MTP: Inflation forecasts raise, record trade deficit seen

According to the new three-year Medium Term Program published in the Official Gazette on Sunday, the inflation forecast for the full year 2022 has been raised to 65%. The government expects the inflation rate to fall to 24.9% next year. In the same report a year ago, 2022 inflation was estimated to be only 9.8%. In July, the central bank had predicted the end-of-year 2022 inflation rate of 60.4%. Today, August inflation figures are announced, it is seen that annual CPI increased to 80.2% in August from 79.6% in the previous month.

Other important topics from the OVP;

-Inflation slowing to 24.9% in 2023; It is expected to be 13.8% in 2024 and 9.9% in 2025.

-GDP growth is expected to be 5% this year and next year.

-The ratio of current account deficit to GDP is expected to be 5.9% in 2022 and 2.5% in 2023.

-With the increase in energy prices, the foreign trade deficit is expected to reach 105 billion dollars in 2022 and 80 billion dollars in 2023.

-Unemployment rate will decrease to 10.8% this year and 10.4% next year.

When looking at this whole estimation scale, a few issues come to the fore. First of all, in the short-term projections for the coming months, it is seen that there will be a large current account deficit at the end of this year. The level of 47.3 billion dollars (5.9% of GDP) foreseen for 2022 in the MTP is in line with the levels expected by the market, and we expect a current account deficit of 45 billion dollars this year. The current account deficit was $13.6 billion last year. In the New Economy Model, which is in its first year, the perspective that the current account deficit will decrease or even a current account surplus was dominant this year. However, the forecasts have strayed a lot this year. Export performance seems to be quite problematic in the future due to the situation in Europe. On the other hand, export performance is currently not going well with an increase in the 10-15% bands and record increases are seen on the import side. It is normal for the export performance to remain low for 2023 as Europe has entered a new phase economically and will face a serious recession.

Turkey’s export performance will decline as Europe enters a new economic phase. It is obvious that this situation in Europe, which will likely form itself under the 0.99 band and experience a serious supply shock, has a reflection on the Euro. In other words, since the situation is not just the Fed – ECB interest rate difference, the Euro is probably depreciating significantly and this is against us. It seems that we will observe the problematic sides of the export decline, as there will be no demand due to the recession in Europe. The reduction of Turkey’s impact from this situation may decrease with market diversification and technological investments, but this requires a strategic planning that includes the medium and long term. Of course, this is not a situation that will be resolved in the next 6 months.

It is a little more in line with the market expectation of 65%, which is the year-end forecast for inflation, or even slightly below it. Of course, when we look at the economic plans of the last few years, inflation is the leading indicator that deviates the most from the forecasts and wonders how to reduce it. Especially this year, there is a situation that is completely out of control. While the authorities and the Central Bank of the Republic of Turkey, which practice unusual monetary and fiscal policy experimentation, have been in a easing cycle for almost a year, global central banks are implementing tightening policies. This caused inflation to accelerate to levels last seen in 1998. The first point we observed, based on the forecast framework based on the next 4-5 months, is that rising prices will continue to be a problem, as President Mr. Recep Tayyip Erdoğan’s perspective also includes focusing on economic growth before the 2023 elections. It has not been fully clarified how inflation will be reduced in line with the current monetary and fiscal policies implemented. Considering the current intense depreciation pressure on the TL and the high current account deficit, it seems likely that exchange rate levels will put pressure on inflation.

On the budget side, despite the surplus in the first 7 months, the projections for the whole year point to a great spending performance in the remaining months. This situation seems to be valid in 2023 as well, and the budget deficit is expected to have a share of 3.5% in national income for the next year. As inflation accounting is being deferred, tax collection from nominally increased corporate profits will continue. However, in the absence of consumption, exports and domestic demand, the real sector is not expected to maintain these nominal profits. In this environment, if growth is to come, fiscal expenditures will also be high and the budget deficit will increase.

In the light of all these indicators, the issue of how the projected growth path will be formed and how inflation and current account deficit will be reduced while these are happening are gaining importance. If we analyze the growth issue, investment performance is below the desired level in an environment where consumption is the driving force in the 4Q21 – 1Q22 and 2Q22 periods. On the consumption side, when inflation is high, there is a demand that is brought forward, in this case, companies can achieve high profitability. However, in an economy where there is no savings, the welfare loss effect of inflation will eventually cause pressure on both consumption and the real sector. Despite wage adjustments, it is not possible to expect long-term consumption as the share of wage earners in the economy decreases.

In order for an investment to take place, the real sector and the exporter must have access to finance. Credit increase does not exist despite the intervention in interest rates, and therefore, there is no adequately funded investment environment. The economy should be predictable for both the real sector and the banks. This is not possible in a very high inflation environment, so banks cannot issue long-term investment loans. In the resulting credit mechanism, it can be said that banks take a certain risk. At this point, we can think that it will focus on large companies, which are considered much more risk-free than SMEs and exporters in terms of investment loans. In terms of companies, the need for working capital is intense, because there have been serious increases in production factors, especially in terms of energy input, and it will be very difficult for companies to maintain the current situation in the environment of decreasing demand.

If we look at the currency side; Of course, the exchange rate is not pronounced in the MTP, but currency conversion can be made from the assumptions of USD and TRY based national income. A ground where the TRY depreciates on a more stable ground is predicted, and an average exchange rate of 21.5 dollars is expected next year. On the other hand, if inflation is to fall to the specified levels, these exchange rate forecasts show that the currency will appreciate in real terms. Currently, pressure factors on TL and high current account deficit reveal the risk that exchange rates may not hold.

As a result; According to the MTP, inflation will decrease, but a disinflationary effect cannot be analyzed in the assumptions in other figures. At the beginning of this is the growth that is expected to continue above the 5% band. In order to achieve these balances in the existing monetary and fiscal policy, some structural transformations need to be made. However, in an economy where the damaging effects of inflation are felt, it seems difficult to obtain a perspective that will last 3-4 years with current practices. Global planning and adaptation to changing economic realities, strategic analyzes with a long shelf life and appropriate investment, technology, workforce and global competitive strategies are required. The fact that there has been a lot of concentration in the framework of inflation, exchange rate and regulations in the recent period and the fluctuations of the economy in an instability cause this point of structural planning not to be focused very much.

Kaynak:Tera Yatırım-Enver Erkan
Hibya Haber Ajansı