In our third article of Turkey 2025 series, we present the views of Mr Murat Berk, a famous TV guest and the chief strategist of Yapi Kredi Invest brokerage house.
A Macro Strategy outlook for Türkiye
The turnaround in policy credibility in 2025 has been impressive, with net reserves in particular swinging from deeply negative to positive.
Growth
Developments in 4Q to date seem to corroborate our expectations that the momentum of economic activity is slowly turning upwards. Activity is likely to grow on a QoQ basis in 4Q, after contracting in the previous two quarters, due, to tighter financial conditions and normalization in private consumption. We expect economic growth to bounce back a bit from our expected 2.75% in 2024 to 3.15% in 2025.
Although the Manufacturing PMI increased from 45.8 to 48.3 in November, the threshold value remained below 50.0 for the 8th consecutive month. In fact, Excluding the 50.2 and 50.0 levels in February and March of this year manufacturing PMI has been below the 50 threshold since July 2023.
However there is a disparity between consumption and services. Also, despite this weakness in production, we observe that the consumption trend, which has already shown a very limited cooling, has started to move up again in recent months according to such indicators like retail sales and consumer expectations. For example Bloomberg HT Consumer Confidence Index increased by 4.9% monthly in November to 72, Accordingly, a clear outlook of a cooling trend in domestic demand, which is important for the growth outlook but also the disinflation process, has not yet become visible.
Inflation
We expect 2025 to be more challenging than this year in terms of fighting inflation. In 2024 annual CPI started to decline in the summer months after peaking at 75% in May mostly due to base effects and tighter financial We expect CPI complete this year at 45.4% and a drop to 26.5%. While food price increases remain elevated, a decline is observed in inflation excluding food. The CBRT believes that the course of food prices is relatively outside the effectiveness of policy. Depending on many factors, food prices will continue to pose an obstacle to the decline in inflation. Together with sticky services inflation, inflation risks seem to the upside.
However, signals from the CBRT seemed to a point the disinflationary gains seem to be sufficient for interest rate cuts. CBRT, both in the presentation of the 4th Quarter Inflation Report and at the November meeting, high prices in the fresh fruit and vegetable group, which are relatively outside the sphere of influence of monetary policy, were emphasized. Our view is that the CBRT will aim at staying within a certain real interest range. We expect the CBRT to cut interest rates and the policy rate to come down to 32.5% at end 2025.
Fiscal
Budget performance has not been so well from a disinflation perspective. Also the discrepancy between the accrual data the Ministry of Treasury and Finance and cash budget continued.
YTD data suggest that primary spending has been outpacing tax revenue growth. We expect the year to finish with an overall deficit of around 4.9% of GDP. The new MTP envisions a meaningful adjustment next year. However, whether it is attainable remains an open question. We expect a budget deficit of 3.1% in 2025.
This forecast still implies a “fiscal impulse” for 2025. In 2024, monetary policy has not received sufficient support from incomes and fiscal policies. This is likely to change at the margin.
Balance of Payments
On the back of weaker activity, softer energy prices and reduction in gold imports, we expect the current account deficit to narrow this year. These factors are also expected to keep the current account deficit in check, at 2.2% of GDP in 2025. Our assumptions are that there will be no shock on the energy side and the low levels of gold imports will be maintained.
While a decline in the balance of payments defined foreign trade deficit was observed, largely due to imports, exports saw no significant change. In terms of risks, a rebound domestic demand conditions and no recovery in foreign demand are the risks. In the Trump era tariffs and protectionism could negatively affect Türkiye’s main trading partners although Turkey’s trading volume with the USA is relatively small.
Macro Strategy implications:
Factors such as the expectation of real appreciating pressure on the TL, the ongoing attractiveness of carry trades due to the high interest rates and the significant improvement in the TCMB’s foreign exchange position indicate that the real appreciation process in the Turkish Lira can be sustained in the short term. This is positive for the TL and especially shorter term local debt.
However, the continuing widening of the exchange rate and inflation gap may also lead to pressures on the Turkish Lira at some point, depending on some external or internal factors. In this respect, it is also critical that the interest rate reduction process is gradually implemented and maintained in parallel with the decline in inflation. In addition to the real appreciation of the TL, a gradual decline in CPI inflation may continue with the support of the improvement in service inflation.
With respect to Türkiye external debt, our view is neutral. While we see further improvement in the country’s risk premium, the spread compression has already gone a long way. More importantly, we expect a rise in UST rates. For example UST10Y yields are likely to see above 5% in 1Q before they decline, in our view. Thus, on a total return basis, there seems to be better buying levels ahead.
On equities, we will publish our detailed annual strategy report in mid-January. That said on a macro strategy basis we take a what we believe is a contrarian stance and see a good year ahead. As a reminder last year saw outflows from foreigners. This could see the reverse.
Turkey’s main “investment story” is one of disinflation and CBRT rate cuts. Even though inflation accounting blurs the picture, Turkish equities trade at around the lowest in the world. Also, better relations with the West and especially the USA seem likely. The Syrian issue creates both rewards and potential risks.
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