The world is sailing through one of the most complicated political and economic storms in history. Although there is nothing particular similar to European debt crisis or 2007 financial crisis, the atmosphere is quite heavy in the international arena.
Trade wars, super power collisions, securitization policies, embargoes, commodity and oil market performances, global inflation and various other topics constitute an economic outlook that is obstructed by a fog of uncertainties.
There is not a particular macro problem that's dominating the agenda as an acute turmoil, but smaller struggles in Europe, the U.S., Asia and pretty much all over the world are actually disruptive enough make big waves and strong winds.
After developments in the 3Q18 the expectations towards economic growth is revised downwards by organizations like IMF, World Bank and OECD as possibility of further negative revisions still on the table. According to IMF World Economic Outlook October 2018 report, Asia countries including China is likely to have a weaker growth as well as Eurozone and the U.K. growth expectations has been marked down. The U.S. is also expected to suffer a decrease in growth after the measures taken regarding the tariffs.
Turkey had its fair share of the pressure and experienced a rather challenging period. The exchange rate volatility, of which the main reason is not a particular occasion but a combination smaller and indecisive factors by their own, and aftermath effects on Turkish economy required an effective, result-oriented and the most importantly a trustful set of actions. Subsequent to a range of ad-hoc interferences made, the decision makers of Turkish economy came up with a more extensive and organized approach that is aiming at not only bringing contemporary solutions to adverse developments but drawing a reliable road map to follow over
the upcoming terms. The New Economy Program is introduced to be this road map. The program presented by Minister of Treasury and Finance Berat Albayrak, is putting a perspective for the period of 2019-2021. And the three key aspects underscored in the program were balance, discipline and transformation. Where program is more extensive in terms of policies, the common denominator of 2 keywords; balance and transformation, is export.
WHAT IS IN THE PROGRAM?
The program offers a detailed economic projection regarding the upcoming 3 years. Three main pillars defined in the program are establishing an economic balance, a fiscal discipline to accompany economic balancing and transformation of manufacturing and exports with a “valueadded” perspective. In terms of the pillars the GDP growth forecast in program is 3.8% for 2018. For 2019, 2020 and 2021 the expected growth rates are 2.3%, 3.5% and 5.0%, respectively.
Improving Fiscal Discipline
With regards to the fiscal discipline the program seeks to optimize the budgets without inflicting adverse effects on development. The budget deficit, which is estimated to be 1.9% of the GDP by the end of 2018, will most likely stay stable as the forecast of program is 1.8%, 1.9% and 1.7% for upcoming three years respectively. On the other hand primary surplus target, which is expected to realize as 0.1% of the GDP in 2018, will be raised to 0.8%, 1.0% and 1.3% over the tri-year period. The first step stated in program for reaching the targets is to implement some series of budget optimizations that will save around 60 billion TRY and generate extra 16 billion TRY revenue for 2019.
The preference of international funding options for mega infrastructure projects is in the agenda. Along with revising PPP models in use to ensure a more efficient and financially sounder structure, the social insurance system will also change. Also revoking non-effective tax advantages is planned.
Reducing Current Account Deficit
The current account deficit was 5.6% of the GDP in 2017 and despite the setbacks the deficit is expected to drop by 0.9% in 2018. For 2019 the program foresees further 1.4% decrease, as the estimation for current account deficit in 2019 is 3.3%, where the target for 2020 and 2021 are 2.7% and 2.6% respectively. In order to achieve the targets, the program includes a series of policies and measures. In the first phase the public incentives will focus on high value-added sectors, pharmaceuticals, petrochemicals, machinery/equipment and software sectors in particular, to encourage technology-oriented investments. Various PPP models will be introduced to promote and improve technology and R&D investments. Existing export incentives will be reorganized as new incentives will be provided for exporters. Being one of the primary factors stressing the account balance, foreign dependency on energy will be reduced by prioritization of renewable energy and further use of national coal resources. The new model implemented,
YEKA (Renewable Energy Resource Areas), will support the localization of energy technologies. Tourism will also receive extra support, in which health tourism is underscored as one of the strategic tourism fields.
Inflation is another matter of high gravity. The end-year inflation rate estimated for 2018 is 20.8 and the program aims at reducing the inflation to a one-digit number as of 2020 and decreasing it to 6% by the end of 2021. The measures to be taken to reach such a challenging goal are of an extensive approach. The program underscores that the Central Bank of Turkey will use all tools in its disposal in a decisive and independent manner for building a sustainable price stability. Furthermore, new 'Financial Stability and Development Committee' will be in charge of the process for a smooth implementation. A sub-program named 'Collective Inflation Reduction Program' will launched along with “Product Monitoring Mechanism” and “National Agricultural Project” to monitor the price volatility and food inflation closely. The rent prices also mentioned as they are going to be capped based on consumer price index instead of producer price index to decrease the vulnerability against exchange rates.
Fighting Off Unemployment
Although over the past years unemployment rate was not a drastic factor for Turkish economy, as the unemployment rate fluctuates between 4% and 12% in developed countries, the program also focuses on creating new jobs. The program estimates 2018's 11.3% unemployment rate will reach to 12.1% in 2019, mainly because of the lagged effects of exchange rate volatility. On the other hand for 2020 and 2021 a downwards trend is expected with unemployment rate forecasts are 11.9% and 10.8% respectively.
In order to provide opportunities to young generation and control unemployment, program aims at creating 2 million jobs over 3 years. The actions to be taken to ensure that are signifying the government's eagerness on the subject.
In terms of the projection, a reform will be implemented, which will secure the benefits of all stakeholders, in severance payment system. The public sector is going to adopt a new flexible employment approach, whereas also reorganizing employment incentives. Occupational training programs, which will be held in association with private sector, and more strict auditing applications aiming at reducing informal employment will be auxiliary forces for the employment policies Basically program is consisting of a hybrid set of policies that are aiming to restore the fiscal discipline while instead of limiting investments in production, building a more sustainable and technology oriented production infrastructure. In this sense two key aspects come to prominence; reliability and export. Why?..
THE TRUST AND THE HEART
The fiscal policies part of the program needs to convince international financial markets and investors regarding the implementations and the feasibility, as reliability is the key for any fiscal policy or financial market. In that sense the program should build a certain trust that international financial chambers can rely on. And the initial reactions show that the program is widely welcomed in finance sector.
Credit Suisse evaluates the program 'broadly satisfactory' in terms of technical details, according to a report released by the bank. The prominent corporation sees the program appropriate in both regards with fiscal policy and the banking sector.
Furthermore, the financial institution stated that the program turned out be more satisfactory than they had expected, in terms of an overall policy response to the market developments and the fiscal adjustments are consistent with what they would expect from a credible program. Economic Watch research conducted by BBVA brands New Economy Program as more realistic. Stating that the program hinders a rebalancing of the economy with fiscal consolidation in the short term in a more realistic way, the research concludes that the new stance in terms of fiscal policies is more sound and the content of program, which is adequate, should complement the existing monetary policies to rebalance the economy.
The U.S. based banking giant, Citibank issued Turkey Economics Review report, in which also referring to NEP realistic with regards to macro targets and assumption, that is sharing the downward expectation in inflation after 2019, seeing the growth forecast for 2020-2021 period challenging but obtainable, welcoming the establishment of Public Finance Transfer Office, finding the road map for fiscal policies and banking sector satisfactory. Furthermore, the bank finds the recognition of balance sheet vulnerabilities, and the resolve of policy-makers encouraging in terms of the upcoming terms.
The French international banking corporation BNP Paribas' “Turkey: A Realistic Roadmap” report is another vote of confidence from international finance sector to NEP. The report says that besides from finding the program reliable in general, the forecasts regarding growth and current account balance particularly are realistic. According to the report, the bank forecasts a sharp drop in current account deficit due to the strong increase in exports and recovery in tourism revenues. Furthermore the bank says that Turkey can achieve the targets set in NEP. Of course there are also negative reviews from other corporations, and some of the financial figures are taking the content of NEP with a pinch of salt. But it is obvious that NEP has signified an initiative regarding the reshaping of Turkish economy and managed to build an environment of financial trust in international scale.
Securing a positive feedback from the global economy, the program can be said to have gained the trust it required in terms of the fiscal policies. How about the heart of it?
EXPORTS: THE HEART OF NEP
Since Turkey aims at creating a sustainable growth, it is obvious that export will occupy the top spots in the agenda. For building a competitive, high value-added producing and agile real economy, domestic demand can't be solely dependent on for a number of reasons. In this sense exports lie at the heart of program in many aspects; growth, employment, current account balance and production reform in particular.
Turkey grows with exports. During the soaring growth period, which suffered a set back in the era of global banking crisis, the exports were always a main contributor. For example the record quarterly growth of 3Q17, with which Turkey secured the top position of G-20 in quarterly growth with 7.4%, the share of net exports was 3.5 points.
Furthermore, although the rate of exports meeting imports is expected to grow rather slowly, there is a consistent increase expected. According to NEP export/import rate, which was 67% in 2017, will see an increase of 4.9% in 2018 as the contribution of net exports to GDP growth 1.4 points. For 2019 the contribution of net exports is expected to increase 0.1 point, thus reach 1.5 point where the export/import rate is expected to become 74.6%. This means that even before the structural reforms in production to support high valueadded manufacturing can start to deliver results, the export is already a part of Turkey's GDP growth projection. In this sense, as well as being the key for long term sustainable growth models, Turkish exports hold an important position in short term rebalancing plan.
The employment is also another factor, in which export has an important role. According to a paper released in 2016, increase in exports is directly affecting the employment capabilities of exporter firms. The paper studies exporters in Turkey and focuses on the correlation between the increase in exports and employment by exporter companies.
The paper shows that for every 1% increase in exports, the employment in exporter firms is raised by 0.4% whereas 1% increase in domestic sales can only increase the employment by 0.2% in the same group. Considering that there are 75.000 exporters under TİM's umbrella the increase in exports can significantly help reaching the goals set in NEP. Instead of depending on domestic demand for growth, the export based growth model will be more beneficial in terms of employment too.
The current account deficit is another subject that is widely affecting Turkish economy and trade balance is main factor in balancing the current account. The positive and negative changes in current account caused by Exchange rate volatilities might be deceiving with narrowing down the deficits. But for a healthy account balance, a sustainable export growth is of utmost importance, as not only contributing in GDP growth, increased exports directly decreases current account deficit. In this context, export also reduces the dependency to foreign investment, which is likely to shrink in times of any global and/or local uncertainties. Thus, export has also an important for investments as it helps central banks to keep the interest rates at lower levels by reducing the pressure on local currencies.
Prioritizing high value-added production means prioritizing exports, since the competition in domestic markets is way lower than competition in international markets. Thus, the exporting companies intensify their investments in branding, innovation, R&D and design to penetrate foreign markets and keep their competitive profiles high. And the main factors that are stimulating high valueadded production are those 4 pillars. In an optimal manufacturing environment the exporters invest in technologies, which nourishes R&D and innovation ecosystem. The ecosystem supplies exporters with input, with which they can diversify, enhance and improve their products. This positive feedback is the very thing that production reforms try to create.
Over an all, export is the most efficient instrument for development and NEP remarks that Turkish policy makers are aware of this fact. When we look at NEP we see that exports directly or indirectly affect almost each and every aspect. In other words Turkish exports are at the heart of NEP, and Turkish exporters are the veins, which deliver the value created in Turkey to each and every part of the world.
İsmail GÜLLE / Chairman of TİM
“WE BELIEVE THE ROUTE CREATED IN NEP WILL PAVE A SUSTAINABLE PATH“
“New Economy Program” was mainly prepared to boost exports for future growth.
What are the key aspects of New Economy Program and what is the importance of export in terms of the new economic policies and targets described in New Economy Program?
First of all, the realistic targets specified in the program gained the trust of the public opinion. The numbers in our second quarter growth, indicated that our economy is showing signs of a slowdown for the recent future. Our gross domestic output might rose 5.2 percent, which kept us among the worlds fastest growing nations; however there has been a significant decrease in domestic demand and investments. What kept us on track was, government spending's and exports. As a result, its natural that the “New Economy Program” was mainly prepared to boost exports for future growth.
What are the common opinion and evaluations of Turkish exporters about the NEP?
As TİM, we always underline that the only way through a sustainable growth can only be achieved with exports. We saw that in our second quarter growth rates. The contribution of exports was one points to our 5,2 percent growth. This was promising and a sign for us to focus more to increase our exports. In fact, we must also increase the quality of our exports too. With this perspective, we shared our remarks with Ministry of Treasure and Finance during the preparation of the “New Economy Program”. Our financial resources needs to be allocated to the production of petrochemicals and high tech products which are the biggest components in our imports. We need to support R&D projects to add value to our products. All this topics were mentioned in NEP. Therefore we believe the route created in NEP will pave a sustainable path both for our exports and growth figures in the recent future.
What are the expectations of Turkish exporters regarding the upcoming terms, in which NEP will be implemented?
We have a continuous interaction with our exporters. Today's major issue is accessing financial resources for production and exports. Regarding to this issue we are working with side by side with Eximbank and other major banks of Turkey. Especially the rising interest rates and struggles in letter of bank guarantees were primary issues that needs to be agreed upon. Thankfully, we have the support of the banks and Exim according for the exporters. NEP and other projects from our Ministry of Industry and Ministry of Trade were also indicated a financial support for value added production for exporters. It shows that we share the same concerns with our government. At that point, we can say that NEP shares the same concerns with our exporters and plans a similar strategy with the exporters.
What further policies might be implemented for boosting Turkish export?
2018 is a year of records, when we look upon the monthly export figures. For example, our exports boosted 22,6% in September with an all-time high record among all Septembers. We also forecast a similar projection for October too. Our quantity based exports are increasing significantly while our exporters are entering new markets around the World. I believe we are going to surpass our annual export target which is 170 billion dollars. For furthermore projections we are working on several different projects. We need to collect every data to analyze our situation on exports. For example, we are working closely with our Ministry of Trade to measure the “transit trade” statistics. This is a major component for trade figures. There is a significant value in transit trade which is out of our trade statistics. Countries like Hong Kong, Singapore a favoring the outcomes of this. As Turkey we also have to focus on that to benefit from it. When we consider the whole business environment, it won't be fair if we only count production, trade or manufacturing. Services in Turkey is a huge pillar among our business sectors. Therefore, we established the “Service Exporters' Association” in last April. Turkey's service exports was 43 billion dollars in 2017. Turkey has got a great potential and power to increase this numbers. Our medical, transportation, education, logistics, construction and finance services includes Turkey's top companies. We have to consider this opportunity and focus on increasing its potential.