Turkey: Orthodoxy-powered Recovery

Last month’s country visit left us with the impression of a recovery rapidly gaining momentum – but far from complete.  The nation’s turnaround in net foreign exchange reserves provided the starkest illustration: from an April 2023 US$65bn deficit nadir these stood at US$58bn by last week’s data.  Rating agencies have started to sound their approval: Fitch, Moodys and S&P all upgraded their sovereign rating outlooks between May and September this year.  Economists and issuers we met expect the latter two to upgrade sovereign ratings of the country to ‘double-B’ from high ‘single-B’ in the coming quarters.  Behind these improvements stands brutal monetary policy.  The benchmark interest rate now stands at 50% - a sharp contrast to the 8.5% where it held until 1Q23.  The near vertical trajectory between the two figures marked the an equally dramatic reversal in monetary policy.  From the view that inflation was best fought with low interest rates the central bank pivoted back to the orthodox policy of fighting inflation with similarly aggressive interest rates.

Economic growth continued despite these eye-watering interest rates.  Local observers expect GDP growth to come in at 3.5% - 4.0% for 2024 and accelerate to 4.0% in 2025.  This comes despite stubbornly high service sector inflation that is expected to delay rate cuts into 1Q25.  The return to orthodox policy showed early returns: inflation stood at 52% in August – well off its 75% peak just a few quarters ago.  It is expected to close 2024 at 43% and in the ‘mid-20%’ range by YE25.  One economist ventured it would reach a ‘single-digit’ number by 2027. 

The return to orthodox monetary policy and foreign exchange reserve rebuild topped rating agencies’ recent positive comments.  However it is the success of accompanying de-dollarisation policies and narrowing current account balance driven by falling imports, improved tourist receipts and agricultural and industrial exports that are driving the nation’s recovery.

Activity we observed left no doubt as to the economy’s acceleration.  In- and outbound flights from the UK and Mid-East were at capacity with tourists the overwhelming majority.  Restaurants, markets and visitor attractions were typically thronging by mid-day.  The markets on the city’s Anatolian side were bustling with merchants plying wholesale ‘cash and carry’ business to both domestic and international (primarily mid-East and South Asian) buyers in addition to the tourist trade.  A remarkable number of the latter sported post-operative bandaging – testifying to the ongoing health of the country’s cosmetic surgery industry.

Construction sites were evident throughout Istanbul - particularly in the new central business district on the city’s European side. This area is undergoing a transformation from low-rise residential and commercial buildings to high-rise office towers.  Restructuring was similarly observed in the country’s payment and financial systems.  The government’s ‘de-dollarisation’ policy was evident at street level.  We had expected hard currency would be preferred by street vendors and shopkeepers.  But transactions took place in Lira - though posted prices were marked in erasable pen or other easily updatable formats.  Also on its way out was cash.  All merchants - except for street vendors and some market stall owners – happily accepted (in some cases preferred) card payments.  This should prove a fiscal bane: introducing card payments dramatically improved tax collection in other economies where we’d seen it implemented.

Due credit for the economy’s resilience rests with its private sector.  The country’s business owners – from street vendors to conglomerates are well versed in operating through economic and political instability.  Banks in particular – many with histories dating back over a century – have well-used playbooks.  Institutions we spoke to shortened their loan book tenors to allow quick re-pricing as the inflation crisis gained traction.  They were now pivoting to longer tenor loans and pushing into more credit-intensive products (SME and consumer lending in particular) to lock in higher rates and take advantage of the stabilising economic environment.

The ability to tap capital markets opportunistically is another characteristic shared by the country’s issuers.  Liquid balance sheets allowed them to avoid having to raise funds during crisis years.  Stronger issuers – banks in particular – had already returned to global debt markets by 3Q24.  All we had spoken to mentioned issuance plans in the coming quarters.  Issuers with sovereign-constrained ratings looked to eventual ‘BB’-range ratings as allowing them to widen their funding away from their current emerging and frontier sources.

All we spoke to were adamant that the return to orthodox monetary policy was here to stay - though many cast a wary eye to 2028’s Presidential elections.