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  • Emerging Markets Debt Daily

    Turkey’s Teetering Fiscal Position

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 16, 2019

    Weak growth and tax cuts continued to weigh on Turkey’s fiscal performance in June. Poland’s central bank remains unfazed by rising core inflation.

    Turkey’s fiscal position remains precarious
    . Even though post-election spending started to show signs of moderation, weak growth and tax cuts continue to weigh on revenue collection, keeping the overall fiscal deficit wide. The cumulative fiscal gap widened to nearly TRY80B in January-June, well above the previous years (see chart below). Turkey’s public debt remains relatively low as a percentage of gross domestic product (GDP), however the latest budget numbers raise concerns about the government’s contingent liabilities and their potential impact on fiscal sustainability. The existence of fiscal constraints also means that the central bank might come under more pressure to support growth with rate cuts.

    Poland’s core inflation continued to gather momentum in June, rising to 1.9% year-on-year. The central bank remains unfazed by the prospect of higher core inflation as long as it remains well within the target range (1.5%-3.5%). According to Governor Adam Glapinski, even if headline inflation exceeds 3.5%, this will not automatically result in a rate hike. The most likely explanation for such a relaxed policy stance is a combination of a softer growth backdrop in Poland’s main trade partner—the Eurozone—and the expectation that the European Central Bank (ECB) will embark on another easing program, leaving the Polish central bank extra room for maneuver.

    The recession fears in the U.S. eased a bit more this morning following the release of stronger than expected retail sales and manufacturing production figures. The more robust activity numbers in the U.S. are in stark contrast to their European counterparts, which continue to show a lot of weakness (check Germany’s ZEW survey1for July), and this is clearly reflected in the U.S. dollar’s dynamics this morning. The macro surprise index for the U.S. started to improve lately—and it might be lifted more by supportive seasonality. It remains to be seen, however, whether the benefits will be confined to the U.S. (“U.S. decoupling”) or there will be wider global spillovers.  

    Chart at a Glance: Turkey's Fiscal Consolidation Still "Missing in Action"

    Turkey Cumulative Fiscal Balance

    Source: VanEck Research; Bloomberg LP

    1 The monthly ZEW survey aggregates the sentiments of approximately 300 economists and analysts and is used as an indicator of the economic future for the coming six months.


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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