EME Macro/Strategy: Türkiye – twin deficits ameliorate, challenges persist

The economy delivered an overall strong performance in the first half of this year, despite the tight monetary policy, with retail sales, services, industry and construction all expanding at a faster pace than in 1Q, with a decent outlook from the high frequency indicators in 3Q so far. On the bright side, disinflation is continuing and should reach 29-30% by 2025E eop, and this has opened the door for a somewhat aggressive rate-cutting cycle for the CBT. The fiscal deficit has narrowed to 3.5% of GDP in the latest data, on the back of the authorities’ increased focus on discipline and maintaining buffers – and we have seen further additional constructive measures already, to narrow this deficit ahead. On the external sector, we have grown more constructive. We believe that, if the current focus on curbing consumption is maintained, the CAD could remain below 2% until 2027E. Overall, despite the strong 1H headline performance, we see our 3.5% GDP growth target in 2025E as possible. FX fragility remains a concern, for us; and, in this report, we present several ways to look at FX fragility based on fundamentals. However, overall, an abrupt weakening remains more likely to be driven by political and exogenous risks than the macro outlook itself – external balances results show a deterioration compared to 2024, despite the good tourism performance.