AKP's education by fire
Skirmishes and preemptive air raids started in the Idlib Province, where more than 3.5 million Syrians wait in fear of an Assad campaign. The tri-partite Summit in Tehran failed to find a peaceful solution to the approaching human tragedy, as Russia and Iran rejected Turkey’s proposal of a truce. However, Ankara is determined to defend the northern portion of the contested Syrian province and maintain its presence in Syria. Its red lines will be respected by Russia and Iran, but the Summit demonstrated without doubt that Turkey’s strategic interests clash with those of Iran and Syria.
The Summit was arguably not without benefits for Turkey. Iran and Russia are reportedly ready to consider oil and gas trade in local currencies, which, if materializes, could help to reduce Turkey’s hard currency needs under certain scenarios and might even provide President Erdogan with ammunition to defy the US.
In terms of the Turko-American relations, there is little visible progress in ending the disputes. To the contrary, the new economy czar Mr. Berat Albayrak wrote an op-ed for Foreign Policy magazine bashing the US, which is likely to scare investors. However, there is hectic diplomacy on several fronts to craft a common strategy in Idlib and to iron out the outstanding disputes. Erdogan will make his final decision on Turkey’s course of action at the end of the month, after his summit with German Chancellor Merkel.
The economy is in a hard-landing mode at present, though this Monday’s Q2 NIA release will, naturally, show very little of that with GDP possibly expanding by around 5%-5.5%, y/y. August manufacturing PMI slipped again to visibly contractionary territory, after a relative and temporary revival in July; the cash budget suggests revenue weakness has continued through August, and private credit growth has decelerated into negative territory through the week of August 31st.
At this week’s MPC meeting, the CBRT is most likely to underwhelm again, hiking the policy rate around 300 bps (and adjusting the O/N and late liquidity window rates higher accordingly), though a more substantial hike (like 500 bps) is also possible. After last week’s release, inaction is not an option, we think, though Cosmic is much more skeptical.
Cosmo says there is contagion in the EM, fed by the adverse feedback loop between Turkey and Argentina. EM can’t recover before both stricken countries do. He is pessimistic about both the CBRT/MPC and the MTEP. He has already written off September, but keeps His fingers crossed for October.
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