After the hike in interest rates by the Central Bank of Turkey on September 13 (625 basis points from 17.75 percent to 24 percent), the Turkish government today (Thursday) unveiled a new economic program for the next three years (2019-2021). BBVA Research in a report released Thursday believes that both monetary policy and fiscal policy are now better geared toward correcting inflation and the imbalances of the Turkish economy.
The Turkish finance minister, Berat Albayrak, explained that the main goals of the program are to balance the economy, increase fiscal discipline and implement a shift in the economic model toward increasing productivity and exports over the long term.
BBVA Research believes the Turkish government’s new economic program is now based on “more realistic” economic growth and inflation forecasts, particular the growth figures, which are now estimated at 2.3 percent for 2019 and 3.5 percent for 2020. For this year, the government sees growth of 3.8 percent, above BBVA Research’s forecast of 3.0%. “The government has settled on lower but more sustainable growth figures”, said BBVA Research’s chief economist for Turkey, Álvaro Ortiz Vidal-Abarca.
As BBVA Research explains, the plan looks to correct the main imbalances in the economy, with inflation more in line with market expectations and consistent with the path forecast by the Central Bank of Turkey (20.8 percent para 2018, compared with BBVA Research’s forecast of 21.5 percent and 15.9 percent for 2019, which is above BBVA Research’s estimate of 14.5 percent). The government is forecasting a rapid correction of the current account deficit (from 4.7 percent of GDP this year to 3.33 percent in 2019) and with an average exchange rate more favorable than expected by BBVA Research.
The government also estimates the fiscal deficit to narrow gradually to 1.7% of GDP in 2021 (in line with BBVA Research’s forecast of 1.5 percent), giving the economy some room to absorb the sharp tightening of monetary policy.
The government’s primary surplus target of 1.3 percent of GDP in the medium term is “achievable and balanced“. BBVA Research believes the cost-cutting announced by the government is a step in the right direction. To address the current account deficit, the Turkish authorities are planning to use public resources in a more efficient manner with a view to saving 60 billion Turkish lira (1.3% of the GDP) in 2019. The BBVA Research report says details of the Turkish government plan to boost revenues by 16 billion Turkish lira (0.4% of the GDP) next year would be desirable.