Global Data Pod: Türkiye and Kazakhstan - Disinflation at crossroads

Hello everyone and welcome to another edition of the Global Podcast. I'm Nicolae Alexandru. I head in the AIM Economics and EMAG globally. I have with me two economists covering two interesting countries that we're going to discuss today Fatih, who is the chief economist for Turkey and Azerbaijan and also Hamza Sharif Zoda, who is the chief economist for Central Asia, Caucasus and Balkans. Both of them have a lot on their plate, but what we're planning to discuss today is really much simpler if I may say so, which is definitely not the case, but still it's a discussion about inflationary trends in Turkey and Kazakhstan and more broadly about policies that were adopted in those two countries. So just to kind of frame the discussion for everyone, what we have seen over the past several years in both countries, we have seen a set of policies adopted by authorities in order to achieve this inflation. And we have indeed seen this inflation in both countries, maybe with some hiccups, but still this inflation was achieved, but inflation is still elevated significantly above the target in both countries and there are kind of some issues, right? Because in Turkey, inflation has re-accelerated again in Kazakhstan, there is this inflation, but it's a relatively slow pace. So for the audience to understand, maybe we can start there and let's start with you Fatih, kind of what are the main challenges in this inflationary phase that Turkey is seeing, and then we go to Hamza to discuss the same. Thank you Nikola, great to be here. I think Turkey is facing right now supply side shocks, stemming from the Middle East conflict particularly, right? We had seen significant increase in global energy prices and food prices and these increases just stalled this inflation process in Turkey starting from March this year. I think this inflationary pressures are there, meaning output gap is negative, domestic demand is sharp slowing, but when you look at the bottom up perspective to the Turkish CPI figures, the inflation was driven by energy and food items this year in the first style. So this is the kind of the current story, but like I want to go back a little bit, right? To understand kind of the big drivers behind this inflation that we have seen, let's say, until this year. So what was there and what are kind of, what's good and what's not so good? A Turkish authorities embarked this inflation program starting in June 2023 and hence we had seen rate high and then, you know, after for a while to do, you know, earthquake-related spending, Turkish Ministry of Finance also embarked a fiscal consolidation and we had seen relatively conservative wage policies for minimum wage earners, civil servants and pensioners. So overall these measures reduce headline inflation from 75% in May 24 to 31.8% in July 26. So from that perspective, Turkey has achieved significant success in this inflation. But obviously we had seen some hiccups as you already mentioned, right? You know, and this year's story was around the Middle East conflict and its effect on energy and food prices. So your story Fatih, it's more kind of just to summarize that broad set up of policies is favoring this inflation, has favored and continues to favor this inflation. Before we go into discussing some of those policies, Hamza, what's the story in the case of Kazakhstan? Yes, and thank you for being here. I think, look, inflation in Kazakhstan for a long time has been above the target. I think last time I checked, then inflation was close to 5% was before COVID, right? So we have, over the last six years, a period of elevated inflation and last year it accelerated, right, picking at 12.9% in September. Since then, inflation has fallen, right? And that happened for specific reasons, structural and also some of the idiosyncratic reasons. Structurally the government has finally put a lot more thought into bringing inflation down. We have significant tightening by central bank when they raised the rates to 18% last year. We also have fiscal tightening that was very important. And more importantly, they did not renege on fiscal consolidation matters so this year. And also a very, very exponential tightening, right? Because consumer credit growth was one of the major inflationary impulses behind inflation process. So broadly speaking, we're also in a disinflationary process, but it was still being assisted by some of the items that are were outside of, say, monetary policy impact, right? And thinking about food here on versus food, that helped a lot to bring disinflation down. Looking forward, we still, when we're assessing, in particular services, they remain super strong still. And in Kazakhstan, right? We had a good print last months in July, but this print is, we don't see a significant acceleration in market driven services inflation. Similarly, on non-food cool goods item, there was a significant support from the effects, but that's also to remains to be seen like whether this will not be a reversence. And as we approach the end of the year, and if we think similar the way asked, but if we think about kind of the broad policy setup, how would you characterize that one? Is it disinflationary or maybe there are some components which are not necessarily disinflationary? The board set up is disinflationary. That being said, I think what worries me is that when I look at growth, and I expected significant acceleration in growth this year, but it's surprising how growth remains resilient, not only in Kazakhstan, but across this whole region, right? Like if you look at Kazakhstan, not oil sector grows, it's roughly 5%. Right? That kind of points to the demand is very strong still in this economy, right? Despite the all the monetary and fiscal tightening that the authority is implemented, the economy is still very strong, and we cannot really say that there is a large negative out gap that will bring the inflation down. So the economy is still running relatively hot in the case of Kazakhstan. What about Turkey, Fatih? I mean, is this a similar story? I will imagine that, but just curious to understand your take. No, it's not the similar story. It's the exact opposite. We got a second quarter GDP growth numbers yesterday. It was in line with our expectations. Composition was also in line, and it suggests that domestic demand slowed markedly in the first and second quarter of this year. I think this type of a slowdown is happening for the first time since second quarter of 2024. And in my calculation output gap is around minus 2%, and significantly disinflationary. I mean, you are seeing this impact on Korgut's particularly. The inflation momentum is significantly lower there, even year-on-year inflation on Korgut's side is 16% versus the headline is at 32%. So it's clear that demand conditions are disinflationary in Turkey. The demand conditions are disinflationary. You also mentioned that fiscal policy is disinflationary. I don't recall Hamza, if you mentioned this one, but I would guess it's similar fiscal policies also. Physical policy historically has played a more inflationary role, because in this kind of a setup, fiscal has aimed to bring growth at 5% or above. But this year, we had adopted a budget that saw a significant fiscal consolidation raising VET, expanding tax measures, the broadening of the base. But next year, it's a separate discussion. OK. So that's also the fiscal story. On the supply side, I would imagine that other shocks, besides the one that you mentioned, and just briefly wanted to hear from each of you. the thinking around the exchange rate effect, because we have, let's call it, control depreciation in the case of Turkey and real depreciation, while in the case of Kazakhstan it's quite different, because we have nominal appreciation. So that's another one which I'd like to discuss, but also kind of going in the direction of monetary policy. I didn't hear either of you talking about expectations. So I would be curious to understand kind of what's the role that you guys think expectations have played for each of the central banks. So maybe let's continue with you, Hamza and then we go to Fatih. Sure, I think on inflation expectations, it's very clear that they are unencored and they're very much elevated, right? So I don't really track like how elevated they are, but more of the pace of change. And NBK also pays close attention to expectations. We really see that they've become really volatile. I mean, at one point where they had them at 14%, now they're at 12%, but they bounce back and forth between 14, 13 and 12%. So it's not a really good measure, I would say, except that pointing out that they're still unencored, right? They're very far from being close to the target or remain stable, that one thing. Those are measured expectations, right? But kind of just your thinking about expectations in general as a driver for inflation. I think they would be, they would play certainly a key role in all this inflation process. I mean, NBK would need to bring them down, right? If they want to achieve inflation, it'll be a very hard job to do. But for that, they need to maintain a rates for higher for a really long time, right? And I think this is where I think one of the reasons why we don't really see a sustained improvement in inflation expectations coming down is because NBK has been cutting, right? Like it has maintained relatively tight position, right? It's raised to 18% in October, but this year it already cut 125 basis points and will possibly cut even more on Friday. I think they will cut by another 50, right? So I think when you're on this easing cycle, it's much more difficult now to bring the inflation expectations significantly back to the target. On FX, I think this where we can highlight a really good story because FX has been one of the also major drivers of inflation expectations. I would say not only just inflation, but inflation expectations because you had episodes of really large devaluations in the past, right? And FX was volatile, scaring away a lot of investors. And when you had even small episodes of say, dollarization, it would be very amplified by locals because they would fear that they'll be, again, another big episode of the devaluation. But this year, I think they did indicated actually a good job in terms of how they calibrated FX policy, right? They've supplied dollars through the market specifically at the months when there is a big demand that certainly helped to prevent the pressures on the currency. And I think the other significant driver of FX strengthening this year is a record inflow of non-residence, right? We have 5.5 billion as of July, probably even more this month in August. That helped to contain imported inflation because remember, Kazakhstan imports a lot of goods, especially food from neighboring countries, right? So FX plays an major role. So even though, as I said, on food, we had, say, big drops in inflation when it comes to unprocessed food, processed food, and core goods, they've also kind of the inflation, they're stabilized, right? So the momentum is falling, not significantly, but it is falling. And I think that's primarily because of the FX, right? So I would highlight services, again, as the problematic part of the inflation storing Kazakhstan, right? There, we don't really see any big improvements. That's mainly because of the excess demand that we highlight. Yeah. Okay. Expectation story in the case of Turkey, Fati, how exactly does that work? I mean, what are kind of the good things to highlight about it and what is, let's say, not so good? Let me start with the good things, right? Inflation expectations in real sector and households are improving after the April this year. But always let the inflation expectations among market participants real sector and households remain unanchored and extremely high to give the numbers, right, 12 months ahead, inflation expectations for market participants stood at 24% for real sector is 32.5% and households 45%. This is a big gap versus even interim inflation targets of central bank of Turkey. So it's clear that inflation expectations remain unanchored and it is also reflected in the services inflation, similar to Kazakhstan's story, right? Services inflation is 40% well above the headline inflation and it's the main reason behind stickiness in Turkish inflation story. But in your case, it's different than the Hamza's case because for him, it's really excess demand in Turkish case, it's more kind of expectations, right? That's what you're explaining. Exactly. The wage, the wages play a big role in this, how do you think about that? Let me tell you what plays big role on this. I mean, obviously inflation history is the main driver of these high inflation expectations. Also, right now locals expect significant wage hikes for minimum wage owners, civil servant passioners because of the ongoing cost of living issues in the country. So since the election cycle is nearing, people expect there will be more wage hikes compared to past three years. So that keeps inflation expectations elevated across the board. Okay, and just to kind of summarize the discussion we had so far, right, to understand why this inflation is a bit complicated in both cases, right? In Turkish case, it's more kind of related to expectations and value supply side shocks, but if I understand what you said, and exactly. Okay, perfect. And in Kazakhstan's case, it's also supply side shocks, but on top of those, we have the presence of excess demand that be the right way to put it, Hamza. That's right. Okay. In this environment then, like the one that you presented, and you both discuss about tight fiscal conditions, right? I mean, how would you assess monetary policy stance overall? And what do you think kind of the outlook for inflation is going to be, I would say, for the end of the year, but also during 2027, and what do you think central banks in each country are going to do? But let's start with you. Sure. I believe the Middle East conflict has talked to this inflation process, but it doesn't rail it, right? This inflation will continue in Turkey. And I expect headline inflation to end this year at 29.5%, and next year at 25%, hands central bank will have limited room to cuts until your end. And my expectation is 100 basis points cut in October and December, and they will continue to cuts next year towards 30% by the end of 27. So you said to interrupt, sorry to interrupt, when you say to cut, is that driven by what? Is that driven by the fact that there are still risks that you see on the forecast horizon? Is that driven by something else that you think might happen, which would limit central bank already? Conditions are, let's say, not really supportive of significant easing. I think for the near term, we didn't see a Middle East conflict resolution and hands lower oil and gas prices, right? It doesn't help energy and food prices in Turkish domestic market. And for the next year, it's more about the wage policies and its impact on the services inflation particularly, right? And I believe as of today, policy mix is restrictive in both monetary policy and physical policy side. I mean but next year obviously we will see a sizable minimum wage hike, pensioner hike and maybe some physical stimulus and hence it will slow this inflation process particularly in the second half of the year. Okay, is the story kind of similar in the case of Kazakhstan Hamza? I would imagine not exactly the same but there is also a little bit of discussion of all spending more from the oil fund, right? So like how do you see again monetary policies? Yeah, I think first of all I think where I do see a lot of progress is on the credit growth, right? And we did highlight this as there was a lot of sharp credit growth in the past in Kazakhstan, but ever since they adopted potential measures to contain growth, last year in Focue, first Q of this year, we see a big decline in credit growth, right? This is really good. Just to stop you here a little bit, I guess this is a good factor that you're highlighting and I think this is valid for Turkey as well, right? CBRD has also done it. Yeah. Okay. I think this is particularly important, especially in those economies where monetary policy transmission is weak, right? We don't have really deep credit markets. You don't have a mortgage market, private mortgage market in Kazakhstan, right? So you need to target sectorally with potential measures. The other good thing is that NBK did maintain really high real rates for a good amount of time now, right? Above 6%. Again, of course, I would like them to keep the rates higher this point in time because services and this is where again, I keep emphasize and keep looking, right? That's still strong, right? But I think NBK nonetheless is looking more the headline and I think they're getting a little bit more comfortable with the headline falling again now to single digits and I think they will see this as an opportunity to deliver a cut, right? Because they're also not comfortable at some point in time. I think in their view, the rates are already too strong and too high and by them cutting, by additional say, you know, 50 on Friday and 25, possibly more by the end of the year, right? This will not stall the disinflation process, right? Because there is a lot of unhappy voices in the country against high rates. So in my view, I think inflation will fall to 9.6% this year. I don't see much room for for it to go because again, and process food has helped a lot in bringing inflation down, but that can be easily reversed, especially now that we're headed into the fall, right? Some are easy to do at the time for food prices, but the picture can get ugly and then can push in headline inflation higher, especially at food is making 40% of the basket. I think that's one thing important to remember. Next year, right? I think this is going to be a big test for again for inflation. I think NBK will have room to cut for 100 basis points, but that will depend on two things. Number one, they're willingness to sustain high rates, right? In an environment where policymakers are calling for a reduction in the policy rate, and number two is the fiscal impulse, right? What we do know, right, is that national oil transfers will be higher next year, right? So none of the deficit will be higher, right? This is all in line with Kazakh government focus on growth that it needs to be at 5% or higher, right? So on balance on the on the budget side, it would do probably see fiscal impulse as a fiscal impulse. So if we see fiscal impulse, I mean, I don't know exactly where you have your inflation forecast, right? But what's going to allow them to to cut so much next year? Is it kind of that inflation in your forecast goes down so much despite the fiscal impulse? Or you think they will kind of gradually allow a lower rate when I say, okay? Yeah, I think they will gradually allow lower rates, right? Because right now we're above six and a half or around so. And I think in my view, the inflation will fall towards 7%, and the the policy rate will be around 12%. Right? So that should be under the assumption that fiscal is still relatively contained next year, right? The fiscal impulse is not huge, right? But that also depends not just on the national oil transfers and what is happening on the budget, but also on some rook and by track, right? Because I think that fiscal impulse is much stronger. And we need to know the plans for the next year. So from both of you, what I'm hearing, limited this inflation, particularly over the near term, and I'm also hearing relatively limited policy rate cuts, maybe a little bit more than limited in the case of Kazakhstan next year. But we'd take a bit that a shift in fiscal might kind of make it harder to deliver the forecast that you have now for next year, 400 pages points in cuts. Okay, let's stop it here. Thank you very much to both of you for joining me in this discussion of monetary policy and inflation trends in Turkey and Kazakhstan. And thank you for the audience for joining us and looking forward for more discussions like this. This communication is provided for information purposes only. Please refer to JPMorgan research reports related to its content for more information, including important disclosures. 1026 JPMorgan Chase and company, all rights reserved. This episode was recorded on September 1st, 1026.