AKP under pressure on many fronts
There is now sufficiently heavy news flow to take rumors of Davutoglu and/or Babacan forming new parties seriously. There are other disgruntled groups in AKP, too, which is forcing Erdogan into indecisiveness on several policy areas. One of these is the fate of the alliance with MHP, the other what to do with Istanbul.
As the High Election Council takes its sweet time appraising all challenges by AKP-MHP, the final verdict about the mayoral race will probably drift into May. So far, there is little direct sign of Erdogan interference in HEC deliberations, or HEC favoring AKP-MHP in its interim rulings. The final verdict will probably come down to whether the improper composition of ballot monitoring commissions has tampered with free and fair voting. Our judgement is that it had not, meaning left to its own devices, the HEC will rule in favor of CHP. We still prefer the scenario where Erdogan allows HEC to reach an impartial verdict.
The disagreements with the US are escalating once again, despite some progress behind the scenes, as Reuters claims a third American consular employee and his family had been indicted on terrorism charges. If confirmed, the indictment raises the odds of Turkey being slapped with CAATSA and Magnitsky sanctions. While Mr. Erdogan is a tenacious warrior, the pressure to be exerted by the US will probably prove too much for any mortal.
There is not a whole lot to report on the econ side -- and the econ author is traveling this weekend, so we limited our commentary in this round to this Executive Summary. We’ll see March trade (Tuesday) and April inflation (Friday) numbers next week, as well as the second Inflation Report of the year (Tuesday) and Fitch Review (Friday). We already know from the preliminary print that the trade deficit should come in around $2.1 billion, taking the 12-month rolling deficit down to some $41.1 billion, from $44.8 billion in February, on the back of slightly declining exports and another 18% or so contraction in imports, y/y. We expect April CPI inflation at just over 2%, which, if true, would raise the 12-month inflation to just over 20% again, up from 19.7% in March on the back of, inter alia, a weaker currency, higher oil prices and the partial adjustment to tobacco prices.
As for the Inflation Report, more than the report itself, markets will focus on CBRT statements regarding recent reserve developments. We sure will be monitoring what the CBRT has to say carefully, but we doubt it will say anything that will fundamentally alter (which by-now is) the consensus view, that net reserves fell by over $15 billion in March, basically through state bank interventions. Finally, Fitch will most likely keep the rating unchanged in this round as well; recall that the agency keeps the Turkish sovereign two notches below IG, with a negative outlook since July 2018.
Cosmo says “Sell in May...” and don’t come back until Erdogan sends back the S-400s.
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