Important Points
With over five years of sharp currency depreciation, depletion of foreign exchange reserves, and unconventional monetary policy, Turkey's economy is severely damaged.
Around 70% of the 85 million people in the nation cannot afford basic necessities, and since this time in 2019, the Turkish lira has lost about 81% of its value compared to the US dollar.
But beginning around a year ago, there have been appointments to the central bank and economic teams that seem committed to turning around Turkey's situation, no matter how difficult the journey.
According to Citi's most recent analysis on the nation's emerging signals, investors who fled Turkey in large numbers over the previous few years might want to start returning.
With over five years of sharp currency depreciation, depletion of foreign exchange reserves, and unconventional monetary policy, Turkey's economy is severely damaged. According to official April statistics, the 85 million-strong nation's inflation rate is close to 70%, Turks find it difficult to pay for necessities, and since this time in 2019, the lira has lost about 81% of its value compared to the US dollar.
President Recep Tayyip Erdogan of Turkey, who has tight control over the central bank, has been refusing to raise interest rates for the past few years. He has called rates "the mother of all evil" and has insisted that lowering rates is the best way to reduce inflation, despite the fact that doing so has had the opposite effect.
Since around a year ago, there have been appointments to the central bank and economic teams that seem committed to turning around Turkey's situation, no matter how difficult the process may be. Between May 2023 and January 2024, the central bank aggressively raised interest rates by 3,650 basis points. In March of this year, it increased rates once again, to the current 50% set by the central bank.
The statement stated that until there is a noticeable and long-lasting decrease in the monthly inflation trend, a "tight monetary policy will be maintained."
The bank asserts that the following factors will largely influence the performance of the Turkish lira: "(i) the CBT's achievement in re-anchoring expectations, which will be
major for de-dollarization and disinflation; (ii) a well-thought-out plan to gradually phase out non-conventional regulatory measures; and (iii) a credible fiscal consolidation, which is critical for the current account adjustment and the disinflation process, according to its analysts.
According to the bank, "macroeconomic visibility, increasing investor sentiment, and attracting much-needed high-quality capital inflows" will depend on making the appropriate policy decisions in those areas.
"We believe the CBT is on the proper policy path, and monetary policy may stay relatively tight for longer than is currently factored in by markets," the report's analysts said in reference to interest rates.
Although Turkey's annual inflation rate increased to about 70% in April, some analysts pointed out that the increase was actually rather less than anticipated, indicating that pricing pressures may have eased once more. Although many experts predict that the nation's inflation would decline in the second part of this year, rate decreases will not occur until 2025.
According to the Citi research, ratings agencies are now taking Turkey's "policy normalization and structural reforms" into account and are projecting more good ratings reviews in the near future. However, the bank continued, "We assess Turkey's credit grade is principally restrained by its institutional and political risks," citing the country's sometimes volatile political past and the often unpredictable nature of its leadership.
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