Türkiye has made decisions in favor of growth and opted to follow an approach that differs from other countries when it comes to dealing with inflation, pursuing policies aimed at ensuring price stability and safeguarding jobs, Treasury and Finance Minister Nureddin Nebati has said.
“Our stance at this point is clear. With a different approach to fighting inflation than many countries, we are implementing policies that aim for permanent price stability and do not lead to job and employment losses, rather than the classical approach that focuses on tight monetary policy,” Nebati told Daily Sabah in an exclusive interview.
Nebati elaborated on an array of issues, from global monetary tightening, Türkiye’s stance, inflation, the government’s economic policies, and Russia’s invasion of Ukraine to Ankara’s rapprochement with Saudi Arabia.
Developed economies have reversed years of cheap liquidity and have been in tightening mode to contain red-hot inflation that is plaguing consumers’ pockets around the world.
Spearheaded by the U.S. Federal Reserve (Fed), global central banks have been rising interest rates at paces not seen in decades, sending shock waves through financial markets and the economy.
Russia’s invasion of Ukraine in February triggered a spike in food and energy prices that increased their challenge.
Türkiye went the other way, with its central bank delivering consecutive rate cuts, which it says are necessary given signs of economic slowdown.
The government has been prioritizing low interest rates to boost exports, production, investment and create new jobs as part of an economic program, dubbed the Türkiye Economy Model, which aims to lower inflation by flipping the country’s chronic current account deficit to a surplus.
Türkiye is almost completely dependent on imports to cover its energy needs, which leaves it vulnerable to rising costs that skyrocketed following Russia’s invasion of Ukraine, and domestic demand has risen after the coronavirus pandemic.
Inflation main priority
Nebati said Türkiye has made its economic policy decisions in favor of growth and stressed that inflation continues to be the main priority of the government, citing multiple measures implemented to boost the Turkish lira’s attractiveness and cushion the impact of soaring prices on households.
Driven by a surge in food prices and high energy costs, consumer prices in Türkiye rose an annual 85.5% through October, according to official data. Officials have blamed the inflation on high commodity costs, mainly caused by the war in Ukraine, as well as other external factors.
Nebati said the downward trend in inflation is expected to start soon, supported by normalization in energy and commodity prices, a trend he says is expected to continue in the coming period, as well as improvement in expectations, stability in the lira, government subsidy and tax policies and the so-called base effect.
“Inflation has become a common problem in all countries today. Inflation, which is also high in our country, continues to be our main agenda,” he said.
“Starting from January, the decline process will accelerate, and we expect this decline to continue throughout 2023,” he added.
The government has introduced several relief measures to help cushion the fallout from inflation, including increasing the minimum wage in December and in July.
Nebati said the government would resolutely continue to side with employees, stressing that relevant parties have already started works to determine the new minimum wage for 2023.
“In this context, the Labor and Social Security Ministry is working to determine the expectations of all social parties regarding the minimum wage,” said the minister.
“The Minimum Wage Determination Commission, which will start meeting in December, will carry out its work by taking all these issues into account in absolute terms.”
The government also announced a cap on rent increases, reduced taxes on utility bills, and unveiled a major housing project for low-income families.
Steps to boost lira stability
Strong exports, a windfall of foreign funds arriving in Türkiye, and sustained interest in a state-backed deposit scheme have brought relief for the government’s economic plan.
Nebati cited the effect of a lira-protection scheme, known as KKM, unveiled in December last year. The initiative sought to keep dollarization at bay and curb demand for foreign currency by compensating depositors for lira losses against foreign currencies.
“We have taken some important steps to increase the attractiveness of the lira, especially the KKM, in order to combat inflation,” the minister said.
“With the KKM, exchange rate volatility was minimized in a short time, the share of foreign currency deposit accounts in total deposits decreased significantly, and the average maturity of lira deposits extended,” he noted.
“All these positive developments have strengthened our financial stability.”
“We are also providing tax cuts and subsidies in important areas, especially food and energy. Our citizens significantly feel these supportive policies that we are implementing,” he added.
In a conjuncture where almost all currencies in the world have depreciated significantly against the dollar, Nebati said “we see the lira exhibits a more stable image compared to its peer currencies.”
“In the coming period, in line with our goal of increasing the tendency toward lira-denominated assets, we will resolutely continue our efforts to maintain stability in the lira with alternative tools that we think will attract the interest of individual investors.”
Tightening boosts global recession risk
Nebati says the wave of interest rate hikes by central banks trying to curb price growth is having negative consequences and have significantly increased the risk of a global recession.
“Today, the whole world is exposed to a wave of cost inflation. In such an environment, the central banks of many countries, especially the United States, preferred the way of trying to reduce inflationary pressures by raising interest rates.”
“However, at the point, we have come to today, we see that the interest rate hikes have also significantly increased the risk of a global recession,” Nebati said.
Officials, including Nebati, have said the country’s new model refuses the doctrine that policy interest rate should be higher than inflation to curb price increases.
The Central Bank of the Republic of Türkiye (CBRT) has delivered a cumulative 350 basis points rate cut that saw its benchmark one-week repo rate drop to 10.5% in October from 14%, the level it was kept at in the first seven months.
The monetary authority is widely expected to halt the easing after delivering one last cut this Thursday that will see its key policy rate drop to single digits, something also sought by President Recep Tayyip Erdoğan.
Erdoğan is known for opposing higher borrowing costs, which he says only makes “the rich richer and the poor poorer.” He believes lower interest rates will lead to lower inflation. Higher rates make it more expensive for households and businesses to borrow money.
Erdoğan has defended the policy of lower borrowing costs, insisting that it had helped save millions of jobs. He has said Türkiye would set its economic policy based on its own interests and needs.
Problems rather than solutions
Nebati cited an ongoing process in the world in which the value of the dollar is soaring, asset prices are falling, volatility in markets is intensifying and emerging countries are experiencing portfolio outflows.
“The policies implemented are causing global demand to contract and the risk of recession to increase significantly,” he said.
“It has also been frequently stated by international organizations and leading economists in the recent period that high interest rate increases may bring serious problems rather than a solution to problems.”
Nebati said Türkiye is “successfully maintaining a strong and balanced growth outlook,” attributing it to the policies implemented as part of the new economic program.
He also said they are closely monitoring the effect of the global monetary tightening on emerging markets.
“In this process, while the country risk premiums of developing countries are rising, there may be a certain amount of capital outflows and borrowing costs are rising,” he said.
Still, he said Türkiye, as well as its banks and the real sector, maintained their strong borrowing capacities from international fund markets, against the background of soaring external borrowing costs around the world.
“Our ministry did not have any difficulty in obtaining financing worth $9 billion from international markets this year,” Nebati said.
“With its strong financial infrastructure and managerial capacity, our country has a more stable and strong capacity to overcome this process compared to peer countries and global markets,” he noted.
“Thanks to the sound macroeconomic foundations of our country, we have been able to consolidate our resilient stance, even under the conditions of the war that continues to take place next to us.”
Growth trend to continue
Türkiye is one of the rare countries that is not experiencing a recession risk, Nebati said, attributing it to the policies taken within the scope of the government’s new economic program.
“The most important reason for this is that our economy, on the one hand, maintains a strong growth trend, and on the other hand, it maintains a balanced composition of growth,” the minister said.
The Turkish economy has been growing for the last eight quarters and expanded by a better-than-expected 7.6% year-over-year in the second quarter on strong domestic demand and exports.
The rate, which Nebati said came despite the war in Ukraine and the weakening global economy, made Türkiye one of the fastest-growing economies in the G-20 and Organisation for Economic Co-operation and Development (OECD).
“The investments in machinery and equipment, which carried the uninterrupted growth process to the 11th quarter as of the second quarter of 2022, are a strong and concrete sign that our economy is progressing by increasing its productivity,” the minister said.
Nebati also cited the strong contribution of annual exports, which he said reached $253.1 billion as of October, buoyant service exports, and tourism revenues, which are expected to exceed even the pre-pandemic period by the end of the year.
He said employment increased by 5.5 million people as of September compared to the period when the pandemic was most severe, and by 1.3 million in the last year.
“Thus, the total employment has reached about 31 million people and continues to be well above the pre-epidemic period,” he noted.
Last year, the economy bounced back strongly from the pandemic and grew by 11.4%, its highest rate in a decade.
“We expect the economic growth trend to continue in the coming period, maintaining a balanced outlook. We will witness the strengthening of macroeconomic fundamentals and the permanent establishment of financial and price stability together,” Nebati said.
“While we continue to increase our employment and exports by making investments and value-added production with the Türkiye Economy Model, we are closer to our development goal than ever before.”
Talks with investors
Nebati also recalled multiple meetings he had with investors and international financial organizations during his trips to the U.S. and Saudi Arabia last month.
Nebati met with many of his counterparts and financial institutions on the sidelines of the International Monetary Fund (IMF) and World Bank Annual Meetings and G-20 Finance Ministers Meeting in Washington.
The minister said meetings continued in Saudi Arabia on the sidelines of the Future Investment Initiative conference.
“The interest shown in these meetings is an extremely concrete indicator that the positive reputation of our country continues in the international arena even in such a difficult economic environment,” Nebati said.
“The fact that our country has shown a strong recovery by showing a quick reflex against crises and that our economy has decoupled positively from other countries attracts the attention of both G-20 members and investors. We observe this very clearly.”
Türkiye’s role in grain deal extension
Nebati also referred to Türkiye’s extensive approach to mediating between Russia and Ukraine, as well as efforts to help ease global food security risks that grew after a drop in Ukrainian shipments of grain and other foodstuffs.
Türkiye, together with the U.N., brokered a wartime deal in July that aimed at easing global food shortages by helping Ukraine export its agricultural products from Black Sea ports.
The deal was extended for four months on Thursday after extensive efforts and talks led by Erdoğan with his Russian and Ukrainian counterparts. Russia said it expected progress on removing obstacles to the export of Russian food and fertilizers.
“The leadership diplomacy of our president and the intensive efforts of our country have undoubtedly been effective in making this extension decision,” Nebati said.
“In this way, it will be possible to continue to deliver grain and foodstuffs to needy and developing countries,” the minister noted.
The agreement created a protected transit corridor and was designed to alleviate shortages by allowing exports to resume from three ports in Ukraine, a major producer of grains and oilseeds.
The pact paved way for nearly 500 ships to carry over 11 million tons of Ukrainian grain and other foodstuffs around the world, Nebati said.
“The contribution of this agreement to the security of food supply is appreciated by all countries of the world. As a matter of fact, there have also been noticeable decreases in grain prices after the agreement,” he noted.
“The negative effects of the food crisis are being felt more severely, especially in vulnerable countries in Africa and Asia with households in the lower income group,” he said.
“For this reason, we attach great importance to food supply security. We both support and take the lead in all initiatives that will contribute in this direction.”
Extensive rapprochement with Saudi Arabia
Nebati also elaborated on Türkiye’s rapprochement with Saudi Arabia, as Ankara and Riyadh have this year moved to repair some diplomatic damage after a decade of tension.
“We have been in intensive contact with Saudi Arabia at all levels in many areas, especially political and economic relations, in the recent period,” the minister said.
Oil importer Türkiye and Saudi Arabia have this year moved to mend ties following years of tension, which escalated especially after the 2018 murder of dissident Saudi journalist Jamal Khashoggi in Saudi Arabia’s Istanbul Consulate.
Erdoğan visited Saudi Arabia in April, the first high-level visit in years. His trip was followed by Saudi Arabia Crown Prince Mohammed bin Salman’s (MBS) trip to Türkiye in June.
The two leaders also met last week on the sidelines of the G-20 summit in Bali, Indonesia.
Nebati said the meeting reiterated the determination at the highest level to strengthen relations.
He said bilateral trade between Türkiye and Saudi Arabia was “well below potential,” yet said steps taken in the last two years helped ensure a fresh recovery.
“Our trade volume, which stood at $3.7 billion in 2021, has increased to $3.8 billion in the first nine months of 2022,” said Nebati.
“If this momentum continues, we believe we will capture much higher figures in our trade volume in the coming period.”
Nebati stressed extensive talks with Saudi Arabia on investment, citing his trip to Riyadh last month where he met with his counterpart Mohammed bin Abdullah al-Jadaan, Investment Minister Khalid al-Falih and Trade Minister Majid Abdullah Qasabi.
“I have observed that there is a great interest and desire from our Saudi brothers to invest in our country,” the minister said.
The interest was reaffirmed by a recent report that the kingdom mandated al-Falih to discuss with Türkiye a proposal for a memorandum of understanding for cooperation on encouraging direct investments.
Nebati said they are planning to host a large delegation led by al-Falih in Istanbul in December.
“We will convey the Türkiye Economy Model and Türkiye’s strong investment potential to investors at this meeting,” the minister said.
“I fully believe that the said meeting will contribute significantly to new investment opportunities and the momentum we have achieved in our relations.”