An interview by Hakan Aran, general manager of IŞBANK, about the Turkish economy

Hakan Aran, the General Manager of İşBank, recently provided significant insights regarding the Turkish economy in an interview. He shared his predictions concerning foreign exchange rates and the overall economic outlook.

Here are some of the questions posed to the General Manager along with his responses:

Question: Is there a possibility of the dollar exceeding 42 lira after the elections?

– In my opinion, a greater risk than the dollar exceeding 42 lira is the potential for it to remain below 39 lira. I believe we will end the year within the 39-42 lira range.

Question: When will foreign investors return?

– The Central Bank will have to make purchases until its gross reserves reach 200 billion dollars. We will witness a Central Bank that increases reserves to prevent the exchange rate from falling, rather than one that puts pressure on the rate.

After addressing that point, Aran reflected on current developments:

– We are currently in the second half of July. I still believe we are on this path and that there hasn’t been a deviation from it.

He remarked that the Central Bank’s increase of the policy interest rate to 50% in March was surprising for him:

– Because, in my opinion, 45% was sufficient in terms of reaching the targets. However, just before March 31, a serious speculative attack occurred on foreign exchange. Everyone became convinced that “after the elections, the rate will go to 50 lira”. To send a strong message, the Central Bank increased the rate by 5 points. This was an unexpected hike.

He noted that the effects of this increase on the economy began to be observed for the first time in July:

– We see that the cooling in the economy has started in July. The data from July 1-15 show this trend. We notice that credit card spending has decreased compared to the previous month.

This can be regarded as a leading indicator. He noted that credit card usage has even fallen below levels seen in January:

– These indicate that citizens are hitting the brakes in July. We hadn’t felt the tightness until June. Belts are currently tightening. The inflation figures for July, August, and September will likely confirm this situation, with an additional decline due to base effects.

He emphasized that this served as a leading indicator indicating that inflation would likely be in the 38-42% range by December 31, 2024:

– I believe we will complete this year with inflation in the 38-42% band.

At this point, he shared his expectations regarding interest rates:

– If we consider that inflation will finish the year at 42%, I predict that the policy rate will be lowered to 45% at one of the meetings in October, November, or December, either in one go or gradually.

He underscored that life was not solely about monetary policy:

– The cooling in the economy and the tightening have real implications in the real sector and among citizens. Since the economic management needs to be considered in all aspects, I believe that reductions will be made that do not harm the targets.

Aran pointed out that accessing credit was still expensive, and there was a preference not to use credit in the current environment:

– In this environment, those who cannot price correctly will quickly be eliminated from the market due to low demand. They will struggle to sell their goods, which is why I foresee a period from September to December where cash flow may be problematic.

Expanding on the pricing issue:

– September to December could be a period where those with a mindset of “Let commerce flow, let bread enter the home, I can continue my business” manage to keep their businesses afloat, while those who say, “Inflation is this much, my cost to replace this good is that much, my price is this” may find themselves sidelined.

He added:

– Those who say “I will price based on all my costs” may face demand shortages for their products, and thus will likely encounter cash flow issues in the last quarter.

Hakan Aran’s observations on pricing are of great importance for companies to navigate difficult times with minimal loss and for the fight against inflation. Will the deterioration of ethics caused by high inflation allow for an increase in those behaving “contentiously” while pricing?

Hold Your Breath Until the End of 2025; Don’t Expect Relaxation

Hakan Aran highlighted the scenario he envisions for 2025:

– In 2025, we will see a year when inflation is targeted at 14-21%, while current inflation is at 42%. How will the Central Bank bring 42% to 14-21%? It cannot relax the economy. It cannot increase the credit growth limit beyond 2%.

He signaled that the tightness and expense in credit would persist throughout the year:

– With 45% inflation, credit will be expensive at 50%; at 25% inflation, it will still be expensive at 30%. Thus, high costs in credit will continue.

He provided this warning:

– Those who expect relaxation throughout 2025, thinking, “It will ease a bit, and I can access money,” will likely face significant challenges if they cannot hold their breath until the end of 2025.

In this context, he noted that all companies, from SMEs to large enterprises, will likely focus on reducing shifts and later on increasing efficiency through automation:

– Unemployment will rise in 2025, which will negatively impact the job market. This shift will require the Central Bank to act more quickly, tightening measures while considering employment to a certain extent.

He anticipates that inflation will end up above the 14-21% band, likely in the 20-21% range in 2025:

– In this case, I believe there will be potential for the policy interest rate, currently at 45%, to drop as low as 25%. The year will favor those who can access credit, grow as much as allowed, and enhance productivity in the workplace.

He concluded:

– However, I have the belief that the rate of problem loans and the proportion of non-performing loans within banks will increase, including the commercial sector, in 2025.