Turkish economic outlook by Yapi Kredi  chief strategist Murat Berk

When we look at the domestic market, the most important event of last week was the Inflation Report. The Central Bank of the Republic of Türkiye (CBRT) made significant upward revisions to its inflation forecasts. Year-end midpoint estimates for 2024, 2025 and 2026 were increased from 38 percent, 14 percent and 9 percent to 44 percent, 21 percent and 12 percent, respectively. The new uncertainty bands around the 2024 and 2025 point estimates are 42-46 percent and 16-26 percent.   In our opinion, the new estimates are more realistic. CBRT President Fatih Karahan argued that the upward revision was largely due to factors beyond the control of monetary policy, such as the rigidity in rent inflation and the volatility in food inflation. In fact, for months it has been the opinion that the CBRT needs to see the following in order to consider interest rate cuts: A significant and permanent improvement in monthly inflation, a convergence of momentum and inflation expectations towards the bank's own forecasts. The Governor said the Central Bank expects inflation momentum to be above 2 percent in November and December 2024, with some deterioration likely in the first quarter of 2025 due to various repricing effects such as the minimum wage adjustment.   [embed]https://www.youtube.com/watch?v=mLcCtmTSPe0&t=4s[/embed] He added that momentum measurements are likely to be below 1.5 percent in the third quarter of 2025 and around 1 percent in the final quarter.   President Karahan refrained from giving strong signals to start the easing cycle. However, the general tone of the Inflation Report was a little more dovish vs the last. This makes us think that a December interest rate cut is on the table, although we do not expect it before January 2025. We argue that the CBRT is still undecided about the timing and pace of interest rate cuts at this stage and may be monitoring the data that will come in the next few months before having a stronger opinion on the inflation outlook.   We continue to think that the next big theme to buy TL markets will be the pricing of CBRT interest rate cuts. The performance of stocks, especially bank stocks, after the Inflation Report also supports our view. On the economic data side, Industrial Production decreased by 2.4 percent on an annual basis in September 2024, adjusted for calendar effects. On the other hand, production adjusted for calendar and seasonal effects increased by 1.6 percent monthly in September 2024.  Thus, the average production increase in the third quarter was 0.1 percent. When we consider the totality of the recently announced data, we continue to see a loss of momentum on the production side of the economy. On the other hand, we observe that domestic demand and the service sector remain resilient, although they have lost some momentum. [embed]https://www.youtube.com/watch?v=q2XQrc49fFU[/embed]

EXTERNAL ACCOUNT

In October 2024, compared to the same month of the previous year; exports increased by 3.6 percent to 23 billion 620 million dollars, and imports decreased by 0.2 percent to 29 billion 364 million dollars. In the January-October period of 2024, exports increased by 3.2 percent to 216 billion 383 million dollars, and imports decreased by 7.2 percent to 282 billion 2 million dollars. A striking detail in the announced October foreign trade data is that Consumer Goods imports increased by 8 percent, which can be perceived as a sign that domestic demand has not lost much momentum yet.   According to CBRT data, the current account account yielded a surplus of 2.99 billion dollars in September 2024. Thus, there was a deficit of 5.3 billion dollars in the January-September 2024 period. In January-September 2023, there was a deficit of 36.1 billion dollars.   The average market expectation on Bloomberg was $2.8 billion for CA surplus. Thus, the twelve-month current account deficit decreased from 9.8 billion dollars in August to 9.6 billion dollars in September 2024.   The increase in tourism revenues and the fact that the foreign trade deficit was slightly below last year were effective in the improvement in the current account deficit compared to last year. We see that the current account, excluding gold and energy, has a surplus of 7.7 billion dollars.   When we look at the financing side, we see a net inflow of 649 million dollars in direct investments and 370 million dollars in portfolio investments in September. When we look at the details, foreign investors made a net sale of 83 million dollars in the stock market and a net purchase of around 1.7 billion dollars in government domestic debt securities. In addition, in September, the government made a net payment of 701 million dollars for bonds issued abroad, while banks and non-financials reported a net borrowing of 1.8 billion dollars and 176 million dollars, respectively. On the other hand, under other investments, the foreign deposit assets of domestic banks increased by 560 million dollars, while the domestic deposits of foreign banks increased by 363 million dollars. In addition, regarding the loans provided from abroad, banks, the General Government and other sectors used net loans of 3.3 billion dollars, 170 million dollars and 1.2 billion dollars, respectively.   In short, the financial account recorded an inflow of 2.5 billion dollars in September. In September, there was a capital outflow of 6.2 billion dollars from an unknown source. Thus, CBRT reserves decreased by 719 million dollars in September.   Follow our  English language YouTube videos  @ REAL TURKEY:   https://www.youtube.com/channel/UCKpFJB4GFiNkhmpVZQ_d9Rg And content at Twitter: @AtillaEng Facebook:  Real Turkey Channel:   https://www.facebook.com/realturkeychannel/