TBY talks to Mehmet Şimşek, Minister of Finance, on achieving a “soft landing," the current account deficit, and the privatization regime.

Mehmet Şimşek
Mehmet Şimşek earned his BSc in Economics from Ankara University and earned his M.Phil in Finance and Investments from the University of Exeter. He previously worked as the Chief Economist and Strategist for the Emerging Europe, Middle East, and Africa Region at Merrill Lynch in London. He also served as Senior Economist and Bank Analyst for Deutsche-Bender Securities from 1998 until 2000. He is currently the Minister of Finance after having served as State Minister for Economic Affairs.

You have announced that you're anticipating 4% GDP growth in 2012. What steps are being taken to ensure a “soft landing"?

We have taken a number of measures to manage the “soft landing," which entails a combination of decent growth and the narrowing of the current account deficit. After the global economic crisis, Turkey staged a very strong recovery. In 2010, we experienced 9.2% real GDP growth, followed by 8.5% in 2011. The recovery coincided with a relatively weak external backdrop. The sovereign debt crisis in the eurozone, our main export destination, constrained Turkey's export growth. The Arab Spring, while positive in the long term, also weakened our external position. Another cyclical factor contributing to the current account deficit has been rising commodity prices. In 2012, we are hoping that the gap will begin to narrow from 10% of GDP to around 8%. As far as growth is concerned, we are forecasting a more modest 4%. Turkey has created a net 3.7 million jobs since 2007. In 2011 alone, 1.5 million jobs were created. This is supportive of continued growth.

In policy terms, how do you plan to offset the external variables that are driving up the current account deficit?

First we have taken measures to moderate the pace of domestic demand and rebalance growth. This should cap the current account deficit. Unfortunately, rising international oil and gas prices are given to us. In 2011, Turkey's oil and gas import bill was about $54 billion. Higher oil prices are likely to increase the bill further, and there isn't too much we can do about it.

In the medium-to-long term, we have a well-thought strategy in place to deal with the current account deficit. We are boosting R&D spending to move up the value chain. We are making better use of local and renewable energy sources, such as wind, hydro, and solar power. We are also in the process of developing nuclear power sources.

What is your reform agenda?

We are now looking at making the labor market more flexible, which is critical to boosting employment, reducing informality, and increasing prosperity.

We are also working on financial sector reform. This entails the provision of more incentives to increase savings and strengthen Istanbul's position as a regional financial center. We will also make it easier for asset management and capital assets to develop in Turkey, sparking the addition of more listed companies. We just announced measures to increase incentives for private pensions, venture capital, and business angels.

We adopted a new Commercial Code, which comes into effect in 2012. The reform is very important for SMEs and other Turkish companies to produce financial reports that meet international standards, become more transparent, and make it easier to establish a business. This is an important micro-level reform that should help Turkish companies' access to credit and increase scale.

We are also working on education reforms. Parliament has recently approved a bill increasing the length of compulsory education to 12 years. The average length of schooling for the population above 25 is only 6.5 years. In other Organization for Economic Cooperation and Development (OECD) countries, the average is 11 years. We want to boost the compulsory education period to 12 years, and this is a very critical priority. We are also working on income tax reform, scheduled to be submitted to the parliament in the first half of 2012. This includes a new investment incentive scheme, which aims to narrow the developmental gap between different regions and bridge the gap for strategic sectors that have large account or trade deficits.

In 2012 you are targeting TL10 billion in privatization revenue after stalled projects in the last two years. Is the market ready this year?

We consider privatizations as an important structural reform. Our focus is on increasing market efficiency. That's why we have prioritized the divestiture of energy assets. It is true that over the past year we have failed to attain our revenue targets. Companies could not come up with the financing. It was a market-driven issue, and targets were not met because of the inability of companies to deliver on their commitments. In 2012, we have another ambitious target, reflected by the privatizations that were concluded and are still waiting for the transfer of payments. Another portion of the figure is reflected by transactions we hope to complete in 2012. The energy sector remains a priority; we are not doing them simply because we need revenues. We treat them as structural reforms.