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Turkey's economy returns to a 'positive cycle', finance minister says

Turkey's Economy Returns to Positive Cycle, Finance Minister Says

ISTANBUL, July 27 (Reuters) - Turkey's economy is emerging from a period of turbulence and entering a "positive cycle" characterized by stabilizing inflation, renewed investor confidence, and sustainable growth, Finance Minister Mehmet Simsek announced on Saturday. Speaking at a economic forum in Istanbul, Simsek highlighted the government's recent policy shifts as key drivers behind this turnaround, signaling optimism for the coming years amid ongoing global uncertainties.

The minister's remarks come at a pivotal time for Turkey, which has grappled with high inflation, currency depreciation, and external shocks in recent years. Simsek, who assumed his role in June 2023 following President Tayyip Erdogan's re-election, has been at the forefront of implementing orthodox economic policies aimed at restoring macroeconomic stability. "We are witnessing the fruits of our disciplined approach," Simsek said. "Inflation is on a downward trajectory, foreign reserves are building up, and investor sentiment is improving markedly. This marks the beginning of a positive economic cycle that will benefit all segments of society."

Central to Simsek's narrative is the progress on inflation control. Turkey's annual inflation rate, which peaked at over 85% in late 2022, has been steadily declining following aggressive interest rate hikes by the central bank. As of June 2024, inflation stood at around 71.6%, with projections indicating a further drop to below 40% by the end of 2025. Simsek attributed this to the central bank's commitment to tight monetary policy, including raising the benchmark interest rate to 50% earlier this year. "Our anti-inflation measures are working," he emphasized. "We expect single-digit inflation by 2026, which will unlock lower borrowing costs and stimulate investment."

The finance minister also pointed to improvements in Turkey's current account balance as evidence of the positive shift. After years of deficits fueled by energy imports and a reliance on foreign capital, the country recorded a surplus in May 2024, the first in nearly two years. This turnaround is partly due to a surge in exports, particularly in sectors like automotive, textiles, and tourism, which have benefited from a more competitive lira. The Turkish lira, which lost significant value against the dollar in 2023, has stabilized somewhat in recent months, trading at around 33 to the dollar. Simsek noted that foreign direct investment (FDI) inflows have rebounded, with $5.8 billion recorded in the first half of 2024, up from $4.2 billion in the same period last year. "International investors are returning because they see credibility in our policies," he said.

Economic growth, another pillar of the positive cycle, is expected to moderate but remain robust. Turkey's GDP expanded by 4.5% in 2023, driven by domestic consumption and construction, but Simsek warned against overheating. For 2024, the government forecasts growth of around 4%, with a focus on quality over quantity. "We are shifting from consumption-led growth to one based on productivity and exports," Simsek explained. This includes investments in green energy, technology, and infrastructure under the Medium-Term Program (MTP), which outlines fiscal targets through 2026.

Challenges remain, however, and Simsek did not shy away from acknowledging them. High interest rates have squeezed households and small businesses, leading to rising unemployment, which hit 8.4% in May 2024. The minister stressed the need for structural reforms, including labor market flexibility and judicial improvements, to sustain the recovery. "Painful adjustments are necessary for long-term gains," he said, referencing the social safety nets being expanded to support vulnerable populations. Additionally, geopolitical risks, such as the ongoing conflicts in Ukraine and the Middle East, pose threats to energy prices and supply chains, which Turkey heavily relies on.

In a broader context, Simsek's optimism aligns with international assessments. The International Monetary Fund (IMF) recently upgraded Turkey's growth outlook, praising the shift toward conventional policies after years of unorthodox measures under Erdogan's previous economic team. Ratings agencies like Fitch and Moody's have also taken note, with Fitch affirming Turkey's B rating with a positive outlook in June 2024, citing improved policy credibility.

Looking ahead to 2025, Simsek outlined ambitious goals. The government aims to reduce the budget deficit to 3% of GDP from the current 5.2%, through spending discipline and tax reforms. Public debt, at around 35% of GDP, remains manageable compared to peers, providing fiscal space for investments. The minister highlighted plans to attract more FDI through incentives in high-tech industries and renewable energy, aiming to position Turkey as a regional hub. "By 2025, we envision an economy that is resilient, inclusive, and integrated into global value chains," he said.

Simsek's address also touched on currency reserves, which have climbed to over $140 billion as of July 2024, bolstered by central bank interventions and swap agreements with friendly nations like the UAE and Qatar. This buffer is crucial for defending the lira against speculative attacks and ensuring import coverage. "Our reserves are at a comfortable level, giving us the tools to navigate volatility," he assured.

Critics, however, argue that the recovery is fragile and dependent on external factors. Opposition figures have pointed out that real wages have eroded due to inflation, exacerbating inequality. Economist Mustafa Sonmez, a vocal critic, told Reuters that while short-term indicators are positive, structural issues like youth unemployment and regional disparities could undermine the cycle. "The government needs to address education and skills gaps to make this growth sustainable," Sonmez said.

Despite these concerns, Simsek remains steadfast. He drew parallels to Turkey's economic rebound in the early 2000s, when similar reforms led to a decade of prosperity. "History shows that with the right policies, Turkey can thrive," he concluded. The minister's speech was met with applause from business leaders and investors at the forum, many of whom expressed renewed interest in Turkish assets.

The positive cycle narrative is also reflected in financial markets. The Istanbul stock exchange has risen by 25% year-to-date, and Turkish bond yields have declined, making borrowing cheaper for the government. International banks like JPMorgan and Goldman Sachs have issued bullish reports on Turkey, recommending overweight positions in lira-denominated assets.

In terms of sectoral impacts, the manufacturing industry, which accounts for about 20% of GDP, is seeing a revival. Exports to the European Union, Turkey's largest trading partner, grew by 8% in the first quarter of 2024. Tourism, a key foreign exchange earner, is projected to welcome 60 million visitors in 2024, up from 51 million last year, thanks to eased visa policies and marketing campaigns.

Agriculture, often overlooked, is another area of focus. Simsek mentioned subsidies for farmers to combat food inflation, which remains a stubborn component of overall price rises. "Ensuring food security is integral to our stability," he said.

On the fiscal front, the government is pursuing privatization and public-private partnerships to fund infrastructure projects, including high-speed rail and renewable energy plants. These initiatives are expected to create jobs and boost productivity.

Simsek also addressed the role of digital transformation. Turkey's fintech sector is booming, with startups attracting venture capital. The minister announced plans for a digital lira pilot in 2025, aiming to modernize payments and reduce cash dependency.

Internationally, Turkey is strengthening ties with Gulf states for investment, while navigating relations with the West. Recent deals with Saudi Arabia and the UAE have brought in billions, diversifying funding sources away from volatile portfolio flows.

In conclusion, Finance Minister Simsek's declaration of a positive economic cycle underscores a narrative of recovery and reform. While hurdles persist, the combination of policy normalization, improving metrics, and strategic investments paints a hopeful picture for Turkey's economy in 2025 and beyond. As global conditions evolve, Turkey's ability to maintain this momentum will be closely watched by markets and policymakers alike.

(This summary is based on the key elements and statements from the referenced article, expanded for comprehensive coverage.)

Read the Full reuters.com Article at:
[ https://www.reuters.com/world/middle-east/turkeys-economy-returns-positive-cycle-finance-minister-says-2025-07-27/ ]