After speaking with investors over the past two weeks…
◆ …we note a significant improvement in sentiment
◆ While risks remain, investors appear constructive and expect the current policy setup to bear fruit
Author of the report Ms Melis Metiner
Based on our recent discussions, investor sentiment on Türkiye appears more positive than at any point in the past few years, a shift that is also evident in the recent acceleration in portfolio flows. The consensus view at the moment seems to be that policymakers have succeeded in putting the economy on a more sustainable path. Some investors believe that the inflation outlook warrants more tightening, but even those who are more sceptical regarding the re-balancing process note that the unwinding of various regulatory measures and the clarity offered by the policymakers’ communication have both exceeded expectations.
We think investors will be watching the upcoming data more closely, given that political and policy uncertainty have receded somewhat. On the inflation front, the central bank believes that the current policy stance is sufficiently restrictive and expects the sequential pace of price growth to slow going forward. CBRT’s end-2024 mid-point inflation forecast is 38%. The May forecast in the market analysts’ expectations survey was 44% and our own end-2024 forecast is 48%.
We received some pushback to this above-consensus forecast. A key reason why we expect a slower pace of disinflation is our belief that inflation expectations have become unanchored and pricing behaviour has worsened. According to the latest CBRT inflation
report, households’ year-ahead inflation expectations stood at c80% in April, more than double the forecast in the market participants’ survey. That said, April CPI did show modest improvement in the inflation momentum measures and it will be critical to see if this is sustained going forward. Meanwhile, activity data for Q1 was strong (we revise up our GDP growth estimate), but early signs of deceleration are apparent in some Q2 data.
The recent stabilisation in TRY and the sharp rise in central bank reserves appear to have given comfort to investors regarding external dynamics. We received little pushback to our forecast that the current account deficit could be around USD30bn this year, but given the improvement in sentiment and inflows, investors believe the risk that Türkiye might face funding problems is significantly reduced.
On the political front, the next rounds of presidential and parliamentary elections are scheduled for 2028. Some investors asked if early elections or a public referendum on the adoption of a new constitution could be on the agenda at some point, but there seems to be some comfort with the idea that economic policies will remain on the current path for at least some time.
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