Turkey: Economic measures, VAT reduction, gold under the pillow, credit support

As the main theme, if we take a look at the prominent items in the package, which deals with the measures and practices within the scope of Turkey’s new economic program, as well as the planning in this area;

o President Mr. Recep Tayyip Erdoğan said that the value added tax on basic food products will be reduced from 8% to 1% in order to reduce inflation. Erdoğan urged companies to lower their prices from Monday to reflect the change.

The lira fell and inflation rose as the central bank cut interest rates by 500 basis points in four consecutive meetings since September. Annual inflation rate in January, rose to 48.7%, the highest level since Mr. Erdogan came to power two decades ago. In an environment where consumer inflation converges to 50% as a very high band, food inflation is still one of the most controversial issues. The VAT measure here is important in terms of reducing food inflation. Of course, for the effectiveness of the VAT reduction here and for it to have more significant effects on inflation, companies and businesses will also need to reduce prices. The weight of food in the inflation basket is 25.32%. This ensures that the reflection of the 7% VAT reduction on inflation is roughly 1.8 points.

In the management of inflation, If we look at the Minister of Treasury and Finance Mr. Nureddin Nebati’s statements on Saturday and Friday, it is desired to establish a fight ground both on the supply side, on the demand side and on the expectation management. In this context, a mechanism will be established to tighten inspections, especially in order to combat exorbitant or unjustified price increases, and a mobile application will be developed that will direct citizens to discounted products in their regions in order to be less affected by inflation.

With regard to energy-based inflation, it was emphasized that the government gave up 200 billion TRY of revenue with significant subsidies, and thus covered a significant part of the high price increases that affected electricity and natural gas bills. These subsidies were mostly carried out in the form of the application of the scale mobile system and other incentives. The depreciation of TRY in this process makes it difficult to keep the inflation in these items under control and causes the government to waive its revenues due to ongoing incentives and subsidies. Of course, there are also important external challenges based on global supply in energy-based inflation, and we have to monitor the short-term geopolitical risks as a decisive phenomenon in this regard.

· Mr. Nebati urged the Turks to bring their “under the pillow” gold savings – an estimated 5,000 tons – into the banking system: “This corresponds to 250 billion-350 billion dollars. Some of this will support the central bank and meet its foreign exchange needs”.

For a long time, studies have been carried out to bring gold under the pillow to the economy and various financial products have been introduced. So far, there has been no significant response regarding the gold under the pillow. The Turkish people’s approach to gold, to protect themselves against economic fluctuations and to use it as a traditional investment tool, was effective in limiting this return. In order to bring under the pillow gold to the economy, the opportunities of the currency protection provided by the citizens in the FX currency will be used. Citizens will be protected from the differences that will occur in the changes in the price of the gold delivered to the banks at the end of the maturity, as in the currency protected deposit product, and the difference will be covered. Thus, they will not be adversely affected by price changes between the delivery date and due date.

· Mr. Nebati also detailed a new Credit Guarantee Fund package up to 60 billion liras ($4.45 billion) of which the government is the guarantor. The government offers new loans to medium and high-tech companies at interest rates of up to 16%. This is quite cheap, as the interest rate for commercial bank loans can reach the 35% band and the weighted average commercial loan interest rate is 22.74% as of the week of February 4, according to EVDS data. The government will monitor the use of funds to enable them to finance production and exports, in response to complaints that companies have previously used such loan packages to buy dollars.

We have seen that CGF, which provided an economic support of around 250 billion TRY in 2017, performed an important task by being commissioned during the epidemic period. According to the Elmalı escort supports called the Government Supported Guarantee System in the new economic package, there is an inclusive package with a total of 60 billion TRY provided to companies at the point of supporting the loans that are evaluated in accordance with the intended use. The supports under three main headings are divided as follows;

· 25 billion TRY – Encouraging new investments

· 25 billion TRY – Supporting exports

· 10 billion TRY – Completing the working capital requirement

The details in the investment support package provided are;

· Maximum 24 month grace period

· Maximum 96 months maturity

· SME and non-SME companies will benefit

· Profit Share rate

o 0-24 Months: Fixed (TLREF + 1%)

o Over 24 Months: Fixed (TLREF + 2%)

· Interest rate

o 0-24 Months: Variable (TLREF + 1%)