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Economic Research: Economic Outlook EMEA Emerging Markets Q4 2022: Juggling Inflation, Interest Rates, And Growth

(Editor's Note: The views expressed in this section are those of S&P Global Ratings' economics team. Although these views can help to inform the rating process, sovereign and other ratings are based on the decisions of ratings committees, exercising their analytical judgment in accordance with publicly available ratings criteria.)

Economic activity in several key emerging EMEA economies has visibly slowed, after a strong first quarter. We expect worsening geopolitical and financial conditions will prove a drag on growth through the rest of the year and into early 2023, particularly in emerging Europe. Some downside risks outlined in the previous forecast update (see "Economic Outlook EMEA Emerging Markets Q3 2002: Slower Growth Ahead Amid Mounting Risks," published on June 28, 2022) have materialized, notably including the disruption of energy flows from Russia to Europe following the shutdown of the Nord Stream 1 gas pipeline. Meanwhile, monetary tightening in advanced economies' is progressing at a faster than anticipated pace. Domestic demand is slowing across EMEA emerging economies as persistently high inflation erodes consumer purchasing power, financial conditions tighten, and the impetus from the post-pandemic re-opening fades. Foreign demand is cooling too as global growth prospects dim.

Policy responses to the macroeconomic headwinds will differ across EMEA emerging markets and influence the paths for growth and inflation in individual economies. In many of those markets, governments are providing energy subsidies to household and businesses, which could partly alleviate inflationary pressures but come with a fiscal cost. Central banks in the region are, meanwhile, plotting a difficult course between reducing inflation, anchoring inflation expectations, and protecting capital flows, while facing rising global interest rates on one hand, and the risk of a sharp slowdown in growth on the other.

There are some bright spots amid the generally challenging regional economic outlook. For energy exporters, such as Saudi Arabia, terms of trade remain very favorable, even though oil prices have come off their peaks. That is unlikely to change in 2023, when our assumptions include an average Brent crude oil price of $85 per barrel (bbl). Saudi Arabia is also set to benefit from its ongoing expansion in non-oil sectors, which should help offset an anticipated decline in oil production in 2023. Turkey is benefiting from a booming tourism season--likely to extend into winter--which has boosted growth, employment, and foreign currency revenues. And the South African government's decision to raise the licensing threshold for small-scale power generation projects to 100 MW suggests that private investment in the country's renewable energy sector is likely to receive a boost from 2023.

This forecasting round includes a major downward revision to GDP growth for Poland, in 2022 and 2023, and an upward revision for Turkey, in the same years (see tables 1 and 2). The one percentage point cut to our GDP growth forecast for Poland reflects the impact of higher inflation on consumer purchasing power and an economic downturn in the eurozone, which is the country's key trading partner. In Turkey, we raised our growth forecast for 2023 by more than one percentage point in anticipation of additional policy support ahead of parliamentary and presidential elections in 2023. Turkey does, however, face the growing risk of an abrupt adjustment to the current macroeconomic trajectory from a renewed bout of financial market volatility and exchange rate depreciation.

Table 1

GDP Growth Forecasts
(%) Annual growth rates
2020 2021 2022f 2023f 2024f 2025f
Poland (2.1) 5.8 4.0 1.2 3.2 2.8
Saudi Arabia (4.1) 3.2 7.5 2.9 2.7 2.0
South Africa (6.3) 4.9 2.0 1.6 1.7 1.7
Turkey 1.8 11.6 5.2 2.8 3.4 3.4
f--S&P Global Rating forecast. Source: S&P Global.

Table 2

Real GDP Changes From June Baseline
Percentage points
2022f 2023f 2024f
Poland (0.6) (0.9) 0.6
Saudi Arabia 0.1 (0.2) 0.1
South Africa (0.2) 0.1 (0.0)
Turkey 1.7 1.1 (0.0)
f--S&P Global Rating forecast. Source: S&P Global.

A Mixed Second Quarter For GDP And Signposts To Further Weakness

Second quarter growth outcomes varied across EM EMEA. Poland and South Africa registered a contraction in activity, while growth picked up in Turkey and remained strong in Saudi Arabia (see chart 1). Poland's GDP decline was larger than we anticipated, but followed a strong Q1, and partly reflects volatile investment and inventory dynamics over the prior two quarters. Polish consumption remained resilient, helped by ongoing government support to households, strong labor market, and a strong labor market. Poland's growth rate moderated in Q2, but was still above-trend at 4.7% for the year to the end of June.

Turkey's strong GDP growth in Q2 was driven by a surge in consumer spending and strong exports, both of goods and services such as tourism. Consumers are frontloading purchases, encouraged by very high inflation, unanchored inflation expectations, and deeply negative real interest rates. In South Africa, growth momentum in Q1 was thwarted in Q2 by floods in KwaZulu-Natal province (the country's second largest province by GDP), continued supply chain issues, and significant power supply interruptions. Saudi Arabia continues to post strong performance, supported by both the oil and non-oil sectors, and is on pace become the fastest growing economy in the G20 this year.

Chart 1


High-frequency indicators, which can provide more timely guidance, point to a weak near-term outlook in emerging Europe, with weaker external demand for goods and souring consumer sentiment seeming to play an important role. The S&P Global Ratings' manufacturing sector purchasing managers' index (PMI) in Poland and Turkey were both in contraction territory in Q3 (see chart 2). The new export orders PMI in Poland and Turkey fell below 50, passing the neutral threshold to indicate contraction. Consumer sentiment in Poland fell below the levels of April 2020 (the previous trough during pandemic-related lockdowns). By contrast, South Africa's manufacturing PMI bounced back strongly to 51.7, and Saudi Arabia's PMI continued to signal robust expansion.

Chart 2


A Global Slowdown Will Weigh On Exports, But Energy Prices Support Hydrocarbon Producers

EMEA emerging markets' trade prospects are weakening amid the global economic slowdown. Exporters of manufactured goods are likely to record subdued performance over the second half of the year and into 2023, while the outlook appears mixed for commodity-exporting countries, depending on the type of commodities they export.

We have trimmed further our 2023 GDP growth projections for key large economies. Emerging European economies are particularly exposed to a downturn in their advanced European neighbors (see "Emerging Market Economies Are Vulnerable To A Downturn In Europe," published on July 19, 2022). Poland's combined exports to the U.K. and the eurozone, its largest trading partner, account for 30% of GDP, and the share is even higher in Hungary and the Czech Republic (see Table 3). For Turkey, the figure stands at above 10% of GDP.

Table 3

Exports To Euro Zone And UK
(% of GDP) Raw material Intermediate goods Consumer goods Capital goods Total
Czech Republic 2.0 8.1 21.2 24.1 55.3
Slovak Republic 1.0 5.9 25.2 13.9 46.1
Hungary 2.2 6.1 15.8 21.0 45.1
Poland 2.0 5.4 14.0 8.5 29.9
Bulgaria 3.1 5.6 8.0 5.4 22.0
Romania 1.1 2.5 7.2 6.8 17.6
Turkey 0.6 2.4 5.2 2.5 10.6
South Africa 1.4 1.9 1.3 1.0 5.6
Note: Data as of 2021, except for South Africa, which corresponds to 2020. Source: WITS, Haver Analytics, S&P Global Ratings.

We believe that the eurozone is on the verge of a sharp growth slowdown, to the extent that we cannot rule out a full-blown recession. Even in the baseline scenario, our outlook is for barely any growth in the eurozone in 2023 (our most recent forecast is for 0.3% growth, down from 1.9%), and for a mild recession in Germany and Italy (see "Economic Outlook Eurozone Q4 2022: Crunch Time," published on Sept. 26, 2022). Those revised outlooks suggest weakening exports for Emerging European economies. What's more, the Polish manufacturing sector, which is closely integrated into the European manufacturing sector, is vulnerable to energy supply interruptions that could weigh on Germany-based industrial output.

We also now expect a shallow recession in the U.S. in the first half of 2023 (see "Economic Outlook U.S. Q4 2022: Teeter Totter," Sep. 26, 2022). In China, we expect muted growth in the second half of 2022, translating to 2.7% GDP growth for 2022, down from the previously projected 3.3% (see "Economic Outlook Asia-Pacific Q4 2022: Dealing With Higher Rates," Sep. 25, 2022).

Demand for commodities is also set to cool amid slowing global activity, though prices are likely to remain favorable for energy exporters benefiting from (actual and potential) supply disruptions to Russian energy exports. Saudi Arabia's cautious approach to oil production (including agreed output cuts by OPEC+, announced in early September) suggests that growth in oil production and exports are expected to slow due to weakening global economic activity , which is likely to persist into 2023. Under our assumptions of softer but still elevated oi prices, Saudi Arabia and other oil exporters will continue to enjoy strong exports revenues in 2023. Economies with significant exports flows to energy producers, such as Turkey, may in turn benefit from increased demand that could partially offset weaker demand from Europe.

The energy crisis in Europe has also stoked demand, and prices, for coal, benefiting coal producers such as South Africa. Assuming that shortages in natural gas continue into 2023, and the EU ban on Russian coal imports remains in place, demand for South African coal could remain strong. This could mitigate some of the economic impact of ongoing price declines across iron ore and platinum group metal markets (as tracked by the S&P GSCI Industrial Metals price index, which peaked in March but remains slightly above its pre-pandemic highs).

Chart 3


Slowing Growth And Persistently High Inflation Pose A Monetary Policy Dilemma

Annual headline inflation in emerging Europe continued to trend higher in August, reaching 14.8% in Poland (as measured by the EU harmonised indices of consumer prices (HICP)), and 80.2% in Turkey (see chart 4 and chart 5). We note the emergence of certain factors that could offset some inflationary pressure, including: a slight moderation of energy inflation due to softer international oil prices and, in some cases, energy price caps for consumers; easing of supply chain pressures, reflected in container shipping costs falling from their 2021 peaks, and an improvement in PMIs relating to supplier delivery times. International food prices have also eased, with wheat and corn prices well off their May peaks, even including a recent uptick. Domestic food prices dynamics have varied, with food price inflation rising in Poland in August, but easing in Turkey.

However, core inflation remains elevated and well above the central banks' targets in emerging European economies. This is in part because past energy price increases are still spilling into core items, but also because of the broad nature of price pressures. By contrast, in South Africa, core inflation is close to the mid-point of SARB's 3%-6% target range (see chart 6).

Chart 4


Chart 5


Chart 6


Upside risks to our energy inflation outlook remain significant, in particular in Central and Eastern European (CEE) economies that have significant exposure to very high and volatile European gas prices. Gas dependency varies across CEE (see chart 7). In Hungary, gas accounts for a third of energy supply, and it is close to 30% in Turkey too, while coal dominates the energy mix in Poland.

Chart 7


Many Eastern European economies have, until recently, relied heavily on gas imports from Russia, which represented 15% to 40% of total energy consumption in the region (see chart 8). Yet, several CEE economies have diversified their gas supplies away from Russia since 2020, the last period for which data is available, which may mitigate the risk of supply disruptions, however they remain exposed to the higher cost of gas.

Chart 8


Energy subsidies can partly alleviate inflationary pressures, but they come at a fiscal cost. We expect inflation in Poland to peak in Q1 2023, easing only gradually after that and remaining in double-digit figures in 2023. In Turkey, we expect inflation to remain very high, against a backdrop of deeply negative interest rates and de-anchored inflation expectations. In South Africa, we have increased our consumer price index (CPI) inflation forecast to over 6% on a year-over-year basis until mid-2023. That is above the upper threshold of the central bank's target, and we expect only a gradual decline over the following several quarters.

Many EMEA central banks are facing a dilemma, caught between growth prospects that have generally worsened and inflation that remains uncomfortably high. That has left them seeking to balance the need to curb inflation and inflation expectations, and prevent a sharp slowdown in activity. Adding to the challenge, emerging market central banks have to be mindful of protecting capital flows that are under pressure from rising interest rates in advanced economies, which could make emerging market assets relatively less attractive for cross-border investors. The U.S. Federal Reserve has become decidedly more hawkish since June and we now pencil in a federal funds rate of 4%-4.25% in the first quarter of 2023, suggesting a much faster pace of rate hikes than previously forecast and a terminal level that is 50 basis points (bps) higher than envisioned just three months ago. Many other major central banks, including the ECB have also accelerated monetary tightening.

We maintain our expectation that Poland's central bank will raise its key rate to 7.5% by the end of 2022, before starting to lower rates in the second half of 2023--once inflation is firmly on the downward path.

We also now expect the South African Reserve Bank will raise its key policy rate to 6.75% by the end of the year (versus our previous forecast of 5.5%) and further to 7% by the first quarter of next year. In Saudi Arabia we expect additional monetary policy tightening in lockstep with rate hikes by the Federal Reserve.

Turkey's central bank lowered its policy rate by 200 bps to 12% in the third quarter, pushing real interest rates even further into negative territory. At this point, there are no signs of a monetary policy reset, and our baseline assumptions is for the policy rate to remain at 12% this year and next, with a high probability of further cuts before next year elections.

Conflict, Uncertain Energy Markets, And Persistent Inflation Threaten Our Baseline Scenario

Downside risks to our baseline growth forecast prevail, with the sources unchanged from the last quarter. Recent events seem to confirm our view that the Russia-Ukraine conflict is more likely to drag on and escalate than deescalate or end early. The same goes for the economic standoff between Russia and the West. Emerging Europe is particularly exposed to those events via trade, energy supply, and confidence channels. A further five Middle East and North Africa (MENA) countries-- Egypt, Jordan, Lebanon, Morocco, and Tunisia--are vulnerable to economic spillovers related to rising food prices, rising energy prices, and food supply disruptions. This is due to their dependence on imported food or energy (or both), and in particular the sourcing of much of their cereal supply from Russia and Ukraine (see "Food Price Shock Reverberates Through MENA Economies," published May 26, 2022).

A hard downside scenario would involve a trade rupture between Russia and Europe, which would center on oil and gas but also take in a host of industrial commodities used as inputs in the German industrial complex. The shocks of such a scenario will reverberate beyond Europe.

Further risk comes from the prospect of persistently high domestic and global inflation (linked to continuing pressures on energy and food prices, but also more sticky core inflation). That could, in turn, prompt central banks in the EMEA region to hike rates more than we currently expect, raising the risk of a hard landing and a larger than expected hit to output and employment.


We have reduced our growth expectations for Poland, revising our real GDP growth forecast to 4.0% for 2022 and 1.2% for 2023, down from 4.5% and 2.1%, respectively. This reflects a larger than expected contraction in Q2, increasing headwinds for private consumption from higher inflation, declining confidence amid worsening geopolitical conditions, and an expected downturn in the eurozone, which is Poland's largest trading partner. Nevertheless, we expect that expansionary fiscal policy, an influx of people from Ukraine, and various government initiatives (such as minimum a wage increase) will support domestic consumption in 2023.

The economy contracted by 2.1% in Q2, which was more than we had anticipated. The result notably followed a strong Q1, with the swing partly reflecting the volatility of fixed investment and inventory dynamics. Consumer spending proved resilient to external shocks, helped by ongoing government support, a strong labor market, and the influx of people from Ukraine. On an annual basis, the Polish economy grew at an above-trend 4.7% in the second quarter. Softer recent economic indicators point to a weaker third quarter. S&P Global Ratings' Poland Manufacturing PMI for August was at 40.9, tallying a fourth month in a row below 50 and its lowest value since the COVID-19 outbreak. Consumer sentiment has also been trending down since March. Overall, we do not forecast a sharp decline in domestic demand, but rather a gradual slowdown over the coming quarters. High-frequency hard economic data has proven varied, with industrial production notably rebounding in August, after contracting for several months.

We now expect disbursement of the EU's Recovery and Resilience Facility (RRF) funds will be postponed to late next year as a consequence of ongoing disagreements between Poland and the European Commission, relating to the Polish judicial system. That is unlikely to substantially weigh on growth since the government is planning to prefinance investment projects related to the RRF. We also note that larger EU transfers to Poland (including funds from the seven-year Multiannual Financial Framework) are not at risk of disruption.

We have revised our inflation forecast to 13.3% for 2022 and 11.5% for 2023, up from 12% and 10%, respectively. The revision considers elevated global inflationary pressures and the latest inflation numbers, which surprised on the upside. Poland is less exposed to energy price shocks than many of its CEE peers, as it is less dependent on gas in its energy supply mix. Nevertheless, global developments in commodity markets are adding to domestic inflationary pressures, and the labour market remains tight, despite strong inflows of people from Ukraine. On a positive note, annual energy inflation has been falling since the end of Q2, though core inflation remains elevated, indicating that the current inflationary environment may prove more persistent than previously expected.

The government is implementing measures that should alleviate some inflationary pressures. These include a recently announced energy price cap and an already implemented reduction in value added tax (VAT) on food and energy, among other items, which should be in place at least until end of this year. Nevertheless, we see inflationary risks on the upside due to the further disruption to European energy markets and expansionary fiscal policy. Considering the challenging inflationary environment, we expect the National Bank of Poland (NBP) to continue with rate hikes in the near term.

Risks to our outlook include the escalation of the Russia-Ukraine conflict and further disruption to European energy supplies, which could affect Poland directly or indirectly-- including by ushering in a full-blown eurozone recession. These risks could contribute to tighter financing conditions and exchange rate pressures later this year. We also remain wary of significant delays or reductions in EU transfers to Poland, which could lead to lower than anticipated public investment and negatively affect our outlook for private investment

Table 4

Poland Economic Forecast Summary
2020 2021 2022f 2023f 2024f 2025f
GDP (%) (2.1) 5.8 4.0 1.2 3.2 2.8
Inflation (annual average, %) 3.7 5.2 13.3 11.7 4.4 2.5
Policy rate (% end-year) 0.10 1.75 7.50 7.00 5.50 3.50
Unemployment rate (%) 3.2 3.4 3.2 3.0 2.9 2.8
Exchange rate versus $ (year average) 3.90 3.86 4.50 4.60 4.30 4.10
Exchange rate versus $ (end-year) 3.78 4.04 4.70 4.50 4.20 4.00
f--S&P Global Ratings' forecast. Source: S&P Global.

Saudi Arabia

The Saudi economy enjoyed a robust first half of the year, that put it on pace to become the fastest growing economy in the G-20 in 2022. We forecast Saudi Arabia's real GDP will grow by a robust 7.5% in 2022 (up from our previous forecast of 7.4%), before leveling off at an average 2.5% per year over 2023-2025 (down from 2.7%). This solid performance reflects the country's emergence from the pandemic, high international oil prices, increased oil production, and strong growth in the non-oil sector.

The second quarter saw the economy expand 2.2% on the previous quarter. That robust quarterly pace helped push real GDP growth to 11% year on year in first-half of 2022, its highest rate in over a decade. In the second quarter, total fixed investment surged by 28.2% year on year and 11.7% quarter on quarter, as both private and public sector investment drove those figures to their highest mark in more than a decade. By sector, both the oil and non-oil sectors performed strongly, growing by 4.5% quarter on quarter, which translates into year on year growth of 22.9% and 8.2%, respectively--the fastest pace of oil GDP growth since the early 1990s.

More recent data remains supportive of continued strong growth in the third quarter. Point of sale transactions grew at their fastest pace this year in September and S&P Global Ratings' Saudi Arabia Purchasing Managers' Index (PMI) hit an 11-month high in August, both of which underlines the robust performance of Saudi Arabia's non-oil, private sector economy. A more cautious approach on oil production announced by OPEC+ in early September (when it agreed to cut production targets from October by 100,000 barrels per day), will temper the upside to growth for the rest of 2022. OPEC+'s caution also points to the possibility of a further slowing of oil sector growth, which is likely to persist into 2023, given the weak global economic backdrop. In contrast, growth in the non-oil sector is likely to remain strong amid looser fiscal policy and a falling unemployment rate.

Headline consumer price index (CPI) inflation ticked up 30 bps to 3% year on year in August, largely due to stronger inflation in food, which reached its highest level since July 2021. Saudi Inflation was low in the first half of the year and remains much lower than in many other parts of the world.

The Saudi Central Bank (SAMA) raised its key policy rate by 75 bps to 3% in July, following the U.S. Federal Reserve's 75 bps hike. With the Federal Reserve poised to implement further rate hikes in the coming months, we expect Saudi monetary policy will tighten in lockstep. The government's cap on local fuel prices has helped put a lid on energy inflation, while inflation on non-energy items has also been relatively well contained by both a stronger U.S. dollar (to which the Saudi Riyal is pegged) and tighter monetary policy.

We think that the headline inflation rate is close to its peak, on a quarter on quarter sequential basis, and will slow over the fourth quarter and into 2023. On a year on year basis this translates into inflation peaking in the first quarter of 2023, then falling to about 2% by end-2023. The government's cap on local fuel prices should continue to contain energy inflation, even in the event that global prices rise again. Supply bottlenecks and rising demand could push inflation higher, while a possible cut to the VAT rate could ease inflationary pressure.

Table 6

Saudi Arabia Economic Forecast Summary
2020 2021 2022f 2023f 2024f 2025f
GDP (%) (4.1) 3.2 7.5 2.9 2.7 2.0
Inflation (annual average, %) 3.4 3.1 2.5 2.7 1.8 1.9
Policy rate (% end-year) 1.00 1.00 4.50 4.50 3.50 3.50
Unemployment rate (%) 7.7 6.6 5.9 5.2 5.3 5.6
Exchange rate versus $ (year average) 3.75 3.75 3.75 3.75 3.75 3.75
Exchange rate versus $ (end-year) 3.75 3.75 3.75 3.75 3.75 3.75
f--S&P Global Ratings' forecast. Source: S&P Global.

South Africa

It was a tale of two quarters in the first half of 2022, as South Africa's GDP briefly rose above the pre-COVID-19 pandemic level in Q1, only to fall behind that recovery milestone in Q2. We have revised down South Africa's real GDP growth outlook to 2.0% for 2022, from 2.2%. For 2023, we forecast real GDP growth of 1.6%.

The lifting of pandemic-related restrictions put the wind in the sails of the manufacturing and service sectors in the first quarter of the year when they expanded 1.7% quarter-over-quarter,. That momentum collapsed in the second quarter, when output contracted 0.7%, halted by the floods in KwaZulu-Natal province (South Africa's second largest province by GDP), continued supply chain issues, and frequent power interruptions (due to load-shedding). The weakness affected all subcomponents of GDP, with net exports proving a particular drag, as import volumes vastly outpaced exports. Seven of the ten broad industry sectors ended the quarter in the red--including agriculture, manufacturing, construction, and mining.

Recent data relating to activity in the third quarter offers renewed hope of growth. In August, S&P Global Ratings' manufacturing PMI bounced back strongly to 51.7 (where anything over 50 denotes expansion), while domestic vehicle sales remained buoyant. Residential building activity appears to be faltering, though planning for commercial building is livelier, according to the FNB/BER Building Confidence Index. Retail and wholesale confidence proved surprisingly resilient, despite high inflation and rising interest rates weighing on consumers' disposable income. Consumer confidence edged higher the third quarter, but remains well below the historical average.. The potential for power outages due to load-shedding, which should prove more sporadic over the third quarter, and the risk of more outages over summer, makes us wary of penciling a sharper recovery in the second half of 2022.

South Africa's growth prospects for the next two years appear limited by external headwinds, stronger inflation, and higher interest rates. The gloomier global growth outlook is putting downward pressure on iron ore and platinum group prices (the S&P GSCI Industrial Metals price index peaked in March, but remains above the pre-pandemic highs). Still, we expect exports to perform relatively well over the year led by coal, in both volume and total value terms. Europe's surging demand for coal might boost exports further, but is likely to run into transport capacity constraints.

We have increased our CPI inflation forecast to over 6%, on a year-over-year basis until mid-2023. That is above the upper bound of the South African Reserve Bank's (SARB) target and we expect only a gradual decline over the following several quarters. Core inflation is close to the mid-point of SARB's 3%-6% target range , and should stay within that range in the coming months. Despite the outlook for core inflation, we now expect SARB to raise the key policy rate to 6.75% by the end of this year, up from our previous forecast of 5.5%, and then further to 7% by the first quarter of next year, prompted by rising inflation expectations, depreciation pressures on the rand, and an accelerated cycle of monetary policy tightening by the U.S. Federal Reserve.

As headline inflation starts to decline and falls below the upper bound of the central bank's target (i.e., below 6%), and assuming core inflation remains under control, we expect SARB to begin cutting interest rates, though gradually and with a close eye on the Federal Reserve's activity.

Table 7

South Africa Economic Forecast Summary
2020 2021 2022f 2023f 2024f 2025f
GDP (%) (6.3) 4.9 2.0 1.6 1.7 1.7
Inflation (annual average, %) 3.3 4.6 6.9 6.7 4.7 4.4
Policy rate (% end-year) 3.50 3.75 6.75 6.50 6.00 5.75
Unemployment rate (%) 29.2 34.3 35.9 34.6 34.3 34.1
Exchange rate versus $ (year average) 16.46 14.79 16.19 17.04 17.27 17.42
Exchange rate versus $ (end-year) 14.60 15.89 17.03 17.19 17.41 17.54
f--S&P Global Ratings' forecast. Source: S&P Global.


We have increased our GDP growth forecast for Turkey to 5.2% in 2022, from 3.5%. The revision reflects stronger than expected growth in Q2, a booming tourism season that is likely to extend into winter, and more expansionary macroeconomic policies. Our expectation of additional policy support, ahead of parliamentary and presidential elections mid-2023, further prompted us to raise Turkey's 2023 GDP growth forecast to 2.8%, from 1.7%.

Our expectation that Turkish economic activity would moderate in Q2 did not materialize, with quarterly GDP growth instead accelerating to 2.1%, from a weaker than expected 0.7% in Q1. That left the annual real GDP growth rate running at above 7%. Consumption and exports both expanded strongly, up 4% on the previous quarter, pushing their annual growth rates to 22% and 16%, respectively. This reflects households' frontloading of purchases in response to very high inflation, unanchored inflation expectations, and real interest rates that plunged even deeper into negative territory. We expect private consumption to weaken significantly from elevated levels, as the hit to real income and consumer confidence puts the breaks on consumer spending, although additional policy support may help prevent a sharp drop. Fixed investment contracted in Q2, and the outlook for capital spending is weak due to uncertainties about domestic policies, the international economic landscape, and geopolitical conditions. Goods exports have remained resilient, so far, but are facing headwinds from a downturn in developed European economies, which are the largest export destination for Turkey. Additional demand from energy exporting countries may partially offset slowing demand from Europe.

Inflation reached 80% year-over-year in August, and we expect it to remain very high because of expansionary policies and de-anchored inflation expectations. Planned increases in regulated gas and electricity prices in September will add to already strong inflationary pressures and push the annual CPI number to around 90% in October-November. Beyond then, we project annual inflation will decline gradually, due to the base effect and softer energy prices, to a still very high average of 40% in 2023. Turkey's central bank, meanwhile, lowered the policy rate by 200 bps over the third quarter, to 12% in September, pushing real interest rates even further into negative territory. The bank is also using a growing set of macroprudential measures to redirect credit to priority sectors and curb credit growth in other sectors. At the moment, we see no signs of a monetary policy reset, and our baseline assumption is that the policy rate will remain at 12% this year and next, with a high probability of further cuts before elections in 2023.

A booming tourism season has boosted growth, employment, and foreign currency revenues. The number of foreign visitors over first seven months of 2022 was near pre-pandemic levels (with the first seven months just 7% below the level over January-July 2019). Arrivals from Europe were 2.6 times higher than in January-July 2021, and arrivals from Russia rose 30% over the same period. Bookings remain strong after the summer season, suggesting that international tourism will continue to support Turkey's economy over the coming months. The outlook for 2023 is more uncertain as pressure on European household's real income and geopolitical developments may negatively affect the flow of tourists from Europe and Russia. Increased geographical diversification of international arrivals suggests that the tourist sector is becoming more resilient to visitor fluctuations from particular regions.

The risk of another bout of exchange rate depreciation and financial market volatility remain high amid rampant inflation, low net foreign exchange reserves, and deeply negative real interest rates. Should external or domestic pressures intensify, this may eventually prompt a policy reset. We acknowledge significant uncertainty surrounding economic policies and the macroeconomic trajectory in the post-election period.

Table 8

Turkey Economic Forecast Summary
2020 2021 2022f 2023f 2024f 2025f
GDP (%) 1.8 11.6 5.2 2.8 3.4 3.4
Inflation (annual average, %) 12.3 19.6 74.0 40.1 18.0 12.0
Policy rate (% end-year) 17.00 14.00 12.00 12.00 10.00 9.50
Unemployment rate (%) 13.2 12.0 11.2 11.5 10.4 10.2
Exchange rate versus $ (year average) 7.02 8.86 16.90 21.75 23.00 23.00
Exchange rate versus $ (end-year) 7.86 11.14 20.50 23.00 23.00 23.00
f--S&P Global Ratings' forecast. Source: S&P Global.

Related Research

Economic Outlook Eurozone Q4 2022: Crunch Time, Sep. 26, 2022

Economic Outlook Asia-Pacific Q4 2022: Dealing With Higher Rates, Sep. 25, 2022

Economic Outlook U.S. Q4 2022: Teeter Totter, Sep. 26, 2022

Emerging Markets Monthly Highlights: Growth Is Decelerating, Sep. 14, 2022

Emerging Market Economies Are Vulnerable To A Downturn In Europe, Jul. 19, 2022

Economic Outlook EMEA Emerging Markets Q3 2022: Slower Growth Ahead Amid Mounting Risks, June 28, 2022Food Price Shock Reverberates Through MENA Economies, May 26, 2022

This report does not constitute a rating action.

Lead Economist:Tatiana Lysenko, Paris + 33 14 420 6748;
Economist:Valerijs Rezvijs, London (44) 79-2965-1386;
Chief Economist, Emerging Markets:Satyam Panday, San Francisco + 1 (212) 438 6009;
Research Contributor:Prarthana Verma, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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