Turkey’s new finance team faces a big challenge to fix the economy

Leading Turkey on a sustainable economic path will require a sharp rise in borrowing costs and a further lira depreciation, with the country’s foreign exchange war chest “dangerously” depleted by unorthodox policies and by May’s election. At least $23bn will be used to prop up the lira first.

Since Recep Tayyip Erdoğan’s re-election last month, the newly appointed finance minister Mehmet Simcek and newly appointed central bank governor Hafez Gay Erkan face mounting challenges to the financial leadership as they face mounting challenges Want to get bn’s economy off the brink.

Business officials and analysts expect Turkey’s key interest rate to rise to 17 percent from 8.5 percent when the Monetary Policy Committee meets for the first time next week with Erkan. This is according to a central bank survey published on Friday.

They also expect the lira to decline by a further 17 percent over the next 12 months, after already falling by 64 percent this time in 2021 as the government eases its efforts to slow its decline.

“Recent economic policies have created significant asymmetries, so this will not be easy to achieve,” said a senior analyst at the Turkish branch of an international financial group. “Even if they want to return to conservative policies, those moves could cause side effects.”

Erdogan’s flagship economic program focuses on keeping borrowing costs low and defending the lira despite rampant inflation, which has created severe imbalances and driven foreign capital flight.

The use of unconventional means accelerated ahead of the election as Erdogan deployed government resources to boost the economy, including giving away free gas and raising the minimum wage. Some $23bn was also spent in support of the lira between the beginning of 2023 and the second round of elections in May, according to calculations by economist Haluk Burumceki, which helped offset the currency’s decline in recent years. excludes interferences.

Erich Arispe, primary analyst responsible for Turkey’s government’s credit rating at Fitch Ratings, said: “The build-up of distortions and the increase in vulnerabilities as a result of the election stimulus may call for at least a tactical shift in terms of economic policy direction.” “

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Erdogan said this week that while he had not changed his mind on the unorthodox approach that high interest rates were causing inflation rather than correcting it, he would encourage Erkan and Simsek to take steps to bring inflation down to single digits at around 40 percent from current levels. Will be allowed to pick up. ,

Simsek, a former deputy prime minister well regarded by foreign investors who has vowed to restore “rational” policies in Turkey, has yet to reveal specific policy details. But analysts say the lira’s 16 per cent fall against the dollar since the May 28 vote to a new record low is a sign that Turkey has begun to intervene less aggressively in the currency market. Is done.

He has said that his priorities include reducing the country’s growing current account deficit, caused in large part because goods imports far exceed exports. The deficit was $29.7 billion in the year ended April, the highest level on record.

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An overvalued lira and an overheating domestic economy are partly to blame. Buying of gold from abroad by locals on fear of further fall in the currency narrowed the widening trade gap.

The current account deficit is financed in large part through the foreign exchange reserves of the central bank. Reserves were also spent to defend the lira, which was “not sustainable”, said Clemens Graff, an economist at Goldman Sachs.

According to central bank data, Turkey’s official reserve assets are $99.8 billion, including $50.3 billion in foreign currency and $42 billion in gold. But it does not include the amount that is given by the central bank to local and foreigners.

Net foreign assets, a proxy for foreign exchange reserves closely watched by investors, were minus $15.9bn, a figure even lower if not for the billions of dollars borrowed from the local banking system and foreign central banks. Will happen. The equipment is known as “Swap”.

Central bank data showed Turkey’s net foreign assets are in worse shape than since the 2000-01 Turkish banking crisis, during which the lira collapsed and interest rates soared. “Current levels are dangerously low and require efforts to rebuild foreign exchange reserves,” said Christian Wietowska, strategist at Deutsche Bank.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

Economists expect a series of actions will be needed to get the economy back on track. “There will be a great need to stabilize the economy,” Graefe said, “and we think close, exchange rate adjustments,” to reduce the current account deficit “a significant tightening of policy to slow domestic demand.” was also necessary.

“We can talk about personalities, track records, signals and speculate about what (the new team) might do. But what is really important is the timing and sequence of policy measures . . . because a lot of this adjustment There are moving parts,” said Fitch’s Arispe.

Leading Turkey on a sustainable economic path will require a sharp rise in borrowing costs and a further lira depreciation, with the country’s foreign exchange war chest “dangerously” depleted by unorthodox policies and by May’s election. At least $23bn will be used to prop up the lira first.

Since Recep Tayyip Erdoğan’s re-election last month, the newly appointed finance minister Mehmet Simcek and newly appointed central bank governor Hafez Gay Erkan face mounting challenges to the financial leadership as they face mounting challenges Want to get bn’s economy off the brink.

Business officials and analysts expect Turkey’s key interest rate to rise to 17 percent from 8.5 percent when the Monetary Policy Committee meets for the first time next week with Erkan. This is according to a central bank survey published on Friday.

They also expect the lira to decline by a further 17 percent over the next 12 months, after already falling by 64 percent this time in 2021 as the government eases its efforts to slow its decline.

“Recent economic policies have created significant asymmetries, so this will not be easy to achieve,” said a senior analyst at the Turkish branch of an international financial group. “Even if they want to return to conservative policies, those moves could cause side effects.”

Erdogan’s flagship economic program focuses on keeping borrowing costs low and defending the lira despite rampant inflation, which has created severe imbalances and driven foreign capital flight.

The use of unconventional means accelerated ahead of the election as Erdogan deployed government resources to boost the economy, including giving away free gas and raising the minimum wage. Some $23bn was also spent in support of the lira between the beginning of 2023 and the second round of elections in May, according to calculations by economist Haluk Burumceki, which helped offset the currency’s decline in recent years. excludes interferences.

Erich Arispe, primary analyst responsible for Turkey’s government’s credit rating at Fitch Ratings, said: “The build-up of distortions and the increase in vulnerabilities as a result of the election stimulus may call for at least a tactical shift in terms of economic policy direction.” “

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

Erdogan said this week that while he had not changed his mind on the unorthodox approach that high interest rates were causing inflation rather than correcting it, he would encourage Erkan and Simsek to take steps to bring inflation down to single digits at around 40 percent from current levels. Will be allowed to pick up. ,

Simsek, a former deputy prime minister well regarded by foreign investors who has vowed to restore “rational” policies in Turkey, has yet to reveal specific policy details. But analysts say the lira’s 16 per cent fall against the dollar since the May 28 vote to a new record low is a sign that Turkey has begun to intervene less aggressively in the currency market. Is done.

He has said that his priorities include reducing the country’s growing current account deficit, caused in large part because goods imports far exceed exports. The deficit was $29.7 billion in the year ended April, the highest level on record.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

An overvalued lira and an overheating domestic economy are partly to blame. Buying of gold from abroad by locals on fear of further fall in the currency narrowed the widening trade gap.

The current account deficit is financed in large part through the foreign exchange reserves of the central bank. Reserves were also spent to defend the lira, which was “not sustainable”, said Clemens Graff, an economist at Goldman Sachs.

According to central bank data, Turkey’s official reserve assets are $99.8 billion, including $50.3 billion in foreign currency and $42 billion in gold. But it does not include the amount that is given by the central bank to local and foreigners.

Net foreign assets, a proxy for foreign exchange reserves closely watched by investors, were minus $15.9bn, a figure even lower if not for the billions of dollars borrowed from the local banking system and foreign central banks. Will happen. The equipment is known as “Swap”.

Central bank data showed Turkey’s net foreign assets are in worse shape than since the 2000-01 Turkish banking crisis, during which the lira collapsed and interest rates soared. “Current levels are dangerously low and require efforts to rebuild foreign exchange reserves,” said Christian Wietowska, strategist at Deutsche Bank.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

Economists expect a series of actions will be needed to get the economy back on track. “There will be a great need to stabilize the economy,” Graefe said, “and we think close, exchange rate adjustments,” to reduce the current account deficit “a significant tightening of policy to slow domestic demand.” was also necessary.

“We can talk about personalities, track records, signals and speculate about what (the new team) might do. But what is really important is the timing and sequence of policy measures . . . because a lot of this adjustment There are moving parts,” said Fitch’s Arispe.