All noise, little signal
While political noise is deafeningly high, we find few harbingers of anything significant happening soon. We stay on top of developments in Turko-American and Russian relations, as well as the conflicts in Syria and Libya, yet detect little sign of imminent trouble or relief.
At home, people simply don’t care whether Hagia Sophia retains its status as a museum or is used as a mosque. Ongoing demonstrations by bar associations and labor unions have been peaceful by Turkish standards, attracting little interest from the general public. The politics author believes President Erdogan shall not shut down popular social media outfits, but shall enable bills that allow tighter censorship. Social media is notoriously difficult to tame, short of outright closures, which will further antagonize young voters.
Our analysis of polls does reveal a decline in AKP-MHP votes, but not significant enough to compel Erdogan to call snap elections before “it is too late”. Yet, the rising share of loosely affiliated AKP voters does lend some credence to our base-case scenario of elections before 2021.
On the econ front, the signal-to-noise ratio is also very low. Several indicators released last week showed that recovery in economic activity has continued in June, but as we’ve been pointing out ad nauseum, these tell us little regarding the shape of things to come.
Based on May-June trade data, and assuming little-to-no tourism revenue, we estimate May and June current account deficits at around $4 billion and $2.5 billion, respectively, with another hefty deficit likely in July. The current account will be the key source of pressure on reserves in the summer months, we reckon, but it should be manageable as long as, come September/October, we get broad balance on the back of import compression.
Fitch said Turkey’s reserves are low and the situation has gotten worse since February – a fact that concerns and alarms everyone except Ankara.
On the corporate side, we surmise that it may be too late to save the tourism season. Organized retail and entertainment are both doing poorly, while recent decrees and legislative proposals could cause further damage to small services establishments.
Cosmo sees no value in TL-denominated spot assets, but in anticipation of a turbulent autumn, currency calls and CDS contracts may present opportunities.
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