While the Turkish economy is moving in the right direction, showing positive signs noted by credit rating agencies and other financial institutions, seeing the full impact of the nation’s monetary policy will require patience, the World Bank’s director for the country said in an interview with Anadolu Agency (AA).

Speaking to AA on the sidelines of the COP28 U.N. climate conference in Dubai, United Arab Emirates (UAE), Humberto Lopez said the World Bank was not alone in its support for Türkiye’s economic course under the current conditions

“If you look at the credit rating agencies, some of them have already moved Türkiye’s outlook upward,” he said, pointing to a decision last week by the New York-based S&P, which revised the country’s credit outlook from stable to positive.

“Some of the investment funds like Deutsche Bank or JPMorgan are saying that next year is going to be very hot in the bond market in Türkiye,” Lopez added.

“These organizations see that things are going in the right direction,” he said.

He also noted that the rate for credit default swaps (CDS) in Türkiye is now below 350 basis points, indicating a major improvement in the perceived risk level of the country from a level of more than 550 six months ago.

As the economy stabilizes, this will have the potential to attract more financing, the World Bank official said, adding: “One of the beauties of this is that you can enter into a virtual circle. On the one hand, you have an investment that is coming because the situation is becoming stabilized. On the other hand, as the resources are coming, it would be easier to stabilize the situation.”

However, Lopez also stressed the need for perseverance and patience for the impact of the monetary to fiscal policy measures taken to materialize fully, referring to the tightening and implementation of policies of the new economic administration to counter inflation.

“We have reached a point probably where markets would start thinking that the increase in the interest rate is going to reach the limit,” he said.

The bank has been raising its policy rate, the one-week repo rate, for six months from a low of 8.5%. Last month’s hike was 500 basis points, up to 40% from the previous 35%.

Türkiye’s annual inflation edged up to 61.98% in November, according to official data released Monday. The figure accelerated from 61.36% in October.

On the bank’s forecast for inflation in Türkiye, he said: “We are expecting that inflation figures will be peaking in the middle of 2024 and then it will start declining. We think the inflation will be between 35%-40% by the end of 2024 and drop to around 15% in 2025.”

“Clearly, this is all subject to what is also happening in the global economy,” he added.

In addition, Lopez also touched upon the financing program implemented by the lender in Türkiye, recalling that the bank group announced in September it would provide an additional $18 billion in funds over the next three years. According to Lopez, about $12 billion of it will be going to the private sector.

“We are now starting the process that we call our strategic planning. We are putting forward this for the next three years,” he said, noting that up to $750 million of the $18 billion total would be provided for electricity transmission projects in Türkiye.

Renewable energy growth

One of the significant areas receiving investment in Türkiye is renewable energy, with the country aiming to boost its capacity significantly over the coming years.

“We are very excited to hear Türkiye’s plans to increase its renewable energy capacity by 60 gigawatts in the next 12 years, more or less 5 gigawatts per year. This is one of the biggest efforts in this area that the world has seen in emerging economies,” said Lopez.

Türkiye’s current installed capacity hit 106 gigawatts and the country aims to increase this to 190 gigawatts by 2030.

Renewables are expected to provide for most of this growth, which Lopez said would require costs of around $100 billion over 12 years, including some $80 billion for generation, $10 billion for transmission and $10 billion for distribution.

He added that of the total investment needed, $90 billion will have to come from the private sector.

Moving toward the net zero emissions target by 2053 and building resilience in the sector will need around $640 billion in net present value, Lopez explained.

“This is a pretty significant amount of money. And this will require both the private and public sectors and us to work together to mobilize this amount of resources.”

Source: Daily Sabah

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Turkish central bank chief on Wednesday said interest rate hikes have helped lower inflation expectations and improved visibility on prices, attracting Western fund inflows that have boosted foreign exchange reserves.

Interest in Turkish lira deposit accounts and assets has increased since June, Central Bank of the Republic of Türkiye (CBRT) Governor Hafize Gaye Erkan told a meeting at the Istanbul Chamber of Industry (ISO).

“We believe that the time has come for a transition to the Turkish lira. We see the most evident reflections of this shift in deposit developments,” she noted.

Erkan, echoing the message by the central bank’s monetary policy committee last week, also said its tightening steps would be completed soon.

A former Wall Street banker, Erkan listed a series of long-term benefits of the aggressive rate hikes since she took the bank’s reins in June and began orchestrating a shift toward more conventional monetary policymaking.

The new administration, led by Treasury and Finance Minister Mehmet Şimşek, reversed a yearslong easing cycle and delivered aggressive tightening in a bid to tackle the country’s long-term inflation issue.

Since June, the central bank embarked on a 3,150 basis-point tightening cycle – including hikes of 500 basis points in each of the last three months.

Based on preliminary readings, Erkan said monthly inflation continued to slow in November, adding that the lira currency’s more stable foreign exchange rates will also help cool price rises.

Annual inflation is running above 61% and is expected to rise through May next year before cooling.

“Our priority is disinflation, and the most crucial element in the fight against inflation is stability, accepted by society and price setters,” the governor said.

“Signs of improvement in expectations began to emerge with the implementation of policy decisions after the rise in inflation.”

She cited a positive shift in pricing behavior, with notable reductions in the prices of automobiles and white goods for the first time.

“We are observing signs of a slowdown in rent increases in major cities; these indicators will increase as monetary transmission continues,” Erkan noted.

“Leading indicators for November suggest that the decline in monthly inflation will persist.”

With the contribution of exchange rate stability, Erkan anticipated a reduction in monthly inflation shocks and an increase in cost predictability.

“Exchange rate stability will have a positive impact on monthly inflation,” she added.

“We will transition from a period where companies change prices every two weeks to a period where prices change over a longer duration.”

Strong trend in reserves

Erkan highlighted the increased predictability in the markets and the “very strong upward trend” in reserves, which she says has been influenced not only by Gulf countries but also by Western fund inflows.

Erkan said that international investors are also beginning to believe that “it is time to transition to the Turkish lira,” as observed through reports, expectations, interest, and inflows.

“We see actual inflows increasing with the growing demand for our country’s assets,” she noted.

The total reserves of the central bank are estimated to have risen by $2 billion to a historic peak of $136.5 billion last week, bankers’ calculations showed Tuesday, maintaining an upward trajectory since after the May elections.

The earlier record in the reserves, which rose to $134.5 billion in the week of Nov. 17, the highest level since September 2014, stood at $135.96 billion in December 2013.

Bankers’ calculations suggest a $38 billion increase in total reserves from June to last week, rising from $98.5 billion at the end of May following the elections.

“In the coming period, we will support the development of external demand for Turkish lira assets by ensuring the permanence of the increase in our reserves, with an understanding that establishes the best conditions for our country,” Erkan said.

Some foreign investors, including European giant Amundi, have begun tentatively returning to Turkish assets.

On Tuesday, Amundi, Europe’s largest asset manager, said it had been impressed by the country’s turnaround efforts since its mid-year elections.

The Paris-based firm, which has about $2 trillion worth of assets under management, is yet to go all in, given the lira’s ongoing depreciation. However, it says it has taken its first step toward it by reversing long-held bets against the currency.

“We have started to cover our underweight in Turkish lira a few weeks ago,” Sergei Strigo, Amundi’s co-head of Emerging Markets Fixed Income, told Reuters, referring to the process of taking a more positive view on the currency.

Strigo said last week’s 500 basis-point interest rate hike was “all very positive” and a sign of Türkiye’s seriousness in tackling its inflation problem.

“We are not yet ready to increase the allocation (in the lira), but it is definitely on our radar screen.”

Recent reports, including analyses from international institutions like Deutsche Bank and JPMorgan, also suggested that lira-denominated investment instruments will stand out among developing country markets in 2024.

Last week, CBRT officials said they had started observing fund inflows into the lira from large-scale institutional investors based on the United States West Coast. They indicated that ongoing discussions suggest these inflows will continue.

The central bank has scheduled an “Investor Day” event for Jan. 11 in New York, adopting this format for the first time. While the bank regularly organizes similar meetings, the theme of “Investor Day” will be introduced.

Source: Daily Sabah

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Türkiye’s central bank is forecast to deliver another sharp interest rate hike this week, according to surveys and economists, as it continues to tighten policy in a bid to conquer soaring inflation.

After years of pursuing loose policy, the central bank reversed course after May’s elections and began lifting rates to bring down inflation, which touched 61.5% in the 12 months to September.

The median estimate of 20 economists in a Reuters poll for the policy rate was 35%, up from the current 30%. Four economists forecast a hike of 250 basis points and one expected a lift of 300 basis points.

“The central bank’s focus has remained on anchoring inflation expectations and achieving disinflation… A hike to 35% would lead to a positive ex-ante real policy rate based on the 33% inflation forecast for 2024 in the medium-term plan,” ING wrote in a research note.

Morgan Stanley economists also foresee a 500-basis-points rate hike due to upward risks in inflation and said on Monday they see price increases probably easing in October.

“However, we see that headline inflation will rise to 67.1% by the end of the year and peak at 73.4% in May 2024,” they said in a note.

Since June, the central bank has turned its focus to disinflation and lifted its policy rate by 2,150 basis points while other macroprudential measures such as credit tightening to cut domestic demand were also put in place.

The bank is likely to repeat its intention to implement additional tightening measures in interest rates and macroprudential tools to guide inflation expectations and support de-dollarization efforts, Morgan Stanley analysts said.

Although recent data indicate some moderation in domestic demand, the impacts of the interest rate hikes implemented since the August Monetary Policy Committee (MPC) meeting are yet to be fully seen, they noted.

The median forecast in the Reuters poll for the year-end policy rate was 35%. The central bank is expected to hike rates further to 40% in the first half of next year, the poll also showed.

Further depreciation in the Turkish lira and increases in taxes and fees have fanned inflation despite tighter monetary policy.

Inflation is seen remaining elevated through the rest of this year, ending 2023 at 69.3%, the median of the poll of 10 institutions showed. Estimates in the Reuters poll ranged between 64.6% and 73.0%.

Inflation is forecast to stand at 43.4% at the end of 2024 and 25.3% at end-2025, according to the poll.

It touched a 24-year high of 85.5% last year after interest rate cuts sent the lira down 44% in 2021 and another 30% in 2022. The lira has depreciated more than 30% of its value so far this year.

In the Reuters poll, Türkiye’s economy is expected to grow 4% this year, according to the median of 33 economists, with the help of domestic demand in the first half despite devastating earthquakes in February, monetary tightening and a global slowdown.

The government had forecast growth of 4.4% this year.

The median growth forecast stood at 2.9% for 2024 and 3.8% for 2025 in the poll, compared to the government’s forecast of 4.0% and 4.5% respectively.

Türkiye’s current account deficit in 2023 is expected to be 4.6% of gross domestic product (GDP), the median forecast showed, compared to a government forecast of 4%.

The deficit was seen at 3.1% in 2024 and 2.5% in 2025, compared to government predictions published in September of 3.1% and 2.6%, respectively.

Morgan Stanley analysts see the balance registering a surplus in September and October and end the year with a deficit of $44 billion.

Source: Daily Sabah

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