Pandemic revisions, future assumptions in the New Economic Program

The New Economy Program (NEP), announced by Treasury and Finance Minister Mr. Berat Albayrak, brings significant revisions in macroeconomic forecasts, it is seen that these revisions are made in a manner close to the levels predicted by the market in general terms.

In the Program, the estimates for this year and the next years in the growth forecasts have been reduced by taking into account the "new normal" dynamics created by the pandemic; growth expectation was decreased from 5% to 0.3% for 2020, and increased from 5% to 5.8% for 2021. Forecasts are created as 5% for 2022 and 2023.


Basic deduction from growth expectations; With the gradual recovery of demand after experiencing the effects of normalization process of Turkey's economy this year, coronavirus pandemic resists assumption for 2020; It includes the prospect of a sharp recovery for 2021, aided by a strong base effect. Of course, since unpredictable situations change the balance on economic indicators, it is important that alternative scenarios have been created within this NEP, so it is necessary to be aware of the risks to these predictions by looking at the effects of the epidemic, whether the effects of the epidemic pass or not, and the effects of return and recovery on economic dynamics. Although a cumulative demand growth will be supportive due to the stimulation of loan growth especially for the 3Q20 period in 2020, the inflation risks brought by the weak TRY have caused this policy to change. Tighter financial conditions indicate that this credit growth will not affect the end of the year and will decrease the 4Q20 growth.


The high trend in inflation will continue for this year. Inflation targets foreseen in the NEP were increased from 8.5% to 10.5% for 2020. The following years show a one-year delay in terms of the target below 5% because of the increase in inflation caused by the depreciation of TRY and the pandemic. The 2021 target has been increased from 6% to 8%. The inflation forecast for 2022 was 6%, and the inflation forecast for 2023 was 4.9%. In the Inflation Report announced by the Central Bank at the end of July, the estimates for 2020 and 2021 were 8.9% and 6.2%, respectively, and it is likely that the CBRT will revise these expectations in line with the NEP in the next report. The Central Bank will announce the last Inflation Report of the year at the end of October. With the surprise rate hike last week, advancing the tightening phase in the next period will be important in preventing the decline of TRY and reducing inflationary risks. The MPC meeting on October 22 in terms of tightening or interest rate hike decisions, and the Inflation Report on October 28 in terms of guidance in managing the process will both be critical.


The ratio of current account deficit to national income was revised up from 1.2% to 3.5% for 2020. The current account deficit / GDP forecast was set at 1.9% for 2021 and 0.7% for 2022. The pandemic had an impact on the current account balance through the foreign trade deficit and the service balance at the same time. While the volume contraction in exports was higher than in imports, there was a loss from tourism revenues due to the closing effect of the epidemic. At the same time, the epidemic had an unusual upward effect due to the high demand on gold imports. While the new assumptions include these effects, the predictions that there will be no losses from tourism and the epidemic will not create a new economic shutdown effect in 2021 and beyond.


Assumptions regarding the budget are also based on realistic foundations. The ratio of central government budget deficit to GDP was projected as 4.9% for 2020, with the previous NEP estimate of 2.9%. The budget deficit / GDP was estimated at 4.3% for 2021 and 3.9% for 2022. This year, the decline in tax revenues and government support within the scope of economic measures caused the budget deficit to grow. In this context, there was an expectation close to 5% of the budget / GDP ratio during the year. Due to the course of the epidemic and the necessity of government supports in terms of the recovery process of the real sector, the budget deficit will remain high in the period when the growth in the economy is seen again.


Basing the forecasts on rational foundations, creating alternative scenarios for uncertainties, emphasis on structural transformation in the broader period are prominent details in terms of the NEP. Although the epidemic is still an important element of uncertainty in terms of the economy, the second / third waves will try to be set on a ground where the shock effect will be slightly lighter and economic life can have a smoother adaptation. Therefore, a total closure effect is not expected on the basis of local economy or global economy. In terms of structural transformation in the economy, reducing the effect of dollarization, therefore reducing the import demand, making import substitution and reducing the dependence on imported inputs stand out as a necessity. The effects on economic balances in Turkey takes place in a cascade way or indirectly; For example, the weakening of the TRY does not cause an increase in exports directly, but also causes an increase in import costs, a contraction in demand, a contraction in production due to a decrease in input imports, or a high inflation with its effect on costs. The transition to high technology, competitiveness in global markets and the transition to the position of a net exporter have the most important place in our structural transformation and it seems that there is a need to implement clear policies in this regard in the long term.


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