Alliances at home, conflicts abroad

TURKEY - Report 04 Mar 2018 by Murat Ucer and Atilla Yesilada

At home, the electoral alliance between AKP and MHP begot another one at the center right, as other groupings are beginning to coalesce. Elections contested by alliances rather than individual parties could result in drastically different outcomes that we, or the current poll averages indicate.

Turkish Forces are advancing slowly but surely in Afrin, as the world becomes more alarmed about Turkish intensions. Turkey’s decision to stay permanently in Syria and expand its sphere of influence could lead to unpleasant circumstances, in particular with EU.

The first of the three Turko-American joint commissions to work out policy differences meets this week, where the American side will try appeasement. A compromise on Manbij and the fate of Syrian Kurds is not impossible, but our base-case scenario remains sanctions.

Growth indicators continue to come in quite strong, as attested to by last week’s manufacturing PMI, trade and economic confidence data, though a momentum loss of sorts also seems underway. CBRT home price data confirmed that price appreciation is now well below inflation as well as deposit rates, which is surely bad news for the sector.

A new VAT legislation was submitted to parliament last week, which is a welcome effort that aims to simplify and rationalize the system, as well as clear a backlog of VAT arrears to businesses, but it needs close monitoring in terms of its fiscal implications.

February inflation on Monday and the MPC meeting on Wednesday are the key attractions of the upcoming week. Assuming benign food inflation, we forecast CPI-inflation to come in at 0.3%-0.4%, slightly lower than consensus, which, if true, should drive the 12-month rate to under 10% in February, down from 10.3% in January. We expect the CBRT/MPC to stay put on Wednesday, including no major change to its rhetoric.
After the third panic attack of the year in risky assets, Cosmo turned from cautiously pessimistic on Turkish assets, to suicidally depressed.

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