ING: Geopolitical Pressures Weigh on Türkiye’s Economy as Inflation Risks Rise

Geopolitical tensions continue to complicate Türkiye’s macroeconomic outlook despite a short-lived market rally following a ceasefire announcement. Rising energy prices, capital outflows, and weakening growth prospects are increasing risks to inflation, the current account balance, and fiscal stability.

Markets Stabilize After Turbulent March

Türkiye’s financial markets experienced significant volatility in March, with widening sovereign spreads, rising bond yields, pressure on equities, and higher offshore funding costs.

Following the ceasefire announcement, markets staged a partial recovery. However, sentiment remains cautious amid fragile US-Iran negotiations.

Türkiye’s CDS risk premium, which had climbed above 300 basis points to a nine-month high, has since eased to below 240 basis points.

Energy Prices Complicate Inflation Outlook

Uncertainty in global energy markets continues to pose a major challenge for inflation.

While the government has attempted to cushion the impact of higher oil prices through tax adjustments on fuel, increases in electricity and natural gas tariffs are adding to price pressures.

As a result, the inflation forecast for 2026 has been revised upward to 27.5% from 25.5%, with risks skewed to the upside.

Rising energy costs, along with second-round effects on expectations and fiscal balances, are expected to further complicate disinflation efforts.

Fiscal Space Exists, But Risks Persist

Budget data from the first months of the year indicate a more favorable trend than initially expected, providing some room to absorb energy price shocks.

The rolling 12-month budget deficit stands at around 2.4% of GDP.

A sliding-scale fuel pricing mechanism—designed to offset roughly 75% of global oil price increases—offers temporary support, potentially covering oil prices up to $105–110 per barrel under current exchange rate levels.

However, this mechanism could increase the budget deficit by up to 0.6% of GDP. Prolonged support or broader coverage could further raise fiscal costs.

Current Account Faces Upward Pressure

Geopolitical developments are also expected to widen the current account deficit.

Higher oil and gas prices, potential declines in tourism revenues, and rising gold imports all contribute to external imbalances.

A $10 increase in Brent crude oil prices is estimated to raise the current account deficit by $4–5 billion.

Under baseline assumptions, the current account deficit is projected to reach approximately $54 billion (3.1% of GDP) in 2026.

Growth Outlook Revised Lower

Economic growth is expected to come under pressure due to tighter financial conditions and a negative contribution from net exports.

The 2026 growth forecast has been revised downward from 3.4% to 3.0%, with risks tilted to the downside.

Capital Outflows and Reserve Decline

Since late February, Türkiye has experienced significant capital outflows:

• $9.6 billion in bond and equity outflows
• More than $21 billion unwound from carry trade positions

These outflows contributed to a sharp decline in central bank reserves. Net reserves (excluding swaps) fell from $78.6 billion to around $18.3 billion by early April.

More recently, reserve losses have stabilized, supported by FX swap operations and a partial reversal in capital flows.

Limited Domestic Dollarization

Despite foreign outflows, domestic demand for foreign currency has remained relatively subdued.

After adjusting for gold prices and exchange rate effects, there has been no significant increase in FX deposits or strong demand for FX mutual funds.

Central Bank Likely to Stay on Hold

Against this backdrop, the Central Bank of the Republic of Türkiye is expected to keep its policy rate and corridor framework unchanged at the upcoming Monetary Policy Committee meeting.

However, persistent geopolitical risks may prompt a more cautious stance, potentially leading to an adjustment of the policy rate from 37% to the current effective funding level of around 40%.

Outlook: Fragile Balance Between Stability and Risk

Türkiye’s macroeconomic outlook remains highly sensitive to geopolitical developments, particularly through energy prices and capital flows.

While recent market stabilization offers temporary relief, ongoing uncertainty continues to pose downside risks to growth and upside risks to inflation.

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