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Goldman Sachs: Challenges Have Now Fully Migrated To The Domestic Economy

TURKEY
  • The statement suggests that the Bank will continue on its gradual course in raising rates and appears to put more emphasis on its macro prudential measures to tighten policy. GS agree with the Bank that the current account pressures are likely to decline. Fiscal policy has been tightened and credit growth has slowed, and hence domestic demand in Goldman’s view will slow to allow the current account to balance in H2-2023. GS also concur that credit spreads have declined: the UAE has pledged to fund US$8.5bn of bonds as part of a longer-term investment scheme and gross exchange rate reserves have risen by close to US$15bn since the election.
  • The challenges, in Goldman Sachs’ view, have now fully migrated to the domestic economy and are largely twofold. First, how to incentivize the local population to save in TRY while inflation is running close to 40% both in annual and sequential terms and, second, how to fund the budget, including the cost of the FX-protected savings scheme without having to rely on the TMCB. In their view, the former requires sufficiently high deposit rates.
  • GS still think that introducing an interest rate at close to the deposit rates to put a floor on interest rates is the most likely means to achieve that. However, the fact that today's statement mentions quantitative tightening suggests that, at least for now, the Bank intends to use macro prudential measures to tighten liquidity sufficiently to do this. With respect to the budget, the recently announced tax hikes and the external funding from the Middle East should help but the majority of the funding will still need to come from the domestic banking system. That said, at current yields well below deposit rates and below both current and expected inflation, it is unclear to GS if funding from the banks would be forthcoming or if the banks do provide funding, how they can prevent their capital base being eroded.
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