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Emerging Europe


Turkey: how will officials respond to falls in the lira?

The Turkish lira has come under renewed pressure in recent weeks but interest rate hikes to shore up the currency are off the cards. Instead, further sharp and disorderly falls would most likely be met by formal capital controls and more strident lira-isation efforts.

19 May 2022

Gas supplies at risk, CNB shake-up, Turkey FX restrictions

Russia’s sanctions on European energy companies and the closure of the Sokhranivka transit point in Ukraine this week are a sign that the risk of energy supply disruptions in Central and Eastern Europe is increasing. Meanwhile, changes to the board of the Czech central bank over the coming months, starting with this week’s appointment of Aleš Michl as the next governor, could pave the way for a more dovish MPC that cuts interest rates quickly once inflation drops back. Finally, reports of Turkey’s increased oversight over FX transactions could be the first step towards restrictions that threaten to disrupt activity. EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.

13 May 2022

Turkey Industrial Production & Retail Sales (Mar.)

Turkey’s activity data for March suggest that the economy held up better than expected in Q1 as a weak lira appears to have supported industry, while policies to preserve households’ purchasing power have limited the downturn in retail sales. But spillovers from the war in Ukraine mean that, for now, we are sticking with our below-consensus forecast for GDP growth of 0.3% this year. EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.  

13 May 2022
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Lira stability may give way to further pronounced weakness

We think that the surprising stability of the Turkish lira so far this year will not last much longer and we forecast it to weaken against the dollar over the coming months, from ~14.8/$ now to 18/$ by end-2022. This would be a fall of around 20% and, even then, we think the risks are skewed firmly to the downside. In view of the wider interest, we are also sending this FX Markets Update to clients of our Emerging Europe Service.

Turkey Consumer Prices (Apr.)

Turkey’s headline inflation rate recorded another sharp increase to 70.0% y/y in April and there’s a strong chance that it moves beyond its peak in the early 2000s in the coming months. Despite this inflation backdrop, a widening current account deficit and more aggressive tightening by the Fed, there is no sign that Turkey’s central bank is about to hike interest rates. EM Drop-In (5th May, 10:00 EDT/15:00 BST): Join Shilan Shah for our latest monthly session on the big macro and markets stories in EMs. This month, Shilan and the team will be talking Russian gas, FX weakness and surging food prices. Register now

Inflation risks mount as commodity prices surge

Surging commodity prices have pushed up inflation across the region and we expect inflation to hit fresh multi-year highs in the coming months. A loss of Russian gas supplies should not lead to rationing in Poland, but it will have a big impact in Bulgaria and energy bills are likely to be higher across the region this year. With activity holding up well for now, central banks continue to focus on inflation risks and we expect large interest rate hikes next week in Poland (100bp) and Czechia (50bp). In contrast, Russia’s central bank looks set to lower interest rates further now that inflation pressures have eased sharply. It may be shifting to a dovish stance too quickly, but looser monetary conditions will only go so far to supporting activity.

Turkey’s current account deficit is a growing risk

Spillovers from the war in Ukraine are likely to cause Turkey’s current account deficit to widen to more than 4% of GDP this year. In the recent past, deficits of this scale have tended to precede sharp falls in Turkey’s currency.

Recession risks take centre stage

The Russian economy will collapse this year and we expect spillovers from the war in Ukraine to cause a recession in many of the smaller countries in the region, particularly Bulgaria and the Baltic States. Loose fiscal policy and strong labour market dynamics should help Poland and Hungary outperform but, even so, we’re more downbeat on GDP growth in all major economies than the consensus. We think inflation will end the year stronger and interest rates higher than most expect. The economic backdrop of widening macro imbalances, the euro-zone recession risk and aggressive global monetary tightening will cause the region’s currencies to depreciate.

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