Macro and Politics

* The CBT, taking into account recent developments in foreign currency loans, has decided to support its tight monetary stance through changes in the loan growth-based reserve requirement practice. Accordingly, the monthly growth limit for foreign currency loans has been reduced from 1% to 0.5% and the scope of foreign currency loans exempted from the growth limit has been narrowed. Total loan growth continues to rise, led by FX loans, thereby amplifying the exchange rate risk borne by the real sector. Meanwhile, domestic demand has been strengthening since the last quarter of 2024, and preliminary data for the first quarter of this year also indicate a continuation of this positive trend in economic activity. Thus, the current growth trajectory remains a headwind to the disinflation process. As a result, we interpret the CBT’s latest tightening move as a measure that not only mitigates the real sector’s FX risk but also helps rebalance demand dynamics.

*TURKSTAT will release the February inflation figures today @10:00 local time. We anticipate a 3.1% m/m CPI rise, which would result in an annual CPI of 40.2%, down from the previous month’s 42.1%. According to a survey conducted by ForInvest (previously known as Foreks), the market consensus estimates a 3% m/m CPI rise, which is broadly in line with our house forecast. We project that annual CPI inflation will decline towards 40% in February, with a further drop to below 39% in March. As such, we maintain our forecast for a 250bps rate cut in March.

* Istanbul Chamber of Industry (ICI) Turkey February Manufacturing PMI will be announced @ 10:00 local time. ICI Turkey Manufacturing PMI declined to 48 in January from 49.1 in the previous month, following a two-month increase. Remaining below the 50-threshold for the tenth consecutive month, the index continued to signal contraction. The accompanying report highlighted that contractions in production, new orders, and employment accelerated in January, while inflationary pressures intensified. Leading indicators generally exhibited a weak trend in January. However, preliminary data for February so far suggest a renewed improvement in activity. Following the January PMI data, which indicated a further slowdown in production, we will continue to assess first-quarter activity signals with today’s release of the February figures.

* Turkey’s economy grew by 3% y/y and 1.7% q/q in 4Q24, exceeding market expectations. Our house forecast, as well as the median market expectation based on the ForInvest survey, had pointed to an annual growth rate of 2.8%. Meanwhile, the annual growth rate for the third quarter was revised to 2.2% from 2.1%, while the sequential contraction was adjusted to -0.1% from -0.2%. With the Turkish economy recovering from a technical recession after two consecutive quarters of contraction, the full-year 2024 GDP growth rate came in at 3.2%, surpassing the market consensus, which had been around 3%. Our baseline scenario for this year suggests that after a decline in annual growth in the first quarter of 2025, activity will begin to recover from the second quarter onwards, with GDP growth for the year to be 2.6%, yet with upside risks attached. The preliminary data received so far indicates that the weakening in growth we anticipated in the first quarter may not occur to the extent we had predicted. So, we believe there are upside risks to our 2025YE GDP house forecast.

*The adjusted unemployment rate dropped merely to 8.4% from 8.5% in January, yet the broad-based unemployment calculations remained higher. The rate of composite measure of labor underutilization – including time related underemployment, potential labor force and unemployment— rose slightly to 28.1% from 28%, remaining near its highest levels in the past 4 years. The combined rate of time-related underemployment and unemployment climbed to 18.8% from 18.4% while the combined rate of unemployment and potential labor force edged down to 18.9% from 19.3%.  We expect growth dynamics to gain some momentum starting in the second half of 2025 after a stagnant period, although we forecast GDP growth for 2025 to be lower than in 2024, at 2.6%. As a result, we expect the high levels of composite measure of labor underutilization to sustain its rising tendency.