Albayrak departs from reality with predictions on Turkish economy

Turkish Treasury and Finance Minister Berat Albayrak is predicting that Turkey’s sky-high inflation will halve to single digits by September and interest rates will tumble.

The comments by Albayrak, the son-in-law of President Recep Tayyip Erdoğan, may amount to electioneering – Turks vote in local elections on March 31 - but are misleading and a far cry from the prudent guidance that his predecessors had consistently provided on Turkey’s economic outlook.

In the statement on Tuesday, Albayrak also claimed that Turkey’s economy had emerged from an economic recession following two quarters of negative growth in the second half of last year.

Albayrak’s predictions not only serve to mislead Turks ahead of the election, which is the first litmus test of Erdoğan’s popularity since he won vast new presidential powers last June. They also run the risk of unnerving investors, who are looking to the authorities to show realism and prudence following a currency crisis last year.

Turkey’s economic and financial turmoil, brought on by an overheating economy and a political spat with the United States, exposed the central bank to political interference and delayed much-needed interest rate increases, at Erdoğan’s behest. Most economists now agree with the central bank that the benchmark rate of 24 percent needs to remain high until inflation pressures ease markedly.

Albayrak, formerly Turkey’s energy minister and married to Erdoğan’s daughter Esra, took over the job of running the economy from Mehmet Şimşek, a former Merrill Lynch economist, in July.

Şimşek was highly respected by investors for his pragmatism, ability to rein in Erdoğan’s unorthodox excesses, and his carefully worded statements. Şimşek was preceded by Ali Babacan, who had headed an experienced economic team that successfully completed a $10 billion standby agreement with the International Monetary Fund in 2008.

Ali Babacan
Former Deputy Prime Minister Ali Babacan

The traditional recipe for taming inflation – Turkey’s rate currently stands at a sky-high 19.7 percent – is to cut government spending and, if possible, raise revenue through tax hikes, privatisation or other “high-quality” measures. Such steps alleviate price pressures, bring down expectations for future inflation and instil confidence in financial markets. That confidence then translates into stabilising or strengthening the currency, creating a positive knock-on effect for inflation and interest rates.

But Erdoğan’s government is not reducing spending, raising taxes or selling state assets. Quite the opposite.

Turkey’s budget posted a deficit of 16.8 billion liras ($3.1 billion) in February, expanding more than eight-fold from a year earlier, as expenditure surged an annual 33 percent. Meanwhile increases in tax revenue languished at 9.4 percent, less than half current inflation rate, as revenue from value-added taxes fell 19.5 percent and the government slashed other charges.

The budget had only posted a surplus in January after the government persuaded the central bank to hand over 37 billion liras in profits earlier than planned. That did not stop Albayrak heralding the 5.1 billion surplus as proof of the government’s commitment to austerity.

Meanwhile, Erdoğan’s government, hopeful of a so-called ‘V-shaped’ economic recovery, rather than the more likely and painful ‘U’ or ‘L-shaped’ versions, is implementing a series of patchwork measures that are clouding and confusing the outlook for investors.

Steps include cutting or abolishing taxes, promising companies that the authorities will pay the wages of new employees and using state-run banks to restructure the debts of consumers and businesses. The government is also selling cheap food in city squares to pressure retailers to cut prices and has raised billions in an amnesty on illegally construction.

Albayrak’s predictions on inflation and interest rates are unrealistic, unless the government suddenly slashes spending or the economic recession in Turkey deepens markedly. But paradoxically the minister is predicting a resurgence in economic growth.

It is not the first time that Albayrak has made questionable predictions about the economy. In January, he said at the Word Economic Forum in Davos, Switzerland, that Turkey would escape a recession entirely.

“Currently we don’t see any recession, there is no minus growth,” Albayrak said at the Swiss ski resort on Jan. 23. The economy contracted 2.4 percent in the final quarter of 2018 after negative growth of 1.6 percent in the previous three months, official data on March 11 showed.

The lira, a bell-weather for investor confidence just like any other currency, lost almost a third of its value last year. Declines have continued this year, totaling almost 4 percent. Meanwhile, the Brazilian real has gained 2.4 percent and the South African rand has fallen 1 percent.

The lira will probably lose almost 8 percent of its value by the third quarter, traders say, according to a recent Bloomberg survey. TD Securities, a Toronto-based investment house, is predicting a return of last year’s currency crisis and losses of 40 percent by the third quarter.

The lira will be pressured by a deepening economic contraction, inflation, dollarisation of the economy and, a “bleak” outlook for the nation’s banks, Cristian Maggio, TD’s head of emerging-market strategy, said earlier this month.

This week, Chicago-based William Blair & Company, which manages about $100 billion in assets, said it reduced its exposure to the Turkish lira. A fragile economy may be the least of investors’ concerns, it warned, saying that Turkey may soon find itself in another political crisis with the United States, this time over its planned purchase of Russian S-400 air defence missiles.

A central bank survey of 96 economists and other opinion leaders predicts that inflation will end this year at 15.6 percent, some six percentage points higher than Albayrak’s prediction of single digits. Interest rates were seen at 18.35 percent in 12 months. The economy is expected to grow 1.2 percent this year, the central bank said.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.