Some Thoughts on Turkey

The recent inflation prints in Turkey underscore the urgency of the policy tightening path that local Economic policymakers have been implementing and the need to continue on this path. Simsek and Erkan are trying to front-load the adjustment to try to avoid making things worse. This suggests economic conditions will be tighter and tougher in the near-term as rates tighten.

Notable in Simsek’s recent defense of the policy path was his pledge to allow wage increases at target inflation (high single digits) not actual realized inflation. If implemented this will help reduce the risk of wage-price spirals but mean that working class Turkish wages will fail to keep pace with inflation, adding to political challenges.

Erdogan, long a critic of higher interest rates has remained quiet leaving his economic policymakers to communicate. He has so far bought into the front-loaded adjustment and likely hopes these issues will be forgotten ahead of the next election. Watch for future credit easing. Instead Erdogan has focused on raising his profile and Turkey’s in the region via mediating with Russia over the grain deal and other efforts to secure discounted commodities and to boost re-exports. Turkey has been a beneficiary of the discounted Russia food and fuel cargos and increased intermediary trade, which have helped to offset the rising costs of key commodities.

Funding from the GCC will be critical and requires these market friendly policies. Turkey’s political anathema to a Fund program does not allow it to avoid doing the sort of adjustment that the IMF recommends, and indeed might require it to do so at a quicker pace. Recent outreach to Qatar and other GCC countries will be key to continuing the recent asset performance including co-investments with the Turkish wealth fund. 

As a result, Turkish policy makers will be looking for an exit as soon as they can, but that time is still aways off, with interest rates set to move meaningfully higher to crush inflation expectations. The weaker lira will help tourism, but is unlikely to meaningfully boost manufacturing and trade given Turkey’s reliance on imports.