Entries for 'Turkiye'

The Emerging Europe region is heavily reliant on demand from Germany or the broader Euro area. Growth risks also stem from external demand from the Middle East, though less so. The region’s growth momentum slowed in 2024Q2, primarily due to weak production in Germany.

Orthodox policy continuation should lead to further investor interest in Turkish assets. The current tight monetary policy will help reduce inflation and narrow the current account deficit. Maintaining a sufficiently tight policy stance will also help attract nonresident capital flows.

Achieving a net-zero global economy by 2050 will require significant financial investment in emerging markets and developing countries—which by 2050 will represent a much larger portion of the global economy and population than today.

Consumption remains strong, despite tighter monetary policy. Further monetary tightening and slower depreciation would help ease inflation. The current account deficit looks set to narrow in 2024, which should help authorities maintain Lira stability into 2025.

Investors remain concerned about the authorities’ ability to maintain Lira stability. This is hindering more substantial investments in Lira-denominated assets. The $211 bn in short-term external rollover needs are also a cause for concern but repayments for bonds and loans appear to be manageable.

Inflation momentum is fading in most of the CEE-7 region, except in Turkey. Rising oil price is a risk for the inflation outlook, so are currency depreciations. We expect restrictive stances into 2024 to keep inflation expectations in check.

The policy interest rate hike on June 22 was smaller than market expectation. Output growth appears to remain a key policy priority for Turkish authorities. If lending rates stay below expected inflation, strong credit demand will persist.

Kilicdaroglu is expected to win the presidential elections in the second round of votes on May 28, although the margin of error suggests that confidence in such a prediction should only be medium. The next government will face significant challenges, requiring but not necessarily leading to a pivot to orthodox policies.

Non-residents have cut their holdings of Lira-denominated bonds to historic lows, while still keeping sizable positions in Turkish Eurobonds. Turkey might need to attract more non-resident deposits going forward, unless external debt rollover ratios could be pushed higher.

Global liquidity conditions look set to tighten further, which will force CEEMEA central banks to continue to hike interest rates. Wider macro imbalances also call for tighter policies in some cases. Energy shortfalls could lead to falling output and employment, which would ease demand pressures.

Russia stopped natural gas exports to Poland and Bulgaria on April 27. Disruptions should be limited for Poland due to high storage levels, with more diversified sources, including LNG imports, also factoring in. We do not expect spillover effects to other European countries’ supplies. However, Russia’s energy policy is prompting them to seek other sources.

The ongoing war in Ukraine clouds the outlook for Turkey’s external deficit. Foreign demand for Turkish goods and services will likely weaken markedly. Higher energy imports and smaller tourism revenues will also be detrimental. However, a weaker Lira should continue to constrain import volume growth. Lower GDP growth, now forecast to reach 2.2%, should also contribute to this. Risks are to the downside with a prolonged military conflict first among them.

Sanctions on Russia following the invasion of Ukraine will lead to a deep output contraction. Soaring energy prices and supply chain disruptions are beginning to affect Europe’s economy. The resulting weaker foreign demand, including from the Euro area, will weigh on EM Europe. In addition, tighter liquidity conditions are likely to be a drag on domestic demand through ‘22. Over the medium term, EM Europe could benefit as investors are withdrawing FDI from Russia. The outlook is clouded by extraordinary uncertainty as the military conflict is likely to drag on.

Upside inflation surprises have prompted rate hikes by CEEMEA central banks. We project demand pressures to remain benign despite the ongoing recovery. Even so, markets are pricing further aggressive rate hikes in the coming months. Rising inflation has pushed up long-term bond yields across the region in ‘21H2. Wider term premiums reflect higher credit risk spreads in Turkey and Romania. South African bonds offer the most attractive real returns among CEEMEA bonds.

The recent Lira depreciation is much more pronounced than in 2018. Importantly, the CBRT’s monetary policy response has been different. Rate cuts contributed to depreciation, raising financial stability concerns. FX passthrough will affect rising inflation and inflation expectations. Lira returns above inflation should help ease inflationary pressures.

The result of higher oil prices is a shift in purchasing power from oil consumers to producers. Oil exporters are getting a boost to their terms of trade, leading to wider CA and fiscal surpluses. Higher energy prices will hurt several EMDEs that remain heavily dependent on petroleum imports.

We project non-resident flows of $128 bn to CEEMEA countries in 2021. Higher FDI and the IMF’s SDR allocation are the most important drivers. Excluding one-offs, however, flows will remain below pre-pandemic levels. G3 tightening will likely reduce investors’ appetite for EM assets in 21Q4. But further rate hikes in CEEMEA should improve portfolio flows in 2022. Non-resident flows to the region are estimated to reach $98 bn next year.

Growth remains a key policy priority, despite rising inflation. A looser stance by the CBRT will likely weaken the Lira further. This should boost exports while containing growth in imports. As a result, trade and current account deficits will be limited. The inflation outlook is set to deteriorate with a weaker Lira. And the ongoing dollarization trend could gain momentum.