A panoramic view

The outlook is not great! The dollar-TL exchange rate stood at 8.29 on September 1, 2021. Today it is 14.81. CPI inflation (August 2021) was 19.25% and core inflation stood at 16.76% at that time. We all know where it stands now.

• Then came the CBRT rate cutting sequence. As expected, the Lira depreciated at breakneck speed and in 3 months the exchange rate hit 18.3. Inflation skyrocketed.

• Today we are expecting CPI inflation to peak at 65-70% in May. This is ‘official inflation,’ so to speak. Obviously, the peak level we are talking about is only what momentum tells us. If there is another currency shock, inflation will go up further.

• The Fed is on the move. The whole world is anticipating that USD will gain strength. Although the Fed’s rate hikes and its balance sheet contraction will have a combined interest rate effect of 275-300 basis points this year, the level and the volatility of the Lira against the dollar depends on many other factors, not just the Fed. Yet, this news from the Fed is unfavorable for the Lira.

• The current account deficit is heading towards USD 35-40 billion. Tourism revenue loss is likely to be around USD 5 billion this year. Furthermore, funding from overseas will be a lot more expensive both for banks and for corporations. Pressure on costs will endure.

• Assuming that oil prices will remain above USD 100/barrel, energy costs will go up significantly. Exports will fall because Europe will slow down as a consequence of the war in Ukraine, also due to sanctions and economic restrictions on Russia.

• The currency-protected TL deposit scheme is already at an impasse. If the Lira stays put, people will abandon this scheme because they won’t get the handsome returns they expect from it or the exchange rate will continue to go up. In this case, participants will get high interest and currency compensation. The fiscal burden will then increase and the scheme will be discontinued at some point. The interest rate equivalent of this scheme is headed towards 50% although

the policy rate is 14%. The currency protection mechanism has caused a steep interest rate increase so far.

• Reserves don’t increase because they are constantly being sold in order to keep the currency at a certain level. There is always a level ‘to defend’ but this means net reserves excluding swaps stand at negative USD 43 billion.