Global monetary tightening trend and recession dynamics

The Effect of Increase in Inflation Layers

· Oil and lira dynamics, inflation effect

· Measures for foreign exchange demand

· Liraization and inflation perspective

The Central Bank of the Republic of Turkey raised its year-end forecast for 2022 in its quarterly Inflation Report. The 42.8% preliminary forecast made in April was now very low considering the actual price increases, weak lira and stable expectations and was revised to 60.4%. Inflation reached its highest level in 24 years with 79.6% in July. According to the Market Participants Survey conducted by the Central Bank, the year-end inflation expectation is 69.9%. The central bank's resistance to raising interest rates weakened the lira and worsened inflation expectations. Recently, we have observed an upward effect on the exchange rate and inflation.

As it is known, instead of using interest rates in the fight against inflation, macroprudential measures such as limiting the growth of commercial loans and policies aimed at expanding the use of local currency and directing capital to long-term investments were adopted. The results show the impact on the foreign exchange market, where the lira has lost more than a quarter of its value against the dollar, with the lira experiencing the biggest loss in emerging markets this year. Considering the loose situation of the central bank in its current policy implementation and use of secondary instruments, it is seen that the situation in both foreign exchange demand and credit utilization does not help much in controlling and softening inflation in Turkey.

In general, we think that the trend will continue to increase inflation. The increase in the exchange rate and energy prices will be the most problematic factors in this context. We expect inflation to continue to rise in the August-September period and not fall below the current path until the last quarter. We will see inflation rise above 80% in the fall, and if the outflow of foreign currency and oil cannot be stopped, it may rise above the current forecast levels. The main factor causing this estimation uncertainty is the absence of any U-turn signals from the central bank policy and the lack of responsiveness to inflation.

Turkey USD-based yield curve, comparison with last year.. Source: Bloomberg

When we look at the most recent May 2022 short-term debt statistics published by the CBRT, Turkey's public + private sector has a short-term foreign debt of 182.3 billion USD. These figures show external debt with a maturity of one year or less. When we look at the distribution of this by debtor, 118.3 billion USD is in the private sector. Banks have a short-term foreign debt of USD 54.3 billion and the real sector has a short-term foreign debt of USD 61.1 billion. These debts will be paid until May 2023. In fact, the most troublesome issue for the short term is not clear what the exchange rates will be for the debts to be rolled over. In addition, the public and private sector in Turkey has to bear the current risk costs when borrowing new debt.

Turkey's CDS, which was at 300-400 last year, is now at 700-800. So it's twice the cost of risk. Our 5-year Eurobond interest rate, which was 5.09% last year in this period, is 9.36% today. In short, this difference increases proportionally. For example, there is a change from 1.75% to 5.33% in the 1-year maturity USD-based Eurobond interest rate between 08.21 and 08.22. This situation in CDS shows its real impact, for example, in syndication and financing from the foreign market in September-October. Changes in the exchange rate in debt redemptions, syndication and external debt renewals, CDS and interest rates will increase the debt rollover cost. The debt rollover financing gap also affects corporate foreign exchange demand.

Although we see a movement in the reserves in the latest data, we do not think that this has a corrective effect on the composition. Meanwhile, Turkey and Russia agreed to deepen economic relations after the leaders of the two countries met in Sochi over the weekend. Russian Deputy Prime Minister Alexander Novak, Russian President Vladimir Putin and his Turkish counterpart, Mr. Recep Tayyip Erdogan said that they agreed to start partial payments in rubles for natural gas deliveries. The parties, the President of the Central Bank of Russia Elvira Nabiullina and the President of the Central Bank of the Republic of Turkey Mr. Şahap Kavcıoğlu also stated that he had a meeting. These talks are interpreted as a possible ruble / TRY swap agreement. The foreign currency inflow from Russia, which is said to come or will come, is not to the extent that it will have a long-term and lasting effect, it is seen as a financial inflow related to the construction of the future nuclear power plant and its effect will be small.

Strategy Wars and Geopolitical Risks in Energy

· The energy crisis and the search for alternatives

· Investment risk in emerging markets

· China, the semiconductor market and the US

Europe is looking for an alternative to replace Russian liquefied natural gas (LNG) all over the world, and as a result, it buys blue fuel from third world countries. Europeans are also creating competition in LNG markets and provoking gas-related problems in third world countries. It is stated that energy companies in developing countries can no longer buy gas at world prices. Steve Hill, Vice President of Shell oil and gas company, described the gas situation in Asia as critical. He said Europe is pumping gas from the rest of the world, creating an energy crisis in developing countries. Bangladesh, for example, accused the European Union of lugging LNG producers to its side and depriving millions of people in developing countries from natural gas.

This week, at a divergence milestone, the US president will sign the Chips and Science Act passed by Congress in late July. This provides more than $50 billion in federal grants to companies manufacturing advanced semiconductors in the United States, while requiring recipients of this fund not to upgrade China-based factories for a decade. Japan, which may soon face Beijing's efforts to force high-tech companies to design certain products in China, may also feel stronger divergence pressure.

China's stock indices have taken a hit this year as investors fear the country's strict adherence to its zero-Kovid policy and a quarrel between Beijing and US regulators. The country's benchmark index, the CSI 300, has dropped more than 15% to date, while Hong Kong's Hang Seng index has dropped 13%. China's corporate bond market has also been hit by a wave of defaults in the real estate sector, while home prices, a driver of wealth for decades, have fallen for 10 months after policymakers tried last year to curb developers' debt levels and mortgage lending.

Meanwhile, global trends such as rising inflation and renewed concerns about the potential impact of western sanctions on countries like China following the war in Ukraine are pushing investors towards greenstone and other luxury jewelry as alternative safe-haven assets.

Development of global energy prices… Comparison of oil and natural gas prices… Source: Bloomberg

Current State of Advanced Economies

· Recession potential and criteria

· Structural details of economic definitions

· Future interest path

It is known that the US economy is going through a bad period these days. Therefore, the possibility of a recession in the US is a hot topic for serious consideration. According to CNBC, the US economy is about to deal with its biggest recession.

The current state of the US economy is a very unique situation that needs to be examined one by one without comparing it to other cases. What makes the situation unique is that while there is a possibility of a recession, the economy does not bear some of the key recession factors. For example, there is no situation that creates enough employment and yet has the potential for recession. According to the US employment data for July, the US economy produces 528K jobs per month with an unemployment rate of 3.5%. So this is a huge number and a positive percentage for an economy in or potentially recessionary. But while this is an unusual factor, it doesn't mean there is no potential for recession. According to CNBC, the flexibility of the labor market ironically carries a danger.

As it is known, the Fed is making some changes in its policies, such as tightening the recently announced interest rates, in order to fight inflation and thus prevent a possible recession. According to CNBC, this rate tightening strengthens the recession potential for 2023, although it may interfere with inflation in the short term. On the other hand, the European economy is not at its best. As it is known, the ECB also took some measures to combat inflation and increased interest rates, similar to the US economy. However, the main difference is that the Eurozone has seen an interest rate hike for the first time in 11 years. Thus, the US dollar and Euro parity, carefully observed by economists and investors, came closer than ever before.

Therefore, it can be easily said that both economies are faced with inflation-related threats and are trying to cope with similar approaches. Moreover, the recession of the world economy can be clearly seen from the situation of well-developed economies.