The Investment Office recently sat down with Türkiye's Vice President Cevdet Yılmaz for an in-depth discussion on Türkiye's economic strategy. VP Yılmaz detailed the government's commitment to implementing orthodox monetary policies, public sector austerity measures, and strategies to address concerns about the new economic direction. VP Yılmaz outlined Türkiye's vision for sustainable growth and attracting foreign direct investment (FDI).
Here are the key insights from the interview:
Mr. Yılmaz, after last year's parliamentary elections, Türkiye changed its monetary policy and is now pursuing an orthodox approach. Despite international approval, there are doubts about the decisiveness of this policy. What arguments do you use to counter any critical voices?
First of all, I would like to explain the individual steps of our financial policy in more detail. Immediately after the parliamentary elections in June 2023, the Central Bank of the Republic of Türkiye (CBRT) initiated the turnaround to a restrictive monetary policy. The main objectives of this policy are disinflation and long-term price stability.
To achieve these goals, the CBRT has adopted measures to improve market mechanisms and strengthen monetary transmission. These macroprudential measures are intended to make our financial system crisis-proof and protect the real economy.
Therefore, the proportion of deposits in the Turkish lira was increased, quantitative tightening was enforced, and selective lending was promoted.
An improvement in the public financial balance, i.e. sound budgetary financing combined with strict spending discipline, is also of great importance to us. We are therefore accompanying the macroprudential measures described above with a savings and efficiency package for the public sector. This package came into force in May 2024 by an official presidential circular, which demonstrates how serious we are about our financial and budgetary policies. The savings affect the entire public sector up to and including local governments.
In fact, among the countries of the EU, Türkiye is one of the countries that can have consistently low-budget deficits according to the Maastricht criteria. This is a good indicator of our strict budgetary discipline.
As you can see, we are working very vigorously on the implementation of all monetary policy decisions. To ensure their implementation and effectiveness, the Ministry of Treasury and Finance controls every single step. The respective ministries and institutions are responsible for the exact implementation of the requirements – and will be held accountable for non-compliance with the framework.
A restrictive monetary policy initially weakens domestic demand – this can also be observed in Türkiye. By what means do you want to compensate for these temporary negative effects?
As Chairman of the Economic Coordination Council, I can directly observe and classify the effects of the restrictive monetary policy on our real economy. An increase in investments in strategically important economic sectors and the strengthening of our production capacities are a high priority for us, even under the new monetary policy conditions. That is why, of course, we continue to promote investment, production, export, and employment. We want to drive the economic advancement of Türkiye and create new financing models for investments in cutting-edge technologies and companies with a high added value.
Let me give you an example of our Advance Loans Against Investment Commitment (ALAIC). The ALAIC grants loans based on favorable long-term terms to investors desiring to enter into the green and digital transformation and who seek to manufacture products with a high added value.
Another example is the "Technology-Oriented Industrial Move Program" funded by the Ministry of Industry. The program is currently funding 42 projects that will reduce Türkiye's current deficit by USD 1.8 billion annually.
Within these projects, products in the field of medium and high technology are manufactured in domestic plants.
In addition to these concrete projects, let me also give you some examples of instruments of financial and tax policy, which we employ to counter the consequences of orthodox monetary policy. We already started promoting exports and foreign exchange services last year. The daily usage limit for rediscount credits for exports and foreign exchange services has been increased tenfold to USD 3 billion. The CBRT has kept the discount rate constant at a maximum of 25.93 percent.
The corporate tax was reduced from 25 to 20 percent for exporting companies in July 2023. This reduction has applied to suppliers and producers who handle their export via international commercial corporations or international trade companies since December 2023.
The declining deficit, the strengthening of foreign reserves and the improvement in the risk premium of Türkiye make our country interesting for direct investors. We are already seeing portfolio inflows. All these factors will lead to a strengthening of our economy in the long term.
By EU standards, Türkiye's budget deficit and total debt are relatively good in relation to gross national product. Can you use this starting point, for example, to create incentive systems for the economic development of Türkiye, similar to the Inflation Reduction Act of the USA?
We keep a close eye on how other countries operate. This includes the Inflation Reduction Act, which the US launched as an investment package for healthcare, clean energy, and climate change in August 2022 to reduce inflation.
Türkiye has been promoting investments in green growth for several years and has announced a target of net-zero emissions by 2053.
In the twelfth development plan, we have formulated the vision of an environmentally sound, disaster-resistant and progressive Türkiye: a strong and prosperous nation that grows based on a green and digital transformation.
To achieve this vision, we also provide financial resources, such as the restructured advance loan for investments (ALAIC). This means that we offer long-term loans on very favorable terms. ALAIC is aimed at strategic investments that will reduce our current deficit and increase the technological level of Turkish manufacturing. The annual limit for the ALAIC investment program is 100 billion Turkish liras.
We will continue to invest in clean energy and the green transition in the coming years, i.e. in a sustainable economy in all areas.
How do international rating agencies assess the recent economic reforms and the new monetary policy in Türkiye?
Our orthodox monetary policy, along with all the other measures we employ to support our economy, has generated an overwhelmingly positive response. Türkiye's credit rating has been upgraded by both Fitch and S&P. The further development of the Turkish economy is also viewed positively. Thanks to these assessments, Türkiye's five-year risk premium has dropped from 703 basis points in May 2023 to 264 (as of June 5, 2024). This is a very encouraging development that reflects the success of our efforts. Let me once again mention some important economic indicators.
In March 2024, our current deficit decreased to USD 31.2 billion at the time. We expect the ratio of the account deficit to gross domestic product to fall to 2.5 percent due to the effect of rebalancing policies and the reforms to be implemented – and thus to be even better than forecast in the medium term.
Due to the decline in the current account deficit and the increase in FDI, the gross reserves of the central bank have increased. They were USD 143.6 billion as of May 31, 2024. Net reserves are positive (excluding swaps) for the first time in 4 years during the same period.
I would like to mention another point that is crucial for every economy: a stable national currency. With the gradual improvement in the economic indicators described, the confidence of domestic investors in the Turkish lira has also increased again. This helps us reduce the KKM mechanism introduced at the end of 2021 more quickly. As of May 31, 2024, the central bank recorded USD 66.7 billion in KKM accounts, up from USD 126 billion in August 2023.
As you can see from these key data, there are many positive signals for the Turkish economy. The international financial markets and the domestic economy are responding with great confidence to the realignment of our monetary policy and the reforms we have initiated.
For example, the bond market for Turkish bonds reported high inflows until May 31, 2024, from 0.6 percent last May to now 6.7 percent – a significant increase in a short period of time.
Likewise, international investors have placed investments in Türkiye 12 percentage points higher compared to the previous year – from 27.4 percent in May 2023 to 39.6 percent in May 2024.
At this point, we are talking about inflows of international investors into government bonds and shares in the amount of a total net amount of USD 16.6 billion.
This shows us that our economic efforts are being rewarded and that there is confidence in the soundness of our policies.
How do you want to find ways out of the middle income trap and ensure long-term prosperity in Türkiye?
Türkiye is a strong country and has a resilient economy. Our economy is ranked 17th worldwide, and even 11th in terms of purchasing power parity. The figures for the first quarter of 2024 show growth of 5.7 percent in the Turkish economy – growth that has continued uninterrupted for 15 quarters.
National income increased by 19.4 percent (based on US dollars) last year: In the first quarter of 2024, annualized national income was USD 1.158 trillion – up from USD 970 billion in the previous year. This is an impressive performance with regard to growth. We believe that we will soon exceed the critical threshold set by the World Bank for the high-income group.
We are on a very promising path to stabilize the prosperity of our citizens at a high level.
What do you tell international investors wishing to invest in Türkiye?
Our economic policy is based on the principles of transparency, predictability, and compliance with international standards and agreements.
With an orthodox monetary policy, we will restore macroeconomic balance, reduce inflation in the long term, and strengthen public finances. Türkiye's economic structural change will be further accelerated.
The investment environment in Türkiye is and remains attractive, as we are implementing monetary, tax, and structural reforms.
Already in the second half of 2023, investor confidence in Türkiye has increased again – the CDS credit risk premium for Türkiye has decreased significantly, international capital flows have increased, our reserves have grown and the volatility of the exchange rate has decreased.
We also achieved the MTP targets set for the real economy in 2023, and this trend will also continue in the first quarter of 2024: data on growth, current deficit, foreign trade and the labor market are positive. I think we will see the effects of our efforts in both the real economy and in the financial markets.
To summarize, against this background and with Türkiye's geopolitical advantages, such as its favorable location for international trade, the internal market, and a young and well-educated population, Türkiye offers a highly attractive investment environment. We will further optimize the framework conditions for investors and promote direct investment.
Mr. Yılmaz, thank you for the conversation.