On the shores of Rubicon

TURKEY - Forecast 16 Aug 2024 by Murat Ucer and Atilla Yesilada

The Economic Stabilization Program is facing multiple external and domestic threats. While President Erdogan withstanding the pressure and giving the Treasury and Finance Minister Simsek the go-ahead for even tighter policies can certainly not be ruled out, the base-case scenario of our politics author for the time being is significant dilution of the ESP in 2025, which would lead to a tenuous muddle through, followed by early elections in 2026.

With the CBRT having, de facto, become “the only game in town”, the economics author also has question marks regarding the sustainability of the so-called ESP, given little support from other policy levers thus far, a growing disgruntlement within the business community and the public at large, and lack of social consensus around the ESP.

Let us not despair or lose hope completely, though. The next 4-6 months will be most consequential, more so than usual, during which we shall be watching several indicators with CBRT reserves, the monthly path of inflation and the 2025 Budget as well as the Medium-Term Program, topping our list, the progress around which could change our views and scenarios for the better.

At the moment, against a backdrop of “radical uncertainty”, we estimate growth will finish this year at around 3%, before slowing further to 2% in 2025, but inflation will remain sticky, decelerating to around 30% by end-2025, markedly above the CBRT forecast (of 14%, mid-point), after completing this year at some 43%.

Contrary to our earlier forecast of the policy rate staying at 50%, we now think a premature rate cut late this year is the more likely scenario, with the policy rate finishing the year probably at 45%, as the Bank sticks to its moderate real appreciation strategy in the next several months, thanks to a subdued current account deficit. On the fiscal side, while it will be challenging, the central government budget could finish this year at just under 5% of GDP deficit, as Minister Simsek has been pledging, but his informally stated target of some 3% deficit for next year, looks very hard to achieve.

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