sept 13, 2023. ekonomim.com is one of the prominent and most reliable sources of information regarding economy and politics in Turkey.

The article was translated into English language by BTT – with thanks to the author and source.