Turkey’s new economic programme offers an attractive bargain, but the electoral calendar may make that carefully balanced bargain considerably more expensive.)
Turkey’s new Medium Term Programme, or MTP, wants five things at once:
faster growth, lower inflation, falling unemployment, a smaller current account deficit and continued fiscal discipline.
Can Turkey deliver all five? Possibly. Would I use that combination as the base case in a bank stress test? Probably not.
I am Oguz Senbayrak, a financial risk management professional working across banking, asset and liability management and macroeconomic scenario analysis. This background has given me a particular professional habit. When a forecast looks exceptionally comfortable, I start searching for the discomfort hidden elsewhere in the balance sheet.
What Is Turkey’s New Programme Actually Promising?
Turkey’s MTP for the period from 2027 to 2029 projects economic growth rising from 3.3 per cent in 2026 to 4.2 per cent in 2027, 4.6 per cent in 2028 and 5 per cent in 2029.
During the same period, inflation at the end of the year is expected to decline from 28.4 per cent to 9 per cent. Unemployment is projected to fall from 8.1 per cent to 7.6 per cent, while the current account deficit is expected to narrow from 2.6 per cent of gross domestic product to 1.6 per cent.
As forecasts go, this is a cheerful document. Growth and disinflation are seated at the same table. Employment is making polite conversation with fiscal discipline. The current account has promised not to cause a scene. Even the final bill appears manageable. Unfortunately, economies do not always follow the programme printed on the invitation. These objectives are not unreasonable when considered individually. The difficulty lies in their interaction.
Faster growth must come largely from investment, productivity and export capacity. If growth comes instead from household consumption and easy credit, imports are likely to rise with it. Rapid disinflation requires restraint, while stronger growth in the near future usually requires some form of easing. Lower interest rates can offer relief to borrowers. Yet they can also weaken demand for assets denominated in Turkish lira if reductions arrive before inflation expectations have adjusted. A lasting fall in unemployment requires the creation of productive jobs. An unemployment rate that falls merely because people stop searching for work is not much of a victory. An improvement in the current account depends on exports, tourism revenues and manageable energy costs. Strong domestic demand and higher oil prices could quickly disturb that calculation. Fiscal discipline, meanwhile, requires careful spending priorities. Pressure for transfers, subsidies and incentives before an election may test that discipline.
What If Credit Starts Running Before Productivity Can Walk?
The strategic direction of the MTP is broadly sensible. It places emphasis on manufacturing, exports, advanced technology, small and medium sized businesses, green investment, digital transformation and productive investment. The programme also envisages wider credit guarantees, larger rediscount facilities and improved access to investment finance. The crucial word is “productive”.
Credit that allows a manufacturer to install efficient machinery, expand capacity or generate export revenues can increase the productive potential of the economy. Credit that mainly supports consumption can also produce growth, at least for a while. It simply produces a different kind of growth, usually with a less attractive need for foreign currency attached. An investment in a new factory and the purchase of an imported smartphone may both contribute to measured economic activity. They do not make the same contribution when Turkey later needs to earn the foreign currency required to pay for imports and external liabilities.
Structural reforms are notoriously patient. Improvements in education, technology, energy infrastructure and industrial productivity tend to arrive gradually. Credit campaigns are far less patient. They can become demand for cars, property and imported consumer goods within weeks. If supply takes the stairs while demand takes the lift, consumption may revive before productive capacity is ready. Imports may accelerate, the current account deficit may widen and demand for foreign currency may increase. Pressure on the exchange rate can then return to consumer prices. At that point, the central bank may find itself looking back with unexpected affection at the interest rates it recently reduced. This does not mean that Turkey should avoid supporting productive companies. High borrowing costs, weak foreign demand and pressure on working capital can damage otherwise viable businesses. The challenge is to distinguish credit that protects and expands productive capacity from credit that simply brings tomorrow’s consumption into today. That distinction looks perfectly clear in a policy document. It becomes less tidy once money begins moving through the banking system.
When Does Economic Support Become an Election Economy?
The MTP is not formally an election economy programme. Its stated priorities include disinflation, fiscal discipline and balanced domestic demand. It nevertheless creates a sizeable framework through which economic activity can be supported. Credit guarantees, subsidised facilities, exporter finance, assistance for smaller businesses, employment incentives, debt restructuring, social housing and public procurement can all serve legitimate economic purposes.
None of these instruments provides evidence of an election economy on its own. A screwdriver can assemble a bookcase or create a hole that nobody requested. The tool is not the problem. Purpose, timing and scale determine the result. The dividing line is crossed when economic support begins to lose its targeting and becomes increasingly linked to the electoral calendar. One reduction in interest rates does not create an election economy. Neither does a single wage increase, credit programme or social transfer.
The picture changes when several developments arrive together. Suppose policy rates begin falling faster than inflation expectations.
Consumer lending then starts accelerating, while public banks provide cheaper finance on an increasingly broad basis. At the same time, wages, pensions and social transfers may move away from the disinflation path. The budget deficit may begin to exceed the projections in the MTP. If increases in prices controlled or influenced by the public sector are also postponed, the cost does not disappear. It waits elsewhere, usually in the public accounts or in the form of a larger adjustment after the election. Add renewed demand for foreign currency and weaker reserve accumulation, and controlled normalisation starts to look like something else. The important distinction is therefore not between government support and no government support. It is between targeted assistance that increases productive capacity and broad stimulus that mainly increases current demand. If interest rates, credit, wages, transfers and public spending enter the room together and loudly introduce themselves, it becomes difficult to pretend that this is still a small gathering.
Will Inflation Follow the Official Calendar?
The MTP aims to bring inflation down to 9 per cent by 2029. That requires more than a temporary slowdown in spending. The pricing behaviour of households and businesses must also change. Companies often set prices with one eye on their costs and the other on the inflation they remember. Workers base wage demands on purchasing power already lost. Landlords occasionally combine past inflation, expected inflation and an alternative economic reality in a single rent increase. Reducing inflation from close to 30 per cent to a single digit rate within three years therefore requires a broad adjustment in expectations and behaviour. Real interest rates will need to remain sufficiently positive. Credit growth must remain controlled, and fiscal policy must avoid working against monetary policy. The Turkish lira should follow an orderly but credible path rather than being held at a level that gradually damages competitiveness. Wages and prices will need to become more focused on future inflation rather than past inflation. Food and energy prices must also remain reasonably cooperative, which is never an entirely safe assumption. Most importantly, households and companies must believe that the programme will remain in place when its political cost becomes uncomfortable.
That last condition may be the hardest. As elections approach, pressure to compensate households for lost purchasing power will increase. This pressure is economically understandable and politically difficult to resist. However, if incomes, credit and public expenditure rise faster than productivity, inflation may take back part of the relief before households have had much time to enjoy it.
The economy occasionally opens the gift box and discovers the original problem inside, wearing a new ribbon.
Why Should Banks Pay Particular Attention?
Banks will be central to the growth strategy in the MTP. They will also be among the first institutions to absorb the side effects if controlled easing turns into an electoral credit expansion. A gradual decline in interest rates could improve the ability of borrowers to service their debts. Corporate funding costs could fall, demand for loans could recover and some pressure on asset quality could ease.
However, rapid credit growth can temporarily disguise existing weaknesses.
Borrowers may refinance rather than repay. Companies with impaired cash flows may appear healthier while new liquidity remains available.
The underlying risk may become visible only when credit conditions tighten again. This is why the headline capital ratio is rarely the end of the conversation in financial risk management. I would also want to know what happens if deposit costs remain stubborn, the Turkish lira weakens and restructured corporate loans begin to deteriorate at the same time. Deposit behaviour deserves equal attention. If interest rates decline too early, savers may shorten deposit maturities or move towards foreign currency and gold. Banks could then face greater sensitivity on both sides of their balance sheets. Assets may adjust more slowly, while the cost or composition of liabilities may change much faster.
What Will Tell Us Whether the Plan Is Working?
The targets in the MTP are not impossible, but it would be unwise to judge progress only through headline growth or official policy statements. Consumer lending will reveal whether domestic demand is beginning to accelerate too quickly. The lending behaviour of public banks will show whether support remains selective. Real interest rates will indicate whether monetary policy is genuinely restrictive rather than merely described that way.
Budget performance will be equally important. If new transfers and incentives are financed through expenditure savings or more efficient revenue collection, fiscal credibility may remain intact. If they are simply added to existing commitments, the central bank will be left carrying more of the burden of disinflation.
The composition of foreign financing also matters. A current account deficit financed by direct investments with a long horizon is not the same as one financed by portfolio flows with short maturities or by using central bank reserves. The headline number may be identical, but the resilience of the economy is not.
The behaviour of deposits will provide another signal. A stable or rising share of Turkish lira deposits would suggest that confidence in the programme remains intact. A renewed shift towards foreign currency or gold would indicate that households and companies are becoming less comfortable with the relationship between interest rates, inflation and the exchange rate. I would therefore watch consumer credit, lending by public banks, real interest rates, budget execution, the maturity and composition of deposits, net reserves and the quality of current account financing. Together, these indicators will show whether Turkey is moving towards productive relief or borrowed comfort. The most fragile assumption in the MTP is not the forecast for oil prices, tourism revenues or even the expected improvement in productivity. It is the assumption that policy discipline will survive the growing demand for economic relief as elections approach.
Economic programmes write the targets. Electoral calendars have a habit of enlarging the footnotes.
About the Author
Oguz Senbayrak is a Financial Risk Consultancy Manager at EY, specializing in market liquidity and interest rate risk management. With a background in economics and an MBA in progress, he has extensive experience in financial risk management, derivatives, and speculative market behavior, making him an expert on inflation dynamics and consumer behavior in emerging markets.
