Some highlights from the report:
- President Erdogan was re-elected with 52% of votes versus opposition candidate Kilicdaroglu at 48%.
- Election uncertainty is over but policy uncertainty remains amid rising macro stability risks. Market focus will shift to the assignment of key roles and guidance on policy direction post-elections.
- Given President Erdogan’s long-held view that higher interest rates cause higher inflation, we do not expect a reversal in interest rate policy post-elections. However, the recent stress on official reserves amid large external finance needs and high inflation seemingly would require a change in policy direction to contain macro stability risks.
- Policy implications: In the absence of conventional monetary tightening, post-election macro adjustment, i.e., external rebalancing, would have to rely more on exchange rate depreciation and a tightening in financial conditions through other instruments and regulations.
- We think that the policy authorities will adjust alternative instruments, including the CBT’s liraisation and reserve-management strategies, to: 1) Let the currency depreciate at a faster pace; 2) Let deposit and loan rates go higher; 3) Restrict loan supply; and 4) Tighten regulatory controls over locals’ FX transactions.
- Without a change in the macro policy framework to prioritise disinflation and to adopt market-friendly policies, Turkey’s high external finance needs will likely keep macro risks alive, increasing sensitivity to global shocks (commodity prices, Fed) as well as the availability of FX inflows from regional partners.
- Our pre-election scenario note stated that USD/TRY could reach 26 by the end of the year and in a back-loaded fashion. But the risk is that this level is reached sooner, with a higher USD/TRY level by the end of the year, closer to 28, absent a change in policy direction, particularly on interest rates.
- Equity Strategy: Meanwhile, with a high inflationary outlook, in local currency the equity market should continue to have its inflation-hedging appeal to local investors, but not similar to 2022 as KKM have become more attractive as well.
- Sovereign credit strategy: Turkey 5Y CDS and the belly (2033) of the cash curve are 171bp and 164bp wider, respectively, since the first round of voting, which suggests that the preliminary second round election result was fully priced in.
- Full rapor linkdedir: MS TURKEY_20230528_0000
