Turkey’s finance minister has called for patience as his new cadre of technocrats try to reverse years of economic mismanagement and restore investor confidence in the country’s battered economy.
In his first interview with international media since his appointment in June, Mehmet Şimşek said he was seeking to “rebalance the economy and soften domestic demand”, after years of unconventional economic policies pursued at the behest of Turkey’s president Recep Tayyip Erdoğan.
Şimşek said the president had thrown his “support and commitment” behind a policy U-turn that had seen interest rates rise more than 20 percentage points since the May general elections.
“We’re on the right track. There is strong evidence confidence is returning. But we need to be patient, it’s still challenging,” Şimşek told the Financial Times.
The country’s $900bn economy has faced years of tumult after Erdoğan pressured successive finance ministers and central bank governors to make decisions that sapped the country’s foreign exchange reserves, sent foreign capital fleeing and ignited runaway inflation.
However, the president shook up his economic management team following the election, which he ultimately won after the tightest contest in his two decades in power.
Şimşek was appointed to lead a broad overhaul of policies, which had for years hinged on Erdoğan’s insistence that high interest rates cause, rather than cure, severe inflation.
“We have already taken dramatic measures,” Şimşek said from his office in Turkey’s capital Ankara.
Şimşek, a former Merrill Lynch economist who has recently returned from a New York trip to woo fund managers, said policies would focus on cooling inflation, rebuilding the country’s depleted foreign currency reserves and reducing its yawning current account deficit.
Higher exports and investment would be key to sustaining growth, Şimşek said, adding that Turkey would need to become less reliant on consumer spending, which was stoking inflation.
While Erdoğan has publicly embraced the new policies, many investors and analysts remain sceptical about how far the president will let his new economic team go, with key elections in major cities including Istanbul and Ankara looming early next year.
Inflation, now close to 60 per cent, remains extremely high and is not expected to fall into single digits until 2026.
Most analysts think new central bank governor Hafize Gaye Erkan will need to raise rates much higher to contain price pressures, setting up a potential clash with the president and raising the possibility that the former Goldman Sachs banker could find herself the latest policymaker to be sacked.
Şimşek himself abruptly left a senior economic post in Erdoğan’s government in 2018 after the president appointed his son-in-law as finance minister.
While inflation would remain in a “transitional phase” until the middle of next year, Şimşek said financial conditions were already tighter than what the central bank policy rate alone suggested because of other steps to tighten policy.
He pointed to a series of measures that are aimed at slowing growth in lending to consumers and businesses, as well as increases in petrol and VAT taxes.
“To reset inflation expectations, you need trust, that is the key,” he said.
The government has allowed the lira to tumble 24 per cent since the start of June as it curtailed a costly attempt to support the currency.
Turkey would also seek to slowly unwind the $123bn savings scheme in which depositors were compensated at the government’s expense when the lira depreciated against foreign currencies such as the dollar and euro, Şimşek said.
The programme, which was launched in late 2021 as part of an effort to prop up the lira, is seen by analysts and economists as a serious risk to Turkey’s public finances since it links them more tightly to the performance of the lira.
There are already some indications that the new economic programme is beginning to bear fruit. Gross foreign currency reserves, excluding gold, have risen to about $73bn, from less than $50bn in May, central bank data show.
Protection against a Turkish debt default, using tools known as credit default swaps, has become much cheaper since June.
Turkish companies are also regaining access to international bond markets: home appliance maker Arçelik last week became the first non-financial corporate issuer to sell a dollar bond since January 2022, according to Dealogic data.
“As we make progress, the ability of companies and banks to tap international capital markets will improve — and that is key. Once we’re there, our job will be easier,” Şimşek said.
Şimşek also said building more constructive relations with western countries and Gulf neighbours would help boost the economy.
The UAE and Turkey, which have been mending frayed ties in recent months, signed $50bn in investment and financing agreements in July, although some commitments may take years to pan out since they rely on mergers and acquisitions.
A presentation Şimşek gave during his trip to New York last week also listed Turkey’s approval of Sweden’s accession to Nato as a key selling point, according to a banker who was present at the conference. While Erdoğan has said he supports Sweden’s accession to the military alliance, Turkey’s parliament, which is controlled by a coalition led by the president’s political party, still needs to approve it.
Şimşek said the finance ministry would welcome progress with the EU, especially on upgrading the customs union and visa liberalisation, in addition to co-operation on security migration and energy.
“Turkey is in the process of pulling out of a geopolitical recession,” he added.
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