Inflation and Additional Price Risks Spiral
· Inflation over 50%
· Increased cost of risk
· Adverse factors on indicators
We think that the economic policy perspective adopted by Turkey will be exposed to some risks in terms of the current inflation spiral, interest rate policy and the potential effects of external risks against economic targets. At the forefront of these factors are growth and current account balance risks with the contribution of decreasing net export and service revenues, as well as factors from global food and energy prices and inflation risks.
While the inflation continued to increase and reached 54.4% in February, the global price risks from the last Russian tension are not yet included in these rates. We do not see the oil price movements at the end of February and the beginning of March and the food price pressure from agricultural commodity prices to be positive in terms of inflation balances and we think that it will push the path up during the year. Therefore, we raised our year-end inflation rate expectation to 46.2%. We do not see the imbalances that emerged with the current geopolitical crisis as positive for Turkey’s current account balance bill, and we consider that the economic targeting based on current account surplus will not be realized, as the foreign trade indicators for the first 2 months of the year reveal. The fact that the foreign trade deficit was realized as 18.4 billion dollars in January and February, and more than 80% of it came from the energy deficit, shows that the increase in oil prices due to supply gaps may have more layered effects. In terms of current account balance / GDP estimations, we have watched the course of the Ukraine war and the state of the energy bill.
Since the central bank’s previous policy statements did not reveal a clear toolkit planning for upside-down economic winds, we do not make any new predictions on the evolution of policy. March is home to a lot of variables. From the Russia-Ukraine war to the meeting where the Fed is expected to raise interest rates. Difficulties in maintaining financial balances have increased. Because both CDS and external borrowing costs increase depending on global risks, and risk aversion has the potential to stratify inflation and disrupt the budget balance by creating additional pressure on TRY.
Comparison of CBRT policy rate and CPI inflation Source: Bloomberg, CBRT, TURKSTAT
Currency protected deposit accounts, launched on 20 December, reached a size of 520 billion TL according to the BRSA data for the week of February 25. Although the BRSA data does not include details of how many are DTH-TL conversions and how many are direct TL accounts, it is estimated that approximately 300 billion TL of this is from foreign currency conversion. The dollar rate of 14.21 on March 4 indicates a periodic rate return of 6.84% as of December 21. In KKM accounts with a maturity of 3 months, this amount corresponds to a difference payment of approximately 1 billion dollars. We attach importance to the Treasury burden, which may be caused by upward movements in foreign exchange, in terms of budget balance and its ratio to GDP.
Russian Effects in Emerging Markets
· Factors that differentiate EM rates
· Return position, risk underwriting
With the sanctions imposed on Russia by the Western countries, the country whose financial position was struggling made a drastic interest rate increase. At the same time, it applied some kind of capital control rules by converting 80% of FX revenues to rubles and limiting foreign exchange transfers abroad. In order to balance the sharply depreciating ruble, the Russian Central Bank brought the policy rate to 20% with an almost 11-point increase in interest rates. With this situation, Russia, which suddenly became the developing country with the highest real interest rate, is not in a position to be the subject of investment due to its borrowing profile that cannot be evaluated in a conventional position. Russia’s CDS premium reached four-digit levels amid increased risk of default.
Globally, there are upward pressures on inflation. It looks like this situation will continue for at least a while. Countries that depend on imports for energy may be more vulnerable. For this reason, countries such as Turkey, which are more sensitive to energy prices, have increased risk-undertaking. The interest position, which is about 40 points below inflation, reduces the coefficient of resistance to a financial turbulence and demand for local assets.
It is difficult to predict clearly how supply and demand will be affected in macroeconomic uncertainties. In this challenging profile, assuming that the US economy is strong enough, the Fed’s consideration of raising interest rates nevertheless causes difficulties in maintaining the economic risk adaptation balance for emerging markets. In addition to the current return position, countries that may be more exposed to Russia risk geographically and within the scope of trade relations and that may not have sufficient positive impact on foreign financing net inflows in terms of import bills will be more cautious.
Return positions of developing countries adjusted for inflation (Policy rate-inflation=real interest) (Source: Bloomberg)
Fed and Developed World Central Banks
· Softening in the interest path
· Assessing Russian risks
· Inflation concerns and rate hike path
In his statements last week, Powell confirmed that he will support the 25 basis point increase at the FOMC meeting to be held on March 15-16. Although the difficulties that emerged after the Russian crisis created serious uncertainty, it can be inferred that the Fed still evaluates the progress towards a tight policy in terms of confidence in the tightening labor market and managing inflation expectations within the base scenario. On the other hand, we assume that the tightening in financial conditions will not be as predicted two weeks ago.
Factors such as the sanctions imposed on Russia by the developed countries will bring trade to a near standstill, the congestion that will occur in payment systems, and the fact that Russia’s restrictions on goods exports will deepen the global supply shortage are at a level that will trigger the risks of economic slowdown. However, it is obvious that the current situation will create more and more permanent inflation on the axis of the recently increased commodity prices.
The inflation situation did not improve compared to last year, it got worse. The Fed will normally continue to keep disinflation a priority, especially if it also takes into account the inclusive effect of inflation on low-income groups. We assume that the Fed will probably raise interest rates by 25 basis points on March 16 as a more traditional step, proceed more calmly throughout the year, and will measure the balance sheet shrinkage as part of its reinvestment plan in the first place.
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