P.A. Turkey

HSBC Turkey outlook:  Where are we now? Where are we going?

Summary

 

We continue to expect Türkiye to experience gradual economic adjustment in 2024

In theory, it should be possible to deliver a much faster pace of disinflation and to  shrink the external shortfall more meaningfully, but we think policymakers will  continue to prioritise a soft landing for the economy, especially with local elections  now less than three months away. We expect some fiscal stimulus in the lead up to the vote and forecast the budget deficit to widen in 2024 as a whole, but envision no  monetary or credit-channel easing. We think growth is set to slow from an estimated  4.0% last year to 2.5% in 2024.

Slow pace of disinflation

Inflation stood at 65% y-o-y at the end of 2023, while the six available core inflation indicators were in a 61-71% range. We expect a slower pace of disinflation compared to the central bank’s projections and see headline inflation at 45% by end of 2024 (vs the CBRT’s forecast of 36%). There is a high degree of stickiness in services prices in particular, while inflation expectations remain extremely high.

One-year ahead expectations stood at 41% in December, compared with fluctuating in a 5-10% range five years ago. We see some risk that if inflation remains above 40% this year, after ending 2022 and 2023 at close to 65%, it may become further entrenched, which in turn could require a more forceful monetary policy response.

External deficit easier to manage, but vulnarabilities remain

Despite the persistent current account deficit, reserves have risen since June, when the CBRT started its tightening cycle, although this partly reflected net errors and omissions inflows in June-August and the favourable seasonality of the current account during the third quarter. More recent data since the start of the year shows a modest decline in net foreign assets. Portfolio investment has turned from outflows to inflows, reaching USD6.6bn in January-November, but FDI remains subdued.

Taken together, these trends show that while external dynamics have become more sustainable in recent months, vulnerabilities remain. If portfolio flows slowed or  financing pledged from the UAE did not materialise, funding the estimated USD30bn current account shortfall for 2024 may not be straightforward.

 

No monetary easing in 2024

 

From a policy perspective, the primary risk is premature easing. The central bank has given no indication that it is considering rate cuts in the near term, but the outlook can shift if activity weakens more than expected. We expect the policy rate to peak at 45% after a final 250bp rate rise on 25 January and see no room for cuts in 2024 given the inflation trajectory.

 

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