Turkey is the biggest beneficiary in the EMEA region of a decline in commodity, energy prices
Turkey is the biggest beneficiary in the EMEA region of a decline in commodity and energy prices. Q4 GDP was anyway a disaster, leading institutions such as the IMF to downgrade 2013 forecasts; combined with the sell-off in commodities, which reduces immediate inflation risk, this development prompted the CBRT to cut rates by 50bp across the board in April. Prior easing of the extremeties of the rate corridor had done nothing to reduce underlying funding cost in the economy - the 50bp repo rate cut this month will. Q1 had already witnessed some revival in domestic demand. The ebbing of inflation risk is now a significant positive for the economy and the bond market.

Macroeconomic highlights
•Turkey is the biggest beneficiary in the EMEA region to a decline in commodity and energy prices. Such a decline immediately ameliorates risks surrounding the two main imbalances - inflation and the current account. Both are very sensitive to world commodity prices, and therefore, the outlook has improved significantly over the past month. The CBRT need not worry about trading off growth with inflation at this time.

•Q4 GDP growth (just 1.4% vs. 1.6% in Q3) was a disaster; major domestic demand components contributed negatively, while only a year-on-year improvement in net exports made a positive contribution (along with fiscal spending). The IMF has downgraded its 2013 growth forecast to 3.4%, and expects a reasonable 6.8% of GDP current-account deficit this year. The trade deficit had widened slightly over the past couple of months - encouragingly, this was driven by stronger import demand - but, the world outlook appears to have soured.

•The CBRT's earlier reduction of the rate corridor failed to impact average funding cost for banks (which remained stuck at around 5.62%). In fact, nothing but a repo rate cut would have reduced it from here - hence, when the economy really needed support (beyond the symbolic), the repo rate had to be cut. The worsening of economy and reduction of inflation risk made the cut possible. This is very positive for Turkish local bonds. The lira is unlikely to weaken from easier policy either, because bond market inflows will accelerate.

Key risks
•A satisfactory breakthrough on Kurdish peace talks could trigger a major rally, and a rating upgrade, soon, by Moody's. Kurdish peace talks have been progressing, and have now taken on a life of their own as the CHP Opposition and also Iraqi Kurds have been drawn into the discussion. The key question remains whether or not PKK on the ground will observe every letter of what Ocalan promises at negotiations. And, what will the CHP opposition demand of the AKP in order to constructively participate.

•The February current-account deficit worked out to $5.1bn - worse than a year ago, but it was driven by faster import volume growth (not oil or commodity prices). If the economy had been overheating, import volume acceleration would not be great news; but, when growth is 1.4%, it is good news. The CAD is on target to better 7% of GDP this year.

bne/Commerzbank