The Midterm Program (OVP), consisting of Turkey's macroeconomic aims, was announced last week. Daily Sabah spoke with Finance Minister Naci Ağbal regarding the viability of the program. Saying that they revised this year's growth rate to 3.2 percent after the July 15 coup attempt and several terrorist acts, Ağbal expressed that the most recent data on the fourth quarter of 2016 indicates that the Turkish economy is recovering. Ağbal stated that they expect the process of re-invigorating Turkish economy to continue in 2017, while adding that the projected growth rate in 2017 will be 4.4 percent. Adding that Turkey will continue to realize structural reforms that will support the investments and investors while maintaining a financial discipline, Ağbal asserted that Turkey will continue to grow in the following years, keeping its deficit under 2 percent.
Finance Minister Naci Ağbal with Daily Sabah's Ankara Representative Ali Ünal (Left) in Ankara
As you know, the new economy program named "Midterm Program" (OVP), which will be valid for three years, was announced last week. Do you believe the aims of this program are viable?
We announced the OVP last week and believe that it will have a positive impact on the markets. Our predictions for 2016 and the years 2017-19 are also deemed solid by the markets. We always say that economic programs should be viable, predictable and rational, while also being supported with structural reforms; the program announced by Prime Minister Yıldırım has these qualities. It's crucial to maintain the sustainability of macroeconomic aggregates in the midterm. In this sense, Turkey has a strong economic base; thus, it would be a mistake to evaluate the country's economy on the basis of daily market trends.
Looking at the details of the OVP, it can be seen that there is a decrease in this year's predicted growth, while there is a predicted increase in the deficit for next year. Could you elaborate on the economic factors that altered the predictions?
While setting the mid-term aims for 2016, we made a prediction by taking global and EU economic growth and the growth of developing countries into consideration. We foresaw a 4.5 percent growth for Turkey. For instance, during our preparation, the IMF predicted a 3.4 percent global growth. However, the IMF revised this number. Therefore, considering the low growth numbers, we have also revised our own growth to 3.2 percent. There are both internal and external factors that led us to revise our numbers. We assumed that in 2016 the global instabilities would decrease, that there would be a positive global trend in growth in accordance with the IMF's prediction and the EU would grow substantially. As you know, there were certain problems in the tourism sector; we were expecting a more positive trend at the very beginning of the year, and we had hopes for higher agricultural growth.
In this sense, we have two main reasons for revising our growth rate. Firstly, there are certain external factors hampering growth in a downward trend in exports, imports and financing. Secondly, there were internal factors: the July 15 coup attempt and terrorist acts. These events alone caused almost a 1 percent drop in the growth rate. Similarly, due to bad weather, the agricultural sector may have a downward trend that will decrease the national dividend by 0.3 percent.
The revised growth rate of 3.2 percent is still impressive when compared with countries of a similar economic scope. Moreover, we also see a decrease in the growth rates of developed and developing countries after the global crisis. Nevertheless, Turkey's growth rate is above the average of almost all countries except for China and India. The average is around 2 percent and we are predicting a 3.2 percent growth. Of course, this rate isn't adequate for Turkey; that's why we determined the predicted growth rate to be 4.4 percent for 2017.
As the primary indicators reached only a percent of growth in Q3, it is said that to achieve even 3.2 percent of growth is unrealistic until the end of 2016. How would you respond to this criticism?
We are conducting all the technical analyses in various fields for Q3 and Q4. These analyses reveal that the rate we have stated in the midterm program is viable. Moreover, international institutions and corporations have a more or less similar growth rate prediction about Turkey.
Regarding consumption and investments, there was a significant downward trend in Q3 due to the July 15 coup attempt, especially when compared to Q3 of previous years. Nevertheless, we believe that we will witness a swift recovery in Q4, as a result of the regained political and economic stability, along with implemented economic measures.
In my opinion, 3.2 percent is still a conservative prediction; it is still possible to have a higher growth rate. Of course, this will depend on our measures and what we will do. We have already implemented certain measures that will support growth via consumption, investment and exportation channels in Q4. Moreover, we instilled new incentives for exportation and regulated credits in consumption in order to support growth. In the last consumer expectation surveys there is a positive trend. I also believe that the public sector will also contribute to growth. Therefore, putting all these facts together, I can say that our growth rate prediction is viable, if not conservative.
Along with numbers and rates, there is also an emphasis on the structural reforms in OVP. What are some examples of structural reforms which will improve the economy?
For 2017, we foresee a growth rate of 4.4 percent , which is based on the private sector, home demand, investments and exports. Thus, as a result of our precautions, we believe that the private sector will perform better in 2017 than in 2016. Again, in 2017, we expect the recovery of the tourism sector. Of course, it will not fare as well it was in 2015, but it will be better than in 2016. There will be increased investments to the private sector, while exports will have a negative contribution to growth. Still, as we have announced supportive measures for exports, it will have an improved contribution to growth. Therefore, no one should think that growth is being realized through public expenditures. Our growth relies on the consumption channel and we are predicting moderate growth in consumption for 2017. We do not foresee a growth in consumption, which will increase deficit. However, we expect developments that will increase private sector investments. In summary, we believe that with the political and economic stability, there will be an increase in 2017.
Regarding the structural reforms, we made some important decisions regarding investment incentives, which were published in the official gazette last week. I believe this will have a positive effect on the investors. Historically speaking, if there is a cooling-off period, it is usually followed by an increase in investment expenditures; as was the case between 2003–07 and 2010–11. Thus, we will achieve growth in investments and exports. However, for sustainable and permanent economic growth, structural reforms are essential. We will continue our work on providing flexibility to the employment market. Prime Minister Yıldırım announced important components of the OVP; therefore, it means that only a part of the midterm structural reforms were revealed. A significant number of the structural reforms are currently being or will be discussed at the parliament. Moreover, there are laws such as the Patent Law, Expertise Law, Improved Technical and Vocational Training Law that are almost complete. Our ministries are to conclude preparations that will improve the investment conditions in the meantime. More specifically, an extensive regulation about employment and employment conflicts will be submitted to the parliament swiftly.
We have also completed certain structural reforms on the existing tax system. Therefore, it is now crucial to implement these legal regulations that will contribute to growth in the long-term. It is also important that Prime Minister Yıldırım announced these regulations, giving priority to the matter.
Can you elaborate on the incentive regulation published in the official gazette last week?
As you know, in the incentive system, there are various incentives such as corporate tax discount and social security support. With the new regulation, these temporary incentives are rendered permanent. For instance, there were certain incentives and support that were to end in 2017; however, with this regulation, now things are indefinite. Therefore, if investors invest in the private sector during the OVP, these benefits will become permanent.
Another important regulation foresees the increase of the discount rate from 80 percent to 100 percent. In this sense, investors will be able to apply the discount rate to their operating activities.
These limitations were also altered; meaning that investors can benefit from higher investment discount rates if they invest during the OVP. We are also extending the interest rate supports.
In this sense, we are giving permanence to the existing incentives and supports, while providing higher rates. In the following weeks, we will be implementing further incentive packages that will provide immense opportunities for investors. All of these will hopefully improve investments in 2017.
The annual budget of 2017 will be submitted to parliament on Oct. 17. There are various aspects that concern the larger public. How will the budget be distributed between education, healthcare and social welfare? What will be the employment policy?
First of all, I would like to express that we prioritized the maintenance of financial discipline. If a country doesn't have a sound budget, nothing can be accomplished. Therefore, while we were preparing the OVP, we prioritized expenditures that will decrease the deficit between the years 2017-19. Regarding public expenditures, we gave emphasis on expenditures that will contribute to the growth on the long-term. We also tried to create a public income policy that will contribute to the economy and investments.
The ratio of the budget deficit to the national dividend is an essential measure used in international comparisons and also an indicator of how the state is faring economically. We estimated a 1.9 percent deficit by the end of 2016. However, this deficit will decrease to 1.7 percent in 2017 and by the end of OVP it will decrease to 1 percent. Comparing this data with the ones of the OECD countries or developing countries will reveal that we have a solid financial discipline. We prepared the central administrative budget according to this principle. Moreover, Turkey has a budget deficit under 2 percent for four or five years. Even if it is going to increase to 1.9 percent, we believe that it will eventually decrease to 1 percent. Therefore, we find financial discipline crucial and we know it is crucial for financing the private sector as well.
The 2017 budget also has many expenditure programs that will contribute to growth, as was the case in previous budgets. We said we would increase exports and, for many years, we had a fund of TL 1 billion for exports. We increased this to TL 3 billion in the 2017 budget. As the prime minister said, the main force behind the private sector's productiveness and effectiveness are infrastructural investments. We increased the investment-to-national dividend ratio to 2.8 percent from 2.3 percent for 2017 because of this. This means that we provided an additional TL 8-9 billion for investment expenditures.
Our investment expenditure has two axes. The first consists of the development plan for Eastern and Southeastern Anatolia. Public investments are especially significant for this plan. This constitutes some portion of the increase in investment expenditure. The other axis is education and healthcare; we will provide a larger budget for these fields.
The year for investments in projects such as highways, railroads and airports is going to be 2017. This will contribute to the private sector. We believe that if we are going to have extra expenditure, this should be utilized for investment and production as per the prevalent general notion of growth in the world. You have to have public expenditure programs that will nurture growth and production in the long-term. Turkey is doing exactly this, and we have a budget deficit under 2 percent, that is better than most other countries. Moreover, towards the end of the OVP, the ratio of our national debt to our national dividend is forecast to decrease to 30 percent.
During the OVP announcement meeting, Prime Minister Yıldırım focused on the importance of public savings. For instance, he said there will be measures, such as limiting travel of personnel abroad unless absolutely necessary and halting the purchase of compounds. How will the public savings programs be applied?
We will try to control or even decrease our current expenditures. We foresee a 2 percent decrease in current expenditures by the end of the OVP. Current expenditures consist of buying public commodities and services, stationary and inventory expenses. In the 2017 budget, we decreased the ratio of public expenditure. Thus, public institutions will have to decrease their expenses and save. If we are to encourage people to save like the public institutions, we have to do it first. These savings are also true for personnel employment; we will try to limit employment and make do with the existing personnel. This means that the personnel will work at the right institution and at the right time. In this context, there will be a decrease in the personnel employment numbers compared to 2016. A more detailed explanation will be provided during the budget meeting. However, 2017 and the years to follow will be characterized by rationalized personnel employment, public savings and decreased current expenditure.
