A pregnant pause
Turkish politics is a rich vein of gold that keeps political analysts entertained and well-paid. At the eve of July, a time when centralized high school and college entrance exams are finally out of the way, which means families with children will head South for a well-deserved vacation, the cauldron is boiling hot. Yet, there is little on the radar that should change our opinions expressed ad infinitum in these pages or would make the world business and investor community sit up and take notice, which, by the way, is more or less the case with the economy, as well. (Hence the title, “A Pregnant Pause”).
In an unusually brief politics section, we cover events that should shape Turkish politics and diplomacy in the fall, admitting that Turkey’s political risk premium is very unlikely to increase in July/August.
On COVID-19, new cases have stabilized around 1.5K during the week, as President Erdogan expressed concern. We assert that even though no lockdowns are expected, rising negative coverage of the epidemic could suppress social mobility and consumption, and deter UK and EU from adding Turkey to the safe list for their tourists.
Despite Egypt’s threats and some salutary military action by pro-Russian mercenaries, we don’t expect all-out war between Turkey and its rivals. More broadly on foreign policy, sensing the danger of a Biden presidency, Erdogan would likely show some restraint in diplomacy and his relations with Russia.
While Erdogan does try his best to infuriate and antagonize new constituencies by the day, the prospect of significant social unrest is low. Incidentally, there is news of a Cabinet change by mid-July, but it is unlikely to involve key ministers or signal substantive policy changes.
Our thoughts on the macroeconomic state of affairs remain broadly unchanged from the forecast/quarterly report that we published in early May. So, in an equally brief section, we provide a quick update of sorts on a few topics.
Regarding growth, economic activity indicators are rebounding, which is good news, but calling this a “V-shaped” recovery is entirely premature, and misses the point, in our view.
Credit is going rampant, but Ankara wants more of it, and seems infuriated that private banks are not playing along. But the true constraint is lack of external funding, which Ankara has so far substituted with monetization, but this is a dynamic that cannot possibly end well, simply because reserves are low and inflation is edging up from an already elevated level.
The economics author doesn’t anticipate an imminent balance of payments “event” because loan amortizations are light during July-September and gross reserves are still around $90 billion, but the clock is certainly ticking. Call him naïve, but he remains deeply befuddled as to what Ankara’s endgame is here, especially considering the fact that the year 2023 feels like a hell of a long time from now.
Now read on...
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