Forecasting in a witch’s cauldron
The context is eerie and highly fluid, as the fund scandal --or “Fonzi” as it is colloquially called-- shows no sign of abating, which makes forecasting ever more difficult even by Turkish standards. We try anyway. We expect economic activity to continue to stagnate, as growth ends the year at 2.5%, before picking up modestly in 2027, while inflation should finish the year at just under 30%.
The September inflation print was encouraging, with annual inflation decelerating to under 30% for the first time in 5 years, and a couple of more of these favorable figures could follow, but whether all this will morph into a lasting disinflation trend is another question. We still think inflation ending next year at around 25-26%, higher than both the CBRT and the consensus forecasts, is a good working forecast for now.
Despite a challenging backdrop, the CBRT acted upon the favorable September inflation print --not so surprisingly but yet again prematurely, we think-- by lowering the policy rate by 100 bps to 36%. Waiting would almost certainly have been the more cautious approach for myriad reasons, but monetary policy works reactively not preemptively in this land of ours. We thus see another 100 bps cut before the yearend as very likely --and expect cuts to continue as long as reserves hold up -- but we don’t think there is much easing room, certainly not as much as the consensus seems to have it with a yearend rate at 28%.
The defining macroeconomic challenge of 2027 will be to manage the USD/TL rate or F/X demand more specifically as elections approach, which, incidentally, should take place close to the original date of May 2028, we believe. As long as interest rates stay high and the USD/TL depreciation pace picks up somewhat over the next several months, along with a few other policy tricks, the worst, i.e., a run on reserves, should be avoided – an assumption that is central to our “muddle through” scenario for 2027.
Meanwhile, the BOP will need close monitoring throughout 2027. After closing this year at a better than forecasted $42.5 billion or 2.3% of GDP, the current account deficit should stay around these levels in 2027. While a deficit of around $40-$45 billion is not particularly large, financing it in the current global and political environment may not be a trivial matter.
Finally, one could envisage two (reasonably fat) tail scenarios around this muddle through baseline, a good scenario in which inflation falls faster than we envisaged, and a bad scenario where political turbulence and confidence crisis lead to faster reserve depletion.
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