• Markets projected the PMI at 45.8
• Weak demand is slashing output once again
• Redundancies remain primarily outside core staff, for now
• Input prices keep rising on food and transportation expenses, selling prices decrease marginally
• We expect slightly optimistic sentiment to stick a bit longer, until the realisation kicks in that we are in for a long downturn

The manufacturing PMI worsened to 44.8 in December from 46 in November, according to figures from S&P Global. The print was worse than anticipated, as markets projected the PMI at 45.8. It was the worst performance of the indicator since July, reflecting challenging demand conditions that provoked the steepest decline in output in 5 months. New orders expectedly declined again, particularly export orders, which continue to reflect poor demand from Germany. The resulting spare capacity led to the biggest decrease in backlogs of work since the beginning of 2024. Workforce cuts continued as well, at their second-sharpest rate over the past year. In all fairness, what we have been hearing is that redundancies come mostly through agency staff and not filling in voluntary departures, with core staff remaining unaffected. We suppose there is still a room to do this, given the acute labour shortages that the country experienced in manufacturing immediately before the crises at the beginning of this decade.

Lower activity led to a decline in input purchases, as weak demand has decreased stock requirements. Firms have continued to use pre- and post-production inventories to meet current orders, and there appears to be no desire to increase them, given the current level of demand. Despite lower purchases, input prices continued to rise, mostly because of foodstuffs and transportation expenses. Even though the increase remained marginal, it has been there since for the 11th straight month. On the other hand, the ongoing decline in the workforce has reduced cost pressure, which allowed firms to lower selling prices a bit more. Yet, this was only fractional, and mostly relies on producers willing not to lose market share and current contracts.

Optimism remains in place, as producers still expect output to be higher in 2025 than in 2024. Yet, we feel that the bar is being lowered every month, as manufacturing performance in 2024 has been disappointing. We believe there is a certain degree of stubbornness in many producers, who refuse to accept the reality that we may be in the current downturn for some time. When that finally happens, we will likely see a more noticeable cut in the labour force, and redundancies now affecting core staff. Yet, the current state of limbo could drag a bit, as some cyclical factors could boost demand just enough so that sentiment remains slightly on the optimistic side a bit longer.

Data Download

• Offering EUR-denominated debt instruments drew investors' attention

State debt held by non-residents rose by CZK 37.8bn (4.2% m/m) in November, adding up to CZK 928.5bn (28.8% of the total) at the end of the month, according to figures from the finance ministry. The increase was in line with our expectations, as the finance ministry launched a number of EUR-denominated instruments that have expectedly drawn foreign investors' attention. In particular, the finance ministry offered EUR-denominated instruments for EUR 1bn in November, which is effectively doubling its typical monthly issuance levels. It also brought foreign bond holdings upwards by CZK 122.2bn (15.2% y/y) over the past year, even though a low base effect is still in play.

We remind that foreign bond holdings increased rapidly in late 2023 when the CNB launched the current monetary easing cycle. However, state debt held by non-residents has increased since then in nominal value, and December will also likely feature an increase due to EUR-denominated instruments in offer. Thus, we may eventually see a stagnation in nominal terms, even though the share of foreign bond holdings will remain a bit under 30% of the total.

• Fx corporate loans drove a faster growth, despite a more than 300bp decline in domestic borrowing costs
• Household loans recovered on the back of housing loans, though a low base is still pushing up numbers
• Broad money supply rose in line with expectations, private consumption is still recovering fast

Lending to the non-financial private sector rose by 4.9% y/y in November, faster than the 4.4% y/y increase seen in October, according to figures from the CNB. The faster increase was due to the corporate sector, though lending to households accelerated its growth as well. Loans to corporations rose by 3.7% y/y in November, faster by 1pp m/m. As usual, the push came from fx loans, which accounted for the bigger part of the improvement and rose by 5.5% y/y. Foreign currency loans represent just over of 52% of all corporate loans, reflecting the large exposure of Czech exporters to the euro area, as almost all of these loans are in euro. In contrast, only 0.4% of consumer loans are in foreign currency. Somewhat encouragingly, it was long-term loans (5 years and longer) that had the biggest contribution to the improvement, rising by 4.8% y/y in November, their strongest increase since January. It could signify some renewal of activity, though we would not hold our breath yet.

Data Download

Borrowing costs on local currency loans fell by 317bps y/y, which is hardly surprising, given the 300bps of monetary easing provided by the CNB over the period. Yet, given that this affects only half of the loans provided (the CNB provides interest rate data only on local currency loans), it is no surprise that the CNB board is concerned about the transmission of monetary policy through the interest rate channel. In any case, corporate borrowing costs are now the lowest since early 2022, which may have triggered some additional borrowing in late 2024.

Regarding households, their loans rose by 5.7% y/y in November, mostly pushed by housing loans, whose growth was 4.9% y/y, the strongest since May 2023. Borrowing costs have played some role, though they fell by only 65bps y/y over the past year. Instead, there is still a very low base that has been bringing noise into housing loan data. Pure new housing loans rose by 68.6% y/y in November, with the base effect to be seen at least until the end of Q1 2025. Renegotiated housing loans were still about 52% of the total, which is a relatively high ratio.

Broad money supply (M3) rose by 5.1% y/y in November, only a bit higher than the CNB-projected 5% y/y increase in Q4 2024. This is in line with expectations that money supply has stabilised along with inflation, even though inflation will likely be close to the upper end of the tolerance band (2%+/-1pp) in Q4. In real terms, M3 rose by only 2.2% y/y in November, which was its slowest increase since the end of 2023. M1 preserved a steady increase, higher by 7.9% y/y, which is in line with the recovery in consumer spending. In real terms, M1 rose by as much as 5% y/y, a rate not observed since late 2021, i.e. even before the Russia-Ukraine war. It implies private consumption will remain an important growth driver in early 2025 as well.

Czech Republic is facing a year of decision with an erratic Babis-like point (Hospodarske Noviny)

A difficult election year: ANO's triumph or Fiala's repair (Pravo)

President advises us not to give in to labels during an election year (Lidove Noviny)

Pavel warns against spreading lies, opposition criticises him (Pravo)

The euro will make us prosperous, Pavel said during an event (Mlada Fronta Dnes)

Czech economy should see growth. Hurdles may be Germany, Trump, and the Green Deal (Mlada Fronta Dnes)

An honour to the monuments of mortgage heaven (E15)

Why would I go to war. After 20 years of a professional army, qualified reserves are dwindling (Lidove Noviny)

Musk recommends the Germans to vote AfD. He is preparing to impact the election, Berlin reacts (E15)

Not only Kaja Kallas. We picked whom to follow this year (Hospodarske Noviny)

• Yield falls compared to previous auction, remains higher than secondary market benchmark

The State Debt Management Agency (AKK) sold HUF 10.5bn of twelve-month T-bills on the latest primary auction today, AKK data showed. The issued amount fell short of the announced auction size of HUF 30.0bn due to weak demand. The auction size itself was raised considerably from the HUF 10.0bn offered on the previous tenders. We think the upward adjustment in the supply of T-bills was a response to the past improvement in demand for the bills, which appeared to be temporary though. Total bids for the twelve-month T-bills amounted to HUF 12.6bn on today's auction, considerably lower than on the previous auction two weeks ago. Demand also failed to cover the auction offering. The average yield still dropped by 10bps from the previous tender to 5.32%. It remained up by 8bps compared to the secondary market benchmark rate.

• Troubles of electromobility sector to continue depressing Hungarian industry, in our view
• New orders, output improve, while weak hiring plans suggest fragile sentiment in industry

The Purchasing Managers' Index (PMI) rose by 0.2pts m/m to 50.6pts in December, the logistics association Halpim reported. The print for November was also revised slightly up with today's release. The PMI was above the 50pts threshold, showing expansion in the manufacturing sector, for the second month in a row, but we note that the index has not been a reliable leading indicator for industrial activity in the past few years. The latest industrial data for November did suggest some cautious signs for a prospective recovery and we think the positive PMI reading could mean potential for further improvement. We expect that manufacturing output will nevertheless remain largely subdued by the continued stagnation of the electromobility sector, which has a large weight in Hungary's industry and is probably not fully captured by the PMI survey.

Both the output and new orders sub-indices of the survey increased m/m and were in the positive territory of above 50pts. Purchased inventories displayed a similarly favourable picture. In contrast, employment plans moderated and remained below the neutral threshold, which we consider a sign of fragile industrial sentiment.

Data Download

• Buyback operations together account for 1.4% of expected GDP

The State Debt Management Agency (AKK) re-purchased HUF 462bn of domestic government securities from the National Bank of Hungary (NBH) on Dec 31, the last day of 2024, the finance ministry announced. The transaction followed another buyback worth HUF 615bn earlier in December. The two operations aimed to ensure compliance with the constitutional fiscal rule for reducing the debt-to-GDP ratio each year as long as it is above 50%, the ministry confirmed. The government remains committed to improving the fiscal balance and reducing government debt, which will also contribute to improving Hungary's risk assessment and strengthening its financial resilience, it underlined.

The government was at risk of violating the rule due to the slower-than-expected nominal GDP growth, the budget deficit overruns and the forint depreciation in 2024, in our view. General government debt was 76.0% of GDP at end-Q3, according to latest available data by the National Bank of Hungary (NBH), up by 2.6pps ytd. The buyback operations together accounted for around 1.4% of the expected GDP for this year, according to our calculations.

The NBH holds government bonds as a result of its earlier quantitative easing programme, which was terminated in late 2021 under the monetary tightening cycle at that time. The NBH still committed to holding the purchased bonds under the programme until maturity and it held HUF 3,302.1bn of government bonds as of end-November, according to latest available data.

• Budget allocates HUF 8.4bn for election preparations in 2025, which is unusual, opposition politician claims
• Funds to be mainly used for election-related IT development, government says
• Main opposition leader Magyar calls for early elections as soon as possible

There is political stability in Hungary and the next parliamentary elections will be held on time in 2026, the government press centre announced in response to some allegations about early elections. The allegations stemmed mainly from a social media post by Gergely Kovacs, leader of the joke Two-Tailed Dog Party (MKKP), who claimed that the government had allocated budget funds for elections in 2025. The 2025 budget has provided HUF 8.4bn for preparations for the 2026 general elections, according to earlier report by the specialised election portal Vox Populi. Kovacs pointed out that it was not an usual practice for the budget to allocate funds for elections in the preceding year and also that the allocations in the 2025 budget included items specific for the election year like ballot printing or the cost of postal notifications.

The government press service confirmed that the 2025 budget has provided funds for the preparation of the 2026 elections. These funds will mainly finance IT developments to organise the elections, it explained.

The main opposition leader Peter Magyar called for early elections in a new year speech. Elections should be held as soon as possible because there is no time to waste, he stated, calling for an end of the government's propaganda of hatred, warmongering and its excessive budget spending. His speech also included messages for improvement of various public services in case of a change in government and messages of unification and compromise between the various social groups.

Magyar's call for early elections might have aimed to foil an attempt by the ruling Fidesz party to bring early elections, according to some political analysts cited by the pro-opposition news portal Telex. Magyar could take the initiative from Fidesz in this way, the analysts said. We are however, sceptical that Fidesz would want to trigger early elections in 2025 since the political situation seems unfavourable to achieve any gain. Fidesz trails behind Magyar's Tisza Party in most polls and we think a turnaround is unlikely soon, unless the economy improves strongly, which is not even part of the government's baseline scenario. In this context, we believe that Fidesz would be better positioned to win the regular elections in 2026, than potential snap elections in 2025.

Early elections can be triggered if the parliament dissolves itself or if the President initiates them after consultations with the PM, the parliamentary speaker and the parliamentary faction leaders. Elections should be held in 70 to 90 days after the dissolution or the presidential decision.

New year begins with tax increases and parking fees in left-wing-led municipalities (Magyar Nemzet)

Opposition does not abandon constitutional coup (Magyar Nemzet)

Government does not expect early parliamentary elections (Magyar Nemzet)

There will be big milestone for Paks II nuclear plant in March (Vilaggazdasag)

Career start-up loans: Banks quickly target young people (Vilaggazdasag)

Government bonds: Hungarian government announces another brutal buyback (Vilaggazdasag)

Transit of Russian natural gas through Ukraine has stopped (Heti Vilaggazdasag)

Government denies that it is planning early election (Heti Vilaggazdasag)

Inflation-tracking tax increases, more expensive banking, more complicated administration - this is how life is changing (Heti Vilaggazdasag)

Fuel prices could rise significantly in first days of new year (Heti Vilaggazdasag)

• Some PLN 30bn to flow into Poland from RRF in 2025, ministry says

The Fund and Regional Policy Ministry said Dec 27 that it had signed the so-called fourth and fifth payment applications for Recovery and Resilience Facility (RRF) money and that some PLN 30bn would flow in via this channel in 2025, according to a statement. The ministry added that the PLN 30bn should help foster planned investments of over PLN 90bn. The fourth and fifth payment applications would target investments in nurseries, broadband internet, cardiology, energy transformation, and adult education.

The RRF is to send some EUR 60bn Poland's way, or around PLN 257bn. Poland has received about PLN 67bn so far, according to the state news agency PAP.

• Wnorowski says council could even start cutting soon after
• But Wnorowski says 2025 won't see big monetary policy changes due to loose fiscal policy

Monetary Policy Council member Henryk Wnorowski was cited saying Dec 30 that the council will begin a serious discussion of policy easing at the March meeting as the new inflation and GDP projections would be released and could even begin cutting rates a short time from then, according to comments made to broadcaster Radio Bialystok. He said all of this with loans should find relief in 2025. But he also said that the very loose fiscal policy meant that the potential reduction of rates would not be "significant." "I would like this to be the last such loose budget, and I am waiting for tightening from 2026," he said.

Overall, Wnorowski has stuck to his guns that rate cut discussions could start in March, but has tended to say the cuts could come later, such as in Q2 in order for the council to see that inflation has peaked. His worry of the loose fiscal policy suggests that he does not expect to sharply cut rates in 2025. That said, there are many potential changes that could lead to bigger cuts. Once the fate of power prices in Q4 is known in Q2 or so, this should remove the threat that inflation will jump in Q4 due to power. One other factor is that the 2026 budget will be out in August-September and that could show a big cut in the budget deficit (or is supposed to, according to the government's medium-term budget and structural plan). Perhaps that could give the MPC more room to be more aggressive, though many uncertainties clearly remain.

• FinMin to issue T-bills for first time in some time on Jan 13 and Jan 20
• FinMin may tap foreign markets in Q1

Poland's Finance Ministry said Dec 31 that it would offer PLN 55bn-75bn of Treasury bonds in eight auctions in Q1 2025, including three auctions in January at which it will issue PLN 16bn-31bn in bonds, according to a pair of statements [here and here]. For the quarterly issuance calendar, the FinMin said that the structure of the T-bonds would be subject to market conditions. It said it would also hold one switching bond auction, which is to occur in February or March. The ministry will also issue T-bills for the first time since April 2020.

For January, the FinMin will auction PLN 6bn-11bn of T-bonds on Jan 9, PLN 5bn-10bn on Jan 23, and PLN 5bn-10bn on Jan 29. The ministry said it will not hold a switching bond auction, but will offer PLN 3bn-6bn of 45-week T-bills on Jan 13 and then another PLN 3bn-6bn of 44-week bills on Jan 20.

In terms of foreign issuance, the FinMin said only that it would possibly issue such bonds in Q1 2025. However, it does usually tap the EUR market early in the year, and Finance Ministry public debt department head Karol Czarnecki said in mid-December the ministry would likely begin 2025 with a EUR-denominated issuance.

Overall, Deputy Finance Minister Jurand Drop recently said the ministry had financed over 25% of its PLN 553bn gross financing requirement at end-2024. That works out to a minimum of PLN 138bn. In terms of T-bonds and T-bills, the FinMin could issue PLN 43bn in January, potentially boosting borrowing coverage to at least 32% by end-January.

• DepFinMin Drop also says ministry's cash balances top PLN 130bn at year-end

Deputy Finance Minister Jurand Drop said Dec 31 that the ministry pre-financed over 25% of its 2025 gross borrowing needs at end-2024, according to comments cited being made by the state news agency PAP. Borrowing needs have been preliminarily set at PLN 553.2bn. The over 25% pre-financing level is up from the over 20% level Finance Minister Andrzej Domanski mentioned in a X post published in mid-December.

Drop also said that cash in the FinMin's accounts would top PLN 130bn at year-end. The end-November cash pile was put at PLN 148.3bn.

Overall, the pre-financing level is strong in that we had estimated it would be around 23% in terms of the pre-financing in switching bond auctions, in T-bond auctions late in the year, and the likely amount of cash used to cover borrowing was around the PLN 80bn used in 2023. Since the 2025 borrowing total is a record high, the faster coverage can be done reduces the risk of problems later should unforeseen events hit sentiment towards EMs like Poland, especially in light of the many uncertainties swirling around the new year.

Interest rates in 2025? Anything is possible as MPC is unpredictable [various MPC members have talked of cuts in March, July, H2, or in 2026] (Rzeczpospolita)

Safer with the euro [daily says euro adoption debate should begin again; it notes PiS govt and Glapinski-led NBP have flooded media with negative euro stories; it says govt should start enumerating benefits, including to geopolitical security; others say meeting convergence criteria would be good in itself; so far coalition has shown little stomach for this debate] (Rzeczpospolita)

Poles' savings are growing faster than their debt [households saved over PLN 100bn in deposits last year, boosting total to PLN 1.3tn at end-Nov; (Rzeczpospolita)

PKW finally reversed decision to reject PiS's 2023 accounts, meaning FinMin must pay party at once (Rzeczpospolita)

What next with public money for PiS? (Gazeta Wyborcza)

A year of turbulence [2025 will be dominated by Polish presidential election, Poland holding rotating EU presidency in H1, and ongoing political polarisation; Tusk to give Fri. speech inaugurating presidency and laying out priorities, which are to focus on security; rumour is that if PiS-backed Nawrocki wins, early general election could be held in autumn 2025] (Rzeczpospolita)

Prosecutor to look at cases that were stymied during PiS years (Gazeta Wyborcza)

Gazprom without flows to Europe (Gazeta Wyborcza)

NATO strengthens defense over Baltic Sea area (Gazeta Wyborcza)

Services centres will again be hiring in 2025 (Rzeczpospolita)

Question:

Could the following be wrong "The government increased various taxes by 43.9% in line with the revaluation rate, which is the legal reference rate of the 12-month moving average of domestic industrial PPI inflation in October"? PPI was not that level, its CPI.

The question was asked in relation to the following story: Taxes rise 43.9% on par with revaluation rate

Answer:

The information we provided is correct. In our story, we mentioned the 12-month moving averages of producer prices index, not the monthly data. The relevant figures are available here. The cell K-246 indicates the relevant percentage.

• Exporters benefit from reduced borrowing costs

The CBT reduced the total interest cost of rediscount credits from 35% to 29.93%, following a 250bps cut to its benchmark policy rate, the CBT announced a revised calculation method for the discount rate applied to export and foreign exchange-earning services rediscount credits. The new approach relied on a specified proportion of the CBT's policy rate, allowing lenders to reference a more adaptable and market-sensitive benchmark for determining interest on these facilities. The move, in our view, was intended to lower financing costs for exporters and support the transmission effect of the latest policy rate cut.

• Government forgoes TRY 12bn to ease consumer cost pressures
• New rule curbs inflation and reinforces ongoing monetary policy efforts

A presidential decision limited the increase in the special consumption tax (OTV) on fuel to 6% for the new year, leading the government to forgo approximately TRY 12bn in revenue, the local media reported. The measure came into effect upon its publication in the official gazette and replaced the standard approach of pegging excise tax adjustments to changes in the domestic PPI. This decision aimed to prevent excessive cost pressure on consumers and businesses by setting the tax increase below the actual producer price index figures for the Jul-Nov period, which stood at 7.1%, FinMin Mehmet Simsek stated. Under normal circumstances, Turkey's excise tax on fuel and similar petroleum products would have been adjusted every January and July in line with the domestic producer price index over the preceding six months. However, the new regulation curtailed the increase to a level below this figure, effectively preventing larger fuel price jumps that would have otherwise occurred, the minister stated.

Simsek indicated that the constrained tax hike was designed to complement the existing monetary policy framework. By limiting the extent of the excise tax hike, the authorities aimed to help manage inflationary pressures, as the local media projected the adjustment to add roughly 1% to retail fuel costs. According to CBT's former chief economist Hakan Kara, this policy adjustment was expected to bring down inflation by an estimated 0.2pps, factoring in both direct and indirect influences on related sectors such as logistics and manufacturing. Fuel and oils of personal transportation vehicles had 3.7412% weight in Turkstat's CPI basket for 2024.

• Government raises abroad fees to TRY 710, ban stamps from 2025

The mandatory departure fee for individuals travelling abroad was raised by 42% to TRY 710, effective from Jan 1, 2025, according to the revenue administration's communique published in the official gazette. The communique also stated that stamp-based payments would no longer be accepted as of the new year.

The departure charge had gone through various increments since 2007, when it stood at TRY 15. It had risen to TRY 50 by 2019 and reached TRY 150 in 2022. Prior to the latest revision, the fee had climbed from TRY 150 to TRY 500 in August, reflecting the consistent upward trend in departure-related costs over the years.

• Erdogan reaffirms interest-rate cuts to curb inflation
• We weigh potential policy twists amid pragmatic decision-making
• Government bolsters employment incentives through new KOSGEB programme

President Erdogan addressed ruling AKP's Bursa Provincial Congress, where he discussed Turkey's macroeconomic roadmap and affirmed his unconventional belief that reducing interest rates would help curb inflation, positioning the coming year as pivotal for implementing supportive monetary measures, the local media reported. Erdogan also recounted that if extraordinary global or regional developments did not arise, the 2025 inflation targets would likely be met, paving the way for greater economic stability. In parallel, the markets contended that the President's statements about imminent interest rate and inflation drops cast doubts on the economic management team's trajectory. Still, given that an interest rate reduction appeared virtually guaranteed, inflation seemed poised to decelerate owing to base effects that would likely persist through May barring unforeseen global risks, it would have been a miscalculation for Erdogan not to leverage this opportunity to confirm his long-held stance. Put differently, it might be perceived as he is not reinstating prior policy frameworks but rather using this course of action for political advantage - a choice, in our assessment, some deemed potentially misguided because it risked further destabilising already delicate market perceptions. We think the economic management team remained robust, particularly bolstered by a 30% minimum wage increase. On the flip side, we note that Erdogan had demonstrated his pragmatic nature before by pivoting back to unconventional economic beliefs, as observed during the Naci Agbal era. Therefore, we caution that despite the current signs of stability and enhanced credibility for the economic management team, future policy shifts could occur abruptly.

Erdogan referred to the recently announced 30% increase in the minimum wage, emphasising that it was intended to reflect a balance between wage growth and inflation. He noted the administration's readiness to reassess this figure should an unexpected inflation surge occur. In the same context, he encouraged employers capable of offering more than the official baseline to do so, explaining that government policy set the wage floor rather than the ceiling. Erdogan reiterated his commitment to preventing any setbacks in employment, highlighting that job creation and stability had remained top priorities.

Erdogan also elaborated on investment inflows and credit rating improvements, stating that Turkey had advanced in securing sizable projects, including those in electric vehicles and solar cell technology. The 2024 outlook, according to Erdogan, had demonstrated positive trends in foreign capital entry, robust reserves and stabilised exchange rates, all of which contributed to stronger financing conditions. He explained that the 2025 budget would build on these gains, with more than TRY 1tn allocated for investments to reinforce economic growth and resilience against potential crises.

Erdogan went on to announce a new employment protection programme to be introduced through Small and Medium Enterprises Development Organisation (KOSGEB) in Jan 2025. This initiative intended to bolster key sectors such as textiles, leather, furniture, and manufacturing, which contributed significantly to exports and workforce engagement, he stated. As part of this programme, small and medium-sized enterprises maintaining their end-of-2024 employment levels in 2025 would receive monthly support of up to TRY 2,500 per employee, he underscored. Erdogan maintained that this measure would stimulate both production and job security. At this time, he did not provide further details.

• Turkstat's inflation controversy sparks legal battles
• Multiple lawsuits highlight widespread financial hardship due to disputed inflation data
• Critics demand transparent CPI basket and thorough scrutiny of regional price inputs

Turkstat reportedly faced heightened scrutiny after allegations emerged that eight regional directors were removed from their posts for declining to enter what had been described as the lowest possible values into inflation data calculations, the pro-opposition daily Sozcu reported. According to legal representatives involved in the matter, these actions underscored concerns regarding the reliability of the official inflation figures, the daily indicated. In our view, this strongly corroborates the findings of our special report, which identified a recent increase in data irregularities and supports the hypothesis of potential issues affecting data quality.

Multiple political parties and civil society organisations already lodged legal complaints, arguing that millions of citizens experienced financial hardship due to potentially inaccurate data, the daily emphasised. The case gained further prominence when the Ankara 6th Administrative Court requested a second round of defence from Turkstat, following a lawsuit filed by a retired high-level judicial official who contended that unsubstantiated inflation rates had led to reduced pension increases, according to the same source. Turkstat initially submitted an 85-page defence, maintaining that it merely prepared statistical data and bore no responsibility for subsequent wage and pension calculations, it said. However, critics argued that Turkstat had not fully disclosed the itemised data underpinning its CPI basket, it indicated. They contended that the institute, as a constitutional body, was obligated to provide the court with transparent documentation of the methods used to calculate nationwide inflation.

Legal representatives for the plaintiff requested a formal hearing, stressing that independent experts should examine the internal basket of goods and services, along with pricing details from individual localities, the daily underscored. They indicated that several organisations intended to join the case as intervenors, reflecting the lawsuit's broad significance for a wide spectrum of citizens, it indicated. The former head of Turkstat, Birol Aydemir, who self-described as the last independent chief of the agency, was expected to testify on the methodology behind regional price inputs, it highlighted.

• Ocalan proposes new framework, urges constructive cooperation for Kurdish question resolution
• Erdogan and Bahceli seek DEM Party support to surpass parliamentary threshold
• Subtle concessions entice but fail to address deeper democratic grievances

The pro-Kurdish Democratic Party (DEM) deputies Pervin Buldan and Sirri Sureyya Onder visited imprisoned Kurdistan Workers' Party (PKK) leader Abdullah Ocalan on Imrali Island and later provided detailed insights into their discussion, the local media reported. Ocalan proposed a framework aimed at finding a lasting solution to the Kurdish question, highlighting the pressing need to strengthen Turkish-Kurdish relations. He reportedly expressed his willingness to share a constructive approach and to make the necessary call with both state authorities and the wider political sphere, emphasising a historical responsibility to foster cooperation across all ethnic and social groups. However, he did not clarify what he meant by the 'necessary call,' leaving open the question of whether it might include urging the PKK to disarm. Ocalan emphasised on a constructive paradigm appeared to coincide with Turkey's growing engagement in regional matters, where ongoing tensions in Gaza and Syria further underscored the urgent call for stability and cooperation.

The impetus for renewed dialogue first emerged when the Nationalist Movement Party (MHP) leader, Devlet Bahceli, suggested a direct interaction between DEM party members and Ocalan, prompting an immediate application by DEM Party officials to meet with the imprisoned leader. As political discussions intensified, Ocalan's nephew, who serves as a DEM Party deputy, visited Imrali for a family meeting and conveyed Ocalan's readiness to contribute meaningfully to ending violence. This series of events represented the first contact between Kurdish political figures and Ocalan since 2015, when formal discussions were last held. Since that time, attempts to restart the process had been hindered by restrictions on Ocalan's access to political interlocutors.

In our assessment, Ocalan's latest signal of readiness, which underscores both his determination and his perceived ability to reinforce what he considers a new political framework proposed by Devlet Bahceli, may align with Bahceli's recent position advocating an end to the PKK's decades-long insurgency. This convergence of views may also initially suggest the revival of a Kurdish peace process similar to efforts made in the early 2010s, when a tentative cease-fire raised hopes of a lasting reconciliation. Yet we question whether this apparent openness to a new peace process is truly motivated by a desire to resolve core Kurdish concerns or serves instead as an effort to shore up President Erdogan's political power. Erdogan is currently serving his second term under the new presidential system and, absent a constitutional change or a parliamentary decision to hold early elections, he is ineligible to stand for a third term. According to Bekir Bozdag, a lawmaker from the ruling AKP and former justice minister, an early election decision by the parliament would open the door for Erdogan's third bid, but this requires the support of at least three-fifths of the total MPs, which stands at 360 votes. The AKP and its ally, MHP, together control 315 seats, leaving them 45 seats short, at least. DEM party, holding 57 seats, thus becomes particularly pivotal, as any alliance of the AKP-MHP government with the DEM could bring the total beyond 360. The vote count could surpass 400 if joined by parties such as Saadet-Gelecek (20 seats) and DEVA (12 seats), which is in our view very likely. This would eliminate the need for a referendum entirely by meeting the threshold required for direct constitutional amendments.

Against this backdrop, we think subtle concessions to Kurdish constituencies, such as easing Ocalan's incarceration or reinstating democratically elected Kurdish mayors, could be tactical rather than genuinely reformist in spirit. Should the AKP-MHP alliance and allied blocs succeed in garnering the necessary parliamentary support, it is apparent that Erdogan would have a chance to run once again. Under these circumstances, measures aimed at addressing Kurdish demands might turn out to be temporary gestures primarily designed to cultivate pro-Kurdish electoral support, in our opinion. Unless their broader democratic grievances, particularly around cultural rights, political representation, and civic freedoms, are addressed, any new Kurdish peace initiative risks becoming an instrument for further entrenching executive power and reshaping key political alliances, rather than a pathway toward an equitable resolution of Turkey's long-standing conflict, we assess.

• Print reflects slowest contraction in eight months
• Production contracts mildly, new orders decline the least since April
• Input costs surge, while product inflation eases significantly

The PMI index edged up by 0.8pts m/m to 49.1pts in December, S&P Global reported. This reading signalled the weakest rate of contraction in the past eight months, aligning with a range of sub-indices that pointed toward a near halt in the deterioration of business conditions, the report said. Despite persisting pressures on overall demand, there were tentative signs of improvement, reflected in the milder drop in production and softer contraction in new orders.

Data Download

Production contracted at the mildest pace in nine months, with some firms responding to weak order inflows by reducing output, while others expanded operations in anticipation of potential recovery, the survey underscored. New orders, including export demand, continued to decline but at their slowest rates since April, it said. Purchasing activity and inventories also saw slight reductions, as firms remained prudent amid ongoing demand pressures, according to the report. Despite these adjustments, the sector displayed resilience, supported by tentative signs of demand stabilisation, it stated.

Input costs rose sharply in December, attributed to elevated raw material prices and the depreciation of the lira against the dollar, the report said. This pushed input inflation to a three-month high, though it remained below the average levels observed in 2024, it highlighted. Final product price inflation, in contrast, eased to its lowest rate in over five years, as firms balanced cost pressures with competitive pricing strategies, it stated. Some manufacturers raised prices to offset rising costs, while others provided discounts to secure sales and market share, it mentioned.

The late-2024 PMI dataset painted a relatively optimistic picture for the manufacturing sector in 2025, S&P Global market intelligence head Andrew Harker commented. Although a slowdown persisted, its modest scale and the upward movement of several key indicators suggested the potential for renewed growth in the coming months, he stated. Moreover, the notably softer inflationary environment was expected to bolster the sector's outlook, given that final product prices rose at a considerably subdued pace compared to earlier periods, he underscored.

• Revaluation affects various taxes and fines, including motor vehicle taxes
• Income brackets expand, easing minimum wage-earners' tax burdens

The government increased various taxes by 43.9% in line with the revaluation rate, which is the legal reference rate of the 12-month moving average of domestic industrial PPI inflation in October. The presidential authority to reduce the revaluation rate was not exercised. The rate applies to a range of levies, including stamp duties, motor vehicle taxes, environmental and specialised communication fees, as well as passport and driving licence charges, alongside various tax, traffic, and miscellaneous penalties.

Income tax brackets were also revised. The first bracket has risen from TRY 110,000 to TRY 158,000, and the second bracket has climbed from TRY 230,000 to TRY 330,000. The 30% increase in the minimum wage lowered many individuals' tax obligations by boosting the exemption limits for both income and stamp taxes, allowing minimum wage-earners to enjoy a reduced overall tax burden.

Annual exemptions related to various income streams had undergone similar adjustments as well. Rent exemption rose from TRY 33,000 to TRY 47,000, while the non-taxable threshold for capital gains on certain transactions advanced to TRY 120,000. Monthly automobile leasing expenses that could be deducted were elevated to TRY 37,000, and the maximum acquisition value for depreciation was raised to TRY 2.1mn.

• CBT narrows corridor from ±300bps to ±150bps, curbs policy rate swings
• MPC eyes inflation dip, cites moderating domestic demand
• Committee signals hawkish resolve but acknowledges near-term inflation risks

The Monetary Policy Committee (MPC) reduced the policy rate from 50% to 47.5% on its Dec 26 meeting after 18-month tightening drive. In addition, the operational framework was revised, setting the CBT's overnight borrowing and lending rates at a margin of -/+150bps relative to the policy rate, compared to -/+300bps earlier. Inflation displayed a near-flat trend in November, with preliminary data indicating a decline in December, the committee highlighted. Indicators for Q4 suggested continued moderation in domestic demand, supporting the disinflationary outlook, it indicated. Core goods inflation remained subdued and improvements in service inflation became more pronounced, it mentioned. While unprocessed food inflation showed moderation in December following elevated levels in the preceding two months, risks to the disinflation process persisted due to challenges in inflation expectations and pricing behaviour, it highlighted.

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The decisive stance in monetary policy contributed to a decline in the monthly inflation trend through domestic demand rebalancing, real appreciation of the lira and improving inflation expectations, the MPC emphasised. Fiscal policy coordination further reinforced this process, it said. The tight monetary stance will be maintained until a clear and permanent reduction in the inflation trend was achieved, with inflation expectations converging toward the forecast ranges, it indicated. Policy rates will be calibrated to ensure the necessary disinflationary tightness based on actual inflation data and forecasts, it underscored.

The committee emphasised its focus on inflation outlook, prudence, and meeting-specific decisions. Should a marked and lasting deterioration in inflation be foreseen, monetary policy instruments would be employed effectively, it indicated. Additionally, unexpected developments in credit and deposit markets would be addressed with macroprudential measures to bolster monetary transmission, it said. Liquidity conditions will be closely monitored, and sterilisation tools will continue to be deployed efficiently, it mentioned.

We think the CBT's substantial rate cut, supported by the government's moderate minimum wage increase, marked a strategic shift in monetary policy. Aligned with current inflation trends, this step, in our opinion, suggested that future rate decisions will likely remain measured. We also expect the narrowing of the interest rate corridor to moderate downward volatility in the effective policy rate, particularly amid abundant lira liquidity. The 250bps reduction combined with corridor narrowing highlights, in our opinion, a hawkish cut strategy. By keeping borrowing rates at 46%, we think the CBT prevented a more pronounced drop in deposit and lending rates, which might have occurred under a wider corridor. However, if liquidity tightens, market rates could climb to 49%, indicating precise calibration of monetary tools. Reflecting a communication style akin to the Federal Reserve, we think the CBT's cautious, meeting-by-meeting approach might be positively received for the lira.

On the other hand, we note the rate cut exceeded the market's 150bps expectation and was accompanied by optimistic commentary on inflation. While the CBT appeared confident, we remain more guarded, especially as January and February inflation may be further distorted than expected by New Year's price adjustments, particularly given the revaluation rate was set by backward-looking manner.

• New regulation addresses overdue payments

The CBT announced an upward adjustment in the default interest rate for overdue commercial payments, setting it at 53.25%, according to a decision published in the official gazette. This revision was applied to scenarios where the default interest rate was not stipulated in the contract or where relevant provisions had lapsed. It represented a significant shift from the 48% rate that was in effect at the beginning of 2024.

Price gouging inspection in Istanbul (Hurriyet)

Foreign minister Hakan Fidan's message to EU: Relations must return to pre-Sarkozy levels (Hurriyet)

President Erdogan's new year message: We will take necessary steps for terror-free Turkey (Hurriyet)

MHP leader Devlet Bahceli's comment on PKK leader Abdullah Ocalan: We must move from words to action (Hurriyet)

Digital payment period begins for international departure fee (Sozcu)

Big change in gold trading: New regulation starts today (Sozcu)

First oil well of 2025 is opened in Gabar mountain (Sabah)

Construction of 201,000 houses in earthquake zone is complete (Sabah)

Gaza rally in Istanbul (Sabah)

Istanbul Metropolitan Municipality proposes 55% hike in public transportation fares (Sabah)

• CBT cancels its support for FX and TL accounts of foreign currency-liable entities

The CBT decided to discontinue its currency-protected deposit schemes (KKM) support mechanism for companies bearing foreign exchange obligations, according to a decision published in the official gazette. This policy change terminated earlier initiatives that allowed these entities to benefit from special deposit and participation account mechanisms, either in foreign currency or in lira. The measure had previously permitted companies with import or foreign exchange loan repayment requirements to place deposits in accounts with a shorter one-month maturity option. We think the complete removal of KKM might follow in the near future, hinting at further normalisation in Turkey's financial and regulatory framework.

• CBT maintains floating exchange regime, monitors currency fluctuations, avoids direct market intervention
• KKM scheme to be discontinued in 2025, promoting lira deposits, strengthening de-dollarisation momentum
• CBT enhances transparency with regular inflation reports, parliamentary presentations and high-level speeches
• CBT lowers discount rates for inflation-indexed securities from 80% to 30%

The Monetary Policy Committee (MPC) will convene eight times in 2025, rather than twelve, according to the CBT's 2025 Monetary Policy document. This approach was previously implemented during the tenure of Governor Murat Cetinkaya, resulting in eight committee meetings in 2017, 2018, and 2019. The onset of the pandemic necessitated more frequent sessions, prompting a return to twelve meetings as of 2020. In our assessment, convening fewer meetings theoretically confers several advantages, such as mitigating overall market volatility and affording policymakers and market participants additional time to analyse the implications of each decision. Notably, Fed and ECB also meet eight times per year, suggesting that this schedule can be suitable for a stable macroeconomic environment. Nonetheless, we think the timing of this shift may have been premature, given that domestic economic balances in Turkey were still in the early stages of normalisation. Moreover, reducing the number of meetings naturally diminishes the opportunities to adjust policy rates at regular intervals, which places heightened importance on each decision. While fewer meetings help moderate short-term market fluctuations, they also restrict policymakers' flexibility to respond swiftly to unforeseen economic developments, in our view.

The CBT intended to focus on preserving price stability as the primary objective of monetary policy and reiterated that price stability was the most significant contribution a central bank could make to societal welfare, the report indicated. All available instruments will continue to be used decisively to contain inflationary pressures and ensure financial stability, it emphasised. The document also stated that if credit and deposit markets behaved in unexpected ways, the monetary transmission mechanism would be reinforced through additional macroprudential measures.

The CBT indicated that the floating exchange rate regime will remain intact and that foreign exchange rates will continue to be driven by supply and demand in the free market. There were no pre-determined targets for foreign exchange rates and the CBT did not intend to conduct foreign currency buying or selling with the purpose of influencing levels or direction. However, CBT will continue to monitor currency fluctuations closely and implement any necessary measures to support robust market functioning and healthy price formation.

In the same report, the CBT outlined its plan to discontinue the FX-protected deposit (KKM) programme in 2025. By late 2024, the share of lira deposits had increased, thanks in part to the gradual shift away from the KKM, the report highlighted. As of Dec 20, 2024, the total balance of KKM stood at USD 34.2bn, constituting 6.2% of total deposits, it indicated. These trends were expected to strengthen the broader de-dollarization process, and the CBT planned to continue its simplification steps throughout 2025 in tandem with the decreasing relevance of KKM. Disinflation was anticipated to become more pronounced, further boosting demand for lira assets and reinforcing ongoing policy efforts, according to the report.

Regarding communication policies, the CBT confirmed that it will maintain transparency, accountability, and predictability by continuing to publish the Inflation Report four times per year and holding related briefings. Presentations in the parliament's planning and budget commission will also continue, while speeches by the governor and deputy governors will remain a key element of the CBT's communication strategy, it said. The CBT further noted that the Financial Stability report will be published twice a year and monthly price developments will be shared to enhance market participants' understanding of inflation trends in the period following the release of official price statistics and before each MPC meeting.

Additionally, the report mentioned that the CBT has reviewed the collateral discount rates for open market, interbank money market, and foreign exchange market transactions, including inflation-indexed government securities and relevant lease certificates. In this context, the discount rate for inflation-indexed government securities and lease certificates was reduced from 80% to 30%. The report indicated that collateral requirements could be reassessed in the future if necessary, ensuring that the framework remained responsive to market conditions and continued to support financial stability. Any unanticipated developments in credit and deposit markets might prompt additional macroprudential measures to support monetary transmission, it stated. Liquidity conditions will be monitored closely and sterilisation tools will continue to be deployed as needed, it underscored.

• Government sets new rate, aligning with market forecasts
• Policymakers emphasise balanced economic growth amid rising inflation challenges
• 83% of workers earn at or near minimum wage thresholds

The government increased the minimum wage by 30% and set at TRY 22,104, labour minister Vedat Isikhan announced. Employer support was increased to TRY 1,000, while the updated gross monthly wage reached TRY 26,005, the minister said. The revised minimum wage led to an overall employer cost of TRY 30,621 per employee, factoring in social security and unemployment insurance premiums, the local media reported. The net figure remained exempt from income and stamp taxes.

The increase aligned with both our own and the market's projections. S&P Global Ratings applied a year-end inflation forecast of 44% alongside the official target of 17% to arrive at a projected 30% rise in the minimum wage, noting that linking wage growth too closely to past inflation might impede disinflation. Meanwhile, senior policymakers, including President Erdogan, reaffirmed their commitment to raising incomes without unsettling the broader economic programme. Erdogan cited forthcoming wage adjustments for public employees and retirees, stressing the need to safeguard growth while alleviating heightened living costs. Vice President Cevdet Yilmaz highlighted that higher salaries will also bolster public revenue, making a balanced increase crucial for sustaining production capacity in small enterprises and vulnerable regions. FinMin Mehmet Simsek underscored that wage adjustments were likely to surpass inflation in 2025, building on the precedent set by recent pay raises.

83% of workers in Turkey earned salaries above or below 50% of the minimum wage, according to the minimum wage survey prepared by the Confederation of Revolutionary Trade Unions (DISK-AR). Although approximately 7mn individuals officially fell under minimum-wage employment, the prevalence of near-minimum wages made the figure effectively broader. 1.6mn workers earned a monthly salary of TRY 4,500 or less, while 7.6mn employees did not reach the minimum wage threshold, it stated. When employees paid 10% above the minimum wage were included, 8.5mn workers were found to be living at or near the basic wage level.

Chainsaw: after cutting 36.000 jobs in 2024, the government freezes the size of the national public sector workforce (La Nación)

Milei begins the election year with an advantage over the Kirchnerists (Clarin)

New year, new RIGI project: Luis Caputo confirmed another investment for USD 255mn (Clarin)

Javier Milei begins 2025 with trips to Donald Trump's inauguration and the Davos Forum (Ámbito)

Question:

What's driving the increase in loans and deposits that subtract from net FX reserves?

The question was asked in relation to the following story: Net FX reserves confirmed at negative USD 7.3bn in October

Answer:

The increase in the BCRA's liabilities labeled as "loans and deposits" had three main drivers:

1) Private sector deposits held at the BCRA rise due to the capital repatriation / tax amnesty program.

2) Government deposits rise because the Treasury is buying to cover future debt payments.

3) The BCRA's obligations falling within one year also rise due to the schedule of repayment on its Bopreal bonds, which had three series issued early in 2024.

• Net FX reserves decline due to Treasury USD purchases and approaching Bopreal bond obligations

The BCRA's net FX reserves declined by USD 2.6bn to a negative USD 9.6bn in November, reflecting an increase in government deposits and in obligations tied to the Bopreal bonds, according to data published by the central bank. We remind that this a net FX reserves measurement that follows the IMF's standards for data dissemination, which takes gross FX reserves and subtracts FX obligations due or callable within one year.

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The BCRA had two good months in the FX market in October and November, buying a combined USD 3.2bn in the spot market. This performance was helped by a couple of unique and temporary factors. First, a big differential between interest rates on local currency instruments and the expected returns on FX-denominated assets, which enticed exporters to sell stocks or goods in advance, while discouraging import settlements. Second, a successful capital repatriation program that boosted FX deposits in the financial system, which led to an increase in FX lending activity that helped grow USD supply in the market.

Net FX reserves declined despite the above because the government and the BCRA are cancelling FX debt. In the government's case, the Treasury's FX deposits at the BCRA grew by USD 2.3bn to USD 3.6bn in November, and this will be used in January to cover the next round of interest and amortization on the sovereign's global bonds.

The other element subtracting from net FX reserves was the schedule of payments on the BCRA's Bopreal bonds, which are redeemed in US dollars. The first USD 1.6bn amortization of the 2026 Bopreal bond falls on November 2025, so in the IMF's net FX reserves methodology it started to count against reserves due to the payment being less than 12 months away.

Overall, the BCRA ended up buying about USD 19bn in the spot market in 2024, but net FX reserves barely moved because the money was used to cancel FX debts of both the sovereign and the central bank. Government officials believe net FX reserves can spike in 2025 because new money from the IMF, possible repos from international banks, and the possibility that the sovereign returns to bond markets will cover FX obligations moving forward. Our concern is that the strong exchange rate and the necessary elimination of FX controls will not allow the BCRA to repeat another year of USD 19bn in spot market purchases.

Lula signs law naming Galípolo as governor of the BCB until 2028 (Metrópoles)

Lula signs LDO but with vetoes related to parliamentary amendments and party funding (CNN Brasil)

Lula signs law on banks to raise BRL 16bn by 2025 [our story here] (Folha de São Paulo)

Lula signs decree raising minimum wage to BRL 1,518 (Agência Brasil)

STF Justice Dino releases part of parliamentary amendments, but criticizes 'apex of shambles' in budget (Carta Capital)

Former BCB Governor Campos Neto refuses invitation to serve on São Paulo's Finance Department (O Globo)

Banks revise down credit portfolio growth projection for 2025 (Valor Econômico)

• Seems to respond to threats by US President-elect Trump
• Should give a way out of a tariff threat by the US

The government continues to show off a tighter stance on international migration, announcing the detention of 475,000 thousand immigrants from October 1 to December 26, suggesting the Q4 capture closed on half a million immigrants. The data comes from a government report published during the holiday period. The focus was evidenced by Foreign Minister Juan Ramón de la Fuente, noting the number of migrants detained at the US-Mexico border fell 81% in mid-December y/y.

In the same political effort, Economy Minister Marcelo Ebrard announced the government confiscated some 3mn goods in recent raids, targeting products coming from Asia. Not all goods came from China; however, this seems linked to calls by Trump and Canadian authorities, accusing Mexico of being too lax in the arrival of goods from China. The accusations are more linked to the arrival of supplies later presented as Mexicans to benefit from the regional trade agreement; still, we see the announcement aimed at showing the govt's efforts vs counterfeiting overall from China.

Overall, this policy and its communication strategy are clearly linked to threats by US President Donald Trump, who vowed to impose a 25% tariff on Mexican goods if it doesn't do more to curve migration and fentanyl traffic. Indeed, we believe the government is giving the president-elect a way out from this protectionist threat; however, although we do not expect these tariffs to materialize, it's unclear how much domestic announcements will do to shape the perception of migration and drug trafficking in the US, and, thus, these efforts do not fully end the threat of a tariff war in the region.

• Measure will hurt agricultural activity, should increase imports

President Claudia Sheinbaum said she fully expects Congress will be banning planting genetically modified corn. This assures the prohibition, considering the strong position of the ruling bloc in Congress, in our view.

This measure should have a negative impact on the agricultural sector and may weaken the competitiveness of animal farming; however, considering much of the feed comes from abroad, the impact may not be grave overall. The prohibition seemingly promoted by President Sheinbaum does not include imports, walking back the strategy presented by ex-President Andrés López, surely in response to a trade panel ruling against Mexico.

Overall, we see this as another economically unsound policy promoted by the MORENA regime, based on a political calculation. This particular move hurts the business climate a bit, but should not have a massive impact, in our view.

2024 closes with 29,280 murders (Reforma)

MORENA's governors Will help Pres Sheinbaum to tackle migration in Mexico (Milenio)

Authorities suspend environmental contingency in the Mexico Valley (El Sol de México)

• Will back at least 20 reforms to secondary laws
• Does not include tax reforms in the proposed projects
• Most announced reforms seem unlikely to shake the market much, in our view

President Claudia Sheinbaum announced during the holiday period that she will be promoting new constitutional reforms and at least 20 reforms to secondary laws next year. These reforms are certain to advance swiftly, in our view, given the strong position in Congress of the MORENA regime.

The president's new reforms aren't likely to be as worrying as those passed in 2024, in our view, considering the massive impact on the institutional framework of those passed last year. Still, a few are set to have an impact on key industries, including construction, as the government eyes reforms to the INFONAVIT law (related to public housing) and to the public works law. Other reforms may impact the energy industry, including state-owned oil firm PEMEX and energy firm CFE; however, the reach of the reforms is not clear yet.

The president did not include any tax reforms among the announced projects. This is unsurprising, considering she insists there is no need for such reform at this point, despite opinions on the contrary by experts, including Finance Minister Rogelio Ramírez.

Overall, the reforms anticipated for 2025 are unlikely to shake the market much, in our view. Some might have a relevant impact on selected industries, which may help or hinder overall growth a bit; however, barring any surprising project coming out of the Sheinbaum administration, we expect domestic political noise to be less relevant this year than in 2024.

• Says magnitude of the cut will depend on the context
• Hawkish comment diverges from previous tone, increases chances of faster easing, to our surprise

The CB may cut its policy rate by 50bps in its February sitting, CB Deputy Governor Jonathan Heath said during the holiday period, as quoted by Reuters. The magnitude agreed on will depend on the context, he said.

Overall, this acknowledges the CB is looking to cut its policy rate again in is next sitting, as anticipated by the market; still, it's surprising to see Heath recognize the chance of faster easing, in our view, considering he is set to be the more hawkish board member at the turn of the year, with the departure of Deputy Governor Irene Espinosa. This increases the chances of a 50bps cut in the next sitting, as seemingly supported by Governor Victoria Rodríguez and Deputy Governor Omar Mejía. Still, further core disinflation and a stable financial market are necessary for this faster easing, despite the dovish position now seemingly assumed by the board, in our view.

• Despite surges of portfolio inflows, Egypt seems more resilient to global shocks than previously thought
• Foreign funds bought USD 17.0bn worth of debt notes through EGX in March-December, attracted by high nominal interest rates
• Foreign investors held USD 36bn worth of T-bills as of end-June, according to CBE data

Foreign non-Arab institutional investors bought EGP 403bn worth of T-bills and bonds through the local exchange (EGX) in December and sold EGP 340bn worth of notes, recording a net acquisition of EGP 62bn (USD 1.2bn) in the month, according to data from the local bourse. Meanwhile, the Arab funds were also net buyers, acquiring notes worth EGP 52bn, which meant the total foreign funds acquired a total of EGP 115bn (USD 2.3bn) worth of T-bills and bonds in the month. This is one of the strongest net inflows since the currency reform and should reflect Egypt's attractive high nominal interest rates, abating FX uncertainty, improved confidence and outlook, and the government's commitment to structural reforms. Further, Egypt's sovereign ratings were upgraded in December, which most certainly played an important role.

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It should be noted that the EGX launched secondary trading of T-bills relatively recently and the data is now lumped together (bonds + T-bills), with demand most likely geared almost entirely towards short-term notes.

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The total purchases of foreign investors (including foreign Arab funds) was EGP 814bn in March-December, thus resulting in a total FX inflow of USD 17.0bn through the EGX since the pound was floated. Separately, the foreign investors bought around USD 8bn worth of T-bills directly from the banks, according to our calculations. This sharp increase in portfolio inflows has made Egypt more vulnerable to capital outflows and rollover risks especially when the short-term nature of the debt instruments is considered. However, the relatively muted sell-offs from August and November suggest Egypt's financial market may be more resilient to global shocks than previously thought. This resilience could be attributed to the recent reforms, improved investor confidence, and relatively large FX reserves.

• Suez Canal revenues fell by 70% or USD 8bn due to insecurity in Red Sea
• Egypt received EUR 1bn tranche from EU, expects USD 1.2bn IMF tranche any day now

Egypt repaid USD 7bn in debt during November and December 2024, raising total repayments for the year to USD 38.7bn, PM Madbouly said during a cabinet meeting on Dec 26. Madbouly highlighted the significant challenges that Egypt faced last year - noting Suez Canal revenues plummeted by 70% or USD 8bn because of insecurity in the Red Sea - but reaffirmed the government's commitment to meeting both local and external liabilities. Looking ahead, the PM said that Egypt is well-prepared for its future obligations, with the burden for 2025 significantly reduced compared to last year. He expressed confidence in the nation's ability to maintain stability while pursuing economic growth. We note that Egypt has just received EUR 1bn tranche from the EU and is expecting a USD 1.2bn tranche any day now.

According to CBE projections made on June 30, the government is expected to pay USD 22.5bn in medium-term and long-term debt that is due in 2025 (including interest and principal payments), while another USD 17.1bn short-term debt will mature during the first half of the year. The short-term debt, however, includes USD and EUR T-bills that are routinely rolled over and possibly GCC deposits which will be either extended or converted into direct investments.

• Major FX reform from March has eliminated black FX market and encourages people to transfer money through official channels
• Remittances jump 45% y/y to USD 23.7bn in Jan-Oct

Remittance inflows rose to USD 2.9bn in October from USD 2.7bn inflow in September, but surged by 71% from October 2023, according to CBE. The CBE stopped publishing monthly remittance data in 2022 and the resumption of this series is welcomed news, because these inflows are a key category in the Current Account. The CBE said remittance inflows jumped by 45% y/y to USD 23.7bn in Jan-Oct and attributed the recovering personal transfers to the major currency reform from early March. We remind the CBE liberalized the pound, which eliminated the black FX market premium and thus encouraged people to use the official channels. Remittances are one of the key sources of FX for Egypt and the government said in early 2024 it was working to increase inflows by 10% each year to reach USD 53bn by 2030. Meanwhile, the CBE launched in December the instant inbound remittance network, which should encourage more personal transfers through the official bank channels.

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• MPC says current monetary stance remains appropriate until inflation slows visibly
• Inflation to slow in Q1 on favourable base effects and tight policy stance
• Global and regional insecurity, uncertainty around global trade pose risks to disinflation path
• GDP growth to strengthen in Q3 supported by non-oil manufacturing, construction, and trade; MPC expects further recovery in 2024/25
• Leading indicators for Q3 and Q4 suggest economic activity is gradually picking up

As expected, the MPC decided to keep the overnight deposit rate, the overnight lending rate, and the rate of the main operation unchanged at 27.25%, 28.25%, and 27.75%, respectively. The Committee also kept the discount rate unchanged at 27.75%. The MPC also decided to extend the inflation target horizons to Q4 2026 and Q4 2028 at 7% (+/- 2.0pps) and 5% (+/- 2.0pps) on average, respectively, in line with CBE's gradual advance towards implementing a fully-fledged inflation targeting regime.

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In the accompanying statement, the MPC said the gradual unwinding of food inflation along with the improvement of inflation expectations since the start of 2024 suggest that inflation remains on a downward trajectory, albeit disrupted by subsidy cuts. Favourable base effects, tight monetary stance, and sizeable FX inflows, which helped to stabilize the pound, have all contributed to reigning in inflationary pressures. Further, the MPC sees a significant slowdown in inflation during H1 2025 due to the tight monetary stance and favourable base effects. The MPC, however, noted that rising global and regional security risks and higher than anticipated pass-through of fiscal measures pose risks to disinflation path. While energy commodity prices have mostly moderated, commodity prices continue to be susceptible to supply shocks such as global trade disruptions and adverse weather conditions.

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On the domestic front, the MPC said it expects a further improvement in GDP growth during Q3, supported by non-oil manufacturing, construction, and trade and added that leading economic indicators point towards gradual pick-up in economic activity going forward. The disruptions in the Suez Canal have persisted, which together with supply line-disruptions, keep economic growth below potential. The MPC expects that economic growth will recover in 2024/25, with all forecasts pointing towards notable recovery as FX shortage are eliminated, manufacturing rebounds, FDI inflows pick up, and tourism inflows remain resilient. The MPC said that GDP growth should reach its full potential by mid-2026.

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In its final remarks, the MPC said the current monetary stance remains appropriate until a significant and sustained decline in inflation materializes. The MPC will continue to follow a data-driven approach to determine the duration of policy restrictiveness based on its assessment of the inflation outlook, dynamics of underlying inflation, and strength of monetary policy transmission. Upside risks to the forecasted disinflation path, include but are not limited to, an escalation of the current geopolitical tensions, unfavourable climate conditions, both domestically and globally, and a higher than anticipated pass-through of fiscal measures.

Egypt received EUR 1bn first tranche of EU EUR 7.4bn financing package (Ahram)

Egypt population surpassed 107mn by end of 2024 (Ahram)

Egypt overall budget deficit declines by EGP 92bn in July-November: Finance ministry (Ahram)

Egypt private investments grow by 30% in Q1 FY24/25 (Ahram)

Egypt real GDP growth recovers to 3.5% in Q1 FY24/25 (Ahram)

Egypt central bank sells USD 840mn in USD-denominated T-bills (Ahram)

Egypt accomplished 98.5% of its FY23/24 investment target: Planning minister (Ahram)

Egypt launches 1st phase of EGP 30bn initiative to support priority industrial sectors (Ahram)

Suez Canal revenues plummet to USD 4bn in 2024 amid Red Sea tensions: SCA chairman (Ahram)

Egypt to limit car imports to 1 per importer over next 5 years starting Friday (Ahram)

PM: Egypt's Debt Dues for 2025 Much Less than 2024 (Sada Elbalad)

CBE Withdraws Liquidity worth EGP 639bn through Open Market (Sada Elbalad)

Cabinet approves key international agreements with Japan, Serbia (Egypt Today)

Egypt awards nine golden licenses to boost strategic investments (Egypt Today)

USD 5.5bn record growth in Egypt's food industry exports for 2024 (Egypt Today)

Investment Min. reveals project to establish industrial complex for railway industries in Egypt (Egypt Today)

ACWA Power secures USD 702mn for 1.1GW Egyptian wind farm (Egypt Today)

Cabinet: Foreign Direct Investments surged 11-fold during FY2023/2024 (Egypt Today)

• Improvement attributed to festive season
• Expansion driven by growth in new orders, output, and employment
• Purchase costs continued to rise rapidly
• Sentiment remains weak, but companies are more optimistic for 2025

The Stanbic IBTC Bank Nigeria PMI increased to 52.7 in December from 49.6 in November, recording the first expansion in six months. The solid improvement was driven by continued expansion in new orders (for second consecutive month) as well as renewed increases in output, purchases, and employment and was attributed to the festive season, which traditionally boosts the non-oil economy.

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The increase in new orders is one of the most notable developments as this is the fourth expansion in the past five months, and came at the strongest rate of increase since May. The respondents attributed the increase to improving client demand and rising customer numbers. The increase in new orders also led to a renewed expansion of business activity in December, ending a five month sequence of contraction. All four broad sectors signalled rising output at the end of 2024. Meanwhile, inflationary pressures have remained elevated and continue to be a major drag on consumer demand. Purchase costs continued to rise rapidly, driven by currency weakness and higher fuel and raw material prices. Transportation price pressures also contributed to an increase in staff costs. In response to rising input costs, output prices also saw further increases.

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The overall outlook for business activity improved slightly but was still at the third lowest level on record. A moderation in headline inflation is expected to support domestic demand, though high interest rates and currency depreciation will continue to challenge the non-oil sector.

New refineries: NNPCL may cut crude supply to Dangote plant (The Punch)

New withholding tax policy begins (The Punch)

Naira defies CBN's forex reforms, tumbled 41% in 2024 (The Punch)

Economists worry as FG breaks Jan-Dec budget cycle (The Punch)

FG plans credit guarantee company for Q2 (The Punch)

Nine banks rake in N4.8tn on loan charges (The Punch)

MDAs remitted N1.96tn through IPPIS in 2024 - Report (The Punch)

NGX All-Share Index soars by 283.45% since 2020 (The Punch)

FX pressure will reduce as Warri refinery resumes - Senator (The Punch)

Ministry inaugurates NGN 250bn real estate investment fund (The Punch)

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• CBN allotted NGN 332.5bn in total
• Subscriptions for 364-day bill reached NGN 607.8bn
• CBN reports a strong increase demand for longer-tenured securities

The CBN offered NGN 27.3bn worth of three-month T-bills at its regular auction held on December 27, eventually selling notes worth NGN 25.5bn, according to data on the CBN's website. The stop rate remained at 18% compared to the December 11 auction. The central bank also sold NGN 25.5bn worth of 182-day T-bills and NGN 281.5bn worth of 364-day bills. The CBN allocated NGN 332.5bn across the tenors. Total subscriptions reached NGN 663.2bn across the three tenors, lower than NGN 907.9bn subscription at the previous auction. The auction results show a strong demand for long-dated bills. The breakdown indicates that 92% of the subscription was for the 364-day T-bills, despite a liquidity shortfall in the money market.

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In 2024, total subscription to T-bills surged to NGN 38.1tn, up from NGN 23.5tn in 2023, according to CBN's primary market data. This increase was driven by investors seeking risk-free instruments as a hedge against inflation. The CBN raised NGN 12.3tn from the T-bill market, exceeding its target of NGN 7.6tn. In response to inflationary pressures, the CBN raised interest rates during auctions, with the 91-day T-bill rate increasing from 7% in December 2023 to 18% in December 2024. Similarly, the rates for 182-day and 364-day bills also saw significant increases. Analysts at Cordros Research highlighted that the domestic fixed income market remained volatile in 2024, driven by factors such as the CBN's tight monetary policy to curb rising inflation, the repricing of instruments to attract foreign portfolio investments and increase real returns for local investors, and tight liquidity in the financial system. They also noted that domestic borrowings increased, partly due to the federal government's refinancing of the CBN's ways & means.

• Local funds remain main players on local bourse; foreign investment share is rising slowly
• Market capitalization hit an all-time high of NGN 61.9tn (USD 40bn)
• Banking sector recapitalization and reforms in the oil and exchange rate sectors contributed to a more attractive market

The Nigerian Stock Exchange All-Share Index (ASI) rose by 4.7% m/m as of end-December, following a 0.1% m/m increase in November, according to NGX data. The m/m increase was mostly driven by the oil and gas index (+13.8% vs +3.3% in November) and the consumer index (+7.4% vs +2.2% in November). All the other major sector indexes also rose on the month, including the banking index by 6.8%. Market capitalization (equities only) rose to an all-time high of NGN 61.9tn (USD 40bn) as of December 27 or about 23% of GDP. The CBN's macroeconomic policies, including the naira depreciation and liberalisation of exchange rates, were key drivers of this growth. Additionally, high-profile listings like Geregu Power Plc, Transcorp Power Plc, Aradel Holdings and BUA Foods have contributed to the significant rise in market capitalisation.

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Foreign investment rose particularly quickly in the first half of 2024, reflecting improved market sentiment and the liberalization of the FX rate. Foreign capital inflows steadily increased from 4% in mid-2023 to 16% by November 2024, further boosting the market's performance. Outflows have also surged, indicating a balancing act of capital inflow and outflow dynamics. While still dominant in the market, domestic investors have seen their relative share reduce as foreign investors increase their stake. The positive performance of the stock market has been further supported by the banking sector's recapitalization efforts, which have increased investor interest in banking stocks. Additionally, reforms in the oil sector and the exchange rate adjustments have also made Nigerian assets more attractive to foreign investors, leading to a more favourable market environment. Analysts expect the market to continue its upward trend, driven by year-end activities and positioning in strong stocks, suggesting further growth in the coming weeks.

Despite the strong performance in 2024, challenges remain in Nigeria's capital market. High transaction costs, information asymmetry and low liquidity continue to hinder optimal market efficiency. However, experts see potential in leveraging the equity market by listing national assets such as the NNPC, which could unlock liquidity and attract both domestic and foreign investment. In 2024, Nigeria's financial sector was influenced by a series of reforms designed to stabilize the economy, particularly amid rising inflation and the removal of fuel subsidies. However, these reforms also contributed to higher inflation, which reduced consumer purchasing power and increased costs for businesses. Looking ahead, the CBN is expected to maintain a tight monetary stance to control inflation and stabilize the naira, which could further weigh on the equity market. Continued policy reforms are expected to further strengthen the market, increase investor confidence and sustain long-term growth, particularly in the oil and gas sectors.

• Rise is mostly due to growth in Bonny and Forcados
• Oil production remains below budget target (1.78mn bpd) and OPEC quota (1.5mn bpd)
• Government remains optimistic production levels will pick up in 2025
• In 2024, FG approved key transactions including Seplat Energy's acquisition of ExxonMobil's MPNU

Nigeria's crude oil production (excluding condensates) surged by 11.5% m/m to 1.49mn bpd in November following a marginal 0.7% m/m rise in October, according to the upstream oil sector regulator (NUPRC). While production rose across many categories, two major terminals/streams recorded the sharpest increase on the month - Bonny and Forcados. Meanwhile, according to OPEC's estimates based on secondary sources, Nigeria's crude oil production (excluding condensates) rose by 1% m/m to 1.42mn bpd in November following a rise of 0.8% m/m in October. Even with this growth, the country is still struggling to meet its budget target (1.78mn bpd for 2024) and OPEC output target (1.5mn bpd, crude only). Despite being Africa's largest oil producer, oil production continues to be limited by theft, vandalism and underinvestment in the Niger Delta. OPEC has extended Nigeria's oil production quota of 1.5mn barrels per day (bpd) to 2026, while the federal government is targeting crude oil production of 2.06mn bpd in the 2025 budget.

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In 2024, Nigeria's oil and gas sector saw major advancements, particularly the commencement of crude oil refining at the Dangote Refinery. The refinery began producing diesel and aviation fuel in January but faced challenges in securing crude feedstock. Disputes arose between the refinery, international oil companies (IOCs) and regulators, delaying operations. By September, the refinery started producing petrol and began exporting to other African countries. A new naira-for-crude agreement with the Nigerian National Petroleum Company (NNPC) helped stabilize supply, although pricing disputes with marketers persisted. The Port Harcourt refinery also marked a significant milestone by resuming operations after years of inactivity. The refinery began processing crude in November. Despite some public concerns about the blending process, the NNPC defended the method, emphasizing its importance in maintaining product quality. The year also saw the approval of divestment deals that had been pending for years. The federal government gave the green light to key transactions, including Seplat Energy's acquisition of ExxonMobil's MPNU, Oando's purchase of Eni's Nigerian Agip Oil Company, Equinor's sale of its Nigerian operations and Renaissance's acquisition of Shell Petroleum Development Company assets.

Crude spot prices - OPEC

The differentials for Bonny Light, Forcados and Qua Iboe crude against North Sea Dated decreased by USD 0.17, USD 0.25 and USD 0.12, respectively, resulting in premiums of USD 0.06/barrel, USD 1.06/barrel and USD 0.48/barrel. Cabinda's crude differential also declined m/m in November, dropping by USD 0.31 on average to a premium of USD 0.56/barrel against North Sea Dated.

• Demand for shorter-tenor bonds has fallen
• The stop rate on the longer-dated instrument remained at 22%

The federal government sold NGN 211.1bn worth of bonds of 5- and 7-year residual maturities, exceeding this month's target by 76%, according to the bond auction results released by the DMO. No bonds were allotted on a non-competitive basis. This is the fifth consecutive month in which allotment and demand exceed the target. The total subscriptions across all tenors amounted to NGN 278.8bn, lower than NGN 369.6bn recorded in the previous month. Despite declines in subscriptions and allotments, marginal rates remained stable. The stop rate for the 5-year bond increased slightly to 21.14%, compared to 21% in November. The stop rate for the 7-year bond remained at 22%. The drop in subscription and allotment volumes is likely due to seasonal liquidity constraints typically seen at the year's end.

Investor interest in long-term FGN Bonds has been robust throughout 2024, driving the high amounts raised in the auctions. The rise in marginal rates indicates investors' expectations for greater returns amid tighter monetary policies, presenting challenges for the government in managing its borrowing costs. There has been a notable shift in investor preferences toward higher-yielding, longer-tenor bonds, reflecting cautious market sentiment. The DMO has responded by reopening some bonds and steadily increasing interest rates to attract more investors, particularly in light of the country's double-digit inflation rate.

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In 2024, the total FGN bond allotment of NGN 5.84tn amounted to 101.4% of the DMO's offer of NGN 5.76tn throughout the year. We remind that the 2024 budget has a borrowing target of NGN 6tn. Early findings from analysts indicate that the FG may exceeded this target by 67% for the full year.