Turkey’s Finance Minister on the Economy, Lira and Energy

Christel Deskins

(Bloomberg) — Turkey’s Treasury and Finance Minister Berat Albayrak provided written answers to questions from Bloomberg about the economic outlook, exchange and interest rates, energy and foreign policy. Following is a transcript translated from Turkish. © Bloomberg Berat Albayrak, Turkey’s finance minister, speaks during a Bloomberg Television interview on day […]

(Bloomberg) — Turkey’s Treasury and Finance Minister Berat Albayrak provided written answers to questions from Bloomberg about the economic outlook, exchange and interest rates, energy and foreign policy. Following is a transcript translated from Turkish.

Berat Albayrak wearing a suit and tie: Berat Albayrak, Turkey's finance minister, speaks during a Bloomberg Television interview on day three of the World Economic Forum (WEF) in Davos, Switzerland, on Thursday, Jan. 24, 2019. World leaders, influential executives, bankers and policy makers attend the 49th annual meeting of the World Economic Forum in Davos from Jan. 22 - 25.

© Bloomberg
Berat Albayrak, Turkey’s finance minister, speaks during a Bloomberg Television interview on day three of the World Economic Forum (WEF) in Davos, Switzerland, on Thursday, Jan. 24, 2019. World leaders, influential executives, bankers and policy makers attend the 49th annual meeting of the World Economic Forum in Davos from Jan. 22 – 25.

Q: Could you give us some details about Turkey’s recent gas discovery in the Black Sea and ongoing drills nearby and in the Mediterranean Sea?

A: As you know, we have started a new period in offshore hydrocarbon exploration with the National Energy and Mining Policy unveiled in 2017, when I was the minister of energy and natural resources. We have aimed to reach capacity to operate in this field completely through our own means. In line with this strategy, we have acquired three state-of-the-art drilling ships in addition to our Oruc Reis and Barbaros Hayrettin seismic ships. We have made a significant improvement in Turkish Petroleum in terms of human resources, as well as hardware. We have made a very important gas discovery in the ninth round of drilling in the new period we have started with our Fatih and Yavuz drilling ships. In the past, six wells were drilled in the Black Sea in cooperation with foreign firms but nothing was found. Tuna-1 well is a location where we decided to drill after three-dimensional seismic researches that we conducted during this new significant period that started in 2017.


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The water is 2,100 meters deep. We drilled 3,500 meters below the seabed and discovered 320 bcm of gas in two layers. We will go 1,000 meters deeper than the discovery point. More good news may come soon.

This basin has serious potential and the Sakarya block as a whole is an area we will focus on in the upcoming months and years.

We have to underline that this discovery clearly portrays the level Turkey reached in hydrocarbon exploration. Today, Turkish Petroleum uses the same methods, tests and research conducted by the leading petroleum and natural gas firms in the world.

The potential of the field excites us. Yet it’s important to note that 320 bcm is a terrific discovery. In the coming period, we will quickly complete new seismic and drilling activities in the region.

Q: President Erdogan said Turkey hopes to begin production in 2023. How much gas does the government expect to produce per year from the Tuna-1 field? How will the project be financed? Will there be talks with any foreign partners on financing or production phases?

A: We are drafting our production plans so we can feed the first gas into the grid by 2023. We aim to reach plateau-level production in the following few years. With production at those levels, our target is to meet 30% of our current consumption.

We can certainly share the production and field development figures publicly after completing an engineering study.

Turkish Petroleum has a strong balance sheet. The Treasury of the Republic of Turkey stands behind it. At the moment, external financing is not among our priorities. But we can surely consider this option, too. We believe this gas will be an important element of trust for Europe’s supply security, and it will provide a new motivation for regional energy cooperation.

Q: You recently said Turkey’s growth data is expected to show a V-type recovery. How will Turkey recoup its losses from tourism amid ongoing travel restrictions and global demand shock after the coronavirus outbreak? What will be the drivers of the V-type recovery in Turkey?

A: Turkey is highly resilient to crises and apart from extraordinary periods it can easily reach a 5% economic growth rate, thanks to its young and well-educated population, dynamic and entrepreneurial business people, modern production and logistical infrastructure, and strategic geographical location. In this way, it positively decouples from many developing countries.

In the past two years, our economy has been growing below its potential due to the exchange rate attacks and lastly, the coronavirus outbreak. Many firms have delayed fixed-capital investments and capacity-boosting projects, and households also postponed major spending. Given the impact of these delayed investments and demand, I believe our growth rate will be significantly above 5% in 2021 if there won’t be another major wave in the outbreak.

With help from our currency’s competitive level, the new economic model we have built to boost exports and tourism income and decrease imports will support our growth and make it more stable and sustainable through fixed capital investments, net exports and tourism channels. Achievements in the balancing period helped Turkey grow 4.4% in the first quarter. Yet our economy shrank a less-than-forecast 9.9% in the second quarter, at a time when the pandemic gripped the global economy. In this period, Turkey was among the countries that contracted the least among the G-20, the OECD and the European Union countries that reported data.

All of the leading indicators indicate that the worst is behind and the recovery in the economy is uninterruptedly gaining pace in the third quarter. In light of all the data, we expect the recovery in the second half to be V-shaped. The measures we have taken and the packages we have announced rapidly and decisively were among the important factors that have supported this process. In addition, Turkey’s strong and entrenched health care system has qualities to alleviate the adverse economic effects of the pandemic. High trust in the health care system is also a positive factor in Turkey’s recovery period.

Turkey’s young and dynamic population, low household indebtedness at 16.1% of GDP, households holding no foreign-currency debt, solid public finance structure, strong banking sector and policies tailored toward shifting production and export bases will incentivize economic stability and a balanced growth outlook. As a result, economic activity will gradually and continuously return to its normal course, and we will end 2020 by positively decoupling from the world. We are resolved to make 2021 a year that will bring us closer to our potential through an inclusive and sustainable structure.

Q: Banks have put the brakes on credit, as the central bank’s weighted average cost of funding jumped to double digits last week from as low as 7.34% in July. The loan and deposit rates are also rising rapidly. How long do you anticipate this cooling down of the economy to last?

A: All of our institutions are working in tandem to minimize the effects of the pandemic on the economy. In addition to the measures taken by our ministry, the central bank and the banking regulator, the loan initiative led by state banks has significantly contributed to the recovery period in economic activity. These policies supported the country’s production potential and helped economic activity enter a distinct recovery trend, starting from May. Although internal and external uncertainties remain important, the need for measures specific to the pandemic period is dissipating at the current stage of economic recovery following the normalization process.

This is why it is important to gradually ease the measures implemented during the pandemic period and create a policy space to reimplement them if needed in the upcoming period. In this context we should evaluate the central bank retracting a significant portion of the liquidity it has been providing since March, state banks taking an ordinary stance on credit flows, and the banking regulator easing its asset ratio rule. Loan and deposit rates increased and credit growth reached more moderate rates during the gradual normalization of the extraordinarily supportive stance in the policies.

A healthy and balanced continuation of economic activity is also important for the stability and long-term sustainability of economic growth at the current stage of recovery. We aim for economic growth to be sustainable, healthy and balanced in line with New Economy Program. In line with this strategy, we are following all developments closely and taking the necessary steps accordingly. Fiscal policy and financial measures are dynamically being reviewed through consultations and by taking into consideration the pace of the recovery, employment, inflation and current-account developments. The central bank will also continue to take the necessary steps through coordination by paying attention to price and financial stability.

I have been saying since March: We are managing a dynamic process. None of us can predict today whether or not there will be a second wave in the pandemic. That is why we are setting our own course and taking swift steps when needed by closely watching data, frequently listening to markets and the business world, and continuously consulting our team.

Q: The recent wave of lira depreciation increased inflationary pressures, forcing the central bank to tighten policy. What are your projections for consumer inflation and the currency for the rest of the year?

A: Pandemic-related unit-cost increases as well as exchange rate and credit developments led to some rise in the inflation trend in the recent period. The supply-side factors that had an impact on inflation in the short term are expected to gradually disappear with the continuation of the normalization period. In fact, the monthly price increases in service groups, which were exposed to capacity limitations during the normalization period, began to ease. While core goods inflation, especially, rose somewhat lately on exchange rate and credit developments, demand conditions may lower inflation in groups that are more sensitive to labor market conditions. The assessment is that the central bank’s recent policy through its liquidity tools will also be effective in curbing inflation, and that inflation will return to a path of deceleration in the upcoming period. All of our institutions, led by the central bank, are making a maximum effort to manage the currency volatility correctly, in line with our price and financial stability goals.

Q: You stated in early August that the lira’s competitiveness is more important than its level. Do you believe the lira is at a competitive level at the moment?

A: Achieving a permanent balance in the current account is one of the most important goals of the New Economy Program. There was a strong recovery in the current-account balance with the balancing period in 2018-2019. Turkey posted a current-account surplus within a year, with positive growth for the first time since 2001.

There will be a deterioration in the current account, especially due to the drop in travel income on the heels of the coronavirus measures in 2020. But our goal in the medium term is to restore the achievements in the current-account balance. With strong steps in energy, we are preparing and implementing extensive programs to cut our import dependence by producing goods with high added value. Essentially, we are aiming to build a much stronger economic structure and to increase our international competitiveness through a structural reform that will help Turkey advance.

Being Turkey, we will turn this global crisis into an opportunity for our country at a time when the world is radically changing. We will speed up the rise of Turkey as a trusted supplier in the world economy.

Q: Economists say that state lenders sold more than $100 billion from the central bank’s reserves in the name of supporting the lira since the beginning of 2019. Do you think the strategy of the government-owned lenders to support the Turkish lira was successful given the current level of the foreign-exchange rate? Do you plan on following the same strategy in the future as well?

A: We’re not going through an ordinary period. There has been an intense capital outflow from emerging countries during the Covid-19 pandemic, due to volatility in global risk sentiment and the increasing uncertainties following the outbreak. In this period, we saw foreign investors in Turkey, too, creating intense FX demand by reducing their assets in bonds, stocks and similar markets. This strong demand has resulted in a depreciation pressure on the lira, much like in similar currencies. In the framework of the current monetary and foreign-exchange policy, necessary liquidity measures have been taken in order to maintain the healthy functioning of FX markets and minimize the negative impact of uncertainties on Turkey’s economy, while closely following FX supply and demand. In the period ahead, we’ll continue to take the necessary steps against processes that might have a negative impact on our economy by using all instruments available to us.

Q: The Turkish central bank’s gross FX reserves have fallen by more than a third during this period and dropped to as much as $45.4 billion as of Aug. 14th. When gold is included, this figure stands around $88.2 billion. Of this, about $53 billion have been borrowed from local banks through short-term swaps. What will Turkey do to regain the FX reserves lost?

A: The central bank frequently says that it will remain a priority to increase international reserves under suitable circumstances while economic conditions and the trajectory of capital flows are taken into account. There can be volatilities in reserves data due to implementation of monetary and FX policies. There are various factors that decrease and increase the Turkish central bank’s reserves other than the swap transactions. All economic policies aimed at the continuation of economic activity and financial stability will be executed in a coordinated way by meeting the necessities of the relevant period.

Q: The banking regulator BDDK announced an exemption from lira restrictions for international investment banks like the ones that were granted to development banks earlier. There was also a revision in the so-called assets ratio. Will there be similar market friendly steps in the future?

A: We have adopted policies such as the asset ratio that encouraged credit expansion and the delay of existing loans’ repayments in order to keep supply chains and labor markets strong at a time when our economy faced the threat of a sharp contraction due to the pandemic. And we eased those measures at a time of normalization. We’re not formulating our economic policies by looking at daily developments in the FX or interest rates. Our objective is to increase our people’s wellbeing by taking the right steps at the right time. At a time when our economy risked a total shutdown, priorities in economic objectives can vary for a certain period, much like elsewhere in the world. Markets will see similar steps as economies normalize or steps that will be necessitated by existing conditions.

Q: The central bank has recently been raising lending costs without resorting to an outright interest rate hike. Some economists, who call this stealth tightening, point out that this is a strategy that was abandoned by the central bank in the past because it’s considered to be less efficient and transparent. Do you think the Turkish central bank should once again simplify policies in order to increase its efficiency?

A: I don’t want to comment too much on this because I care about the independence of the central bank. But I can say this much: such a flexible policy approach may have been adopted in the name of managing the situation in a dynamic way while uncertainties surrounding the Covid-19 pandemic continue.

Q: Why did the Treasury increase its FX borrowing significantly and why does it resort to short-term debt aimed at local investors instead of tapping international capital markets? This appears to be a marked shift from the strategy of the last 20 years, which was aimed at keeping FX-denominated public debt at a minimum? Doesn’t this contradict your call on Turkish people to stay away from dollar and euro assets?

A: It’s out of question for us as the Treasury to determine our strategies without paying attention to market conditions. We’re taking into account various factors when we’re making decisions on borrowing. There has been an important amount of demand for savings in foreign exchange since the pandemic’s fallout on social life and financial conditions peaked in May. It was observed that our citizens moved toward FX and gold while staying inside the financial system in their saving decisions.

During that same time, as there was no demand for FX loans, lenders developed a need to use the increasing FX and gold funds as a result of the rising FX savings. In this context, we as the Treasury have been able to register marked savings in terms of borrowing costs while providing the market with products of certain maturities at a relatively lower cost. As far as international markets are concerned, we might have appetite as long as the timing and pricing are right. In this context, we haven’t revised our $9 billion target set for this year. We’ll continue to take advantage of good opportunities with regards to price dynamics, just as we did in the past.

We’ve managed to limit the economic impact of the pandemic better than expectations. Our budget performance is better than all other emerging economies and our additional funding needs are relatively low. Our total and FX-denominated liquidity as of now is far above the level we had planned before the pandemic, it’s quite strong and has been so all throughout the year. As a result of our strong liquidity position, we absolutely do not feel any urgency to borrow. The share of FX debt in the total debt inventory is something that we closely follow. In this regard, it’s impossible to act with a strategy that’s out of line with the financial sector and the country dynamics. While we maintain flexible strategies dependent on the changes in the country’s saving dynamics, we see no dramatic shift in the share of FX debt. For instance, today’s level is nearly the same as the level in March before the pandemic.

As we declared in our September-to-November borrowing strategy, we’re going to restart selling 5- and 10-year fixed-yield lira securities, which we had put on pause for some time. It’s also important to mention another aspect of gold, which is seen as FX. Gold is a leading saving product in our country. Despite periodic ups and downs, we see that savers constantly go for gold. In this regard, we have focused on gold-denominated sales, with the objective of attracting into the financial system the savings that are currently outside, the so-called under-the-mattress savings. The banks had faced a serious allocation problem. We have sold gold-denominated bonds and sukuk at a much lower cost than other FX-denominated debt and, while driving down our costs, we’ve contributed to the inclusion of gold savings in the financial system. It’s an important issue that needs to be tackled in the same context.

Q: Do you think there is need for consolidation in Turkey’s banking sector? Is there a plan to merge state lenders and development banks owned by the state, as was the case with portfolio management and insurance companies?

A: There is no such issue on our agenda at the moment. We’re going to take different steps in line with our objective of having a much stronger financial architecture.

Q: For you, what’s the optimal credit growth in order to keep the current-account deficit in check while supporting growth?

A: After posting a current-account surplus in 2019, we registered a trade deficit of $32.9 billion during the first eight months of 2020. But it’s critical to assess the headline figure properly.

First of all, net gold imports account for $13.3 billion of the trade gap in the first eight months. It’s necessary to separate gold imports from imports of other goods and services, because gold is an investment instrument and doesn’t create a funding gap for our country. Excluding gold, our trade deficit shrinks to $19.6 billion. Secondly, we were expecting tourism income of $40 billion this year if there hadn’t been a Covid-19 pandemic; however, the revised year-end expectation is now $10 billion. When you factor in lost tourism revenue during the first eight months of the year, you get the following picture: We would be talking about a trade surplus instead of deficit when the impact of gold is stripped out had there been no impact on tourism from the outbreak. In sum, a proper, in-depth study of the figures show there is no serious and permanent deterioration in the foreign balance, to the contrary of what’s being said.

A key objective of our economic program is to have a balanced current account in the medium term and reduce reliance on foreign financing. We’re going to achieve this by increasing our exports and tourism income, domestically producing some goods and services that are being imported, raising our savings rate, channeling more of our resources to production and maintaining a competitive foreign-exchange rate policy. In the field of financing exports, Eximbank, and Development and Investment Bank of Turkey in the field of finding substitutes for imported goods, will take on an important role along with other state lenders, thanks to their new business models and human resources, as well as with the special funding means provided to them by our central bank. Our sovereign wealth fund will also contribute to the current-account balance by making investments in line with its founding objectives. Natural gas discovered in the Black Sea, and other gas and oil resources that will be developed with new discoveries will take on an important role in balancing the current account and even posting a surplus.

Q: What’s your view on sanctions threatened by the European Union due to Turkey’s row with Greece over the eastern Mediterranean Sea?

A: They should put themselves in Turkey’s shoes: Which European country would accept the map that’s being imposed on us? The EU shouldn’t so easily give up on international law and justice when it comes to Turkey. When judged individually, Turkey is in a strong, mutually beneficial relationship with a big majority of the EU member countries. But when it comes to the EU as a whole, one or two countries establishing a united front against Turkey due to political motives, electoral concerns puts at risk benefits for the entire group of EU nations. The joint stance by Greece and France at the moment benefits neither those two countries nor the EU. We are confident that they will recognize their mistake when they adopt some common sense, but we hope that doesn’t happen too late.

(Corrects to show the eight-month gap refers to trade deficit under the question on current-account balance.)

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