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Interview

Turkey's powerful finance minister says worst is over for economy

Erdogan confidant defends efforts to stabilize currency

A period of hardship has strengthened the Turkish economy's "immune system," Treasury and Finance Minister Berat Albayrak told Nikkei. (Photo by Sinan Tavsan)

ISTANBUL -- The worst is over for Turkey's economy, and its financial system, although bruised and battered, is now more resilient to internal and external shocks, the country's economic chief told Nikkei.

"They say, what does not kill you makes you stronger," Treasury and Finance Minister Berat Albayrak said in a recent interview. "The Turkish economy's immune system has entered a phase in which it is getting stronger."

The country is emerging from around a year and a half of economic hardship punctuated by a brief but steep recession and currency shock that saw the lira lose nearly 30% of its value in a single year in 2018. Now, Turkey is showing signs of economic recovery as it recorded positive quarterly growth rates in the second half of 2019.

Albayrak said he is expecting roughly 0.5% gross domestic product growth for 2019 with a possibly 5% expansion in the last quarter of 2019 making the largest contribution.

"Considering high population growth and an export-oriented competitive industrial base, 4% to 5% annual base growth for Turkey is only natural," he said.

Albayrak, 41, is the son-in-law of Turkish President Recep Tayyip Erdogan, who has led in the country in different capacities for almost for two decades. Albayrak is known as one of Erdogan's closest confidants, and although he is in charge of the economy in general, he wields a strong influence in other areas of policy-making.

Since the currency shock, stabilizing the lira has been a top priority for the government. According to Albayrak, "financial stability is a matter of national security."

Turkey's state banks have been selling large sums of dollars to prop up the lira either within their regulated position limits or U.S. currency provided from central bank reserves through "backdoor" channels. 

When asked if dollar selling by state banks was one of the ways the government is attempting to stabilize currency, Albayrak said: "With the presidential system change in 2018, all state banks, private banks, central bank and other institutions started to become much more active market players in this new structure as strong stakeholders and acting in a more harmonious and coordinated fashion for financial stability." 

However, he said, "within free market rules, state banks pursue both the public interest as well as profitability and this will continue as such."

Asked if he was satisfied with the lira's value between 5.7 and 5.9 against dollar, Albayrak said: "When we look at the developments in imports and exports as well as balancing in the current-account deficit, the foreign exchange rate looks competitive."

Erdogan has said he wants to boost the economy with interest rate cuts and has repeatedly called for rates to be in the single digits as soon as possible. He sacked the former central bank governor who resisted pressure to cut rates last July. The newly appointed governor delivered a total rate cut of 12.75 percentage points at the last five consecutive monetary policy committee meetings.

Despite such drastic rate cuts and heightened geopolitical risks -- including the threat of U.S. sanctions and military operations in Syria and Libya -- the lira is enjoying a recently unfamiliar level of stability, slightly depreciating against dollar.

Currently central bank policy rate of one-week repo rate is 11.25%, which is below the current inflation of 11.84%, taking real interest rate to negative territory. Moody's in a report said on Jan. 20 that negative rates make investing in Turkish lira less attractive. However, Albayrak said what matters more to investors is nominal interest rates and pointed that "there is a high demand from foreign investors."

Albayrak downplayed accusations that the Erdogan administration was undermining the central bank's independence by pressuring it to cut rates.

"I think central bank is showing good management by strengthening communication very much in sync with markets and stakeholders including government, contributing growth of economy and to deliver financial stability," he said. "Therefore, I do not deem any of the criticism coming on that matter as noteworthy."

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