As the year draws to a close, the fallout from the Russia-Ukraine military conflict continues to shape the macroeconomic outlook and risks for emerging markets in Europe, the Middle East, and Africa (EM EMEA). The impact will depend on each country's geographic and economic proximity to the conflict, as well as on the extent and variety of exposure to commodity trade. Tightening of global financial conditions will act as a headwind for the whole region.

Economies in Central and Eastern Europe (CEE) that are most exposed to the conflict's economic spillovers will continue to face elevated energy import bills, risk of energy supply disruption, and high uncertainty that weighs on consumer and business confidence. A downturn in developed Europe, CEE's key economic partner, further clouds the region's economic prospects. Although economic activity in CEE (Poland, Hungary) has held up relatively well until recently, helped by significant government support, a downturn is now underway. Persistently high inflation, waning impetus from the release of pent-up demand following lifting of pandemic-related restrictions, and tighter financial conditions are denting growth momentum.

For energy-exporting economies in the Gulf Cooperation Council (GCC), the macroeconomic picture is generally very positive. Saudi Arabia, a key global exporter of oil, is on track to become the fastest growing economy in the G-20 this year. The country's cautious approach to oil production points to growth in the oil sector slowing in the fourth quarter, which is likely to persist in 2023 against the weak global economic backdrop. By contrast, growth in the non-oil sector is likely to remain strong on the back of looser fiscal policy and falling unemployment rates.

For metal exporters in EMEA (such as South Africa), optimism about previously favorable terms of trade has given way to concerns about ongoing price declines across iron ore and platinum group metal (PGM) markets. At the same time, South Africa has benefited from high demand and prices for coal, triggered by the energy crisis in Europe.

We have revised upward our GDP growth expectations for Poland this year, to 5.5% from 4% (see tables 1 and 2), due to a stronger-than-expected third-quarter outturn and substantial upward revision of GDP figures for the first quarter, but now anticipate weaker growth in 2023 at 0.9% rather than 1.2%. In Hungary, which is a more open economy than Poland, has a larger energy trade deficit and is facing much tighter monetary and fiscal policy settings, we expect real GDP to remain virtually flat in 2023 (0.2% growth), sharply lower than this year's outturn (4.6% real GDP growth). Once the external environment improves, these economies should regain their momentum, with GDP growth recovering to above 3% in 2024.

Our macroeconomic projections for Turkiye have not changed materially since September. We have raised our GDP growth forecast to 6.1% in 2022, from 5.2% previously, on account of stronger-than-expected incoming data. However, we expect activity to slow in the coming quarters amid high inflation, depressed consumer and business confidence, and faltering European demand. We forecast 2.4% GDP growth in 2023, down 0.4 percentage points versus our September forecast, while acknowledging high uncertainty regarding policy settings after parliamentary and presidential elections next year.

For South Africa, we expect GDP growth of 1.9% (versus our previous forecast of 2.0%) in 2022 and 1.5% (instead of 1.6%) in 2023. Power producers' continued load shedding--albeit sporadic in its intensity--puts a quick recovery in the second half of 2022 in doubt. We assume that broadly similar energy shortages will continue in 2023, handicapping the agriculture, mining, and manufacturing sectors. Next year's economic growth prospects are also limited by weak global demand and higher interest rates to fight inflation.

Table 1

Table 2

Energy-Importing Economies Are Slowing

Economies in EM Europe have been ahead of many developed markets and other EMs in recovering from the pandemic-related downturn. By midyear 2022, output in Hungary had exceeded its pre-pandemic (fourth-quarter 2019) level by more than 6%; in Poland by more than 8%; and in Turkiye, GDP in the first quarter of 2022 was almost 19% above that level (see chart 1). Based on these metrics, the region has outperformed the U.S. and eurozone. What's more, Turkiye has exceeded its pre-pandemic growth trajectory, meaning that its GDP has surpassed the level that the economy was expected to reach if the pandemic had not occurred, and continued to grow at the pre-pandemic trend rate. Poland and Hungary have been close to trend trajectory, with a gap of around 2%. We note that in South Africa, the differences between the gap to fourth-quarter 2019 GDP level and the expected pre-pandemic GDP path are relatively small, reflecting low trend growth: on average 1% over 2015-2019, compared with 4.5% for Poland and 4% for Hungary.

Some moderation of growth is typical following a strong recovery, and we expected a slower pace toward the end of 2022 and in 2023, amid normalization of activity after the surge following reopening of business as pandemic lockdowns ended. However, we believe that geopolitical and financial impediments will depress growth in EM EMEA to well below trend next year.

Chart 1

Available GDP metrics, real-time activity trackers, and sentiment data generally point to a slowdown in activity in the second half of the year, although in some cases certain idiosyncratic factors have led to volatility in the quarterly data. Flash GDP estimates show that Hungary's economy contracted in Q3 by 0.4% quarter on quarter, while in Poland, GDP growth was 0.9% for the same period after a contraction in Q2. In annual terms, growth in both economies slowed to around trend rate in Q3. Consumer confidence in CEE has dropped to the lowest levels since the pandemic started in 2020, and hit rock bottom in Hungary (see chart 2), while S&P Global's Purchasing Managers Index for Poland is well in the contractionary territory (see chart 3).

Chart 2

Chart 3

We note a certain disconnect between survey indicators and hard data, for example, activity in Poland was stronger than survey indicators suggested. It remains to be seen how long this gap will persist. Meanwhile, the Organization for Economic Cooperation and Development (OECD)'s real time weekly GDP tracker also points to a slowdown in Hungary, Turkiye, and Poland (see chart 4).

Chart 4

In South Africa, high-frequency indicators were mixed, but generally point to a recovery in the third quarter after a GDP decline the previous quarter, with manufacturing showing a certain resilience to severe electricity supply disruptions. Turkiye's recent economic data have also sent mixed signals, with industrial weakness, but resilient retail trade, likely boosted by a strong tourism season. Saudi Arabia bucks the trend with a continuing strong performance, once again beating growth expectations for both the oil and non-oil sectors. The third quarter saw the economy expand 2.6% from the previous quarter, another robust quarterly pace that has brought the annual tally in real GDP to 8.6%.

Terms Of Trade Are Unlikely To Change Meaningfully Next Year, Forcing A Stronger Economic Adjustment In EM Europe

For many countries in EM EMEA, the ratio of export prices to import prices (terms of trade) has changed considerably over the past two years, mostly because of the rise in energy prices (see chart 5).

Chart 5

The terms of trade have worsened substantially for energy-importing economies in EM Europe and several MENA economies, while energy exporters such as GCC saw a significant improvement. Fluctuations in other commodities (such as metals) led to volatile terms of trade for other EM commodity exporters (such as South Africa). And, although, initially, the rise in energy prices stemmed mainly from the rebound in global demand (which is generally good for both energy exporters and energy importers), supply-related factors subsequently took over as a driving factor. This is particularly evident in sky-rocketing European gas prices. A supply-related terms-of-trade shock for energy importers is much more problematic and ultimately leads to lower income and demand, other factors remaining unchanged.

Worsening terms of trade for EMEA energy importers have resulted in wider energy trade deficits (see chart 6), weaker currencies, and in many cases exacerbated inflationary pressures. EM Europe has been hit particularly hard, although there are notable differences within the region, with Hungary--which is highly dependent on oil and gas imports--facing much larger energy imports bill than, for instance, Poland which relies more on domestically produced coal in its energy mix.

Chart 6

Given the magnitude of the terms-of-trade shock, growth in EM Europe has been relatively resilient. Consumers used savings accumulated during the pandemic to support consumption, while governments have stepped in with various energy subsidies and other fiscal measures to protect households' purchasing power and alleviate cost pressures on businesses. As a result, fiscal and current account positions in these economies have deteriorated.

In our view, the terms-of-trade will not reverse meaningfully in 2023, and likely worsen for EM European economies. Although global oil prices have recently declined, largely due to demand concerns, and are well off the highs recorded this year (see chart 5), they remain supported by many supply-related factors, while significant conflict-related geopolitical risk premiums show no sign of abating. S&P Global Ratings believes that price volatility will continue as markets focus on opposing factors and especially as the EU embargoes on Russian seaborne crude oil from Dec. 5, 2022, and products (from Feb. 5, 2023) take effect. Our baseline assumption is for Brent oil prices to average $90 per barrel in 2023, which is only 12% lower than in 2022. As far as European gas prices are concerned, in our base case, we expect them to remain elevated and 60% higher on average in 2023 than this year see "S&P Global Ratings Revises Its Oil And Gas Price Assumptions On Supply/Demand Fundamentals," published Nov. 18, 2022). These trends suggest that next year, economies in EM Europe will need to make more significant adjustments to the terms-of-trade shock from higher international energy prices, since savings buffers have reduced and fiscal space is diminishing.

What's more, until recently, robust export revenue (from goods, as well as tourism in the case of Turkiye) has supported growth and partly offset pressures on the current account from mounting energy import bill. They are however set to weaken due to a downturn in Western Europe and a broader global economic slowdown. We expect the eurozone economy to stagnate in 2023, with GDP growth at 0%, versus the 0.3% we expected previously; this is much lower than 3.3% outturn expected for this year (see "Economic Outlook Eurozone Q1 2023: Reality Check," published Nov. 28, 2022). We also continue to expect a shallow recession for the U.S. economy in the first half of 2023, with U.S. GDP forecast to contract by 0.1% for the year, a bit weaker than our September projection of 0.2% growth.

Our current oil price assumptions suggest that terms of trade will remain favorable for oil exporters, although cooling global demand point to a cautious approach to oil production in Saudi Arabia and other OPEC members. Metal prices meanwhile have come down from their 2020 highs (see "S&P Global Ratings’ Metal Price Assumptions: Lower Prices And Higher Costs Start Squeezing Profits," published Nov. 1, 2022, on RatingsDirect), reversing South Africa's previously favorable terms of trade. Nevertheless, demand and prices for coal remain high because of natural gas shortages and the EU's ban on Russian coal imports, which could pose potential upside to South Africa's terms of trade.

Inflation Is Yet To Peak In CEE

Central banks in EM EMEA will continue to walk a delicate line between taming inflation, anchoring inflation expectations, and preventing a sharp economic downturn amid rising global interest rates and heightened uncertainty. This dilemma is especially notable in CEE, where inflation is trending up, reaching 16.4% in Poland and 21.9% in Hungary in October, as measured by the EU Harmonised Indices of Consumer Prices (HICP), and where GDP growth is set to decelerate sharply in late 2022 to early 2023. What's more, both economies face the risk of a full-year recession in 2023, as outlined in our downside scenario.

Easing global oil prices should bring some relief for these energy-importing economies, however volatile European gas prices could fuel energy price inflation. At the same time, policies regarding energy subsidies also have an important impact on the dynamics of the energy component of the consumer price index (CPI), and the overall price index, due to a pass-through of energy prices to core items. As an example, although in most EM EMEA, domestic energy prices have eased from their peaks, in Hungary a partial removal of energy price caps in August pushed energy inflation up (see charts 7-10). More broadly, to the extent that governments used subsidies to alleviate pressures on consumers and businesses from rising global energy prices, the removal of these subsidies will also reduce gains from softening international prices.

Meanwhile, food inflation outlook has improved, but prices could still go up. Wheat and corn prices are already well beyond this year's historical highs (see chart 5), and the recently agreed deal to extend the Black Sea grain exports should help contain food inflation. However, there is still a risk it can be derailed, while upward pressures on food prices persist from high input costs, particularly for fertilizer.

Core inflation in Poland and Hungary is still rising, amid tight labor markets in both economies. Pass-through from previous exchange rate depreciation has exacerbated price pressures, especially in Hungary, and preserving exchange rate stability will also factor in the central bank policy stance.

Reacting to weakening growth prospects, central banks in CEE stopped interest hikes in October, despite high and rising inflation. However, the Bank of Hungary had to urgently intervene on Oct. 14, to counteract exchange rate pressures. A number of measures, including a change of effective interest rate from 13% to 18% have stabilized the forint.

All in all, the inflation outlook for these economies remains very uncertain, while ongoing global monetary tightening, including by the Fed and the European Central Banks, is adding to the challenges facing the central banks. We don't project further interest hikes for Poland in our baseline scenario. However, market pressures on currency and bond markets could intensify if inflation looks set to rise further, potentially leading to a much tighter monetary stance. In Hungary, after a substantial tightening of monetary conditions, the central bank will likely remain cautious, and may start gradual easing once inflation is firmly on a downward path, possibly toward mid-2023.

In South Africa, the situation seems less challenging, since headline inflation has likely peaked, while core inflation remains within the target (see chart 9). Nevertheless, we now expect a 100-bps higher terminal rate for the U.S. Federal Reserve Bank's benchmark rate of 5.00%-5.25% by second-quarter 2023. Taking that into account, we now assume that the South African Reserve Bank's policy rate will rise to 7.5% from the current 7.0% in the first quarter of 2023.

In Saudi Arabia, inflation has also peaked, and generally remains contained, thanks to the government's cap on local fuel prices and a stronger U.S. dollar, against which the riyal is pegged. The Saudi Central Bank (SAMA) raised its key policy rate by 75 bps to 4.5% in November, following the Fed's 75 bps hike, and we expect additional tightening in lock step with the Fed.

In Turkiye, inflation reached 85.5% in October (see chart 10), and while base effects will bring inflation down in December, it will remain very high amid deeply negative interest rates and unanchored expectations. The central bank has continued to cut rates, lowering the key rate by 300 bps over October-November. It uses an array of regulatory and other instruments to support the lira exchange rate and redirect credit to priority sectors, while curbing credit growth in other sectors, a setup that is poised to continue until parliamentary and presidential elections at midyear 2023.

The Balance Of Risks Remains Firmly On The Downside

Key risks to our forecast are the long shadow of the Russia-Ukraine conflict and its spillover on commodity prices and confidence, as well as a sharper tightening of global financial conditions engineered by global central banks to fight persistent inflation. In a downside scenario of the cut-off of remaining gas supplies from Russia to Europe, and significantly tighter monetary policy in the U.S., eurozone, and the U.K., Poland and Hungary will be in recession in 2023. Hungary's economic growth will take a larger hit, given the larger share of gas in its energy mix, reliance on energy supplies from Russia, and higher dependence on trade. We also expect that potential fiscal support in Poland could mitigate the impact of negative external shocks (see "Central And Eastern Europe: Growth Freezes, Risks Mount," published Nov. 10, 2022).

Hungary

After strong expansion in the first half of the year, Hungary's economic growth has come to a halt, and we expect continuing weakness over the next few quarters, amid high inflation, tighter fiscal and monetary policy settings, and global economic slowdown. We forecast close to zero GDP growth (0.2%) in 2023, sharply lower than this year's outturn of 4.6%. Improved external conditions should help growth recover to 3.2% in 2024.

Chart 7

Fiscal support measures ahead of the general election in April boosted growth in the first half of 2022. The resilient labor market, with unemployment at 3.2% in the second half underpinned double-digit wage growth. Fiscal policy has now turned to consolidation, and the government has removed some energy price caps previously in place, which pushed inflation up and real disposable income down. Third-quarter flash estimates showed a 0.4% quarter-on-quarter GDP decline, and we anticipate another quarter of contraction, followed by weak growth in the first half of 2023. Reduced consumer purchasing power due to high inflation, rock-bottom consumer confidence, and higher interest rates point to a substantial weakening of household spending. Private investment is also likely to be subdued due to tighter financing conditions and an uncertain demand outlook. Fiscal policy has tightened significantly over the past months and we expect it to remain tight, given high interest costs; however we expect EU funds will support public investment and growth. Because of Hungary's openness and high degree of integration in automotive supply chains with Western Europe, in particular Germany, its economy will also be highly vulnerable to a downturn in Europe, as well as a broader global slowdown.

After a partial removal of energy price caps in August, the energy price component of the CPI surged to around 30% year on year in August-October from 8.9% in July. Food prices and core inflation were also very high and rising in October (up 35.2% and 14% year on year respectively), due to strong wage growth and the passthrough of past exchange rate depreciation to domestic prices. Headline inflation stood at 21.9% in October (HICP), and we expect it to remain above 20% in annual terms well into 2023, reflecting base effects and higher energy prices feeding into other components of inflation. Unemployment has ticked up and wage growth should slow amid weakening activity, easing the pressures on core inflation.

The Hungarian forint has been under strong downward pressure this year amid a surging energy imports bill and market concerns. The currency has appreciated since the monetary policy setup changed in mid-October, which implied an effective rate hike to 18% from 13% due to changes in key financing instruments. Nevertheless, compared with its value early this year, the forint remains significantly weaker against both U.S. dollar and euro (by around 18% and 10% year to date respectively). Assuming a tight monetary policy stance and stable domestic currency, inflation should decline more meaningfully in the second half of next year.

Hungary's growth prospects face substantial risk. Its economy is vulnerable to higher gas prices and energy supply disruptions, due to the importance of natural gas in its energy mix (around one-third of total energy supply), and it still relies on oil and gas supplies from Russia. In our downside scenario, growth would take a significant hit, leading to a full-year recession in 2023. Disbursement of EU funds supporting public investment is part of our baseline and downside scenarios. However, there are notable risks of a material reduction in these transfers, which could weigh on growth, and the fiscal outlook in 2023 and beyond.

Table 3

Poland

Stronger-than-expected GDP growth in the third quarter, coupled with a substantial upward revision of first-quarter estimates, has prompted us to raise our 2022 GDP growth forecast to 5.5% from 4.0%. Quarterly GDP growth has been volatile due to fluctuations in inventories, but has held up relatively well this year, helped by government support, a resilient labor market, and spending by people coming from Ukraine. The near-term outlook remains challenging, however, amid high and rising inflation, volatile financing conditions, and weakening European demand. Our baseline assumption is weak but still positive GDP growth of 0.9% in 2023 versus our previous forecast of 1.2%. Once the external environment improves, the economy should regain its momentum, and we expect GDP growth to reach 3.2% in 2024.

Table 4

Flash GDP estimates put growth at 0.9% in the third quarter, quarter on quarter, after 2.4% contraction in the second quarter, while historical revisions of national accounts lifted quarterly (non-annualized) GDP growth in the first quarter to 4.2% from the 2.5% previously reported. Consumption continued to expand in the first half of 2022 at a solid pace, and likely also in the third quarter, based on retail sales data. Persistently high inflation eating into consumer purchasing power should considerably weaken household spending in the coming quarters, although various government initiatives such as minimum wage increases and mortgage payment holidays will partly offset these trends. The outlook for private investment is muted amid the increased uncertainty, but public investment should support growth.

Inflation continued to climb, reaching 16.4% year on year in October (HICP measure). Annual energy inflation has notably decreased from its peak in June; however, food and core inflation are trending up (respectively by 21% and 11.7% year on year in October). The National Bank of Poland (NBP) left its key rate on hold at 6.75% during its last two meetings, contrary to general expectations of rate hikes, showing a preference for supporting growth in the face of elevated uncertainty and risks. Taking into consideration the NBP's latest statements, we do not expect additional hikes in this cycle.

Chart 8

The government has implemented a number of measures to curb the growth of food and energy prices, and some of them are set to expire in the coming months. Assuming that a planned phaseout of VAT reductions--currently in place on some food and energy items--will go ahead in January 2023, annual headline inflation will increase at the beginning of 2023, and start declining thereafter. We expect disinflation to be very gradual because price pressures are likely to persist, due to a tight job market with the unemployment rate at 2.6% as of September, and ongoing fiscal stimulus. Taking into account recent price developments and the central bank's more accommodative stance, we have revised our annual average inflation forecast in 2023 to 12.9% from 11.7% previously.

Risks to our projects remain substantial. In our downside scenario, assuming a complete cut-off of Russian gas to Europe and higher global interest rates, the economy would see a recession for the full year of 2023. At the moment, we expect disbursement of the EU's Recovery and Resilience Facility (RRF) funds under both baseline and downside scenarios next year, but note the risk of significant delays or reductions, which could hamper investment. What's more, market pressures on the currency and bond markets could intensify if inflation looks set to increase, potentially leading to a much tighter monetary stance, which could result in a larger-than-expected hit to output and employment.

Saudi Arabia

Saudi Arabia continues to enjoy robust economic performance and is on track to become the fastest growing nation among the G-20 this year. We have raised our 2022 real GDP growth forecast to 8.1% from 7.5% in September and to 3.4% in 2023 from 2.9%, and expect growth will level off to average 2.3% rather than 2.5% in 2023-2025 expected previously.

Table 5

The third quarter saw the economy expand 2.6% quarter on quarter, another robust quarterly pace that brought the annual tally in real GDP to 8.6%, following decade-high growth rates of 9.9% and 12.2% in the first and second quarter, respectively. In the third quarter, both oil and non-oil sectors showed strong performance, with the non-oil sector, in particular, exceeding our expectations. Fixed investment spending has received a boost as the government announced several investment projects to push forward with the Vision 2030 agenda.

S&P Global's Purchasing Managers Index (PMIs) for Saudi Arabia have remained between 55 and 57 points throughout the year (as of October data), which indicates robust activity in the near term. Had it not been for a more cautious approach on oil production--announced by OPEC+ in early September, where it agreed to shave 100,000 barrels per day off production targets in October--we would have likely raised growth numbers for 2022 more substantially. The cautious approach also points to growth in the oil sector slowing further and likely to persist in 2023 against the weak global economic backdrop. In contrast, growth in the non-oil sector is likely to remain strong on the back of looser fiscal policy and a falling unemployment rate.

Headline CPI inflation slid to 3.0% year on year in October from September's peak of 3.1%. Non-food inflation has been stronger recently, reaching its highest level since July 2021. Still, inflation remains much lower than in many other parts of the world. Saudi Arabia's fuel price cap has helped keep a lid on inflation. We think inflation peaked in September 2022 and will continue to decelerate for the rest of 2022 and in 2023, returning to 2% by year-end 2023. This inflation profile would result in annual average inflation of 2.5% in both years.

The central bank (SAMA) raised its key policy rate by 75 bps to 4.5% in November, following the Fed's 75 bps hike. With the Fed poised to implement further rate hikes in the coming months, we expect additional monetary policy tightening in lock step. Besides the government's cap on local fuel prices that has helped to moderate energy inflation, a stronger U.S. dollar, against which the Saudi Arabian riyal is pegged, as well as tighter monetary policy will contain global inflation passthrough to consumers on non-energy items.

South Africa

We have revised down our GDP growth forecast slightly to 1.9% from our previous estimate of 2.0% in 2022, and to 1.5% from 1.6% in 2023, amid power producers' continued load shedding. The lifting of omicron virus-related restrictions lifted the manufacturing and service sectors in the first quarter. However, the economy contracted 0.7% in the second quarter, due to floods in KwaZulu-Natal province (second largest province by GDP), continued supply chain issues, and power supply interruptions. Domestic data for the third quarter have been a mixed bag and, compared with our September forecast, we expect a slower recovery in the second half of 2022.

Table 6

Real retail sales contracted in the third quarter while wholesale trade sales remained resilient. Manufacturing also expanded during the quarter as a surge in output in the transport sector outweighed the load-shedding impact. Mining output rose as well, although by small margin. On balance, we are now more confident that the economy achieved some growth in the third quarter, as we expected. S&P Global's PMI rose to 49.5 in October from 49.2 in September. As a result, the PMI moved closer to but remained below the 50.0 no-change mark, signaling a milder deterioration of private-sector business conditions from the previous month.

That said, South Africa's GDP growth continues to face headwinds from severe electricity supply disruptions, handicapping the agriculture, mining, and manufacturing sectors (all significant users of electricity). And there doesn't appear to be any relief in the near term. Eskom's System Status and Outlook Briefing, released last week, painted a gloomy picture of continued power rationing and we expect the high number of unplanned generation outages will continue. Reportedly, at a minimum, Eskom would need to maintain load shedding (at least stage 2) over the next six-to-12 months due to planned capital investment projects and repairs.

Prospects for growth in the next two years are limited by a global economic slowdown, elevated prices, and higher interest rates to fight inflation. The optimism from earlier in the year on terms-of-trade benefits has given way to concerns about ongoing price declines across iron ore and platinum group metal (PGM) markets. South Africa's exports of coal, PGM, gold, and iron ore contribute almost half of total merchandise exports. While falling prices for key metal exports have reversed South Africa's very favorable terms of trade, coal prices remain high because of natural gas shortages, and could bring potential upside to our projections of net exports in both volume and nominal terms. That said, infrastructure bottlenecks are currently weighing on coal exports' potential.

We also revised down our annual CPI inflation forecast for 2023 to 5.8% with inflation peaking in September-November this year and coming down only gradually over the next several quarters. Considering rising inflation risks and a higher Fed terminal rate, we now expect the South African Reserve Bank to raise the key policy rate to 7.5% from 7.0% in the first quarter of next year before pausing as inflation eases. As inflation starts to get under the upper bound of the central bank's target in a sustained manner (that is, below 6%), it will consider cutting rates later in 2023, but only gradually, with an eye on the Fed, in part to protect capital flows and the rand's value. We expect this to help some support the rand amid the Fed's tightening and ongoing market volatility.

Chart 9

Turkiye

We have raised our GDP growth forecast for Turkiye to 6.1% in 2022, from 5.2% previously, on account of stronger-than-expected incoming data. Our macroeconomic narrative has not changed materially since our September update, and we continue to expect growth to slow sharply in the coming quarters amid high inflation, depressed consumer and business confidence, and faltering European demand. We forecast 2.4% GDP growth in 2023 (down 0.4 percentage points versus our September forecast), while acknowledging high uncertainty regarding policy settings after parliamentary and presidential elections next year.

Table 7

The economy expanded by more than 7% in the first half of the year, fueled by exceptionally strong consumption and exports. Recent data releases have been mixed, but generally point to slowing growth, which however is still holding up somewhat better than expected. Industrial production contracted in the third quarter by around 4% versus the previous quarter, with a broad-based decline across consumer, intermediate, and capital goods. S&P Global's Manufacturing PMI slipped further into contractionary territory (below 50), to 46.2 in October, pointing to continuing industrial weakness. At the same time, retail sales have been resilient. This suggests that a trend we observed before--of households' frontloading purchases in response to very high inflation, unanchored inflation expectations, and deeply negative real interest rates--has not run its course yet. A strong tourism season, with the number of international visitors in July to September close to pre-pandemic levels, has also likely boosted retail trade. The OECD's real time weekly GDP tracker meanwhile points to slower year-on-year growth in the third quarter, decelerating further in October-November.

We continue to expect weaker activity in the coming quarters as the hit to consumer purchasing power from very high inflation pulls down household spending. Additional policy support may prevent a deep decline in consumption, however. Uncertainties about domestic policies and the global economic landscape, as well as geopolitical developments, will weigh on investment. A downturn in Europe will weaken exports and possibly tourism, although increased geographic diversification of international arrivals indicates rising resilience of the tourism sector to visitor fluctuations from particular regions.

Inflation climbed to 85.5% in October, and likely peaked over October-November. Base effects will bring annual inflation down in December but it will remain very high amid deeply negative interest rates and unanchored expectations, with average annual inflation exceeding 40% in 2023. The central bank continued to cut rates, lowering the key rate by 300 bps over that period. It uses an array of regulatory and other instruments to support the lira exchange rate and redirect credit to priority sectors, while curbing credit growth in other sectors, a monetary policy setup that is poised to continue until parliamentary and presidential elections at midyear 2023. The energy imports bill doubled in 2022 to 10% of GDP, and while strong tourism revenue and financial inflows (including unidentified inflows through errors and omissions) have so far helped contain pressures on the lira, the risks of another bout of currency depreciation and financial market volatility remain high.

Chart 10

Related Research

• Economic Outlook Eurozone Q1 2023: Reality Check, Nov. 28, 2022
• Economic Outlook U.S. Q1 2023: Tipping Toward Recession, Nov. 28, 2022
• Economic Outlook Asia-Pacific Q1 2023: Global Slowdown Will Hit, Not Halt, Growth, Nov. 28, 2022
• S&P Global Ratings Revises Its Oil And Gas Price Assumptions On Supply/Demand Fundamentals, Nov. 18, 2022
• Central And Eastern Europe: Growth Freezes, Risks Mount, Nov. 10, 2022