Finance Minister Şimşek: Tight monetary policy to a looser monetary policy in 2024.”

Minister of Treasury and Finance Mehmet Şimşek attended the meeting on “2023 Year Evaluation and 2024 Expectations” organized by the Independent Industrialists’ and Businessmen’s Association (MÜSİAD) at the JW Marriott Hotel in Ankara.

Evaluating the global economic outlook in his speech, Şimşek stated that growth in the global economy and global trade were slow in 2023, inflation fell and commodity prices declined slightly. Pointing out that global trade decreased from 32 trillion dollars to 30.5 trillion dollars, Şimşek said that there was an increase in trade in services and a serious slowdown in trade in goods.

Pointing out the global expectations for 2024, Şimşek said, “(Global) growth will remain weak. Inflation will continue to decline. We will evolve from tight financial conditions, tight monetary policy to a looser monetary policy in 2024.”

Pointing out that growth in Turkey remains strong in 2023, Şimşek said that Turkey will be growing more than one and a half times faster than the global average if the 4.4 percent target in the Medium Term Program (MTP) is realized.

Şimşek stated that they are seeking to turn challenging global conditions into opportunities for Turkey by embracing the MTP. Stating that they maintain fiscal discipline by supporting price stability, Şimşek said that sustainable current account deficit and reserves are among the goals of the program. Stating that sustainable growth is their ultimate goal, Şimşek explained that the essence of the program is to ensure price stability.

“Steps to ensure budget discipline have been successful”

Pointing out the importance of price stability, Şimşek continued his words as follows:

“We need price stability to improve the investment climate, to be able to see the way ahead, to channel resources to productive areas, to lower Turkey’s risk premium and for a fairer distribution of income. How will we achieve price stability? By reducing inflation. How will we do this? We needed a tightening in monetary policy to manage demand. We have done this and we are doing it. Supportive fiscal and revenue policies are important. Fiscal policy has been supportive of disinflation except for the earthquake. 2023 budget results will be announced soon. Except for the earthquake, the steps we have taken to ensure budget discipline to a significant extent have been successful. We will have the same perspective in 2024.”

Underlining that fiscal policy should also be supportive of disinflation, Şimşek stated that disinflation will not only be achieved through monetary policy, but should also be supported by structural reforms, fiscal and incomes policy. Pointing out that the program should be supported by all segments of the society, Şimşek said that the program can only be successful in this way.

Regarding inflation, Şimşek said, “Since inflation is high, the monetary tightening under the authority of the Central Bank will remain tight for a while. Then, with the success in the decline in inflation, Turkey will take the necessary steps in line with global norms. This is our path.” Pointing out that the monthly increases in both core and headline inflation are currently in line with the program targets, Şimşek said, “January is an exception, it is like that every year. But we do not expect the trend to deteriorate fundamentally.”

“We expect an increase in credit rating”

Stating that they believe that with the rapid decline in annual inflation, inflation expectations will also converge towards the target, Şimşek said, “The disinflation program helped us achieve macro financial stability in Turkey. In other words, predictability has relatively increased with the introduction of the program. We expect an increase in credit rating. Increases in outlook have started. Access to long-term financing has started. We have started to lay the foundations for sustainable high growth.”

Şimşek stated that they are working to keep the ratio of budget deficit to national income below 3 percent, excluding earthquake expenditures, and that they will continue to be in line with this target this year.

Şimşek stated that efforts to rationalize public expenditures will continue and that public resources will be transferred to productive areas.

Pointing to the importance of fiscal discipline and budget deficit, Şimşek said, “We desire a fairer tax system through tax reform. Reducing and combating informality will be one of our very important axes in 2024 and beyond.”

Stating that resources should be allocated for structural transformation, Şimşek said, “If I were you (MÜSİAD members), I would make a request to our Minister of Transportation and Infrastructure. Connect all industrial bases to ports. By what, railroad. Why? Because you will be more competitive. We need resources for this. Our minister is already planning this, and we will create a 70 billion dollar area for him. Investment in railways is important. We will be more competitive if we can load the goods from the OIZs to the factory and then load them back to the ship from the port by rail.”

“We did not limit earthquake-related expenditures”

Şimşek said that Turkey had experienced the disaster of the century and that they were doing whatever was necessary to quickly heal the wounds of the earthquake. Pointing out that they did not put restrictions on earthquake-related expenditures, Şimşek said that they will mobilize the means to heal the earthquake-related wounds this year as well.

Stating that debt sustainability is important for sustainable growth, Şimşek said that resources are needed for structural transformation and therefore it is important to maintain fiscal discipline.

Stating that the ratio of budget deficit to national income in the last 20 years has averaged 2.4 percent, below the Maastricht Criteria of 3 percent, Şimşek said that they want to maintain this situation. Şimşek stated that they have taken all measures to maintain this situation. Stating that with the additional effort they will put forth from 2025 onwards, they will reduce the budget deficit excluding earthquakes well below 3 percent, Şimşek noted that Turkey’s total debt to national income ratio is below the average of developing countries.

“Tight monetary and fiscal policy will soften domestic demand”

Stating that the objectives of the economic program are price stability, fiscal discipline and reducing the current account deficit to a sustainable level, Şimşek said that the current account deficit figure that will not pose a macro financial risk is 2.5 percent and below and that these levels will be sustainable.

Pointing to the importance of reserve accumulation in order to establish financial stability strongly, Şimşek said that the most important output of successful disinflation programs is the real appreciation of the currencies of those countries.

Explaining what will be done to reduce the current account deficit, Şimşek noted that tight monetary and fiscal policy will soften domestic demand and increase savings.

Emphasizing that they reduced foreign dependence on energy through green transformation on the one hand and domestic production on the other, Şimşek continued as follows:

“We will continue to introduce enormous incentives in goods and services. If you are not exporting, please plan to export in 2024 and beyond. Because we will support you. The right policies will bring portfolio preferences. Portfolio preferences will be in favor of the TL both at home and abroad. This is how it has been going so far. I believe that international investments will also increase as predictability increases. The TL asset preference of non-residents is an important factor here. Why is the current account deficit important? Because it will reduce the need for external financing, pave the way for the country to find financing from abroad at more reasonable costs, and put external debt on a more sustainable path. It will contribute to macro financial stability. In general, stability and predictability will increase. Reserve accumulation will also reduce Turkey’s exchange rate volatility, lower the risk premium, protect us against financial shocks and increase investor confidence. Know that no target is set arbitrarily. We have made progress in accumulating reserves, reducing the current account deficit and bringing inflation under control. Since day one, we have said ‘second half of 2024’. You take measures today, but it takes time for them to be reflected. Because all over the world, monetary policy works on a delayed transmission mechanism. This inflation will fall, but it will fall on an annual basis in the second half of the year. Monthly declines have already started.”

“We believe that the current account deficit will settle on a sustainable path”

Şimşek pointed out that the current account deficit has averaged 4 percent of national income in the last 20 years, and that this figure is above the 2.5 percent threshold.

Reminding that gold imports broke a record with 30 billion dollars last year, Şimşek said, “This is completely a portfolio preference. We believe that this preference will change with the normalization of monetary policy in Turkey. Therefore, with the tightening in monetary and fiscal policy and the return of gold demand to moderate, the current account deficit will decrease. We believe that by the end of the program period, the current account deficit, including gold, will settle on a sustainable path of around 2.5 percent as of 2025. We will implement policies that will bring the current account deficit to a sustainable level and ensure that the public sector and the private sector increase their savings.”

“There is nothing to support your exchange rate-related projections”

Şimşek advised businessmen to invest in areas that are productive and can repay their loans very easily.

Pointing out that both Turkey’s net and gross reserves increased above their projections, Şimşek said:

“Therefore, we are not in a trend that supports your hesitations about the future of the TL. Neither the disinflation program, nor the reserve accumulation, nor the trend in the current account deficit, nor the stance in monetary policy supports you. If you look at the current policy framework, there is nothing that supports your exchange rate projections. Strong, sustainable and high growth is our main target. In order to do this, we want to soften domestic demand and put in place policies that will support foreign demand and make you all exporters. Sectoral and geographical diversification is very valuable for you, it reduces your vulnerability. I would like MÜSİAD management to prepare a program for all its members on how to become exporters, and we will support them. Domestic demand will slow down, this is the output of the program… Let’s prioritize exports while domestic demand is moderate and the EU is recovering.”

“We want to increase the contribution of net exports to growth”

Stating that Turkey has grown by 5.4 percent in the last 20 years and 4.8 percent in the last 100 years, Şimşek said that the problem here stems from growth with domestic demand. Şimşek said, “Let’s achieve structural transformation together. Let us support you. You can also achieve this. We want high sustainable growth. It is not right to grow only with domestic demand, we want to increase the contribution of net exports to growth.”

Şimşek said that they will further improve the investment environment, deepen capital markets and reduce inflation to single digits for access to long-term financing at reasonable costs.

Noting that structural reforms are the most important pillar of this program as reforms improve expectations, Şimşek underlined that competitiveness can be increased through reform.

Şimşek emphasized that permanent competitiveness can be gained through productivity and innovation, not through exchange rates, and that this requires reform and investment.

“A rating increase will come, we believe this”

Stating that they have started to get results from the economic program, Şimşek said that Turkey’s risk premium has decreased from 700 levels to 300, and exchange rate volatility has decreased. Şimşek stated that after the elections, confidence in the program will be further strengthened both inside and outside.

Pointing to the beginning of balancing in the economy, Şimşek said, “We are on the eve of a period when net exports return to positive contribution and domestic demand to moderate. The decline in the current account deficit on an annual basis has started and will continue. Improvement in expectations will accelerate with the decline in annual inflation. Improvement in the rating outlook has started. There is no rating increase yet, but we believe it will come.”

Support for high technology products

Şimşek stated that the priority clearly put forward by President Recep Tayyip Erdoğan is investment, employment, production and exports, and concluded his words as follows:

“We will give up more than 630 billion liras in 2024 to support your competitiveness, employment and employees. We will support high technology investments. There are 284 high-tech products we have identified. You (the business world) produce one of them and become a suitor. Apply on a purely technical basis, without any subjective criteria. We will provide Turkish lira loans with a grace period of 2 years and a maturity of 10 years. The interest rate will be around one third of today’s market interest rates. We have increased the rediscount credit facilities by 10 times. I believe that our Central Bank will increase this further this month.”