September 2018 Inflation Figures

The section below is my revision to the original story — which is a significantly more positive outlook:

Turkish Central Bank released the Reel Effective Exchange Rate Index for September which taken in to accoun the high September inflation figure and a base of around 6.35 USD/TRY rate.

The figure is rounded up 62 for the index and if TL falls to 5.50 and inflation goes up by another 7%, the index will rise to around 75. This should indicate a relatively weak currency which is consistent with structural worries.

As it stands, my piece needs a CORRECTION that — if fiscal policy is reined in, private sector slows down, export growth picks up THEN IIF’s August call of 5.50 fair value for TL can hold true for the end of the year.

Early trade balance figures support this argument and if Turkey manages to ease its political problems with the US then the market sentiment can also support it.

If reached, at that level, a host of factors will determine the path forward:

1. 2019 growth and its export component
2. Fiscal policy in general
3. Private sector investment preferences and household consumption choices
4. Interest rates both at the Central Bank level and for the market in general
5. Domestic politics — namely governance and public sentiment improvement
6. International politics of reconciliation and mitigating ensuing problems — not all have to be resolved
7. Rollover ability of the financial and non-financial sector
8. Global risk appetite, porfolio flows and FDI levels

I think that 1, 2, 3, 4, 6 and 7 are positive while 5 and 8 are negative contributing factors.

Given that all factors were negative over the last year, this is a huge improvement which happens at a time of historicaly low prices. Perhaps the risk perception is a bit too excessive. For all of us..

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The section below is the original story — which was less optimistic before the release of Central Bank Reel Exchange Rate data:

IIF called 5.50 as fair value for Turkish Lira as of August:

Since then, August and September inflation figures have been released:

Üfe/Tüfe Oranları

In August, CPI was 2.30% and PPI was 6.60%. In September the figures were 6.30% and 10.88%. If we take IIF’s 5.50 as the benchmark and add the average of CPI and PPI for these two months, the base figure comes to 5.74 and 6.24 in these two months.

These figures will have to be corrected by the corresponding set of global inflation for countries included in the basket. For simplicity let’s take 1% for such an adjustment to bring the fair value (as per IIF) to 6.18 as of September’s end.

Given 24.52% CPI and 46.15% PPI for September annualized, it is at least highly probable that CPI will move upwards. Observation of CPI vs PPIover the last 12 years indicats that in the years when CPI undershoots PPI, this undershooting is around 15% to 25%. Applying the higher end to 46.15% will give 34.6% CPI potential with downside risk of economic contraction and upside risk of energy prices. Even if CPI peaks at 30% and PPIdoes not increase further in the next 3 to 6 months; fair value of TL as per IIF will be creeping higher in nominal terms to reflect CPI to PPI convergence.

In sum, the recent inflation figures have been a major event that can have substantial repercussions both in Turkish financial markets and the economy in general.

October 2018