Türkiye is leaving behind a year marked by multiple headwinds and challenges, spearheaded by devastating earthquakes in early February and high inflation. Still, a shake-up in its economic management in the second half of 2023 reignited confidence with a shift toward policy orthodoxy and steps to simplify monetary policy.
Heading into 2024, the country is hoping to reap the benefits of its new economic road map, unveiled in early September, aimed at arresting inflation, reducing chronic current account deficits, continuing to rebuild foreign exchange reserves and stabilizing the Turkish lira.
President Recep Tayyip Erdoğan revamped his economic administration after his May election victory, bringing in prominent figures including Mehmet Şimşek, the Treasury and Finance minister, and Hafize Gaye Erkan, the first woman to lead the country's central bank.
The new team shifted from a yearslong easing policy, delivered aggressive monetary tightening and pledged to focus on fiscal discipline and structural reforms, welcomed by foreign and domestic investors alike.
Şimşek on Sunday assured Türkiye would continue to reap the positive results of the government's medium-term program in the new year.
"2024 will be a year in which the annual inflation begins to decline, reserve adequacy further increases, the foreign exchange-protected system comes to an end, permanent improvement in the current account deficit starts, budget discipline is established, and the foundations of sustainable high growth are strengthened," Şimşek wrote on social media platform X, formerly known as Twitter.
"We will continue to implement our program with determination for a more prosperous Türkiye."
Monetary tightening, growth
In its first meeting under the helm of Erkan in June, the Central Bank of the Republic of Türkiye (CBRT) began its monetary tightening cycle after 27 months, delivering an aggressive 650-basis-point hike.
Since June, the central bank has lifted its one-week repo rate by 3,400 basis points to 42.5% from 8.5%. The rate has led to much higher costs for mortgages, auto loans, business borrowing and many other forms of credit.
After its latest meeting held in December, the bank suggested it was closer to the finish line by saying it expects to "complete the tightening cycle as soon as possible," as it was close to the level required to establish a disinflationary trend.
After hitting a 17-month low in May at 39.59%, Türkiye's annual inflation rate rose to nearly 62% in November, the highest so far this year.
The central bank expects inflation to rise to 70-75% in May, before dipping to about 36% by the end of next year as tightening cools prices.
Türkiye has also seen diminishing volatility in the lira exchange rate, which eased below the average volatility of developing countries. The lira depreciated about 35% against the U.S. dollar in 2023.
The economy expanded by a more-than-expected 5.9% year-over-year in the third quarter, accelerating from an upwardly revised 3.9% growth in the second quarter and 4% in the first.
It achieved a 4.7% average growth in the first nine months of the year.
The economy is expected to end 2023 with a gross domestic product (GDP) growth of over 4% as activity begins to slow after aggressive monetary tightening meant to cool domestic demand and high inflation.
Earthquake devastation
Catastrophic twin earthquakes of magnitudes 7.7 and 7.6 shook southeastern Türkiye and northern Syria on Feb. 6, leveling thousands of buildings in a region home to about 14 million people.
The disaster claimed more than 50,000 lives and severely damaged the infrastructure, with the overall cost estimated at about $104 billion, according to Erdoğan.
To help cover the bill, Türkiye received $7.5 billion in financing from a number of financial institutions for use in reconstruction efforts, Şimşek said in November.
Rising confidence
Efforts by the country's economic administration to reduce inflation and external imbalances have increased interest in assets denominated in the lira.
In December, Türkiye's five-year credit default swaps (CDS) fell below the 300 mark for the first time since March 2021. The CDS – a form of insurance for bondholders – dropped to a three-year low of 282 basis points.
The central bank’s reserves have been maintaining an upward trajectory since it embraced more conventional policymaking after the May elections.
The data last week showed its total reserves reached a record $145.5 billion in the week through Dec. 22. The figure marks a $47 billion increase from $98.5 billion before the May vote.
In its annual monetary policy report for 2024, published last week, it said it seeks to maintain a reserve "buildup strategy" to continue an upward trend in its international foreign currency reserves, which it says is essential for effective monetary policy and financial stability.
In August, international credit rating agency Moody's revised its forecast for Türkiye's economic growth for 2023 to 4.2% from 2.6% and to 3%, from 2%, for 2024. Analysts expect Moody's to upgrade Türkiye's credit rating and outlook soon.
In September, Fitch Ratings revised its outlook for Türkiye from "negative" to "stable" and affirmed its "B" rating.
"The revision of the Outlook to Stable reflects the return to a more conventional and consistent policy mix that reduces near-term macro-financial stability risks and eases balance of payments pressures," Fitch analysts said in a note.
S&P Global, meanwhile, revised its outlook on Türkiye from stable to positive in December, affirming the country rating at "B," thanks to Turkish policymakers' progress in cooling down the country's "overheated" economy and rebuilding the central bank's stock of net foreign currency reserves,
According to the government's medium-term economic program, Türkiye is aiming for 4.5% GDP growth rate on average in the three years to 2026. The GDP is projected to rise by 4% in 2024, 4.5% in 2025 and 5% in 2026.
The program estimates the year-end inflation rate to be 65% in 2023, 33% next year, 15.2% in 2025 and 8.5% in 2026.
In November, the central bank revised its year-end inflation forecast upward for this year and next, while cutting it for 2025. Annual consumer inflation is estimated to come in at 65% this year, 36% next year and 14% in 2025.
Record-breaking exports
Despite the earthquake-caused decline in the aftermath of the disaster, Türkiye's exports shattered multiple peaks over the course of 2023, particularly in the second half of the year.
Outbound shipments hit nearly $233 billion from January through November, increasing by 0.7% from 2022. Imports rose 0.5% to $332.8 billion.
The 12-month rolling exports reached $255.8 billion, marking a 0.9% increase, according to official data.
The negative impact of the earthquakes on exports was estimated to at over $6 billion as of November, Trade Minister Ömer Bolat said. Türkiye also made what Bolat said was a "sacrifice" of nearly $2 billion in agricultural exports to prevent food price increases.
Still, the minister said Türkiye had achieved the export target set for this year in the medium-term program (MTP). He did not disclose specific figures and said Erdoğan would announce them this week.
The MTP export estimates were set at $255 billion for 2023, which would mark Türkiye's best annual sales to foreign markets ever, and $267 billion for 2024.
Exports reached over $254 billion in 2022, lifting the previous all-time high of nearly $225.4 billion in 2021. Sales were hit by the pandemic and dropped to as low as $169.5 billion in 2020.
Bolat acknowledged the challenging global 2023 trade landscape, citing sluggish global production, particularly in the European Union, and a decline in global demand.
Despite these adverse factors, he asserted: "We closed the gap with second-half initiatives and reached the MTP target. We achieved the highest monthly export figures in history in the last six months."
Bolat also anticipated a reduction in the current account deficit as of the second half of the year. For January-October, the shortfall stood at $40.7 billion, and on a 12-month basis, it reached $50.7 billion in October.
The annual deficit decreased by $9.6 billion compared to May, Şimşek said.
Türkiye's unemployment maintained its downward trend throughout on both a quarterly and monthly basis. In the second quarter, the jobless rate fell to single digits after 20 consecutive quarters, hitting 9.7%. Unemployment fell to an 11-year low of 8.5% in October, after hitting this year's peak of 10.1% in February.
In May, economic confidence soared to a record level since March 2018 as sentiment improved among consumers, manufacturers and retailers. However, it weakened steadily through the end of the year.
The year 2023 has also been marked by a diplomatic normalization with several countries in the Middle East, including the United Arab Emirates (UAE) and Saudi Arabia.
Türkiye signed a total of 13 deals worth $50.7 billion with the UAE on July 19, during a three-nation Gulf trip by Erdoğan.
In March, Saudi Arabia agreed to deposit $5 billion in the Turkish central bank through its Saudi Fund for Development, while a visit by Erdoğan ended up with Riyad agreeing to a deal to buy dozens of Baykar’s drones in the biggest defense contract in Türkiye’s history.