Macro and Politics

* The Treasury and Finance Ministry will release February cash budget figures @ 17:30 local time. The central government budget posted a deficit of TL214.5bn in January, while the primary balance recorded a surplus of TL241.8bn. Accordingly, the 12-month cumulative budget deficit edged up modestly from TL1.8tn to TL1.87tn, whereas the primary surplus widened markedly from TL255.3bn to TL473.4bn. The Treasury cash balance registered a deficit of TL246.2bn in January, with the primary cash balance posting a surplus of TL207.5bn. As such, the budget deficit came in roughly TL32bn lower than the cash deficit in the first month of the year, suggesting that the divergence between the accrual-based budget balance and the cash-based balance has persisted, albeit at a somewhat narrower margin. The Treasury cash balance figures for February, scheduled to be released today, will serve as a leading indicator for the central government budget data to be announced on Monday, March 16. Our house forecast for the 2026 budget deficit stands at TL2.8tn (3.4% of GDP). Meanwhile, we expect the recently introduced 75% échelle mobile mechanism in fuel pricing to pose downside risks to special consumption tax (SCT) revenues –  and thus to cash revenues – in the coming months.

* Following the introduction of the 75% échelle mobile mechanism aimed at limiting the pass-through of geopolitical risks to pump prices, fuel price adjustments were announced as of March 5, amounting to TL0.92 per liter for gasoline and TL3.11 per liter for diesel. Under the mechanism, only 25% of the cost shock is reflected in retail prices, while the remaining 75% is absorbed through reductions in the special consumption tax (SCT). Accordingly, the fiscal cost of the latest fuel price adjustment corresponds to TL2.76 per liter for gasoline and TL9.33 per liter for diesel. Notably, these tax reductions remain below the SCT ceiling levels determined as of March 2 (TL13.9 per liter for diesel and TL14.83 per liter for gasoline), suggesting that the mechanism retains sufficient room to absorb the current shock. In this context, while the échelle mobile mechanism is likely to soften inflation pass-through in the near term, it may also pose downside risks to SCT collections—and consequently to the Treasury’s cash revenues—should the oil shock prove persistent. From an inflation perspective, the mechanism supports the near-term inflation outlook by limiting the first-round pass-through of fuel-related cost shocks to consumer prices. However, in the event that energy costs remain elevated, second-round effects may still emerge, warranting close monitoring of inflation dynamics. Under the 75% échelle mobile framework, we estimate the direct contribution of the fuel price adjustment to March inflation at around 0.09 percentage points. In the absence of the mechanism, the same adjustment would have generated an estimated direct impact of roughly 0.36 percentage points on the CPI. In other words, the application of the mechanism reduces the direct monthly CPI impact through the fuel channel by approximately 0.3 percentage points. Yet, we emphasize that the mechanism does not fully eliminate inflationary risks. A broad-based increase in energy costs – particularly natural gas – may still intensify cost pressures through the producer channel, posing upside risks to the overall price level in the period ahead. Against this backdrop, we assess that upside risks to our year-end inflation forecast of 23% have increased markedly.

* Foreign investors were net buyers of equities, albeit modestly, to the tune of USD65.3mn in the week of February 20 – 27, while recording net sales of USD212.8mn in the bond market (excluding repo transactions). As a result, the foreign share in the total government bond stock declined from 9% to 8.9%. In the equity market, foreign inflows extended into a thirteenth consecutive week, although the pace of inflows appears to have moderated in the most recent period. Cumulative foreign purchases in the equity market reached USD3.2bn over this thirteen-week stretch. Since the beginning of the year, net foreign inflows have totaled USD2.4bn in equities and USD4.6bn in the government bond market, excluding repo transactions. Meanwhile, rising tensions between the US and Iran have led to a softening in risk appetite toward emerging market assets. Against this backdrop, we assess that foreign outflows through portfolio channels could emerge in the near term. Within the mentioned week, the residents’ FX deposits increased by USD1.1bn (excluding gold, EUR/USD parity effect adjusted), while their total FX deposits (including gold, price adjusted) soared by USD2.1bn. In terms of official reserves, the CBT’s gross FX reserves rose by USD4.2bn to USD210.4bn, net international reserves increased by USD2.6bn to USD91.6bn and net reserves excluding swaps climbed by USD3.2bn to USD78.7bn.