Macro and Politics

* The CBT decided to implement the following changes to the macroprudential framework to support transition to the Turkish lira:

1. Reserve requirement ratios for FX deposits have been raised by 200 basis points across all maturities - We view this measure as an effort by the CBRT to dampen banks’ appetite for attracting FX deposits. The adjustment is estimated to absorb around USD5bn from the market and support a corresponding increase in gross reserves.
2. The reserve requirement ratio for funds that are derived from FX repo transactions with residents of a maturity up to 1 year has been raised by 400 basis points and the calculation method has been changed - The rationale behind this measure appears aligned with the broader objective of reducing demand for FX while encouraging a shift toward lira-denominated instruments.
3. A monthly increase target of 0.3 points for TRY deposit share of legal persons has been introduced for banks with a share lower than 60% - This constitutes a clear incentive mechanism aimed at encouraging banks to expand their lira deposit base, thereby reinforcing the liraization strategy.
4. The remuneration rate applied to required reserves maintained for Turkish lira deposits has been raised from 84% to 86% of the CBRT’s weighted average funding cost - This effectively raises the yield on lira-denominated required reserves, offering banks an additional incentive to accumulate and retain TL deposits, thereby supporting the ongoing liraization process.
5. With an amendment made to the Exports Circular as per the decision of the Ministry of Treasury and Finance, the minimum share of export proceeds to be sold to the Central Bank of the Republic of Türkiye (CBRT) shall be 35% until July 31, 2025 - This adjustment raises the mandatory conversion ratio for exporters’ FX earnings, which is expected to bolster FX reserves.
6. The FX conversion support rate, which is applied to firms’ foreign currency conversions of export proceeds to the Turkish lira, has been raised to 3% until July 31, 2025 - Along with the previous measure, this is designed to reinforce reserve accumulation.

These measures can be interpreted as tightening in nature and aimed at incentivizing Turkish lira-denominated instruments. The overarching objective appears to be fostering greater appetite among banks for lira deposits while simultaneously curbing their willingness to attract foreign currency deposits. This policy stance is expected to exert upward pressure on deposit rates, particularly for lira-denominated accounts. Furthermore, the adjustments to reserve requirements and export proceeds regulations are likely to contribute to an improvement in FX reserves. That said, we believe a sustained and structural increase in reserves may take time to materialize. Overall, the set of measures is consistent with our view that policy rates will remain elevated for an extended period.

*TURKSTAT will release the April inflation figures today @ 10:00 local time. We forecast a monthly CPI increase of 3.08%, which would bring the annual inflation rate to 38% – only slightly below March’s 38.1%. According to a survey conducted by ForInvest, the market consensus estimates a 3.2% m/m CPI rise, slightly higher than our house forecast. We continue to project year-end inflation at 31%.

* The Istanbul Chamber of Industry (ICI) Turkey Manufacturing PMI remained unchanged at 47.3 in April, holding at its lowest level since October. Persistently below the 50-threshold since March 2024, the PMI continues to signal a sustained slowdown in manufacturing sector activity. Following an average of 47.73 in the final quarter of 2024, the index recorded a marginal uptick to 47.87 in the first quarter of 2025, indicating no palpable change in momentum. The accompanying note underlined that the Turkish manufacturing sector continued to face challenges in April, although there were some signs of improvement as rates of moderation in output, new orders and exports all eased. The note highlighted that firms again scaled back employment and purchasing activity, while muted demand conditions contributed to the most pronounced quickening of vendor lead times since the end of 2022. While our GDP growth forecast for 2025 remains at 3.1%, we assess that downside risks to this projection are mounting. The combination of tighter financial conditions and rising idiosyncratic concerns raises the probability of sub-3% growth in 2025.

* The foreign investors were the net buyers on both the equity and bond markets in the week of April 18 – 25, albeit modestly. Accordingly, the equity and the bond market (excluding repo transactions) experienced a net foreign inflow of USD92.4mn and USD476.7mn, respectively, while the foreigners’ share in total bond stock dropped barely from 4.8% to 4.7%. Besides, during the period of April 18 – 25, the residents’ FX deposits slid by USD287mn (excluding gold accounts and adjusted for the EUR/USD parity effect), while their total FX deposits (including gold, price adjusted) retreated by a mere USD147mn. Moreover, the CBT’s gross FX reserves eased by USD5.5bn to USD141.2bn, while the international reserves decreased by USD3.6bn to USD35bn.