The “Global Leaders Summit”, with Haber Global and GLOOB as the main media business partners, was held with the theme of “Artificial Intelligence and Sustainable Future”.
Treasury and Finance Minister Mehmet Şimşek said, “Last year was a transition period, there has been a very rapid decline in inflation since May, this will continue in the coming months, if we take the market’s inflation expectations as basis, inflation will fall to 40s in September. It is currently within the framework of our targets.”
Şimşek sent a video message to the second day of the Global Leaders Summit. Şimşek informed the participants about the Medium Term Program (MTP) and the future perspective of the Turkish economy in his speech, and explained the functioning and goals of the program.
Noting that the ultimate goal of the OVP is sustainable high growth and more equitable income distribution, Şimşek stated that ensuring price stability, re-establishing fiscal discipline and a sustainable current account deficit are essential for sustainable high growth.
Stating that the most critical issue here is structural transformation, Şimşek noted:
“Because with structural transformation, we will increase our competitive power and increase our level of welfare by increasing efficiency. The most important priority of our program is to reduce inflation to single digits. Last year, we experienced a transition period in inflation. Inflation peaked in May, and by the end of this year, we hope to end inflation at 42-41.5 percent, which is the upper part of the TCMB’s target band. Next year, we aim to reduce inflation below 20 percent (the OVP’s target is 17 percent) and to single digits by the end of 2026. For this, the TCMB has mobilized all the means at its disposal and therefore has anchored inflation expectations and inflation.
The significant disinflation that started in the summer will continue in the coming months, we believe that our inflation targets are realistic and we can achieve them. Our other important goal is to permanently reduce the budget deficit to below 3 percent. Due to the earthquake and the EYT, our budget deficit has been quite high last year and this year. The budget deficit was 5.2 percent as a ratio to gross domestic product (GDP) last year, we expect it to decrease to 4.9 this year, but next year is a critical year for us. In order to support the disinflation process, we aim to reduce the ratio of the budget deficit to national income to around 3 percent. We will provide strong support to disinflation by reducing it to below 3 percent in the following years.
“WE WILL TRANSITION TO A MORE BALANCED, MORE SUSTAINABLE, HIGHER GROWTH”
Minister Şimşek pointed out that one of the other targets was to permanently reduce the current account deficit to 2 percent and below, and reminded that last year the current account deficit was around 4 percent, and this year they predicted it would probably be below 2 percent and 1.7 percent.
Simsek said:
“We have a current account deficit forecast of around 2 percent next year, and we are targeting a current account deficit of 1.5-2 percent in the following years. Now, a current account deficit of 2-2.5 percent means that the ratio of Turkey’s foreign debt to national income is decreasing. Secondly, it allows for reserve accumulation. Because one of our goals is to increase Turkey’s reserve adequacy, thus reducing Turkey’s external vulnerabilities. Of course, there will be a temporary slowdown in growth as a result of these policies, but we will transition to a more balanced, more sustainable, high growth.
Last year, as you know, growth was around 5 percent, but more than 8 points of this was due to domestic demand, the contribution of net exports was over minus 3 points, it was an unbalanced growth and this caused inflation and a current deficit. This year, growth is more modest, according to our long-term averages, we are predicting a growth of around 3.5 percent due to the disinflation program, but 1 point of this growth will come from external demand and 2.5 points will come from domestic demand. We are predicting growth of 4 percent next year, then 4.5 and 5 percent, but the contribution of net exports will continue to be positive.”
“OUR PROGRAM IS, IN ESSENCE, A DISINFLATORY PROGRAM”
Minister Şimşek underlined that the OVP was essentially a disinflation program and expressed that they wanted to move towards sustainable high growth along with disinflation.
Şimşek, who pointed out that the purpose of disinflation is to permanently increase predictability and welfare in Turkey, said, “And disinflation has started in Turkey. Is our program working? Balancing growth was one of our priorities. Last year, the contribution of domestic demand to growth, especially in the first three quarters, was between 8 and 11 percent, which is a very high figure. The contribution of net exports is also negative. This is unbalanced growth, we have ensured a transition to a more balanced growth. There is a temporary slowdown in growth, but this is temporary. With disinflation, with the permanent decrease in inflation, both Turkey’s growth potential and growth performance will increase.”
Stating that there is an interaction between inflation and growth in the short term, Şimşek said that reducing inflation to single digits in the medium and long term will increase Turkey’s growth potential and growth performance.
“THE IMPROVEMENT IN THE CURRENT ACCOUNT DEFICIT HAS BEEN ACHIEVED IN A VERY SERIOUS WAY”
Minister Şimşek said, “The improvement in the current account deficit has been achieved very seriously. In May of last year, just before this program, our current account deficit was around 57 billion dollars, today our current account deficit has fallen below 20 billion dollars, the success of the program is clearly evident here. We will most likely complete this year with a current account deficit well below 2 percent as a ratio to national income. We aim to keep the current account deficit below 2 percent in the coming years.”
Şimşek also provided information about the work done on financial discipline, stating that one of the most important features of AK Party governments is that they have maintained financial discipline for a long period of time.
Şimşek said, “One of the most important goals for us is to permanently reduce the budget deficit to 3 percent and below. This year, the budget deficit will be slightly lower than last year, 4.9 percent, but next year we are targeting a budget deficit of 3.1 percent. The main purpose of our goal of reducing the budget deficit is to help the CBRT reduce inflation to single digits and provide strong support.”
Noting that they aim to make room for reforms, Şimşek said that one of their other priorities is to reach reserve adequacy.
Şimşek said, “We have a gross reserve of around 147 billion dollars, but the increase in net reserves excluding swaps is quite dramatic. 2012-2013 was a good period for the economy, the increase in our net reserves was around 38 billion dollars in that period. However, in the last year, there has been an increase of almost 78 billion dollars in our net reserves. The most obvious indicator of trust in this program is that it clearly shows that the program is working. This increase in reserves has more than one source and is largely based on trust. Our net reserves excluding swaps have returned to positive status after a long break and are currently at a level of 17.4 billion dollars. According to the IMF’s definition, the IMF sees reserves of 1 and above as sufficient, we have currently reached 0.97, in other words, we have almost achieved that adequacy.”
“KKM IS A RISK FACTOR FOR US, WE WANT TO COMPLETE OUR EXIT FROM THERE”
Minister Şimşek stated that one of the important targets is the exit from Currency Protected Deposits (CCD).
Recalling that KKM had reached almost 144 billion dollars in August last year, Şimşek continued as follows:
“Thanks to the program we implemented, we have reduced KKM by approximately $96 billion in this process and it has now fallen below $48 billion. Our goal is to exit KKM in the coming months without disrupting the market because this is a risk factor for us, we want to complete the exit from there. Again, KKM’s share in total deposits has fallen from 26 percent to below 10 percent. The share of TL deposits in total deposits has also risen above 52 percent. It had fallen to 32 percent last year. Therefore, all these indicators show that our program is working, trust in our program is strengthening and we will achieve this because this program is a strong program, a program with internal consistency and of course we have made significant progress in reaching our ultimate goals, but we still have a 2-year process ahead of us.
In order to provide disinflation, growth in commercial loans has been made more moderate, which is normal because we were faced with an overheating through credit expansion last year. We have now evolved from that overheating to a more reasonable, more moderate credit growth. Thanks to all of these, Turkey has made very important gains. For example, Turkey’s risk premium was 703 basis points last May, and as of September 12, it fell to 272 basis points. Of course, this is still a high level, but we have differentiated ourselves very significantly from other developing countries in the decline in our risk premium.”
“Of course there are some problems and side effects during the transition period, but these are temporary”
Minister Şimşek said, “Turkey is accessing foreign financing, accessing it cheaper and longer term. The purpose of this program is to pave the way for our real sector and our citizens to access financing cheaper, with more reasonable costs and longer term in order to meet their needs. Yes, there are of course some problems and side effects during this transition period, but these are temporary. Therefore, all of these actually show that we are on the right track.”
“We are the only country in the world to receive a rating increase from the world’s three leading rating agencies in 2024,” said Şimşek, noting the following:
“There is much to do, but thanks to the OVP, we will reach an investable level much faster than in the past. The biggest goal of the program, the most critical goal, is to permanently reduce inflation to single digits, and then to low single digits, that is, below 5 percent. Last year was a transition period, due to the effects of many factors, inflation peaked at over 75 percent in May, but there has been a very rapid decline in inflation since May. This will continue in the coming months and inflation has fallen to 52 percent, I believe that if we base it on the market’s inflation expectations, inflation will fall to 40s in September. As I said, our forecast is to close the year at 41.5 percent. As I said, we have a goal of reducing inflation below 20 percent next year, and below 10 percent the following year. It is currently proceeding within the framework of our goals.”
