In the labour market, the seasonally adjusted unemployment rate has turned stagnant from 2H22 onwards with the latest March data standing at 10%. However, the actual rate is likely to be higher as TurkStat pointed out that the Household Labour Force Survey could not be conducted in certain cities due to the earthquake disaster. Accordingly, both male and female employment has returned to pre-2018 volatility levels, while the informality rate is now close to the lowest in the current series, started in 2014. Despite the same recovery trend in supplementary indicators for labour force, wider definitions of unemployment, ie, the composite measure of labour underutilisation, have remained well above of pre-2018 levels. This implies the labour market has not fully recovered since the pandemic and an expected slowdown in activity could further add to challenges on this front.

Unemployment vs NPLs (%)

Breakdown of C/A financing (12m-rolling, US$bn)

Primary balance (12m-rolling, % of GDP)

Widening external imbalances

The current account deficit has expanded rapidly since early 2022 driven by commodity and gold imports in addition to the widening impact of strong domestic demand. A strong increase in tourism revenues has limited the extent of expansion. For the remainder of the year, an improvement is likely given the recent normalisation in energy prices and gold imports, while recovery in global demand and a possible change in policy mix to a tighter stance should also be supportive for the foreign trade balance.

On the capital account, with official transfers from Russia and strong unidentified inflows, official reserves recorded an increase last year, though the quality of external financing continues to overshadow the outlook given tighter global financial conditions. In the first quarter of this year, total flows have again weakened in the absence of strong unidentified inflows, leading to pressure on international reserves.

Budget deficit on the rise

In the first four months of this year, there has been a major fiscal expansion pulling the central administration budget deficit to c.3.0% of GDP. According to the real budget trend based on the programme (IMF) defined primary balance realisation, which excludes one-off revenues, there was a deficit of around TRY42.5bn in April, bringing the primary balance for the last 12 months to a deficit of 1.9% of GDP.

In addition, the 12-month budget balance excluding one-off revenues rose to a deficit of 2.8% of GDP. Going forward, elevated spending pressures during the election period and an expected slowdown in activity and reconstruction efforts after the earthquakes point to a higher deficit, to above 5% of GDP. However, tax hikes and administrative price hikes to address the widening in the budget deficit in 2H23 should not be ruled out.

Signals of moderation in lending

The latest volume data after the elections hint at momentum loss. Accordingly:

(1) non-SME corporate lending decelerated sharply in both state and private banks though appetite in the latter dropped to single digits in annualised 13-week moving average terms. This shows increasing challenges for corporates in accessing financing lately;

(2) SME lending momentum hand is strong but there has been a moderation in private banks. On the retail side,

(3) credit cards have remained on a strong growth path given the supportive impact of low real interest rates;

(4) there are signals that momentum in mortgages is about to peak;

(5) while the appetite for GPLs is on the decline, in recent months this has been more evident in state banks.

Regarding deposits, FX deposit formation on both the retail and corporate sides remain in negative territory showing the impact of “liraization” moves to control residents’ FX demand.

Banking sector volume expansion