S&P sets a date for single-digit inflation! What is the year-end dollar forecast?

Credit rating agency Standard & Poor's (S&P) Global Senior Director Frank Gill evaluated the Turkish economy in an exclusive interview with CNBC-e.

Speaking about Turkey's credit rating, Gill stated, "Your credit rating outlook is positive. We will review Turkey's B+ rating before the end of the year. There is a one-in-three chance it could be upgraded. We are monitoring Turkey's reserve accumulation and the trend in its current account deficit. The budget deficit was quite large in 2023. However, we estimate that it will fall by about one percentage point towards the end of this year. This process also depends on gold demand. The market will be extremely sensitive to monetary policy and the development of inflation, which remains at a high level."

“THE TREND IN RESERVES IS POSITIVE”

Gill gave the following answers to the questions "Is there a level you want to see in reserves?" and "Will we see a second rating upgrade this year?":

"One issue we consider is the ratio of short-term external debt to gross reserves. We estimated short-term external debt at 200 billion dollars. Gross reserves still do not cover 100 percent of this. For example, this is a metric that the IMF considers, and we would need to reach more reserve accumulation to reach this coverage ratio. However, in general, I think the trend in reserves is positive. So, ultimately, perhaps Turkey will need to accumulate its own reserves domestically rather than through loans taken from domestic banks or swaps from non-residents. But the outlook is positive.

As I said, I think the probability of further improvement by the end of this year is quite high. The policy rate rising to 50 percent makes it quite attractive to shift your savings into TL. Thus, we see a trend of shifting foreign currency deposits into TL. I think the challenge will be more in 2025 because the increase in the exchange rate is below inflation. This could really start to negatively affect the competitiveness of important export sectors such as clothing and textiles, and it will also affect tourism to some extent. Currently, the exchange rate is the reference point for falling inflation. The current policy or strategy seems to be keeping the exchange rate quite strong in real terms. This could affect competitiveness."

SET A DATE FOR SINGLE-DIGIT INFLATION: WE DO NOT SEE IT UNTIL THE END OF 2027

Gill, who set a date for single-digit inflation in Turkey, said the following regarding the Central Bank's year-end target of 38 percent and S&P's forecast of 55.8 percent:

"Our average inflation forecast for this year, if I'm not mistaken, yes, is between 56 and 57 percent. We are looking at 57 percent on average for this year. The average forecast for next year is 28 percent. So, a very slow and complex decline process in inflation may be experienced. We do not see single-digit inflation until the end of 2027. That is three years away, and frankly, the world is a complicated place.

Turkey could also receive another external shock. Besides this, the other thing we monitor is, of course, income policy. Minimum wage policy, because this is quite critical for inflation. So, by default, if there is no other minimum wage adjustment in 2024, inflation could fall faster. However, at the same time, it will also depend on the wage adjustment decisions taken in 2025."

The rest of the interview is as follows:

WILL THERE BE AN INTEREST RATE CUT IN 2024?

Do you see a risk of an early cut in interest rate policy?

"I mean, I think this will largely depend on the dollarization trends of savings and clearly on inflation trends. However, perhaps you could see an opportunity where the Central Bank might consider lowering interest rates in early 2025. In my opinion, this does not seem very likely in 2024. Of course, unless there is a serious decline in inflation."

“BEING THE GOVERNOR OF THE CBRT IS NOT AN EASY JOB RIGHT NOW”

It has been 4 months since Fatih Karahan became the Governor of the Central Bank. Do you think the independence and credibility of the Central Bank have been restored?

"One way to measure this situation might be to just look at interest rate policy, and interest rates have been increased quite sharply since last summer. There was an interest rate hike before the elections, and I think this is a strong signal that the Central Bank will do what is necessary to lower inflation. This is clearly a positive sign. However, being the Governor of the Central Bank of the Republic of Turkey is not an easy job right now."

There is high demand for Turkish bonds. Do you think the inflow of hot money into Turkey will continue? In the event of a possible withdrawal, would there be a risk of a sudden shock in the exchange rate?

"Therefore, the outlook in terms of portfolio inflows looks very good, especially for the overnight market and the local market. I think we will see very strong portfolio inflows for 2024. There were very significant inflows throughout May and even throughout last week. However, I think that in 2025, depending on global market conditions, money could also leave Turkey rapidly. Like in other regions within our jurisdiction, for example, Egypt. What happened in Egypt was this: significant portfolio inflows were seen in 2020-2021. In 2022, there were some large outflows. A similar situation could be experienced in Turkey. I think this money will go. That is why Turkey should attract permanent and direct investment and rebuild by basing capital on fundamentals. Turkey's advantages should be invested in. It has a young population, a resilient economy. It has a special customs agreement with the EU. Therefore, it would be nice to see more direct investment in Turkey."

Turkey's removal from the grey list is on the agenda. Will there be a revival in direct investments?

"If Turkey is removed from the grey list, I think that will help. Foreign investors making direct investments are very careful and very cautious. That is why it can take a long time for them to make a decision to invest billions of dollars in the Turkish market. Therefore, I think they will also look at the volatility of interest rates and exchange rates, labor costs, and just the outlook of the domestic market. However, there are also opportunities to invest in Turkey. And with the management steps that lower inflation, I think we expect to see more foreign direct investors."

DOLLAR FORECAST FOR YEAR-END

There has been a relative calm in the dollar/TL recently. Do you think this is artificial, or have the upside risks in the dollar/TL stopped? What is your dollar/TL forecast at the end of the year?

"I mean, we think the TL will be quite stable against the dollar in 2024. It could end at the 32.5 level at the end of the year, which is quite close to the current level. The number one reason for this is the strong foreign currency inflow with the tourism season in June and September. The real question is, what will happen when the dollar rises? Towards the end of the year, there are normally higher foreign currency outflows and more demand for foreign currency for energy imports. Therefore, I feel there could be a little more volatility at the end of the year. However, we are still observing that portfolio inflows are very strong. The Central Bank is actually buying dollars, not selling dollars. Therefore, the situation looks good for 2024. 2025 raises the question of whether a larger adjustment will be made. Because 2025 could be a difficult year, and profit margins in some sectors, especially for exporters, could be quite strained."