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Although the CBRT operated a controlled devaluation of the lira ahead of local elections – the currency has depreciated by 8% against the dollar and 6% against the euro year-to-date – further devaluation is likely over the coming months given shrinking net foreign assets of USD 6.9bn at end-March, down from USD 27.2bn at the end of 2023.
This would be a repeat of what happened in June 2023 when the currency fell 20% against the dollar (23% against the euro), and 36% in 2023 (39%), increasing the price of energy – which accounts for around 20% of imports.
Still, a weak currency is not the only source of inflationary pressure. The disinflation process could be delayed by a further rise in the minimum wage after the almost 50% increase in January this year. Fiscal policy is also tighter but generally still accommodative following the February 2023 earthquake. The headline fiscal deficit is running at TRY 425bn year-to-date, an 86% rise from the same period in 2023.
Restrictive Policy Stance Will Hurt Domestic Economic Activity
Rebalancing the economy remains a significant challenge as tighter fiscal and monetary policy worsens the economic growth outlook. Real GDP growth is projected at 3.3% in 2024, after 4.5% in 2023 and 3.5% in 2025. This performance would be robust albeit much weaker than the 5.2% recorded on average over the past 10-years.
For a look at all of today’s economic events, check out our economic calendar.
Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Tom Giudice, intern trainee at Scope Ratings, contributed to drafting this economic update.
