Macro and Politics

* The Treasury will hold auctions of a 4y CPI-linked bond and a 9y fixed coupon bond today. The Treasury tapped the domestic markets to the tune of TL101.7bn, including TL63.6bn through non-competitive sales, in yesterday’s auctions of a 3y FRN and a 4y TLREF-indexed bond. The 3y FRN auction attracted strong demand, with a bid-to-cover ratio of 3.45x, while the periodic rate stood at 20.87%. Demand was also robust at the 4y TLREF-indexed bond auction, with a bid-to-cover ratio of 3.99x, while the periodic rate was 20.46%. This brought the Treasury’s total domestic borrowing so far this month to TL370.7bn. Following today’s auctions, the Treasury will complete its August domestic borrowing program with tomorrow’s direct sales of a 1y USD-denominated bond and a 1y USD-denominated lease certificate. Under its August–October 2026 domestic borrowing strategy, the Treasury plans to raise a total of TL536.7bn from the domestic market against TL596.3bn of redemptions in August -- implying a rollover ratio of 90%.

* The central government budget posted a deficit of TL378.1bn in July, while the primary balance recorded a deficit of TL51.3bn. After posting a TL114.2bn surplus in June, supported by deferred tax collections and favorable base effects stemming from provisional tax payments, the budget swung back into deficit in July as these temporary effects faded and expenditures rose sharply. This brought the cumulative budget deficit to TL1.3tn in January–July, corresponding to 48.7% of the TL2.7tn full-year target for 2026. Meanwhile, the 12-month cumulative budget deficit widened to TL2.1tn from TL1.8tn. With oil prices back on an upward trajectory and geopolitical risks remaining elevated, we expect fuel-related pressures on tax revenues to persist in the period ahead. Despite the decision in July to gradually phase out the mobile excise tax mechanism, the renewed rise in oil and diesel prices prompted a new measure last week, under which the excise tax on diesel was reduced to zero through end-August and will be gradually reinstated in September. We expect the measure to contain the pass-through of higher fuel prices to inflation and help prevent monthly CPI inflation from rising materially above 2%. However, the associated loss of excise tax revenues suggests that pressure on the budget will persist in the near term. We maintain our 2026 budget deficit forecast at TL2.8tn, or 3.4% of GDP.