Cameron Deggin's Macro Turkish Economic Outlook for 2023 and Beyond

Introduction and Overview of the Turkish Economic Model

The recent appointment of Treasury Minister Mehmed Simsek marks a significant anticipated shift in Turkey's economic approach. Under President Erdogan, Turkey followed an unorthodox economic model, reducing interest rates even as inflation was rising. This policy sharply contrasted with conventional macroeconomic strategies used globally. The expected shift under Simsek includes an increase in interest rates to stabilise the Turkish lira, aligning with traditional methods to combat inflation. This transition represents a move towards a more orthodox approach that aligns with globally accepted macroeconomic tools. The change in direction is seen as a necessary step to bring stability to the Turkish economy, especially in light of the challenges faced in recent years. Investors and economists are closely watching this shift, as it may have far-reaching implications for both the domestic economy and Turkey's position in the global financial landscape.

2018-23: GDP Growth, Rising Prices, Erdogan Wins Re-Election, Rising Inflation

GDP Growth

From 2020 to 2023, Turkey capitalised on global economic changes and governmental interventions, including fiscal stimulus, a focus on export markets, and infrastructural investments. These factors enabled significant GDP growth, attracting foreign investors to the country's burgeoning opportunities. Domestic industries also thrived during this period. Turkey's growing geopolitical influence played a role in creating a favourable environment for trade and commerce. Strategic alliances and trade agreements further bolstered Turkey's economic position in the region. The government's proactive approach in aligning with global trends and leveraging international relationships has been instrumental in this growth. The success of these policies has set a strong foundation for future economic development, reflecting a robust and resilient economy. 

Unorthodox Policy Analysis (2018-2023)

Between 2018 and 2023, Turkey saw a rise in employment and a decrease in relative unemployment. Service exports, including tourism and medical tourism, surged from $34 billion in 2018 to $120 billion by 2023. Tourism income alone doubled from $30 billion to $60 billion. GDP expanded from just under $800 billion at the end of 2018 to over a trillion dollars in 2023, according to IMF projections. Despite challenges such as inflation and a widening wealth gap, the unorthodox policy of lowering interest rates stimulated growth. Currency devaluation surprisingly boosted exports, and a transfer of wealth towards entrepreneurial efforts increased employment rates. This period marked a bold and unconventional approach to economic management, with mixed outcomes that continue to be the subject of analysis and debate.

Expectations from the New Finance Minister

Treasury Minister Mehmed Simsek's appointment carries expectations of stabilising the Turkish lira, attracting foreign direct investment, implementing more orthodox policies, and granting greater independence to the central bank. His previous tenure as Finance Minister witnessed growth and stability, marked by tax reforms, fiscal consolidation, and structural reforms. Simsek's reputation extends to international money markets, and his leadership is seen as a potential catalyst for positive change. The combination of his experience and the urgent need for economic stabilisation creates a sense of anticipation and optimism. The success of his tenure will likely depend on his ability to balance the need for immediate stabilisation with long-term sustainable growth. 

Rising Prices

Inflationary pressures coincided with GDP growth, leading to increased prices in various sectors, including Turkish real estate. The government's monetary policy struggled to contain inflation, resulting in a higher cost of living. This trend created challenges for average citizens, potentially increasing social inequality and affecting consumer spending patterns. The real estate market, in particular, experienced remarkable price increases, fuelling concerns over affordability, especially among middle-class Turks. The government's response to these challenges will be crucial in maintaining economic stability and social harmony. The balance between growth and inflation control remains a key concern for policymakers.

Erdogan Wins Re-Election

President Erdogan's re-election signified political continuity and stability, reassuring foreign investors about the commitment to long-term economic plans. However, domestic opposition and international scrutiny may present challenges for Erdogan's administration, affecting the pace and direction of reforms. The alignment between political stability and economic growth will be vital in maintaining investor confidence and ensuring sustainable development. Erdogan's victory represents both an endorsement of his leadership and a challenge to continue to navigate complex economic and political landscapes. 

Rising Inflation

Rising inflation has become one of Turkey's most pressing economic challenges. The Central Bank of the Republic of Türkiye (CBRT) significantly revised its year-end inflation forecasts upwards for 2023, 2024, and 2025. For 2023, the annual consumer inflation is now projected to hit 58%, up from the previous forecast of 22.3%. Factors contributing to this drastic revision include Turkish lira-denominated import prices, food prices, administered prices, unit labor cost, and a change in the forecasting approach. The bank's governor, Hafize Gaye Erkan, highlighted that exchange rate developments pushed year-end inflation forecasts for 2023 and 2024 up by 7.5 and 8.3 points, respectively. A week prior, the central bank raised its policy rate to 17.5%, a move seen as an attempt to control inflation but smaller than what markets expected. Annual inflation peaked at a 24-year high of 85.5% in October the previous year, causing economists to revise their year-end forecasts to as high as 60%. This situation underscores the complexity of managing inflation in a dynamic and rapidly changing economic environment.

2023-Q2 2024: Slow Market, Increased Interest Rates, Belated Austerity Measures 

Slow Market

CEO Cameron Deggin forecasts a slowdown in the Turkish market from 2023 to Q2 2024. The reasons for this may include lingering effects of high inflation, increased interest rates, and cautious consumer behaviour. People are holding off on major purchases, especially in the real estate market, contributing to reduced demand.

Domestic challenges such as unemployment and social inequality might also contribute to this slowdown. The government and private sector's responses to these challenges will define this phase of the economic journey. The rise in inflation rates and the central bank's move to increase interest rates by 250 basis points to 17.5% contribute to the predicted slowdown. This increase was seen as a continuation of reversing a previous low-rate policy. Governor Erkan's commitment to reducing high inflation without causing structural damage to the real economy points to a cautious approach that may slow down the market in the short term.

Increased Interest Rates

The increase in interest rates reflects the CBRT's policy shift to tackle soaring inflation. The recent hike to 17.5% was seen as a more moderate move compared to the initial rate increase of 650 basis points led by Governor Erkan. While the bank has been gradually raising the policy rate, it also committed to boosting market functionality and aligning market rates with inflation expectations. Governor Erkan emphasised that the bank's decisions would be based on data and principles of confidence, stability, and transparency. These interest rate hikes may slow down investment but are deemed necessary to stabilise the economy. The central bank's approach to interest rate management and its coordination with fiscal policy will play a key role in defining this period, with potential implications for both domestic and international investors. 

Belated Austerity Measures

Unlike some Western countries that have implemented early austerity measures, Turkey is anticipated to introduce belated measures. These measures may include reductions in government spending, increased taxes, and other fiscal tightening strategies. The central bank's stance on inflation targeting through selective credit tightening indicates a potential reduction in bank lending. The bank's policy aims to ensure stable development in Turkish lira liquidity without excessiveness in exchange rates and domestic demand. The recent interest rate hikes and quantitative tightening measures are expected to support forex stability, impacting lending conditions. The timing, nature, and implementation of these measures will be crucial for Turkey's medium to long-term economic stability. The government's ability to balance austerity with growth will be a key factor in determining the success of these policies. 

Bank Lending Forecast

In line with high-interest rates and austerity measures, banks are likely to limit lending during this period. With mortgaged costs expected to be high, individual and business borrowing will be restricted. The tightening of credit may lead to a reduction in consumer spending and business expansion, contributing to the anticipated economic slowdown. However, this cautious approach by banks can also be seen as a responsible and necessary step to ensure financial stability in uncertain times. Coordination between monetary and fiscal policy will be essential to navigate this complex scenario. The central bank's stance on inflation targeting through selective credit tightening measures balancing domestic demand also indicates a well-calibrated approach to managing liquidity and credit risk.

Q3 2024 - 2025: Increased Demand and Economic Momentum, Economic Prosperity as Driving Policy

Increased Demand

Deggin predicts that starting in Q3 2024, interest rates will begin to decrease, reviving the market and economic momentum. Consumer demand, especially in sectors like real estate, is expected to rebound. The government's policies and private sector's adaptability will play a key role in realising this prediction. A focus on affordability, consumer confidence, and sustainable growth could be essential to drive this resurgence in demand. The anticipated recovery will likely depend on the effective management of lingering inflationary pressures and the successful implementation of policies that encourage consumer spending and business investment.

Economic Prosperity as Driving Policy

With underlying growth patterns, Turkey's focus will likely shift towards promoting prosperity and sustainable development. Urban regeneration, affordable housing, education, and healthcare may become central to economic policy. These initiatives will not only foster economic momentum but also address social inequalities and contribute to overall societal well-being. A balanced approach that integrates economic growth with social progress will likely be the hallmark of this phase. The government's commitment to these goals, coupled with private sector innovation and investment, will be key to achieving a more inclusive and prosperous society.

Conclusion

Cameron Deggin's macroeconomic outlook for Turkey presents a comprehensive and nuanced view of the country's economic future. The complex interplay between growth, inflation, political stability, interest rates, austerity measures, bank lending practices, and future prosperity is thoroughly examined. Challenges and opportunities are laid out, providing valuable insights for investors, policymakers, business leaders, and others interested in Turkey's evolving economic landscape. The picture that emerges is one of a nation poised to navigate intricate challenges with resilience and vision, reflecting its dynamic position in the global economy. Looking forward to 2024 and 2025, Turkey is likely to find itself having made significant strides in managing inflation, strengthening its currency, and enhancing its global economic position. If Erdogan and his government fulfil their promises and make the necessary changes, it could lead to increased confidence in the Turkish economy both domestically and internationally. Investors who act now may stand to benefit from potentially high returns, but consultation with financial experts and thorough research is essential. The interplay of various macroeconomic factors such as inflation, interest rates, and fiscal policies indicates a complex landscape that requires nuanced understanding and strategic positioning. Overall, Turkey's economic journey in the coming years will demand adaptability, resilience, and strategic decision-making, reflecting its evolving global position and potential as an intriguing investment destination.