Turkiye Unveils New Medium Term Program Towards 2024-2027

Enthusiastic Plans Aims to Find Solutions to Macroeconomic Issues but Road is Bumpy

Inflation continues to be the core problem for the country, as we envisage end-year inflation in 2024 will likely hit around 43%-44%, which is higher than CBRT’s year-end inflation forecast at 38% and the government’s end year inflation target of 41.5%. Despite MTP is projecting the inflation decreasing sharply to 17.5% in 2025, which remains unlikely, particularly considering CPI stood at 49.4% y/y in September after hitting 51.9% in August while the deceleration pace was less-than expected igniting concerns. (Note: We expect the falling trend in inflation will continue in Q4 2024 supported by relative slowdown in domestic demand and the decrease in the current account deficit; but the extent of the decline will be determined by administrative price adjustments and TRY volatility).

It appears the government significantly increased inflation targets for 2024 and 2025, which were 33% and 15.2%, respectively, in the previous program. 2024 inflation target being revised from 33% to 41.5% shows higher-than-expected inflation figures so far this year. We think upside risks such as high inflation expectations, stickiness in services inflation, volatile food and energy prices, deteriorated pricing behavior, and geopolitical risks will continue to keep inflation pressures alive in the rest of 2024 and 2025. 

MTP expects Turkiye's GDP to grow 4% this year, 4.5% by 2025, and 5% by 2026. (Note: It appears all growth rate forecasts in the previous program, released on September 2023, were lowered by 0.5 points as the impacts of the monetary policy are still feeding through coupled with rising global tensions supressing growth). We think the forecast of 4.5% GDP growth in 2025 is likely too high, as too much improvement is required in macroeconomic imbalances and also structural policy. We envisage GDP growth will stand at 3.3% in 2024 and 2.9% in 2025 dominated by lagged impacts of aggressive monetary tightening, slowing real wage growth, tighter fiscal actions targeting to slow down demand and lending.

Unveiling the program, Vice President Cevdet Yilmaz said on September 5 that "The government has pledged to continue coordinating monetary, fiscal and income policies to reduce inflation to single digits and to ensure that the economy achieves a stable growth trend in the long term."

We think this MTP program is significant as it serves a guide for the midterm framework for upcoming monetary and financial policies, given forward guidance by the CBRT with disinflation process already began in H2 2024 and macroeconomic stability is predicted to start in 2025.

We believe MTP may help increase economic confidence among economic actors in the near term if CBRT continues to focus on using its tool set effectively until inflation is under control, but determination is key. Sustaining the slow pace of TRY decline will be critical in cooling down inflation given FX pass-through from a weak TRY as currency fluctuations continue to prevail.

We are of the view that CBRT remains highly attentive to inflation risks like high inflation expectations and distorted pricing behavior. We feel the first rate cut will happen in Q1 2025 given residual inflationary risks.  Our end year key rate prediction is 50.0% for 2024, and 30.0% for 2025 as we foresee 500bps cuts in every quarter in 2025. It is worth noting that the pressure has been growing on CBRT from exporters and industrialists to start lowering its rates to reverse a marked slowdown in the economy, and this will also be an issue to consider for CBRT in Q4 and 2025.

MTP seems determined, while a strong determination in monetary tightening supported by accurate fiscal and income policies is required until the expected inflation outlook is achieved and twin deficits are fully controlled. 2025 will be significant for the Turkish economy from every angle as setting prices, wages, and other contracts (such as rents) annually and according to forward-looking inflation will be key to resetting expectations and protecting competitiveness. Maintaining financial stability will require continued vigilance and further reform and macro prudential policies should focus on containing systemic risks.