Turkey – Economic Outlook and Strategy

Inflation continues to rise...
CPI increased by 4.81% on a monthly basis in February and the annual rate increased from 48.7% to 54.4%. Along with this D-PPI, increased by 7.22% m/m and reached a level of 105.0% on an annual basis. The largest contribution to the increase in inflation came from the food and energy segments. However, the acceleration in inflation decreased slightly compared to the previous month.

The outlook of the manufacturing sector and economic activity...
The contraction in production volumes due to natural gas and electricity cuts and the slowdown in new orders put a negative pressure on the manufacturing sector in February. Accordingly, PMI data decreased to 50.4 in February (January: 50.5). The fact that total orders slowed down for the 5th month in a row, despite the new export orders gaining momentum again, was effective in the realization of this situation. Along with this, seasonally adjusted capacity utilization rate which is 80 basis points lower than last month also confirms this situation.

Record high foreign trade deficit in January...
In January, foreign trade deficit increased by %234.9 y/y to 10.3 billion dollars. In the last 12 months, January was the period in which the foreign trade deficit was at its highest level and the highest annual increase occurred. The main reason for the emergence of this situation is the high demand for raw materials from abroad. The imports of raw materials increased by 69.6% compared to the same period of the previous year. However, the decrease in the ratio of exports to imports shows us that the imported raw material is offered to the domestic market after processing. At the same time, we observe that the demand for imported consumer goods weakened and contracted by 2.7% annually.

The slowdown in demand for real estate...
Real estate came to the fore as an important area that was evaluated for the purpose of hedging against inflation in December. However, when we examine the January data, we observe that the sales figures have slowed down compared to the previous month. Accordingly, after the annual increase of 113% in December 2021, total house sales increased by 25% y/y in January 2022. However, let us remind you that at the beginning of 2021, housing sales were weak due to high mortgage rates, and sales increased in the second half of the year.

Russia-Ukraine crisis in Turkey...
The effects of Russia's attack on Ukraine on February 24 were felt both in Turkey and global markets. Along with this, it is worth noting that both Russia and Ukraine are important trade partners of Turkey. In January foreign trade data, Russia ranked first in imports. Turkey conducted 87% of its "grain" imports in December 2021 from these two regions. At the same time, this figure remained at 82% in February 2021. Considering the sanctions imposed on Russia and the fact that Ukraine is under attack, a more significant increase can be observed in Turkey's foreign trade deficit in the coming period, in line with the difficulty in obtaining the products in this group for Turkey and the increase in wheat prices.
Two other commodities that have come to the fore with their rise in the past weeks were Brent oil and natural gas. While the increases in the price of Brent oil are directly reflected in the logistics costs, the fact that natural gas is a vital part of industrial production may have a suppressive effect on the margins of the manufacturing companies.
At the same time, 24% of Turkey's energy imports are covered by Russia, and it is estimated that the effect of the increased commodity prices after the attack will be felt in the foreign trade balances in February-March period. On the other hand, we observed that 27% of the iron and steel imports realized in February 2021 were made from these two countries, and we think that this demand may be directed partly to other countries and partly to domestic producers.
Expectations for March...
15 days have passed since the war between Russia and Ukraine began. Peace and ceasefire talks continue, but no concrete progress has been made so far. In addition, the EU, USA and UK embargoes against Russia are being expanded day by day. These embargoes have made Russia even more aggressive so far instead of stopping it. The global reflection of these developments was reflected in the sharp rise in commodity prices, selling pressure in stock markets and orientation to safe havens. Many negativities seem to have entered the prices globally, but it is difficult to say that the worst is yet to come. Ongoing uncertainty may continue to keep risk appetite low. On the other hand, any mild development from the Russia-Ukraine front may create positive fluctuations in the risk appetite.
Even in the scenario where the war does not spread and the tension does not escalate, it is difficult to predict the global impact of the embargoes that have been put into effect so far. While the deterioration in the global supply chain created by the corona period was being tried to be repaired, the blow from the war may cause a deterioration in macro dynamics again. It seems that the sanctions will increase the already high inflation and create a contraction in growth. Although this effect, which we will define as stagflation, is not expected to show itself immediately in March, it can be felt as of the second quarter. While this environment brings to mind the risks of as rising energy costs and decreasing tourism revenues for Turkey, the export revenues that we hope the most are overshadowed by the decline in EURUSD parity and demand-driven risks in the European market. On the other hand due to the embargoes faced by Russia, it is among the most positive scenarios that the needle will turn to us as a power that can replace this country in various issues.
Risks regarding Turkey are reflected in the CDS market as a rapid rise in our risk premium. The 5-year Turkish CDS has increased by 25% since the war started. However, we did not see a very strong effect against TRY assets in USDTRY and stock market pricing. While the effect of the Currency Protected Deposit product reduces volatility in the Dollar TL, sectoral divergences are seen in the stock market (as companies with Russian risk lose value, companies that have a high weight on the index and benefit from the rise in commodity prices gain value) are seen. The historically low foreign investor ratio, the index being at the USD-based 2008 lows and discount rate compared to developing countries limit the downward trend in the stock market. We have recovered all the losses in the index by the start of the war. In order for an additional upward trend to occur in the next period, the index must be permanently placed above the 2040-2060 band. We recommend keeping the stock market weight high in portfolios by giving importance to stock-based selection.