Something has to give
With no quick resolution in sight to the ongoing regional conflict, the econ author shares some illustrative forecasts as to what the Turkish macro outlook could look like, should, contrary to consensus, this shock prove permanent, rather than temporary.
In a nutshell, the stagflation-like macro outlook we’ve been working with for some time – with subpar growth yet elevated inflation – is expected to be accentuated with growth weakening to 1.5% from 3.6% last year and little gains from the current 30%-ish levels on the disinflation front. The current account deficit should also rise to markedly above $50 billion or 3.2% of GDP, we estimate, up from $30.1 billion or just under 2% of GDP last year, on the back of a combination of higher energy prices and stagnant tourism revenue.
The cumulative loss in reserves since the onset of the conflict through March 26 has exceeded the amount witnessed in the aftermath of Istanbul Mayor Ekrem Imamoglu’s arrest last March, though the drop in the gold price appears to have played a substantial role in this round and, on a more positive note, dollarization by locals was not at all a driver --so far.
We think a recalibration of monetary policy will be inevitable in the coming weeks and months, with the CBRT lifting the policy rate to at least 40% at its April 22 meeting (if not earlier), and accelerating the pace of depreciation somewhat during the second half of the year. The latter would mean interest rates would stay elevated throughout to make sure that the locals continue to stay in TL, which cannot be taken for granted.
Meanwhile, the central government budget deficit, targeted at 3.5% of GDP this year, will very likely finish the year at well over 4% -- and somewhat higher in cash terms -- despite a strong start into 2026, because of lost tax revenue and higher energy subsidies.
A quick resolution of the regional conflict, say, in the next few weeks, could improve these outcomes, particularly the growth outlook, while things could get drastically more troublesome if the war were to spread and intensify further. Take the baseline laid out in this very brief and atypical quarterly/forecast report as a “thought experiment” of sorts, which we sure will follow up by a full-fledged update, once the dust (hopefully) settles.
The report includes a political update focusing on the progress of the regional war, Turkey’s diplomatic performance in the process and the rather disturbing domestic political context.
There will be no weekly report today.
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