International rating agency Fitch has published a report evaluating the new Turkish economy management, policies led by Mehmet Şimşek and Hafize Gaye Erkan.
The report stated that the Turkish government has taken measures to increase policy consistency. It was emphasized that after the large-scale fiscal expansion in the pre-election period, the accumulated deficit of the central government reached the level of 483 billion Turkish Liras in June, which corresponds to 2.3% of 2023 GDP. The reason for this growing deficit was the submission of a supplementary budget that includes tax increases to finance earthquake-related reconstruction costs.
The report stated that the macroeconomic and financial market disruptions experienced in recent years may be partially explanatory of the central bank’s step-by-step approach, while continuing political restrictions, President Erdogan’s views on interest rates and the March 2024 local elections may limit the scope for a more definitive policy change. Therefore, it was emphasized that it may take time to remove the uncertainties about the effectiveness and durability of policy changes.
In addition, in the report published by Fitch, attention was drawn to the risk that the slow approach in policies and interest rates could not strengthen confidence and balance expectations. It was stated that this situation may increase the pressure on the lira and reserves, increase the demand for foreign exchange, root high inflation and put pressure on the availability and cost of foreign financing. It was also stated that it faced the challenge of managing the renewal of approximately $114 billion of FX-indexed bank deposits.
It was stated that the Central Bank of the Republic of Turkey (CBRT) aims to reduce inflation and control the deterioration in pricing. However, the report said that balancing will be difficult with a slow tightening process due to the weak lira, strong core inflation pressures, tax hikes and wage increases. It was stated that as of July 2023, inflation expectations had increased to 33 percent.
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