Turkey’s Economic Turnaround

(Bloomberg Opinion) -- Over a fateful couple of weeks in August 2018, barely a month after the inauguration of Turkey’s first cabinet under its new executive presidential system, Turkish financial markets faced an extraordinary currency devaluation. The timing only strengthened our determination to transform Turkey’s economy.

Soon after the markets calmed, we unveiled a comprehensive three-year program of economic rebalancing, fiscal discipline and structural transformation to restore stability and return to sustainable growth. During the initial rebalancing phase, much of our focus was on addressing major vulnerabilities from the past and strengthening confidence.

Looking back now, informed observers can marvel at the Turkish economy’s resilience. Our policy actions were critical, but so was our economy’s deep integration into the global value chain.

Our near-perfect soft landing and the playbook we followed to make it happen may be the subject of doctoral dissertations for years to come. Inflation is down by more than 10 percent (from 25.2 percent in October 2018 to 15 percent in August 2019), and single-digit inflation is within our grasp. Contributing to this success were well-coordinated actions by monetary and fiscal authorities, including those aimed at containing food-price inflation and the side effects of exchange-rate fluctuations; voluntary price-cutting by the private sector; and adjustments to public-sector prices and wages. Even now, rest assured, we understand that there is no room for complacency: Our fight will continue until inflation drops permanently to low single digits.

The extent of Turkey’s adjustment in balance of trade has been remarkable. After entering last summer with a current account deficit of $57.1 billion, the country posted a surplus of $4.4 billion as of July 2019. This is the highest year-on-year change ever for Turkey, and it’s thanks to both our exporters’ tremendous entrepreneurial drive and a strong tourism season, supported by the modern transportation, energy and communications infrastructure we’ve built over the years.

To maintain momentum, we have initiated a loan program to support investments aimed at reducing imports of intermediate goods and increasing exports. In addition, our sovereign wealth fund and other state institutions are meeting with strategic partners in select industries to attract stable foreign direct investment. The Ministry of Industry and Technology has announced an initiative to advance the domestic production of key industrial components. The Ministry of Trade has announced a plan to promote priority industries and develop new export markets. The Ministry of Culture and Tourism will soon unveil a plan to double tourism revenues over the next four years. And our sovereign wealth fund will work to make Turkey the logistics hub connecting Europe and Asia.

Economic growth is expected to pick up. The central bank’s firm efforts to control inflation led to a recession and rising unemployment in the second half of 2018. But by the first quarter of 2019, thanks to targeted reductions in value-added taxes, prudent loan programs from state-owned banks, and rising consumer sentiment, the economy exited recession. We expect it to grow at a moderate rate of 0.5 percent for the full year. In 2020, we expect 5 percent growth led by delayed household consumption and real investment. Given the considerable slack accumulated over the past two years, this pace should not compromise price stability or put unhealthy pressure on the current account.

Sluggish economic activity and import compression during the past year naturally created budgetary challenges. Tax revenues were down significantly, and fiscal programs supporting economic recovery increased primary spending. Rather than raise taxes or widen the deficit by issuing more debt, we funded the gap with new non-tax revenues. Going forward, we will keep our budget deficit below 3 percent of gross domestic product, consistent with the Maastricht criterion.

To this end, we have invested in new capabilities to track and improve the efficiency of government expenditures, investments and incentive programs. In addition, we are about to significantly transform our tax code to broaden the base, enhance revenue efficiency and reduce income inequality. We will do away with distortionary taxes, reduce corporate taxes to spur investment and create jobs. And we will continue our long tradition of fiscal discipline.

Our financial system is sound. After conducting a rigorous review of bank asset quality, we have instructed banks to reclassify $8 billion of loans as non-performing before the year’s end. With the incentives in the new law on out-of-court financial restructurings, this will address concerns about the transparency of bank balance sheets. The system’s resulting capital adequacy ratio will be 17.7% — still well above global benchmarks.

Our ambitious economic agenda is putting us on a path of sustainable growth, and we welcome everyone who wants to invest in Turkey.

To contact the editor responsible for this story: David Shipley at davidshipley@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Berat Albayrak has been Turkey’s treasury and finance minister since July 2018. He was formerly the country’s energy minister.

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