At the shores of Rubicon
The economy survived the shock stemming from the sudden change of Governor at the CBRT in late March, without a very major market turmoil so far, contrary to our huge concerns at the time.
One key reason is that the most obvious policy mistake, that of a deep and premature rate cut, was avoided. Other things like the softening US 10-year yields since, and absence of skirmishes with the Western partners on the foreign policy front, also helped.
Well, include this in the list of the proverbial “famous last words” if you so wish, but we think the next few months should be relatively calm in Turkey. Come autumn, however, things should get increasingly turbulent, with Turkey likely heading toward early elections some time during the first half of next year, we think, simply because we are looking to a highly unsustainable picture, in both politics and the economy, and June 2023 is still a long time off.
Growth momentum remained reasonably strong through the second quarter, though lockdown-related noise and the nature of the Covid shock (summed up as “uneven” in all regards), make data parsing more difficult than usual. Regardless, we continue to expect the economy to slow visibly during the second half, as, among others, a weak labor market, low confidence, paltry credit growth and a large non-performing loan stock all begin to take their toll on growth.
Inflation, which has been hovering around 17% in recent months, should rise further in July most probably to above 18%, and stay elevated throughout. True, come late Q4, there is a base-effect of sorts in anticipation of which the CBRT may dare cutting rates, but we do not think it will happen, as it would be too risky under the circumstances, because the deviation from the CBRT’s yearend forecast of 12.2% will be too conspicuous by then.
The fiscal side has been one rare strength in an otherwise very fragile story, with the overall deficit having declined to an estimated 1.6% of GDP in Q2, from 3.4% at the end of last year, and a post-Covid peak of almost 4% at end-September. This, however, doesn’t mean that Turkey has a lot of “fiscal space”, given the elevated borrowing requirements and sizeable yet hugely opaque, contingent liabilities.
The external side, as we often stress, continues to be the Achilles Heel of Turkish macroeconomics. The current account has begun to narrow, as exports continue to do well, and import volumes have fallen, but a worsening terms-of-trade has emerged as a key factor that is slowing the current account improvement.
External financing remains generally weak, and is very unlikely to improve much, we think, which will be the ultimate constraint on growth. Gross reserves have increased modestly since end-March, which is largely window-dressing.
Now read on...
Register to sample a report