Treasury and Finance Minister Nureddin Nebati outlined Turkey’s new economic path to investors in London, pledging to keep the exchange rate stable, bring inflation down to single digits and keep dollarization at bay.
Speaking to investors and bankers in a series of meetings on his first trip abroad, Nebati also said Ankara would announce a new scheme on the weekend to get households to convert holdings of gold into Turkish lira.
Nebati met nearly 100 high-level executives on Monday and Tuesday to pitch Turkey’s new economic model based on low-interest rates.
President Recep Tayyip Erdoğan has been endorsing a model based on lower borrowing costs, which he says will boost production, employment and exports, and also eventually help Turkey solve its chronic current account deficit problem and contribute to stabilizing the Turkish lira.
To support the drive, Turkey’s central bank has slashed its interest rates by 500 basis points since September to 14%, before pausing the easing cycle last month.
At a press conference held at the Turkish Embassy in London, Nebati said that at the meetings he highlighted Turkey’s dynamic production capacity, strong growth performance, healthy public finance, firm banking sector and low debts.
Stating that the inflation in the country is temporary, he said communication with bankers and investors will be regularly maintained.
Under the new economic policy, the government aims to ease inflation by creating a current account surplus.
Turkey’s annual inflation soared to a 20-year high of 48.69% in January, according to official data.
The lira has been broadly stable since the start of the year following a 44% decline in 2021. It had hit a record low of 18.4 against the United States dollar in December but rebounded after Erdoğan’s announcement of a scheme to boost lira deposits by protecting them against depreciation.
The initiative had helped the lira rally sharply to just over 10 and then settle at current levels just under 14 to the dollar.
Timothy Ash, a senior emerging-market strategist at London-based BlueBay Asset Management, has praised Nebati's two-day visit to London on Tuesday.
"Nebati did a decent job in London," said Ash, who met with the minister in London.
Saying that Nebati was well prepped and is good at marketing and selling the Turkey story, Ash said on Twitter, "(He) was open, welcoming to foreign capital, was clear capital controls are off the agenda."
"The key is the exchange rate anchor – their line is the selloff in December was abnormal and extreme, and where we are now the currency is more defendable," he was cited by Reuters.
Ash said Nebati described inflation as a major challenge and agreed it was "the biggest problem they have got."
"The message was very much: We are going to keep the exchange rate stable ... and this will help the whole path of inflation to drop off precipitously and for us to reach single-digit inflation by early next year," another investor said on condition of anonymity.
Nebati signaled new financial packages to bring "under-the-mattress" gold into the banking system and was cited as saying that the government would also announce a new scheme on the weekend to encourage households to convert gold holdings into liras.
The "under-the-mattress" term refers to a long-held tradition in Turkey of turning to gold to safeguard wealth and storing it at home.
Two investors who attended meetings said the minister had told them about the plans to ensure part of the $250 billion-$350 billion worth of gold held by Turkish households would find its way into the domestic saving system.
"The important thing for us is the stabilization in the exchange rates. With this package, we will have put the gold under-the-mattress into the system, which is estimated to be around 5,000 tons of gold equivalent to $250 (billion)-350 billion," he was quoted as saying, adding that more details will be announced soon.
A certain amount of this will support the Central Bank of the Republic of Turkey (CBRT) and meet the need for foreign exchange, he noted. "But most importantly, it will shore up the Turkish lira, which forms the basis of our model."
"They will make announcements this weekend on how to convince people to let go of their gold holdings – it is a huge amount in Turkey," said one investor.
"They want this gold to come back into the banking system, this will certainly help to broaden the monetary base in terms of the Turkish lira," the investor added.
The investors said Nebati did not provide any further details on how the scheme would work.
Turkey introduced a scheme in December to encourage locals to convert their foreign currency savings into lira under a deposit protection plan, compensating depositors for any losses due to lira depreciation.
Since the announcement, the government extended the program to corporate accounts. The CBRT also said exporters would be required to exchange 25% of their foreign currency revenue into lira.
On the newly introduced foreign exchange-protected deposits, Nebati said the tools aiming to shore up the lira’s value should not be viewed as single-use.
"We started with individuals, we added legal entities. The central bank also allowed Turkish citizens living abroad to benefit from this instrument," Nebati said.
The volume of deposits under the lira protection scheme has exceeded TL 312 billion ($23 billion) as of Monday, Nebati noted.
"While it (FX-protected deposits) started with 10% of the total deposits in the initial days, the figure has reached 45%," he said.
"Citizens are showing interest," he added.
Nebati also said revenues from the key tourism sector were forecast to recover to $34.5 billion this year. The income doubled to almost $25 billion last year, reflecting a recovery from the initial wave of COVID-19 pandemic measures in 2020.
The figure was still well off the all-time high of $34.5 billion set in 2019, prior to the outbreak of the pandemic. The number of visitors, including Turkish nationals living abroad, jumped more than 88% to over 30 million in 2021, according to the Culture and Tourism Ministry data.
Investors are also eyeing Ankara’s foreign borrowing plans.
Two sources familiar with the plan said Turkey was preparing to sell a dollar-denominated sukuk, its first dollar bond sale since September. One source said HSBC was among banks hired for the deal.
The Treasury did not immediately comment on the possible sale. According to Refinitiv data, Turkey is due to pay off a $2 billion eurobond on Feb. 21 and a $1.1 billion domestic bond on Feb. 25.
Nebati also said at investor meetings that the government had held very productive talks with Abu Dhabi, Saudi Arabia and Israel in recent days, and swap lines were being agreed upon. He declined to give further details.
According to analyst calculations, based on the central bank’s analytical balance sheet data, net and gross reserves rose some $5 billion-6 billion last week.
Bankers said the rise may be due to the bank’s $4.7 billion swap accord with the United Arab Emirates (UAE) and a new requirement that 25% of exporters’ foreign currency earnings be sold to the bank.
Swap deals with foreign central banks help bolster reserves. From January, the central bank has followed a more active forex reserves policy.