WOOD Flash – Turkey macro: inflation scenarios and transition to hyperinflation accounting

The most recent MPC meeting and the following measures to cap some commercial lending rates signalled a dovish shift by the CBT, meaning new pro-inflationary risks for the outlook. Hyperinflation has many negative implications already and one of them, sometimes underestimated, revolves around the transition to hyperinflation accounting. So far, the transition is proceeding quickly among companies that require consolidated IFRS statements, such as foreign-owned companies and JVs. In January 2022, parliament postponed the transition to hyperinflationary accounting to end-2023, a decision we believe will delay inflation accounting in CMB financials by BIST-listed companies. This is understandable, as policymakers face a lose-lose situation on this. Looking at the numbers, however, it seems very unlikely that Turkey will see the IFRS threshold of 100% cumulative inflation over three years disappearing before 4Q24E. This means that, to prevent a significant divergence in accounting standards (between Turkish CMB financials and IFRS financials), hyperinflation accounting will have to be implemented broadly. A different argument could be made if there is a substantial turnaround of the USD/TRY, with 17%+ appreciation in 2H23E, which may reduce the threshold below 100% by 2023E eop. Still, this may be costly in terms of growth; hence, tackling hyperinflation implications offers meaningful upside for direct, portfolio, and other investment, in our view.