HSBC: Turkey's Economic Alignment Continues on a Promising Track

HSBC Global Research has reported that Turkey's economic adjustment continues to progress smoothly overall. Highlighting a significant improvement in balance of payment dynamics, HSBC noted that while inflation is moderating, it remains too high to ease comfortably.

In its report titled "What's Next in the Rebalancing Story?" HSBC advocated for a cautious approach in the monetary policy stance of the Central Bank of the Republic of Turkey (CBRT), stating, "We continue to believe that easing can comfortably commence only next year."

The report included the following assessments: "Despite it being over a year since Turkey's macro adjustment commenced, we remain constructive on the near-term outlook. Simultaneously, we believe policymakers should remain vigilant about risks associated with a more gradual rebalancing experienced by Turkey. One such risk is that the longer inflation remains high, the greater the likelihood of it becoming entrenched, thus making it harder to re-anchor at a level closer to the target. Turkey's inflation has not dropped to single digits since Q4 2019.

Following some slowdown in the second quarter, there was limited improvement in inflation dynamics in the third quarter. In August, the Central Bank Governor stated that for rate cuts to be considered in the fourth quarter, monthly inflation should be below 1.5% and inflation expectations should align more closely with the bank's forecasts. In September, the inflation momentum approached 3% on a monthly basis, with even less improvement in inflation expectations. Therefore, we continue to believe that easing can comfortably commence only next year.

Fiscal tightening will aid in reducing inflation, and the recently published medium-term program indicates that authorities aim for fiscal consolidation of 1.7% of GDP by 2025. However, the outlook remains uncertain. Authorities also project that tax revenues will increase by 0.9% of GDP next year, compensating for a 0.6% of GDP decline in non-tax revenues. There are downside risks to this forecast.

On the external front, there is much better news. The current account deficit has narrowed, capital inflows have accelerated, dollarization in resident savings has decreased, and the Central Bank has accumulated significant reserves. Compared to the lowest point in March 2024, gross foreign reserves have increased by 25 billion USD, while net foreign assets excluding swap liabilities have risen by more than 100 billion USD. In our view, the risk of Turkey encountering funding issues has significantly diminished; however, the economy remains exposed to rising oil prices, weak global demand, geopolitical tensions, or a widespread deterioration in risk appetite.