Turkey: Base Effect Process in Inflation
-Base effect and other elements
-End of rate cut cycle, use of alternative vehicles
-Slowing growth momentum
Monthly consumer price inflation came in at +2.9% in November, generally in line with consensus expectations. As a result, annual CPI inflation declined from 85.5% in October to 84.4% in November. Annual core CPI "C" fell to 68.9%, while annual PPI fell to 136% from a peak of 157.7%. The depreciation in the exchange rate and the gradual transition in PPI inflation as well as strong demand conditions and persistent food price inflation seem to keep annual inflation high.
The minimum wage committee will announce the 2023 figure towards the end of the month. Milliyet newspaper reported that the minimum wage could increase by 50% and the annual increase could reach 94%. With annual CPI of 84.4% and PPI of 136%, trade unions are demanding higher hikes than inflation. Meanwhile, employers want the state's minimum wage support to be increased and income tax brackets adjusted upwards. The minimum wage is currently 6.5 thousand TL (gross) and 5.5 thousand TL (net) per month. That equates to $294 USD.
While the CBRT lowered the policy rate by 150 basis points to 9%, it decided to end the rate cut process that started in August in line with both expectations and the latest guidance of the Bank. The Bank stated that it will continue to resolutely use the tools to support the effectiveness of the monetary transmission mechanism and to implement additional measures. The comprehensive set of policies to be implemented will be published in the 2023 Money and Exchange Rate document in December.
The CBRT increased the 3% penalty fee on foreign exchange deposits to 8% for banks whose TL deposits account for less than 50% of the total. It is ironic that this decision took place the day the CBRT lowered the policy rate by 150 basis points, because the only thing banks can do to avoid penalties or compensate for the increased cost is to raise TL deposit rates and increase loans, which are rates that are not limited by the CBRT. Thus, while the CBRT achieved its sacred goal of reaching a single-digit policy rate on paper, banks increased interest rates. For TL commercial loans whose interest rate is effectively capped by the policy rate, headline interest rates will actually drop but availability will further decrease.
Comparison of headline and core CPI and CBRT policy rate… Source: CBRT, TURKSTAT, Bloomberg, Tera Yatırım
Turkey's GDP grew by 3.9% year-on-year in 3Q22, which is broadly in line with the overall forecast of 4.3%. After a quarterly contraction of 10.4% as a result of the COVID-19 restrictions in 2Q20, GDP is recovering sharply from June 2020. Whereas, 3Q22 showed the first decline in GDP since 2Q20, with seasonally and calendar adjusted GDP contracting by 0.1%. Details showed that total private domestic consumption increased 19.8% in 3Q22 compared to the previous year; consumption expenditures of the public sector increased by 8.5% compared to the previous year; gross fixed capital formation decreased by 1.3% compared to the previous year; the contribution of net exports to overall GDP growth declined slightly and remained at a positive 0.7 percentage point; and the contribution of changes in stocks remained at a deep negative of 9.6 points.
OECD expects Turkey's GDP to increase by 5.3% in 2022 to 3.0% in 2023 and to 3.4% in 2024. Whereas inflation is 73.2% at the end of 2022, and in 2023 it is expected to remain high and stable at 44.6% and 42.1% in 2024. The OECD notes that large external financing needs and low reserve buffers leave the economy highly vulnerable to shocks, and considers that the CBRT should raise the policy rate and provide credible forward guidance for a realistic convergence path to the official inflation target to bolster confidence.
Turkey's Growth Begins to Slow Down… Comparison of real GDP growth rate (seasonally and calendar adjusted) and long-term growth path… (Based on 1Q19, the beginning of the pandemic, the chain volume index has been normalized with Factor 100.) Source: Bloomberg, TUIK, Tera Yatırım
Current account balance posted a deficit of US$3 billion in September. As expected, balance of payments data was revised and the last 12-month C/A deficit was reduced by approximately USD 7 billion, mainly driven by an upward revision of approximately USD 7 billion in net tourism revenues. Thus, Turkey's 12-month rolling C/A deficit rose to USD 39.2 billion in September 2022 (approximately 4.8% of GDP). The goods gap widened sharply each year, driven by higher commodity prices, while net services revenues continued to improve from the relatively low base. On the financing front, there was a gross foreign direct investment inflow of US$1 billion in September.
We think that the CBRT's ongoing loose policy and growth-supported fiscal policies may continue to feed inflation. The annual fall in inflation in November seems to be a start, as the strong base effects will work on inflation after December. We expect inflation to decrease in the first few months of 2023, as similar base effects will prevail in the coming periods.
Emerging markets: Inflation and capital dynamics
-Current status of emerging economies as the year-end approaches
-Russian oil price ceiling
-China: Living with Covid
India has quietly become an emerging market over the past decade. Not only did it easily outperform any major EM, but it was pretty much the only market that yielded positive returns.
Some of the relevant MSCI indices that have been re-based as of December 3, 2012 are given below.
India stands out… Re-based price returns of related MSCI indices in USD (%)... Source: Refinitiv, FT
Starting Monday this week, the EU has banned oil imports from Russia by sea. It also joins the US, the UK and the wider west in banning their businesses from shipping Russian oil anywhere in the world or providing services such as insurance unless Moscow sells its oil below the ceiling price of their choice.
Little can change in the short term. Since the $60-per-barrel cap is close to where Russian oil currently trades (financial restraints and corporate self-sanctions have driven a sharp reduction in world prices), much can continue as before. In particular, the price cap is unlikely to meet Russia's apparent goal of slashing revenues enough to undermine Putin's ability to fight.
Russia says it will refuse to sell to countries that meet the price ceiling. If a significant amount of crude oil is taken off the market, prices could skyrocket. But in this case, the OPEC club of major oil exporters will decide whether a new oil boost is in their interests. The cartel has decided not to change production over the weekend, citing that it prefers to keep things stable.
According to Nomura, the impact of the Covid lockdowns in China on the economy is diminishing for the first time since the beginning of October. However, analysts at the Japanese bank warned that the road ahead will be challenging as China does not appear ready for a spike in infections.
A report by Nomura's Chief Economist for China, Ting Lu, and a team found that as of Monday, the negative impact of China's Covid controls on the economy of China's total GDP fell to 19.3% from 25.1% a week ago.
China does not appear to be well prepared for a major wave of Covid infections and may have to pay the price for its delay in adopting a 'living with Covid' approach. The country has also reported an increase in virus infections, which have reached record daily levels over the past few weeks. The number of cases has dwindled in recent days amid the decline in mandatory virus testing.
About 452.5 million people are affected by the current lockdown measures, though lower than 528.6 million, which is much higher than a week ago, Nomura analysts said. While these figures exceed the population of many countries, they only reflect one-third of China's.
Advanced economies: Disinflation temporary or permanent?
-Latest forecasts for the Fed based on available data and some unpredictable explanations
-Is inflation really cooling?
-Will the Fed continue to operate?
With the expected half-point rate hike, new Fed forecasts to be released this month may show the Fed's target rate moving towards levels last seen on the eve of the 2007 financial crisis, and will also provide policymakers' most up-to-date forecasts.
A stronger-than-expected US jobs report for November showed firms added 263,000 workers, hourly wages rose 5.1% year-on-year, and the size of the workforce shrank; The Fed hopes the job market and wage pressure will start to cool after that.
Rates and inflation… The Central Bank is raising rates rapidly, and the effect of this may finally be evident in the headline inflation figures. This opened the door for smaller rate hikes… Source: Federal Reserve, Bureau of Labor Statistics
Combined with only a modest drop in inflation so far, the Fed's 19 policymakers' new projections appear to indicate that rates continue to rise and remain high through 2023, going against current market expectations for rate cuts by the end of next year.
"The Fed tells us that increasing unemployment and lowering wage growth will require a long period of restrictive policy, and today's data provides further evidence to that effect," said Jefferies economist Thomas Simons. “It does not derail the rate hike and gives us more confidence in our expectation that the final interest rate will rise above 5% next year."
Data released on Thursday showed the Fed's preferred measure of inflation was 6% in October, a drop from 6.3% in September, and this year's low, but still three times the Fed's 2% target.
Kaynak: Tera Yatırım-Enver Erkan
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