A make-it-or-break-it year
Let’s start with a caveat. In our almost two decades of jointly covering Turkey as the Global Source Partners Turkey team, we’ve never written a quarterly/forecast report amid this sort of uncertainty. As a compromise of sorts, since the key questions in most of our readers’ minds focus on the very near term, we’ve decided, in this uncharacteristically brief report, to offer our thoughts on the most imminent issues that are facing us, including the frequently asked questions, like the risk of a potential BOP crisis and/or a depositor panic.
The market reaction to the abrupt and overnight sacking of CBRT Governor Naci Agbal, who had placed things on the right path, restoring some of the Bank’s tarnished credibility particularly in the eyes of foreign investors, has been quite fierce. Things calmed a bit in the past few days, thanks, in part, to relatively orthodox messages of the new Governor, Mr. Sahap Kavcioglu, but the TL weakened by around 10% against the dollar since March 19, the Friday before Mr. Agbal’s dismissal, while the country risk premium surged by more than 150 bps, to around 470 bps.
Aside from market mayhem, Ankara’s problems abound. A new COVID wave, as we’ve been fearing all along, has struck with case numbers running at over 40K, resulting in a new set of lockdowns; the US/EU sanction threats continue, and AKP-MHP alliance appears to be struggling in the polls, having slipped to visibly below the 50% mark, including undecideds.
What, then, are the immediate prospects like? We see three possible scenarios for the next 3-6 months, the odds of which differ depending on which one of the authors you speak to. The first one, which may be dubbed the “pragmatic Erdogan” scenario, is the politics author’s favorite, and assumes the President capitulating under severe pressure, accepting, ironically and paradoxically, another round of rate hikes, and starting a rapprochement with the US/EU, with a view to removing the sanctions risk off the table.
The second scenario, which we call the “early elections scenario”, with elections to be announced sometime in the next 2-3 months and held later this year, is also quite likely, but more so according to the economics author, because it would offer one way out of the current quagmire to the President in the least politically costly way. This scenario entails boosting the economy through lower rates and more credit very soon, as well as stepped up budgetary spending, while trying to contain the adverse impact on the lira through reserve sales and heavy-handed moral suasion.
A third scenario would entail neither early elections nor capitulation, leading to unprecedented volatility and have devastating consequences for the country – one that we feel is almost pointless to expand on at the moment.
Please note that there will be no Weekly Tracker this Sunday.
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