Macro and Politics

* TURKSTAT will release July inflation figures today @ 10:00 local time. We expect monthly CPI to increase by 1.8% in July. Market expectations are also centered around 1.8%–1.9%, broadly in line with our forecast. A monthly print in line with our estimate would bring annual CPI inflation down only marginally, to 31.8% from 32.1%. We estimate that the increase in outpatient co-payments at both public and private healthcare providers, following the amendments to the Health Implementation Communiqué (SUT), together with other administered price adjustments, will add approximately 0.6pp to July’s monthly CPI. In addition, the price developments we monitored throughout the month point to a reacceleration in food inflation relative to June, driven primarily by higher vegetable prices. Accordingly, we expect annual inflation to remain broadly flat in July, posting only a marginal decline. Our preliminary estimates for August also suggest that annual CPI inflation will remain broadly unchanged. Starting in September, however, increasingly supportive base effects are likely to become more pronounced, paving the way for annual inflation to converge toward 30%. While we maintain our YE CPI forecast at 28%, we believe renewed geopolitical tensions have tilted the balance of risks to the upside.

* According to the foreign trade data released by TURKSTAT, exports increased by 21.7% y/y to USD24.9bn in June, while imports rose by 23% to USD35.3bn. The acceleration in imports widened the foreign trade deficit to USD10.4bn from USD5.6bn in May. Meanwhile, the rolling 12-month cumulative foreign trade deficit increased to USD95.7bn from USD93.5bn. Looking at the core data, exports excluding energy and gold rose by 23.2% year-on-year to USD23.3bn, while imports excluding energy and gold increased by 24.3% to USD28bn. As a result, the core foreign trade deficit (excluding energy and gold) stood at USD4.7bn in June. Energy imports declined to USD5.9bn in June from USD6.1bn in May, bringing cumulative energy imports in the first half of the year to USD34.5bn. We expect the current account deficit, which narrowed to USD1.5bn in May, to widen to USD5.7bn in June. We estimate that the balance of payments-defined foreign trade deficit increased to USD9.7bn during the month, while the services surplus likely exceeded USD6bn, supported by stronger net travel revenues. We maintain our year-end current account deficit forecast at USD54bn, corresponding to around 3% of GDP. The trend in intermediate goods imports excluding energy and gold points to a rebound in industrial production (IP) in June. In addition, with the bridge-day effect associated with the Eid holiday no longer weighing on IP and base effects turning more supportive, we expect industrial production growth to return to positive territory in June.