12M rolling deficit below the MTP target in November
November budget results showed a decline in the seasonal surplus to TRY75.6bn, down by 30%, on the back of i) the continued deterioration in non-interest due to the acceleration in transfers to SEEs and earthquake-related spending and ii) a significant increase in interest expenditures, despite strength in direct and indirect tax collection following the measures introduced after the elections.
Accordingly, while the central government budget posted a deficit of TRY532.4bn in the first 11 months of the year, the deficit for the last 12 months reached TRY651.1bn (translating into c.2.7% of GDP). Additionally, the budget for 2024 was determined in line with the latest Medium Term Plan (MTP) and approved in the National Assembly. In the newly approved budget, earthquake-related spending is foreseen at TRY762bn in 2023 (vs TRY1,633bn total deficit) and TRY1,028bn in 2024 (vs TRY2,652bn budget deficit). Given this backdrop, the ratio of the budget deficit to GDP excluding earthquake expenditures is projected to be 3.4% in 2023 and 2024. This confirms that fiscal policy will not be fully helping the CBT in the disinflation process.
Slower pace of hike in December
Following its guidance in November and in line with the consensus, the Central Bank of Turkey (CBT) raised the policy rate by 250bp to 42.5% in the last rate-setting meeting of this year. After large rate hikes totalling 31.5ppt since June, the CBT signalled a slowdown in the pace of hikes to complete the tightening cycle in a short period of time. According to the December statement, however, the wording has changed a little stating that the tightening cycle would be completed as soon as possible. This is based on the bank’s assessment that the extent of monetary tightness is close to the required level to achieve disinflation.
Regarding the micro and macro-prudential framework: i) the bank announced it would hold TRY deposit purchase auctions to strengthen the monetary transmission mechanism and increase the diversity of sterilisation instruments ii) continuing its simplification moves, the bank also cut the security maintenance requirements on FX liabilities to 4% from 5% previously.
Sovereign credit: markets expecting rating upgrades
After a strong performance across 2023, investors in Turkey’s dollar sovereign bonds will now be anticipating improvements in the nation’s sovereign credit rating from the current (B3/B/B) levels, with Moody’s upcoming planned review on 12 January in focus first. Despite credit spreads moving slightly wider to start the year, in line with the market movements, Turkey’s dollar bonds remain, on average, around 150bp tighter than the single-B peer group.
If the central bank’s commitment to monetary policy normalisation continues in the coming months, further improvements in sentiment and more significant foreign inflows into local debt should support macro fundamentals, which could catch up with the move lower in sovereign risk premiums priced by the market. However, the path towards further gains will likely be bumpy given the speed of the rally seen last year, especially with new external debt supply already coming to market via the nation’s banks, and local elections that could present headline risks in the coming months.
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