Choppy waters ahead...
The recent relative improvement in market sentiment has shown the importance of improving relations with the US, and of orthodox economic policies, as manifested by CBRT’s September rate hike. But further progress is between the lips of President Erdogan, who reveals little sign of conduct change, despite two critical visits to the US and Germany.
Additionally, things seem to be getting tougher. Erdogan is now facing a voter revolt driven by rising inflation and economic contraction, forcing him to concentrate his attention on winning the local elections, which should complicate rational policy-making by increasing reliance on nationalist and parochial MHP and introducing an inevitable element of populism.
Truce with the West is further complicated because of developments in Syria, where both Russia and Iran have demonstrated unexpected flexibility to temporarily accommodate Turkey’s strategic concerns. While both alliances are fragile, it is clear that Russia and Iran consider Turkey a vital asset in the upcoming battle with US, obscuring Erdogan’s path.
On the economy front, promising to offer our specific forecasts in our upcoming Quarterly later this month, we share some thoughts on the state of the economy, and reflect on the broad scenarios going forward.
In a nutshell, the economy is contracting sharply as we write these lines, taking the current account deficit down with it – very rapidly indeed. Things are more complicated on the inflation front, with a tug of war of sorts being played out between inertia, lira depreciation and unmoored expectations on the one hand, and a contracting economy and – probably a soon-to-emerge -- ‘negative’ output gap on the other.
The New Economy Program should be given the benefit of doubt we still think, but even the past few weeks’ developments illustrate that macro assumptions are already deviating for the worse, as implementation risks remain just too high.
After a terrible August, September was a calmer month for markets, but it is too soon to call it all clear, while a “muddle-through” scenario of sorts is still not looking all that viable to us. More broadly, we feel it is too early to give up on our base-case scenario -- of President Erdogan turning to pragmatism – though admittedly, we see no concrete evidence to back it.
On more imminent issues, our politics author expects Pastor Brunson to remain in jail and the White House to resort to the blackmail of new sanctions to force Turkey into a different policy path, which also means heightened market volatility.
Now read on...
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