Macro and Politics

* Credit rating agency S&P affirmed Turkey’s long-term sovereign credit rating at ‘BB-’ with a "stable" outlook, in line with our house estimate and the market consensus. S&P stated that its affirmation reflects the view that, despite recent increases in exchange rate volatility and a decline in foreign exchange reserves, Turkish authorities are expected to maintain policies aimed at reducing inflation and curbing dollarization. The agency also noted that recent protests in March — triggered by the detention of opposition leaders — could pose a long-term risk to investor and household confidence, as well as to currency stability and economic growth. Having upgraded Turkey’s credit rating twice last year, in its May and November reviews, S&P’s next scheduled assessment for this year is set for October 17. Meanwhile, Turkey’s upcoming credit rating review is expected to be conducted by Fitch on July 25.

*The CBT has introduced a change in the calculation method for interest payments on required reserves. According to the implementation guidelines sent to banks, the CBT will now calculate the interest paid on required reserves based on the weighted average cost of funding (WACF), rather than the policy rate as previously applied. Currently, the WACF stands at 48.55%, approximately 2.5 percentage points above the 46% policy rate. As a result, this adjustment effectively increases the interest remuneration on banks’ required reserve holdings.

* According to the results of the April Sectoral Inflation Expectations Survey, the escalation in political tensions since March 19 has led to an upward revision in inflation expectations among market participants and the real sector, while household expectations have remained unchanged. Hence, as per the April survey results, 12-month-ahead annual inflation expectations have increased by 1 percentage point to 25.6% for market participants and by 0.6 percentage points to 41.7% for the real sector, while remaining unchanged at 59.3% for households.

* During the week of April 11 – 18, foreign investors recorded a net purchase of USD269.1mn in the equity market, while they were net sellers in the bond market (excluding repo transactions), registering an outflow of USD970mn, which led to a decline in their share of the total bond stock to 4.8% from 5.2%. In annual terms, the equity experienced a cumulative foreign outflow of USD4bn, while the bond markets (excluding the repo transactions) saw a cumulative foreign inflow of USD10.8bn. In ytd terms, the foreign portfolio flow in the equity and bond market experienced a net outflow of USD646mn and USD5.1bn, respectively. Besides, in the mentioned week, the residents’ total FX deposits (including gold, price adjusted) surged by USD2.4bn.