A race against time
Turkey’s daily corona cases declined to under 3K for the first time in April on Saturday, which gives support to President Erdogan’s plans to lift many of the restrictions of movement on industry and people. Yet, there are strong reasons to believe that official data doesn’t capture whole reality on the field. Thus, Erdogan may be taking a huge risk by premature normalization of the economy.
He is probably forced to do so because of the soaring budget deficits, the side effects of CBRT’s asset purchases and the fact that the outbreak has not improved his or his party’s popularity. If the epidemic comes back in the summer and the economy fails to respond to normalization, which is likely, political instability may be in the cards.
In foreign policy, Syria remains our topmost concern, where hostilities re-started in the Peace Spring region and Idlib. We suspect the severity of the corona infections in Syria is disguised by Damascus, with military confrontation significantly raising the risk of new contagion vectors for Turkey. Meanwhile, Ankara will most probably not activate S-400s until the pressures on the currency subside and it sorts out its troubled relations with Russia. In Libya, the pro-Turkish side has chalked up a string of victories, but an end to the civil war is not imminent.
As expected, activity data for April has begun to show COVID-19’s dramatic adverse impact on the real economy, with capacity utilization and all sectoral confidence indices dropping sharply. Based on the latter, we estimate that the overall index (a.k.a. Economic Confidence Index) might have fallen by a whopping 40 pps in April, to around 52-53.
After a deeper than expected 100 bps cut of the policy rate last week, the CBRT keeps spending reserves to prevent the lira from breaking the 7-mark against the dollar for reasons that are unfathomable to us --or unfathomable to the more naïve economist fella of the GSP Turkey team, at least.
The key attraction of the week is the presentation of the year’s second Inflation Report by the CBRT on April 30rd. We would not be too surprised if the Bank revised its yearend inflation forecast slightly lower from 8.2% currently. While this would be a highly optimistic and an unrealistic forecast, it is the only way, tactically speaking, the Bank can justify further rate cuts.
We will also see details of March trade data, which, as we already know from preliminary release, should yield a deficit of around $5.4 billion, with exports declining around 18%, y/y, imports increasing slightly by around 3%.
Cosmo thinks developing nations are engaged in a race against time to salvage their economies and societies from the onslaught of the COVID-19. Turkey’s disadvantages in this race trump falling energy prices, with the country, His Cosmic-ness insists, probably inching towards a balance of payments event.
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