Recently, we briefly discussed whether the 2023 economy would be worse than 2001 in a friend conversation. In your opinion which one was harder?

In fact, there is a significant difference between the two periods; while orthodox economic policy was implemented in the early 2000s, missteps were taken. The 2023 period is the result of the policy modification made in 2021.

In a nutshell, the orthodox policy is the dominating approach. That is, it proceeds from the perspective of the neoclassical school. The heterodox approach is the one that opposes orthodoxy. Of course, the current high inflation is the result of recent heterodox policies. Because we can not claim that inflation is a phenomena that arises on its own. Maintaining the same currency rate during the election season in an effort to anchor inflation and keep it at a steady current level has resulted in an unstoppable rise following the election. And it keeps happening.

The election is over. The new economy squad has entered the game.

However, the minute the substitution was made, the score was pretty bad; high inflation, foreign exchange reserves that have fallen to what we can call "dangerous" (Central Bank) foreign exchange reserves, overvalued TL, the export sector forced by the valuable TL, the current account deficit exceeding 50 billion US Dollar annually, the banking sector forced to struggle with dollarization, the long-standing negative real interest, the increasing debt burden caused by the Currency Protected Deposits (KKM), as well as the additional payments (e.g. / Age Barrier in Retirement (EYT), bonuses) that the election imposed on the budget.

The reason for all these negative results can be called heteradox, that is, the result of unconventional economic policies. A group of economists predicted before the election that "interest rates will rise after the election whether the government continues or not." They were right. This was not a speculation; it was a simple fact. Otherwise, the economy would have had both the current account balance and the banking crisis. As it was, the policy had to change.

In order for the policy to change, a new team was formed and put into play to determine and manage the new policy. The first important act of the new staff was to raise the policy rate to 15 percent. According to many economists this rate is also low, and the period of negative real interest rates is still ongoing. They're right, but with so much of the vulnerability listed above, a sudden-shocking rate hike could have made the economy worse. Namely the sudden increase in loan rates would result in a slowdown in the economy and an increase in the companies' interest costs. In my opinion, it's a risky cocktail, for this time.

It seems that the Central Bank will raise its policy rate gradually. The general forecast is that the increases will be implemented in 500 basis points, or 5 percent increments. My prediction is that the policy rate could reach 30 percent by the end of the year. So is 30 percent the right rate? This question is quite difficult to answer! Suffice it to write; the year-end inflation expectation is at 55 percent, but the expectation for July 2024 is around 30 percent.

How will the currency deficit be dealt with?

According to Lenin, a capitalist system could be easily destroyed by simply deteriorating values of exchange rates. There isn't a more direct approach to upset the social order. Lenin was right in this regard. The currency deficit is an important issue as much as the issue of interest rates.

The economic team is still looking for foreign currency in the Middle East for this reason. If foreign currency is found, the exporter's foreign exchange transactions may return to the past. Reserves take a deep breath. In other words, the hand of economic management will be a little freer. Well, the ways to obtain foreign exchange quickly are obvious; swap, warehouse agreement, credit agreement, etc...

Gulf countries, according to reports, prefer methods such as export credit and direct investment instead of these ways. They follow more permanent  paths, in other words, they wish to invest. In this case, the volume of foreign exchange flow will be high and the speed will be slow. On the other hand, regardless of the method of currency transmission, the Gulf countries will have to concentrate on economic policy and be convinced that the economy is on the road to recovery. They are not wrong to wish to ensure the nation's economic health before making an investment.

Thus, in these countries, an economic administration that follows to orthodox policies may be preferred. Because we have seen this in the case of Egypt. Although the new squad instills confidence, they are not without reason to be worried. They may want to hear the commitment to economic policy from the highest authority in the country. In the past, a similar orthodox economy was disbanded after the team was formed; I am talking about the period of Naci Ağbal. In short, currency deals may be waiting for the visit of top management.

To sum up, I think the peak of the Central Bank policy rate in 2023 will be 30 percent. It is quite possible to make foreign exchange earning agreements with some western countries from the Gulf countries and even after the NATO summit.

The information, comments and advice contained herein are not within the scope of investment advice.