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Tacirler Investment Macroeconomic Outlook Report - April 24'

A challenging journey

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We foresee robust growth dynamics in the first quarter, followed by a palpable contraction in domestic demand in the second half. Our 2024 GDP growth estimate remains at 3%, albeit with associated downside risks. The tightening financial conditions and escalating costs are likely to accelerate the decline in the industrial sector, presenting downward risks to our growth projections. Furthermore, the faster-than-expected erosion of real wages could precipitate a more rapid slowdown in domestic demand.

We do not anticipate the annual CPI to dip below 60% until July 2024. Our projection suggests inflation peaking around 75% in May, followed by a decline of nearly 25 percentage points during the summer months, with a year-end CPI of 43%. While we view the CBRT’s year-end inflation forecast of 36% for 2024 as optimistic, we believe recent measures have fortified the Bank's position in combating inflation.

We expect the tight monetary policy stance to persist in the wake of the local elections. President Erdoğan's moderate statements and conciliatory remarks from the main opposition post-local elections indicate that political uncertainty may not be at the forefront in the near term. Hence, our focus going forward will be on whether there will be a decrease in FX demand following the elections. While we expect the individual demand for FX to settle down in the coming period, if such a cooling does not occur, we believe that the risks to the 50% policy rate could be tilted upwards.

We anticipate the ongoing decline in the CA deficit to persist on an annual basis. The impact of conventional monetary policy and tightening conditions on credit growth and domestic demand will become pronounced in the latter half. Concurrently, with tourism performance and foreign market recovery, we expect the current account deficit to further narrow this year.

We anticipate the decline in the CA deficit to persist in annual terms. We expect to see the significant effects of the traditional monetary policy and tightening conditions on credit growth and domestic demand in the second half. Alongside the performance of tourism and the recovery process in our foreign markets, we expect the current account deficit to continue decreasing this year. Our expectation for the year-end CA deficit is USD33bn.

The financing aspect remains challenging, with the external financing requirement to gross foreign exchange reserves ratio hovering at around 187%. The restoration process of FX liquidity will be pivotal in the wake of the local elections, not only for stabilizing the CBRT’s reserves but also for rebuilding confidence in TL assets. It’s noteworthy that the absence of the ambitioned rise in foreign demand at the beginning of this year is a cause for concern.

We expect the 2024 budget deficit to fall below the Medium-Term Economic Program (MTEP) forecast. With the bulk of earthquake expenditures absorbed in the 2023 budget, we anticipate the 2024 budget deficit to be below the MTEP forecast, with a projected budget deficit/GDP ratio of 5.2% in 2024.