Turkey: Ongoing rebalancing amid implementation of more orthodox monetary policy

Event

Recent macroeconomic figures in Türkiye (the official English name of Turkey) show that the implementation of more orthodox monetary policies start to pay off. Indeed, inflation is on the decline (see graph below), the current account balance was in surplus in June and in July, and real GDP growth is slowing down. 

Impact

Following his re-election in May 2023, President Erdogan appointed a new, more orthodox, economic team led by Minister of Finance, Mehmet Simsek. Moreover, President Erdogan is no longer advocating against high interest rates. Since then, and despite the appointment of a new central bank governor, the central bank has implemented a more orthodox monetary policy by increasing the benchmark interest rates to 50% (up from 8.5% in early June 2023), allowing the Turkish lira to depreciate, gradually removing some unorthodox financial instruments and lowering the short-term external debt of the central bank. These developments are very positive from a macroeconomic perspective, as they allow to reduce imbalances created by unorthodox monetary policies. One of the indicators monitored by Credendo to assess the short-term political risk is the evolution of the gross foreign exchange reserves. These have increased sharply but remain volatile (see graph below). The outlook for the short-term political risk is positive, as it takes into account recent positive developments, such as the improvement of the current account balance and investor confidence, which has led to an increase in foreign capital inflows. On the other hand, the persisting large short-term external debt and high reliance on short-term capital flows still weigh on the liquidity situation. 

Analyst: Pascaline della Faille - P.dellaFaille@credendo.com