Tough Times Call for Sweeping Measures

Jan. 8, 2020

Treasury and Finance Minister Berat Albayrak has introduced comprehensive reforms to stabilize the nation's economy.

Officials are acting to stabilize the nation's fragile economy and rebuild confidence in the banking sector following the 2018 currency crisis. On April 10, Treasury and Finance Minister Berat Albayrak introduced a sweeping economic reform package that will strengthen state banks' capital position, prioritize loans for export and other high-performing sectors, and lower corporate and individual taxes.
“We continue to uphold our fiscal discipline after the [March 2019 municipal] elections," Albayrak said during a speech on April 10 while unveiling the reform plan. “We issued tax incentives to some sectors. We will take steps that will ensure fairer taxation on higher income groups that will have minimum effect on inflation."
Outlining the long-awaited reform package, Albayrak said TRY28 billion in debt securities would be injected into state banks to boost capital. He added private banks might receive similar government aid in the future if necessary, but noted that dividend and bonus payments would be limited during the rebalancing period.
The move seeks to counter the weight posed by a large number of non-performing loans held by banks, which are expected to double in 2019. Albayrak said some problematic loans would be transferred to off-balance sheet funds of local banks and international investors, and two funds focusing on energy and real estate would be created.
Albayrak emphasized government loans would prioritize strategic sectors such as manufacturing, exports, and value-added production. Turkish exports remain competitive following the devaluation of the lira, which has narrowed the foreign trade gap by 63.6%, from USD40.8 billion in 1H2018 to USD14.85 billion in 1H2019. By injecting support into local production, Albayrak seeks to bolster Turkey's exports, nearly half of which is directed toward EU trading partners. In 1H2019, trade between Turkey and the EU amounted to USD41.4 billion.
In addition, a new government tax structure will be implanted to reduce exemptions and gradually lower corporate taxes, while combating black market activity and modifying taxes on high-income earners to create a more balanced tax scheme. Albayrak also said he plans to integrate the nation's severance pay fund with its private retirement insurance fund.
“The new individual pension system will be based on citizens' income level; in five years, we expect the funds in the new retirement reserve to exceed 10% of Turkey's GDP," he said during the April 10 speech.
While presenting the reform package, Albayrak underscored that previous budget reforms had already resulted in savings of TRY44 billion. That figure is set to cross TRY76 billion on the back of new measures. International investors observed the presentation closely, seeking assurance the central bank would move swiftly to address ongoing economic turbulence.
Following the currency crisis in August 2018, the economy suffered its worst quarterly contraction in nearly a decade, in which inflation rose as high as 25%, leaving enterprises and banks saddled with high levels of foreign-currency debt. The lira, which lost 30% of its value against the dollar in 2018 and remained volatile, stabilized in the spring of 2019 as analysts weighed the risk of higher deficits and potential government interventions.

Initial response to the reform package was positive, following which bank stocks rallied, with the majority state-owned Halkbank leading the pack with a 2% rise. The government's sustained efforts continue to bode well for the overall economy, but most importantly, they have started to bear fruit for the average citizen, as according to Turkish Statistical Institute, YoY inflation has dropped steadily over the summer period, from 18.71% in May 2018 to 15.72% in June 2019.