In a recent issue of the Financial Times, Roula Khalaf, the editor, highlights key stories from around the globe, with a focus on Turkey's economic prospects in light of recent developments. Turkey's finance minister, Mehmet Şimşek, has offered an optimistic outlook for the country's economy, suggesting that it has the potential to outperform other emerging markets affected by tariffs imposed by former U.S. President Donald Trump.

According to Şimşek, Turkey's manageable exposure to U.S. trade and declining oil prices position the country favorably for recovery as global markets stabilize. He explained that the recent drop in oil prices would significantly help narrow Turkey's current account deficit, which is crucial for rebuilding international reserves—an important measure of the macroeconomic reforms Şimşek initiated approximately 18 months ago.

Şimşek pointed out that alongside the recovery in oil prices, slowing global growth and the implementation of tight domestic monetary policies are also contributing to a disinflationary environment. This situation is expected to help alleviate Turkey's inflation, which has been a central focus of Şimşek's stabilization program.

When discussing the implications of U.S. tariffs, Şimşek noted that Turkey's economy, valued at $1.3 trillion, remains relatively insulated. A staggering 80 percent of Turkey's trade occurs with nations that have free trade agreements with Turkey, such as those in the European Union, as well as with 'friendly neighbors' in the Middle East, Central Asia, and North Africa. In the previous year, bilateral trade with the United States reached $32 billion, accounting for about 5 percent of Turkey's total trade in goods, with a $1.5 billion surplus benefitting Turkey.

Despite the optimism, Şimşek's economic policies faced a significant test after the arrest of Istanbul's mayor, Ekrem İmamoğlu, a prominent opposition figure and a key rival to President Recep Tayyip Erdoğan. This incident sent shockwaves through Turkish financial markets, resulting in a pronounced decline in investor confidence.

Şimşek commented on the recent political turbulence, stating that it had a temporary but substantial impact on the markets, emphasizing that current challenges are more tariff-driven than politically motivated. He acknowledged the reality that while Turkey may have to cope with slower growth, its vulnerability to external shocks—like U.S. tariffs—is relatively manageable.

İmamoğlu's detention sparked the largest street protests in over a decade, prompting the central bank to increase interest rates and spend billions of dollars to support the lira. İmamoğlu has denied any wrongdoing related to the corruption charges against him, while critics argue that his arrest highlights Erdoğan's growing authoritarianism. Conversely, government officials argue that it demonstrates that the rule of law applies to all, regardless of stature.

Following these tumultuous events, the Turkish lira has stabilized, and many analysts concur that the country has weathered the worst of this bout of market instability, albeit at the cost of maintaining high interest rates. Inflation has decreased to 38.1 percent as of March, a significant drop from its peak of 75 percent in May of the previous year. Currently, interest rates stand at 42.5 percent.

Analysts from Barclays noted that although the central bank is expected to maintain interest rates this month, it is benefiting from a trend towards normalizing dollarization domestically and decreasing non-resident outflows. This normalization follows a period of intense pressure on reserves following İmamoğlu's arrest.

Şimşek acknowledged that a slowing economy could lead to lower tax revenues, which might widen the budget deficit beyond initial forecasts. However, he emphasized that the primary goal of maintaining a small fiscal deficit is to assist the central bank in reducing inflation, rather than preventing the rise of Turkish debt, which remains relatively low at around 25 percent of GDP. The budget deficit was projected to decrease to 3.1 percent of GDP this year, down from 4.9 percent in 2024.

“We will maintain spending discipline regardless,” Şimşek stated confidently. He believes that the overarching narrative is one of resilience: Turkey can adapt to current economic challenges.

Mehmet Şimşek is widely recognized as a key figure in Turkey's return to economic orthodox practices, particularly after the previous regime's preference for cheap credit led to rampant inflation and a balance of payments crisis. Many investors and analysts argue that the recent market fluctuations have bolstered the positions of Şimşek and other reform-minded officials within the government, as their policies offer a stable economic foundation for Erdoğan's administration.

“As long as Şimşek remains in his position, I believe the market can serve as a stabilizing force against political instability,” remarked Tim Ash, a seasoned analyst of Turkish affairs at RBC Bluebay Asset Management, in a recent blog post.

However, long-term concerns linger regarding Turkey's weak rule of law and ongoing political instability, both of which could adversely affect the country's economic prospects. While Şimşek refrained from commenting on political matters, he affirmed his commitment to principles such as the rule of law, price stability, predictability, and an improved investment climate. “Those are music to my ears,” he concluded.

Additional reporting for this article was contributed by Joseph Cotterill from London.