Finance Minister of the Year for Emerging Europe 2013
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Finance Minister of the Year for Emerging Europe 2013

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Mehmet Şimşek, Turkey

“The Turkish story stands out as the prime example of how numerous emerging market countries have not only managed to turn around their fiscal situation in the past years but also to consolidate the backdrop and increase fiscal credibility at a time when G7 countries are struggling to deal with an ever-increasing debt burden and an ageing population,” says Simon Quijano-Evans, head of emerging markets research at Commerzbank.

Gross domestic product growth averaged 3.7% in the first half of the year, driven by strong domestic demand. Turkey’s government debt-to-GDP ratio is around 36%, a performance that few countries in emerging Europe can boast; generally most of the emerging European countries that have low debt are rich in commodities such as oil.

“Turkey’s fiscal policy is standing out in the region as being very solid,” says Nomura’s emerging markets analyst Peter Attard Montalto. “The message that the government is giving out there is bizarre, if you compare it to other countries. They say that 35% [debt-to-GDP ratio] is too high. That sort of message has kept them in the good books with investors much more than the fiscal goings-on anywhere else in emerging Europe.” Montalto believes that rating agencies will deliver more upgrades for Turkey in time, as soon as the social issues that sparked protests in Istanbul over the summer are resolved.

Analysts say the whole government is to be commended for the country’s solid economic position. But finance minister Mehmet Simsek “managed to contain Turkey’s budget, halve Turkey’s public debt and preside over the country becoming investment grade,” says Charles Robertson, global chief economist at Renaissance Capital.

However, Simsek might not achieve the same performance over the next 12 months, because next year there are elections and “there will be strong temptations to spend a little bit more,” Robertson says. However, he is not too worried. “They’ve got one of the lowest debt ratios of the countries we look at, and I can’t believe that the government is going to blow that in the next few years,” Robertson adds.   —Antonia Oprita

EM INTERVIEW Minister Mehmet Simsek says his country’s biggest achievement was the successful rebalancing of the economy, which, with real GDP growth of nearly 9% in 2011, a current account deficit of about 10% and inflation at just over 10% was “clearly overheating”.

“Thanks to effective policy measures we have implemented, Turkey has avoided a hard landing,” Simsek tells Emerging Markets. “The economy has now returned to a sustainable growth rate, the current account deficit has fallen to a more manageable level, and the inflation rate fell to a 44-year low in 2012. Managing a soft landing has improved Turkey’s policy credibility and reduced its vulnerability to adverse shocks.”

He says Turkey achieved a soft landing despite external shocks such as the prolonged eurozone sovereign debt crisis, the turmoil in Arab countries and high energy prices. “Sustained fiscal discipline has been one of the key factors behind Turkey’s outperformance in recent years,” Simsek says.

His most difficult time during the past year was keeping the deficit in check in a slowing economy. “Needless to say, soft landing required a significant slowdown in domestic demand. Without corrective measures, this, combined with an adverse global backdrop, would normally have led to significantly lower budget revenues. And considering my government’s continued desire to allocate increasingly more resources to infrastructure investments, healthcare, education and social programmes, [this] would have led to a significant widening in the budget deficit.”

Turkey hiked taxes on some products such as tobacco and petrol, kept expenditures in check and accelerated privatizations, Simsek says, adding that in 2012 Turkey’s general government fiscal deficit was 1% of GDP, 2 percentage points lower than the Maastricht Criteria that apply in the European Union.

“For this year, our biggest challenge will be pushing the Income Tax reform through the parliament before the deliberations begin on the 2014 Budget in December,” Simsek says.

The bill was submitted to parliament in June and is a major structural reform which aims to simplify Turkey’s complex tax legislation, encourage voluntary tax compliance, reduce the shadow economy and broaden the tax base, he explains. Over the past decade, Turkey has cut the shadow economy by six percentage points to 26.5% of GDP.

“We attach a great importance to combating the shadow economy to create a level playing field, which is essential to innovation and productivity,” Simsek says. “In 2011, we implemented a major tax audit reform that is already helping to reduce the size of informal economic activity. We aim to reduce it further to 18%, the average of EU member states, in the medium term, and to less than 10% in the long term.”   —A.O.

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