Turkey: April reforms welcomed but unlikely to resolve structural issues
Finance Minister Berat Albayrak outlined much anticipated new policy measures on 10 April in the face of a prolonged downturn in the Turkish economy, characterized by sky-high inflation, high unemployment, an elevated corporate debt burden and a rising stock of non-performing loans. The announcement followed a new wave of volatility in the lead up to local elections on 31 March. While the reforms are a first step in the right direction—particularly the promise to recapitalize state banks—measures to deal with structural issues such as the labor market and competitiveness were largely omitted. Moreover, some promises were vague, and further details are needed to ease market nerves.
The measures touched upon various topics, including the banking sector, inflation and the external sector. Regarding the banking sector, Albayrak announced new cash injections totaling USD 4.9 billion via bond sales in order to improve capital buffers, and also stated bad loans would be offloaded from banks’ balance sheets. The banking sector is under pressure due to the economic downturn and the high rate of USD and EUR denominated loans, which has made it difficult for firms to service debt given the lira’s sharp depreciation over the last 18 months. Bad loans in the energy and real estate sectors, meanwhile, are to be offloaded and placed into two funds; it remains to be seen, however, how much appetite there is among investors for these funds.
More clarity over how and when these measures will be implemented is needed, in order to gauge how they can help the corporate sector. Moreover, they could cause investor jitters over the fiscal position, which will be a concern given that the government’s robust public finances are one of the last strongholds of the Turkish economy. That said, Turkey’s public debt burden remains relatively low and a one-off cash injection should not cause too many problems.
Albayrak also vowed to tackle inflation, which sky-rocketed last year on the back of the currency crisis and has remained elevated since, averaging 19.9% in the first quarter of 2019. As well as pledging fiscal discipline, a policy was proposed to combat high food prices, although the initiative is vague and further details are expected later in May.
Regarding the external sector, a master plan to increase exports—particularly of high value-added goods and services—is scheduled for August. However, as with the promise to tackle inflation, concrete policy proposals are still thin on the ground.
In short, while the announced reform package should be a first step in the right direction, many proposals still need to be fleshed out more fully. Moreover, several structural problems are largely left unaddressed. Tackling issues such as education, the labor market and red tape would help to put Turkey on a more sustainable growth path and less-dependent on short-term external credit. The next general elections are not scheduled until 2023, which should provide the government enough time to implement far-reaching reforms. However, President Erdogan remains entangled in a bitter fight over the Istanbul mayoral contest, which could spark protests, scare away investment and distract the government’s focus from the reform agenda.