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Hüseyin Akar

Chief Economist, CESGA, TEB Asset Management, Türkiye


 

Türkiye: Ready to Shine Again!


Türkiye, the most populous country in Europe (85 million), sits in the middle of ancient trade routes connecting Europe to Asia with a rich history. The region, which is the neighbour of the “Fertile Crescent” of the Middle East, hosted the first settlements in human history under many empires such as Hittites, Byzantine (Rome) and Ottoman. The Republic of Türkiye celebrated its 100th anniversary with unforgettable events last year. For instance, many artists competed to compose the best anniversary anthem to reflect the excitement of the new century. The anthem "Shine", which was composed by a famous rapper, seems to be the most accepted one. Shining might be a key word that might be adopted to financial markets as well. Turkish financial markets aim to be one of the prominent destinations among emerging markets in its new century, and tend to be ready for shining again! 


The Turkish economy has been in the transition period since last year’s Presidential election. After a new economy team had been appointed, macro policies returned to a more orthodox framework. The new macrostructure seems to have three priorities: i) to calm high inflation by tighter monetary and fiscal policies, ii) to reduce current account deficit by balancing vivid domestic demand, iii) to rebuild the Central Bank’s FX reserves to limit TL currency volatility. To ensure these targets, the Central Bank of the Republic of Türkiye (CBRT) has gradually raised its policy rate from 8.5% to 50% in one year. In addition to rate hikes, the CBRT continues to implement quantitative tightening by extending the sterilization tools.


Primarily, high inflation stays as the Achilles’ heel of the economy. 2023-end annual CPI materialized at 64.8%. Strong domestic demand, nominal TL depreciation and sticky services inflation pose upward risks. We expect headline figures to peak around 70% in May, and retreat from there thanks to tighter policies and the base effect. The CBRT’s year-end CPI forecast stands at 36%. The course of monetary policies remains data dependent. 

On the growth front, domestic demand continues to be the main driver. External demand did not provide a stable picture in line with the decelerating European growth last year. That said the 2023 growth at 4.5% stayed catchy among emerging economies. The new economy management targets restrained domestic demand in 2024 to tame inflation and current account deficit. The government’s growth projection is 4% according to the Medium Term Programme. 


Lastly, we have followed a bumpy course in the CBRT’s FX reserves since the Presidential elections. After total FX reserves had risen by USD40bn in the second half of last year, FX reserves fell from USD141bn at the end of the last year to USD123bn in March 2024. Positively, the leading indicators point that pressure on TL has started to ease. The CBRT gives high importance to the sufficiency of FX reserves to provide liquidity to the markets if needed, to offset monthly current account deficit if it occurs, and to assure international investors.


Nevertheless, the Turkish economy just started to rebalance itself. The lagged effects of the taken measures would be more evident and investors' interest in TL assets would increase further. The Fitch Ratings presented the first reward for the progress in the economy. The institution upgraded Türkiye to “B+” rating with “positive” outlook.


Meanwhile, the 4-year election-free period is a big opportunity for the medium term. Türkiye went through two elections in the past 12 months, both Presidential and local. We believe the government has ample time to implement aforementioned orthodox macro policies and there is a strong investment case for Turkish assets. 


On the local currency government debt, especially the long-end of the TL bond curve, might present a capital gain opportunity for investors in harmony with decreasing inflation. Falling inflation expectations and tighter fiscal stance are among main drivers. The Turkish equity market has positively decoupled from the other EMs for the last two years. Local investors flocked to the local equity market to protect themselves against high inflation. We expect higher contributions from global investors in 2024. The foreigners’ share in the local equity market is c.37%, which was c.65% five years ago. The investment case is solid, and we expect foreign ownership to increase going forward with better macro outlook, strong earnings and expanding multiples.    


TEB Asset Management is a partnership between Türk Ekonomi Bankası A.Ş. Group, one of the leading banks in Türkiye, and the French BNP Paribas Group. TEB AM manages local and international mutual funds and pension funds. Furthermore, it provides “Discretionary Portfolio Management” to the individual and institutional investors according to their risk/return expectations.


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