Regarding Turkish assets, we are selective on stocks and Eurobonds and more neutral on lira and local bonds. Investors need to act more tactically in 2024. It is possible to reap the rewards of being open-minded, flexible and more alpha-oriented in 2024.
We expect energy prices to be lower in 2024, which if true could be a positive development for Turkish assets. We also think that both credit outlook and rating upgrades are likely in 2024. This will actually mean that the financial improvements priced in Credit Risk Premium (CDS) spreads will be confirmed by rating agencies.
The economics of asset allocation
We expect a slowdown in economic activity in 2024. Although our forecast is for real GDP growth of 4 percent, we think the risks are to the downside. According to the latest available data, Turkish economy grew by 5.9 percent on an annual basis in the third quarter, to slow significantly compared to the previous quarter with 0.3 percent Q/A growth. We expect the lagged effects of interest rate increases, tight financial conditions, including lower credit growth, and the suppression of domestic demand, as well as net exports, to curb economic activity.
On the other hand, higher fiscal spending and a strong labor market are expected to have a positive impact on growth. We do not expect a recession in 2024.
The production side seems weaker than the demand side. On the one hand, industrial production continues to slow down, recording its fourth monthly decline in November; with manufacturing PMI faring below 50 for 5 months.
On the other hand, imports of consumer goods increased by around 40 percent in November, while retail sales increased in October. Consumer confidence has been on the rise since August. Additionally, high and sticky services inflation indicates that domestic demand is resilient.
We expect annual inflation to decline sharply in the second half of 2024, largely due to base effects, after reaching around 70 percent in May, predicting CPI inflation around 37 percent at the end of the year. However, we think the risks are to the upside.
Inflation still sticky
Services inflation rose to 89.7 percent on an annual basis in November. Services inflation was 62.4 percent in January 2023. In our opinion, the path of services inflation next year will be an important issue. We think that services inflation appears to be largely demand-driven, and that particularly high and sticky services inflation creates a higher-than-expected inflation risk.
Our view is that the restrictive central bank policies currently in place, combined with an expected decline in spending, will allow services inflation to cool gradually. But if services inflation does not decline, the central bank may face the possibility of maintaining tight policies for longer than expected.
No external financing bottleneck in 2024
When we look at the balance of payments; The 12-month current account deficit decreased from 51.7 billion dollars in September to 50.7 billion dollars in October. In January 2023, this figure was $52.7 billion. So there was a slight improvement. The decline in the “core” current account surplus, excluding gold and energy, from 50.7 billion USD in January 2023 to 35 billion USD in October 2023, shows that the expected rebalancing has not yet fully begun. We expect the current account deficit to remain broadly stable at around 4 percent of GDP in 2024.
On the financing side, capital inflows accelerated following the change in the economic management team, leading to an increase in both gross and net foreign exchange reserves. We do not expect any external financing problems in 2024.
The central government budget deficit was 532 billion TL as of November, much lower than expected, compared to the year-end estimate of 1.6 trillion TL. In the January-November period, central government budget revenues increased by 83 percent on an annual basis, due to the 89.6 percent increase in tax revenues. In the January-November period, budget expenditures increased by 102.2 percent compared to the same period of the previous year. While non-interest expenditures increased by 100.5 percent in this period compared to the same period of the previous year, this increase was driven by the increase in personnel expenses by 117 percent and current transfers by 104 percent compared to the previous year.
In the Medium Term Program, the central government budget deficit for 2024 is estimated to be 6.4 percent of GDP. Our forecast is also for a wide deficit, but we think the risks are towards a lower outturn.
When we look at Monetary Policy; The CBRT continued its hawkish stance at the Monetary Policy Committee (PPK) meeting in December and signaled that another interest rate increase could be made in January before the possible end of the cycle.
When and where will CBRT stop?
We think that the CBRT will make a final interest rate increase of 250 basis points, hiking the final interest rate in this cycle to 45.0 percent.
According to the CBRT survey, annual CPI inflation expectations are 41 percent and 25 percent after 12 and 24 months, respectively. After the last increase in January, which we expect to be the last, we expect a “higher for a longer time” stance in which interest rates will remain unchanged for a long time. If inflation falls more than expected, there will be room for policy rate cuts in the first half of 2024. However, as we mentioned above, we think the risks are on the upside and therefore we do not expect the CBRT to cut interest rates before the fourth quarter of 2024.
One of the most important questions is what kind of game plan the central bank will implement as inflation declines in the second half. With ambitious 2025-2026 inflation forecasts, it is important to decide how and when inflation pressures have been sufficiently eliminated to make progress.
By Murat Berk, Chief Strategist, Yapi Kredi Investment
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