Recently, Turkish Treasury and Finance Minister Berat Albayrak stated in an interview with Bloomberg Television at the World Economic Forum in Davos, "The Turkish economy will return to its official growth target of 2.3% by the end of 2019, which is a very promising year for us." Nevertheless, the economic slowdown may continue through the first three months of this year. There must be some cooling down; this is a soft-landing strategy. However, others are less convinced that policymakers can avoid an economic collapse, as industrial production has shrunk significantly and the consumer confidence index is falling rapidly. Moody's, an internationally renowned rating agency, has warned that the losses of the lira will turn into a sharp contraction in the first half of this year.
According to forecasts compiled by Bloomberg, Turkey's economy is expected to shrink for three consecutive quarters ending in June this year. The latest data shows that Turkey's year-on-year GDP growth in the third quarter of this year was at its lowest level since 2016, remaining flat compared to the previous quarter. After the collapse of the lira last year paralyzed bank lending, policymakers are trying to guide the economy through what they repeatedly call "rebalancing." As part of this strategy, the Turkish government has begun implementing stimulus measures to boost economic growth and halt the rapid contraction of activity in key sectors, such as manufacturing. At the same time, it must also guard against exacerbating domestic and foreign capital imbalances due to large-scale incentives, while simultaneously promoting economic growth.
Albayrak's three-year economic plan, released last September, confirmed the suspicions of the Turkish people. In it, Albayrak set a growth target for 2019 that is nearly one-third of the economic growth rate in 2017. Last August, when Albayrak claimed that Turkey was the target of an "economic war" launched by foreign powers, the lira lost more than a quarter of its value. Compared to the official inflation target of 5%, the depreciation of the lira pushed consumer inflation above 20%, which also damaged domestic demand, typically the biggest driver of economic growth.
Soaring commodity prices forced the Central Bank of the Republic of Turkey to raise interest rates to their highest level in more than a decade last September. Turkish President Recep Tayyip Erdogan, a long-time advocate of low interest rates, has recently refrained from attacking policymakers for increasing borrowing costs. As concerns about premature monetary easing faded, the central bank's decision to keep interest rates unchanged last week spurred a rebound in the lira. In this regard, Albayrak said, "Over the past few months, the work of the Central Bank of the Republic of Turkey has been very smooth, and they have proven their independence and capability. The consistency of monetary and fiscal policy is the best combination strategy Turkey has had in decades; you can only fight inflation through fiscal and monetary policy."
Albayrak reiterated his commitment to limiting public spending to curb inflation, but the market remains cautious about the Turkish government's ability to meet its fiscal targets in an election year. The three-year economic plan projects a government budget deficit of 1.8% of GDP by the end of 2019, while the median estimate from a Bloomberg survey of analysts is 3.1%. Under Albayrak's supervision, the Treasury has begun to limit the supply of lira-denominated bonds to curb bond yields following the market crash last summer. Since last July, the Treasury has not sold benchmark 10-year lira-denominated bonds. In November, the Treasury canceled its planned debt auctions.
Meanwhile, the Turkish government has turned to local bank depositors to raise funds to meet its financing needs. In January of this year, it raised more than 1 billion euros (approximately 1.1 billion U.S. dollars) in the domestic market. Albayrak stated that the Treasury will be very proactive and aggressive in managing its borrowing strategy, which is consistent with his earlier promise to adopt different auction strategies.