ANKARA
It is safe to say that 2021 was a year of economic highs and lows for Turkey – a description that, admittedly, runs the risk of being viewed as an understatement.
As President Recep Tayyip Erdogan’s government celebrated record-breaking exports and stock market figures, it also contended with the dual challenge of biting inflation and a currency crisis, which it managed to – for the most part – reign in during the latter part of the year.
Key to this was the government’s decision to double down on an economic policy unveiled in the last quarter of 2021 – one that aims for a low current account deficit and high growth rate through investment, production, employment, and exports, instead of steeper interest rates.
Despite the country’s comprehensive measures to offset the impact of the COVID-19 pandemic, the Turkish lira’s value plummeted in the last few months of the year, hitting an unexpected record low of 18.40 against the US dollar.
The spiraling currency prompted Turkey to supplement its new economic policy with a plan to reinforce lira deposits in the country.
As part of these efforts, the government pledged to compensate lira depositors for foreign currency fluctuations, encouraging citizens to move to Turkish lira-based assets to help the lira rapidly regain ground lost over the course of 2021.
This sparked a significant rally that saw the lira climb to 11.00 against the dollar in December, a much better position given the fluctuation of the past months, but still weaker than the figure of 7.44 at the start of the year.
Historic highs
Soaring industrial production and exports were the driving force in a year of strong economic growth for Turkey.
Export figures shattered record after record every month, while industrial production climbed on an annual basis for 16 months in a row.
By keeping up production levels and following pandemic measures, Turkish companies forged ahead of their international rivals during the COVID-19 crisis and global supply chain crunch, gaining a foothold in new export markets while meeting domestic needs.
Offering high-quality products at affordable prices with faster and reliable delivery, Turkish firms managed to establish themselves as the most important suppliers during a period of worldwide uncertainty.
Turkey’s exports in the first half of 2021 hit $100 billion, the highest six-month figure in the country’s history, and the upward trajectory continued in the latter half as the figure climbed to $203.1 billion by November.
In September, Turkey’s exports stood at $20.8 billion, marking the first time in the country’s history that the monthly figure exceeded the $20 billion threshold.
By October, Turkey’s share in global exports had surpassed 1%, another first for the country that marked a more than six-fold rise over the past two decades.
The country’s gross domestic product (GDP) also peaked at a historic high of 22% in the second quarter of 2021, its highest annual mark since 1999.
On either side of the record figure was a yearly growth rate of 7.4% in the first and third quarters.
Another bright spot in Turkey’s economic landscape was the country’s stock exchange, the Borsa Istanbul, which made a flying start to 2021 with a record high closing of 1,495.43 points on Jan. 1.
That set the tone for a year that saw the BIST 100 index hit further heights, culminating in a new record closing of 2,278.55 points on Dec. 16.
New roadmap in Q1
In the year’s first quarter, Turkey unveiled a new roadmap for various fields, including a landmark package for economic reforms, to be implemented until March 2023.
In a bid to strengthen structural foundations and boost resistance to shocks, the plan outlined several measures under 10 main titles – public finance, price stability, financial sector, current account deficit, employment, corporate governance, investment incentives, easing internal trade, rivalry, and market surveillance.
In an address on March 12, President Erdogan said the reforms “aimed to grow the Turkish economy on the basis of investment, production, jobs, and exports.”
The reforms focus on two main areas – macroeconomic policies and structural policies.
The first category includes public finance, inflation, financial sector, current account deficit, and employment, while the latter covers institutional structures, domestic trade, competition policies, market surveillance and checks, and investments.
Turkey also announced a strategy to boost international direct investment in late June, aimed at serving as a roadmap to secure value-added investments in key sectors.
“The main objective is to increase our market share in global direct investments to 1.5% by 2023, in line with the 11th Development Plan,” Erdogan said as the strategy document for 2021-2023 was issued by the country’s Investment Office.
As stated by the president, the Turkish government was determined to “defeat the pandemic in 2021,” an objective it rigorously pursued while taking into account the needs of businesses.
The will to protect citizens and the business community was evident as the government introduced financial support packages when it imposed a full coronavirus lockdown from April 29 to May 17.
For small and medium-sized enterprises, Turkey’s Treasury and Finance Ministry, in collaboration with the Union of Chambers and Commodity Exchanges of Turkey (TOBB) and the Credit Guarantee Fund (KGF), pledged to provide loans, named Breath Credit.
Reshuffles and rebuttals
Along with a full COVID-19 lockdown and shuffling of leadership figures, the second quarter of 2021 also saw a raging debate in Turkey over an alleged $128 billion deficit in foreign exchange reserves.
Sahap Kavcioglu, a former parliamentarian who replaced Naci Agbal as governor of the Turkish Central Bank in late March, rebuffed the claims in an April interview with Anadolu Agency.
Kavcioglu stressed that the Turkish Central Bank could not make “privileged foreign exchange transactions with any segment, bank or company.”
“When considered in terms of the balance sheet asset-liability balance, it’s not possible to talk about lost assets,” he explained.
He said a protocol signed with the Treasury in 2017 to coordinate foreign exchange transactions helped prevent unhealthy pricing, supply-demand balance in foreign exchange markets, and liquidity establishment.
On April 21, President Erdogan also dismissed the alleged deficit as inaccurate, criticizing the opposition’s “campaign” over the figure.
“Neither the number is true, nor the meaning attributed to the number, nor the campaign pursued over this figure. Wrong from beginning to end. Ignorance from beginning to end,” the president asserted.
On the same day, Ruhsar Pekcan was replaced by Mehmet Mus, parliamentary group chairman for the Justice and Development (AK) party, as the trade minister.
Growth and inflation targets
Published in September, the government’s medium-term economic program projected that the Turkish economy will expand 9% in 2021 and grow a further 5% in 2022.
Under the program, the government’s growth target for 2023 and 2024 is 5.5%, while the average gross domestic product (GDP) growth rate target is 5.3%.
It projected annual inflation to fall to 9.8% by the end of 2022, while the year-end targets for 2023 and 2024 were 8% and 7.6%, respectively.
On Sept. 8, Kavcioglu signaled a shift away from the headline inflation figure, which could be volatile at times, to core inflation, an indicator that may better reflect the true strength of Turkey’s economy.
In late October, amid high import costs and rising food prices, Turkey’s Central Bank revised up its year-end inflation forecasts for the next three years but kept its medium-term target constant at 5%.
According to its projections, the annual inflation rate will reach 18.4% by the end of 2021, higher than its previous forecast of 14.1%.
The bank’s year-end inflation forecast for 2022 was revised to 11.8%, up from 7.8%, and to 7% for 2023.
Economic data
Turkey’s calendar-adjusted industrial production climbed on an annual basis for 16 months in a row, with the greatest spike of 66% seen in April.
Production expanded by 12.3% year-on-year in the first quarter of 2021, placing Turkey at par with top G20 economies.
The upturn in the Turkish manufacturing sector continued as the purchasing managers’ index (PMI) hovered above the threshold level throughout the year, except in May, when COVID-19 lockdown measures were in place for much of the month.
Despite inflationary pressures and supply chain disruption, Turkey’s manufacturing PMI rose to 52 in November, up from 51.2 in October.
Following seven months of deficit, the country’s current account balance also started posting a surplus from August onwards.
According to the latest data, the current account surplus was $3.16 billion in October, bringing the 12-month rolling deficit to $15.4 billion.
Beginning the year at 14.97%, annual inflation rose to 21.31% by October, driven by factors such as rising food and import prices, particularly energy, supply constraints, and the impact of exchange rate fluctuations.
The Turkish Central Bank’s benchmark one-week repo rate – policy rate – stands at 14% after the latest cut of 100 basis points in December, meaning the authority has lowered the key rate by 500 basis points since September.
Though the bank is an independent institution, the cuts have been in line with Erdogan’s unwavering opposition to higher interest rates.
Unemployment in Turkey had dropped from 12.7% in January to 11.2% by October, according to the country’s statistical authority TurkStat.
April saw the year’s highest unemployment figure of 13.4%, with the lowest level of 10.6% recorded in June.
Following a major drop last year due to the pandemic, Turkey’s tourism income shot up to $16.85 billion in the first three quarters of 2021.
The latest data from the Tourism Ministry show that the country welcomed 22.8 million foreign visitors between January and November, marking a jump of 89.6% from the corresponding period last year.
Despite battling the largest wildfires in its history during the lucrative tourism season, Culture and Tourism Minister Mehmet Nuri Ersoy announced in December that Turkey had achieved its “ambitious and challenging target” of doubling its tourism revenue to $24 billion in 2021.
Managing the lira
As the US dollar/Turkish lira exchange rate crossed 9.0 by mid-November, Erdogan said his government was “determined to do the right thing” and would pursue its drive for investment, production, employment, and exports.
“The price increase due to the rise in exchange rates doesn’t directly affect investment, production, and employment. Competitiveness in the exchange rate leads to an increase in investment, production, and employment,” he said after a Cabinet meeting in the capital Ankara in late November.
As part of efforts to bolster the economy, Turkey’s Trade Minister Mus met UAE Economy Minister Abdulla bin Touq al-Mari in Dubai the next day, following which the two countries announced an agreement on a working plan aimed at diversifying non-oil trade and increasing trade volume.
On Dec. 1, citing “unhealthy price formations,” the Turkish Central Bank announced its first direct intervention in foreign exchange markets in seven years.
Following the move, the Turkish lira gained 6.27% against the dollar, reaching 12.65 after a low of 14.05.
A day later, Nureddin Nebati was appointed as the minister of treasury and finance after his predecessor Lutfi Elvan resigned.
Nebati said he would focus on addressing “chronic problems” plaguing Turkey’s economy, and “high interest rates will not be a priority.”
On Dec. 17, the Central Bank intervened in foreign exchange markets for the fifth time in the month, as the Turkish lira hovered around a record high of 17 against the US dollar.
Previous interventions by the bank totaled approximately $4 billion.
On Dec. 16, Erdogan announced a hike of 50.4% in Turkey’s minimum wage from Jan. 1, 2022, raising the monthly amount to 4,250 Turkish liras ($275).
Days later, the president unveiled the government plan to compensate lira depositors for foreign currency fluctuations, calling on citizens to move to Turkish lira-based assets.
He said it was a new financial alternative for citizens’ savings to ease worries over rising exchange rates.
Turkish citizens will have guarantees of the Turkish Central Bank and Treasury for savings in the new FX-protected Turkish lira deposits tool.
“Exporting companies that find it difficult to determine prices due to fluctuations in foreign exchange rates will be given an exchange rate future through the Central Bank,” Erdogan explained.
He also said stoppage, or deductions, on companies’ dividend payments, would be lowered to 10%.
The state subsidy rate on the personal pension system would be raised significantly from 5% to 30% in order to boost its appeal, he added.
The announcement sparked a strong rally of the Turkish lira against the US dollar, with the exchange rate dropping to 11.2248 – a gain of almost 40%.
Lira bank deposits in Turkey had increased by 23.8 billion Turkish liras ($2.2 billion) by Dec. 25, and the amount continues to grow, Erdogan recently told local broadcaster ATV.
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