Markets now await Turkey’s medium-term economic program

The recent interest rate decision by Turkey’s central bank was a positive development for markets. 

The markets now have their eyes on the medium-term economic program (MTP), which will be announced on Sept. 20. Until this date, it has been highly expected that the markets will be steady.

We have observed that the 625 basis point rate hike has boosted the morale of the bankers. Before the decision, the markets’ hope for the future had seemed to be non-existent. Now, they have begun being hopeful again. But it is certain that they are still cautious.

In summary, the latest rate decision of the Central Bank has given some time to the political authority. It is said by the markets that the political authority should maintain this and take financial measures. In this vein, Sept. 20, the date when the MTP will be announced, has become the “new critical date.”

The decision, informant bankers have said, stopped the plunging reputation in the eyes of foreigners. According to one banker, foreigners believe Turkey is protecting its currency again. The banker added that everybody is aware that stability is not only affected by the decisions of the Central Bank.

The banker, who stressed on the importance of the attitudes of the foreigners, also mentioned the new syndication period which will be continuing especially until the end of the year. “Looking at the steps which will be taken in a short period of time ahead, foreigners will determine whether to lend money again to Turkey, and the interest rate in the event of a loan,” said the banker, stressing that in the following three months Turkey’s banks should borrow large amounts of money, and in the event of a failure of this the foreign exchange rates are to be affected negatively.

In the meantime, there are different opinions in the market about the expectations for the MTP. It is being said that some measures – including a reduction in the number of vehicles purchased, the renunciation of leasing public buildings or a postponement of some projects that haven’t been launched yet – will not be enough as they have been planned for years but have not been implemented. In addition, bankers say serious radical financial campaigns are needed, while reminding that there will not be a significant increase in the tax revenues in the following years.

On the other hand, there are also bankers who claim that the ground is much more solid now after the interest rate hike, and even though radical steps are not taken, “the reassurance of the protection of the fiscal discipline” will be enough for the recovery of the market trends.

The new MTP

The ease in the foreign exchange rates after the 625 basis point rate hike of the Central Bank is found inadequate by the markets. There are also bankers who claim that the point where the Central Bank hit with the latest hike is nearly the same with the daily funding rate, which is why a highly positive impact was not actualized. On the other hand, there are bankers who said that some following statements from the authorities have limited the positive impacts on foreign exchange rates. After the interest rate hike, political statements that “no hike will be allowed after this” decline the optimistic attitude that needs to be adopted for the following period.

In summary, the substantial interest rate hike was a very positive step, but we are now in a period in which the positive impact should be maximized. The content of the MTP needs to be strong to persuade the international markets and investors. In addition to this, taking serious steps to raise Turkey’s democratic standards and the rule of law could strengthen the country’s image abroad, helping economic stability as well.

Undoubtedly, if negative developments occur, we might lose the improving environment once again.