VP Yilmaz held a conference with the participation of Finance Minister Mehmet Simsek, Central Bank of Turkey (CBT) Governor Fatih Karahan, and relevant members of the Cabinet and presented details of the Medium Term Plan (MTP) for 2025-27, which includes the government’s macroeconomic projections and outlines the main set of policies and reforms. For Turkish economists, the new MTP was no different than previous versions, adopting ambitious growth and inflation targets, without acknowledging the sacrifice in GDP growth that must necessarily be paid as the price.
ING EM research team wasn’t too impressed by the new MTP. The below is a summary of their view:
Yilmaz emphasised that disinflation remains the main policy focus while pledging continuing coordination between monetary, fiscal and income policies to reduce inflation to single digits over time.
According to the MTP, GDP growth forecasts were revised down for 2024-26, by 0.5pp each year. However, it should also be noted that the government sees growth accelerating between 2025 and 2027, from 4.0% in 2025 to 4.5% in 2026 and 5% in 2027, which is the same path in comparison to the previous MTP’s forecast horizon (between 2024 and 2026).
The authorities’ growth projection of 3.5% for this year looks more optimistic than the consensus (3.4%). We see economic activity further slowing from 3.8% in the first half of the year given the implications of a tighter macro policy mix and will be around 2.5% this year. We also believe that the official forecast path beyond 2024, which is more ambitious than the consensus view, will be challenging to achieve.
On the inflation side, the MTP sees that inflation, expected to be 41.5% at the end of this year (up from 33% in the previous plan) would be above the CBT’s forecast of 38%, though remains in its 34-42% forecast range. The MTP also revised 2025 inflation to 17.5% (from 15.2%), while the central bank sees 14% in the latest inflation report with a forecast range of 7-21%. This revision likely increases the possibility of a similar upward revision in the CBT’s forecast for end-25 with the release of this year’s last inflation report in November.
In the fiscal sphere, the new programme forecasts the 2024 central government budget deficit at 4.9% of GDP (from 6.4% in the previous plan), which is broadly in line with Simsek’s earlier guidance that they target a budget deficit-to-GDP ratio this year close to the level realised in 2023 (5.2%) or lower.
The MTP envisions 3.1% of GDP budget deficit in 2025 and looks for a steady improvement thereafter with the deficit narrowing to 2.5% of GDP by the end of 2027. The government has signalled fiscal prudence as it plans to achieve budget targets for next year via spending cuts of as much as 1.5% of GDP and expanding tax income by 0.9% of GDP.
Simsek explicitly pointed out that fiscal policy would provide very strong support to disinflation, implying less reliance on inflationary administered price hikes and tax hikes. It should also be noted that the combination of subdued public investment (capital expenditures and capital transfers to decline by 0.7% and 1.15% of GDP respectively) and relatively strong current spending (up by 0.3%) in 2025 according to the MTP is not particularly desirable for the long-term growth outlook.
Most Turkish economists looked for a new tax package to boost revenues to reach 2025 targets, but reportedly it will not be forthcoming. Instead, the Presidency has instructed Simsek to crack down on tax evasion by landlords, companies and professionals.
Finally, regarding USD/TRY assumptions derived from the MTP figures, Yilmaz highlighted that the USD/TRY assumptions in the MTP are based on the market participants’ expectations for this year, while they relied on inflation differentials for the following years to assuming no real change in the value of the currency, wrote ING research team.
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