The business cycle

Turkey: Business cycle

The CBT surprised the markets yesterday by keeping the one-week repo rate at 17.75%, against the Bloomberg consensus forecast of a 100bps increase. The press statement does not exclude future rate increases and we do expect the Council to eventually capitulate – however, only to reverse the tightening by 100-200bps most likely already in the autumn.

Our overall assessment of Turkey has not changed materially in recent weeks, but our expectation of seeing the lira at 5.5/USD is likely to materialise sooner than expected, given the disconnect between the market’s expectations and the government’s strategy. We have stress-tested our inflation model and in our view even with persistently high food prices, further increases in crude prices and further lira depreciation inflation stays high – at 15%yoy – but does not escalate steadily from here and thus Turkey will remain one of the few countries in Europe these days with positive real interest rates.

The data released recently add to our expectation that economic activity is decelerating, consistent with our real growth model, which suggests around 3% for the remainder of the year, down from 7.4% in 1Q18. Whilst we stress that the indebtedness of the non-financial corporations has increased materially since 2008 and that Turkey cannot escape the global business cycle, we highlight that GDP is likely to contract only once a global recession unfolds and/or if global interest rates rise, particularly if the US Fed interest rates increase continuously next year, in line with the Fed’s current projections (which appear unrealistic to us).