Morning news from Turkey:  Foreign policy dominates, outlook for TL positive

In a Reuters report, a senior official from the US State Department stated that Foreign Minister Hakan Fidan told his NATO counterparts that Sweden could join the alliance before the end of the year.

As you may remember, while Sweden and Finland applied to become members of NATO in May last year after Russia invaded Ukraine, Ankara approved Finland’s application for NATO membership in April this year, but put Sweden’s application on hold.

The legislative proposal regarding the approval of Sweden’s accession protocol to NATO was sent to the Foreign Affairs Committee of the Turkish Grand National Assembly last month. The delay in ratification tests Ankara’s relations with its Western allies. Stated  simply, if the  Grand National Assembly approves Sweden’s membership, we think that US President Biden will eliminate hesitations in Congress against the sale of F-16s to Turkey.

Let us note that such an outcome will take Turkey-USA relations, which are on a troubled path, to a better conjuncture. It should not be forgotten that relations with the Western world are also considered a good indicator for desired foreign fund inflows.

After the positive developments on the foreign affairs front and  Central Bank (CBRT) President Gaye Erkan’s confidence-inspiring or ‘roaring’ speech at the Istanbul Chamber of Industry in the middle of the week, we need to slightly revise our view on the interest rate increase path. We came to the conclusion from Erkan’s speech that the CBRT will continue to increase interest rates if necessary for inflation to reach the 2024 year-end target.

We thought that after the regular MPC meeting concluded last week, the CBRT would stop the policy rate by bringing it to 45.00% with increases to be made in December and January. Even though we are still at the same point, we think that interest rates will remain high throughout 2024 to suppress inflation and may be increased up to 50%.

Parallel to CBRT President Erkan’s instilling confidence in almost every environment by saying ‘we believe, so should you’, the International Credit Rating Agency, S&P, changed the outlook of Turkey’s credit rating from stable to positive yesterday evening in an unexpected move.  We expect this step to be followed by other rating agencies. However, despite all the efforts of the economic management, the fact that the credit rating itself, which is at very low levels, does not increase will keep market  response modest.

In parallel with progress on economic policy at large, we see that foreign investors have started to show interest in TL denominated assets in recent weeks. At the beginning of the week, Paris-based Asset Management Group, Amundi, declared that it closed its TL short positions. Amundi underlined that although they are not yet ready to take a large position in TL-denominated assets, they have a very optimistic view due to the determined stance of the CBRT.


CBRT’s net reserves, excluding swaps and Treasury deposits, recovered to minus 59 billion dollars, reaching the best level in the last four months. Let us note that despite the significant increase in gross reserves recently, the improvement in the net position has remained limited. While the foreign investor’s stock and bond portfolio increased by 311 million dollars in the week of November 24, the cumulative figure of the increase that continued for four consecutive weeks was approximately 700 million dollars. We consider the recovery in the CBRT reserves and the slight revival of foreign investors’ love for Turkey “pleasing”.

If we continue with the data announced yesterday, foreign currency deposits of real persons residing in Turkey decreased by 0.4 billion dollars and legal persons by 0.6 billion dollars, while Exchange Protected Deposits (KKM), which is a kind of foreign currency instrument, decreased by 0.6 billion dollars in the week ending 24 November, according to BRSA data. Although the significant decrease in the volume of KKM in recent weeks slowed down a bit last week, we must say that KKM continues to decrease.


We can say that the return to standard deposits from KKM played a major role in the background of the decrease, as KKM’s very low interest rates encourage the return to TL deposits. In this context, we must say that the CBRT’s game plan continues to work.


In fact, last night another step was taken by the CBRT to support TL deposits. Accordingly, the interest to be paid to foreign exchange protected accounts will remain below the policy interest, but will not be below 85%. According to previous regulations, the interest rate could not be below the CBRT’s policy rate. The change may reduce the return on KKM accounts and thus reduce their attractiveness compared to normal deposit accounts.

Turkish financial markets completed the last trading day of the month in variable sentiment. Despite the data showing that the Turkish economy grew by 5.9% in the third quarter compared to the same period last year, stocks finished the day with a decrease of around 1%. We maintain our view that the growth data will continue to disappoint. Turkish stocks will to struggle as the effects of the tight monetary policy starts to bite. We do not have a very positive tone for stocks in a period when interest rates are moving upward. As a matter of fact, the BIST-100 main index, which has difficulty breaching the major resistance 8 thousand points, has been falling for three consecutive days.

On Thursday,  USDTRY exchange rate dropped from 29.00, where it started the day yesterday, to 28.85. Even though it was a small-scale decrease, this unusual situation made us happy.

On the bond front, while the compound interest of the 2-year benchmark bond fell below the 39% level, we started to look at the TL bond market in a more constructive  perspective!

We expect the upward trend in the USDTRY exchange rate to continue in parallel with the inflation dynamics. Let’s also note that TURKSTAT will announce November inflation on Monday. According to surveys, the monthly CPI increase is 3.8%. Thus, annual inflation will soar to 62.8%. Based on the assumption that the 12-month inflation expectation will be 43.90% and the US inflation will be 3%, we calculate that the USDTRY exchange rate will complete the end of 2023 at 29.5 and rise to 41.00 by the end of 2024.

In this context, let us state that we do not expect TL to lose value in real terms. To put it simply, we expect TL to provide enough protection to compensate for the rise in interest, exchange rate and inflation.


Translated  from Kibris İktisat Bank morning brief


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.