– Central Bank Governor Erkan’s decisive 650-basis-point hike marked Türkiye’s Central Bank’s shift towards monetary tightening, while annual economic growth secured a robust 5.9% in Q3
– Türkiye’s commitment to reducing inflation and external imbalances earned positive assessments from credit rating agencies, leading to a surge in international confidence, supported by the government’s forward-looking economic program and record-breaking export achievements
ANKARA
Despite the human and financial burden of devastating earthquakes in February, a shakeup in Türkiye’s economic management reignited confidence in the country with a shift toward policy orthodoxy and steps to simplify monetary policy.
President Recep Tayyip Erdogan revamped his financial team after his May election victory, bringing in prominent figures including Mehmet Simsek, the new finance minister, and Hafize Gaye Erkan, the first woman to lead the country’s Central Bank.
The new economic administration pledged to focus on fiscal discipline, gradual monetary tightening, and structural reforms, welcomed by foreign and domestic investors alike.
Monetary tightening, economic growth
In its first meeting under the helm of Governor Erkan in June, the Central Bank began its monetary tightening cycle after 27 months, delivering an aggressive 650-basis-point hike.
Since the beginning of the year, the bank has raised its policy rate a total 3,400 basis points to 42.5% from just 8.5%.
In its latest meeting held in December, the bank signaled it would slow the pace of tightening as it was close to the level required to establish a disinflationary trend.
After hitting a 17-month low in May at 39.59%, Türkiye’s annual inflation rate rose to 61.98% in November, the highest so far this year.
The Turkish economy posted annual growth of 5.9% in the third quarter of 2023, accelerated from an upwardly revised 3.9% growth in the second quarter and 4% in the first.
Earthquake devastation
Catastrophic twin earthquakes of magnitudes 7.7 and 7.6 shook southern Türkiye and northern Syria on Feb. 6, leveling thousands of buildings across an area covering 110,000 square kilometers (42,471 square miles) — home to about 14 million people — on the Turkish side of the border.
According to the final official death count, 50,783 people tragically perished in the tremors, while the material cost of the disaster totaled $104 billion to the Turkish economy, according to President Erdogan.
To help cover this massive bill, Türkiye received $7.5 billion financing from a number of financial institutions this year for use in reconstruction efforts, Treasury and Finance Minister Simsek told Anadolu in November.
Rising international confidence
Efforts by the country’s economic administration to reduce inflation and external imbalances have increased interest in assets denominated in Türkiye’s currency, the lira.
In December, Türkiye’s five-year credit default swaps (CDS) fell below the 300 mark for the first time since March 2021. The CDS — a form of insurance for bondholders — dropped to a three-year low of 282 basis points.
As of Dec. 15, the Turkish Central Bank’s international reserves rose to an all-time high of $142.53 billion, with the bank revealing the most recent $1.15 billion surge over the previous week.
In August, international credit rating agency Moody’s revised its forecast for Türkiye’s economic growth for 2023 to 4.2% from 2.6% and to 3%, from 2% for next year. Analysts expect Moody’s to upgrade Türkiye’s credit rating and outlook soon.
In September, Fitch Ratings revised its outlook for Türkiye from “negative” to “stable” and affirmed its “B” rating.
“The revision of the Outlook to Stable reflects the return to a more conventional and consistent policy mix that reduces near-term macro-financial stability risks and eases balance of payments pressures,” Fitch analysts said in a note.
S&P Global, meanwhile, revised its outlook on Türkiye from stable to positive this month, affirming the country rating at “B,” thanks to Turkish policymakers’ progress in cooling down the country’s “overheated” economy and rebuilding the Central Bank’s depleted stock of net foreign currency reserves,
Forward outlook
According to the government’s medium-term economic program revealed in September, Türkiye is aiming for a 4.5% gross domestic product growth rate on average in three years to 2026. The GDP is projected to rise 4% next year, 4.5% in 2025, and 5% in 2026.
The program projected year-end inflation rate to come in at 65% this year, 33% next year, 15.2% in 2025, and 8.5% in 2026, while exports are expected to hit $255 billion in 2023 and $302.2 billion in 2026.
In November, Türkiye’s Central Bank revised its year-end inflation forecast upwards for this year and next, while cutting it for 2025. Annual consumer inflation is estimated to come in at 65% this year, 36% next year, and 14% in 2025.
Record-breaking progress
Despite earthquake-caused decline in some months, Türkiye’s exports shattered record after record over the course of the year.
Exports hit $232.9 billion, edging up by 0.7% from last year, while its imports ticked down 0.5% to $332.8 billion in January-November, Trade Minister Omer Bolat said, citing preliminary data.
The negative impact of the earthquakes on exports was estimated to at over $6 billion as of November, Bolat said.
Unemployment maintained its downward trend this year on both a quarterly and monthly basis. In the second quarter of 2023, the jobless rate fell to the single digits after 20 consecutive quarters, hitting 9.7%. Unemployment fell to an 11-year low of 8.5% in October, after hitting this year’s peak of 10.1% in February.
In May, economic confidence in Türkiye soared to a record level since March 2018 as sentiments improved among consumers, constructors, and retailers. However, it weakened steadily through the end of the year.
In June, Türkiye posted its first current account surplus in two years with $670 million as the goods deficit narrowed and services surplus expanded.
In the midst of diplomatic normalization with several countries in the Middle East, Türkiye signed a total of 13 deals worth $50.7 billion with the UAE on July 19, during a visit to the Gulf nation by President Erdogan.
In March, as “a demonstration of the Kingdom of Saudi Arabia’s commitment to supporting Türkiye’s efforts to strengthen its economy,” Saudi Arabia agreed to deposit $5 billion in the Turkish Central Bank through its Saudi Fund for Development.
