Turkey: Carry now; tough questions later

Research evidence excerpt

Turkey: Carry now; tough questions later

gram is paused; TURKGBs not attractive enough

Turkish core inflation has been stuck around the 30% yoy mark since the start of the

year. Even after taking into account the last drop in oil prices, UBS forecasts headline

inflation to reach c30.5% yoy at YE. Unlike the early months of the disinflation program,

the lira is no longer a powerful disinflation source. Consider this, the gap between

realized inflation and the pace of USDTRY crawling peg is now~ 9% vs ~20% 18

months ago. Indeed, core goods inflation only slowed by 70bps in the first five months

of 2026 - from 17.7% yoy end-2025 to 17% yoy in May. What could restart disinflation?

Taking inflation to 20% at end-2027 (i.e., closer to the CBT's c15% projection) requires

one (or more) of these factors to play out: (1) a sharp decline in USDTRY crawling peg to

5-7% annualized; (2) a large downside adjustment in the minimum wage to < 20% -

below 27% delivered this year. We think that the bar for these is high. TURKGBs are far

from being a crowded position (foreign investors hold only 6% of the stock), but

valuations are not compelling either (see Figure 13The10yTURKGBspriceininflationconsolidatingataround25%inthelongrun). For GBI-EM investors we would

recommend holding a MW position.

#5 Credit rating cycle has peaked; UW vs SOAF long-end

Turkey saw 7 notches of rating upgrades between the three main agencies in the past 2y

period. We think that rating upgrades have peaked as the CBT will most likely continue

to target a relatively predictable TRY depreciation path on the account of reserves while

the BoP funding composition has deteriorated. Consider this, "sticky" inflows (FDI and

portfolio) covered only 13% of current account deficit in 2025, leading to $15bn-$20bn