Damn the package, full speed ahead
The post-election shakeup in Turkish politics continues at an accelerating pace, with surprising twists and turns. The current fashion is “normalization”, which obviously means different things to each protagonist, but in essence entails rapprochement between rival blocs and more cooperative decision-making. Last week it became clear that Mr. Bahceli of MHP is dead set against it. He is imposing increasingly tight constraints on President Erdogan’s policy goals, which may or may not end up in a break-up between the allies.
Bahceli won the first two rounds in this battle of wills, with two high profile political trials ending in his favor. Yet, the battle is not over, with the battleground shifting to the Interior Ministry, with Bahceli demanding the head of Minister Ali Yerlikaya. Erdogan seems undecided between appeasing Bahceli and finding new partners in his quest to amend the constitution to grant himself the right to run for a third turn. We will have to wait for exploratory talks on a new constitution to find out whether Erdogan can cobble up a new coalition to support his cause in return for concessions, of course, at which time he may ditch Bahceli.
The long-awaited fiscal package turned out to be an absolute disappointment, though it does have not-so-minor political repercussions for Erdogan. The politics author has not yet given up on Treasury and Finance Minister Mehmet Simsek delivering more substantial fiscal savings. Reportedly, he promised three more set of measures, some of which may make a difference to the budget deficit. The problem is the easiest way to generate fiscal savings goes through rescinding the privileges granted to Erdogan’s cronies. It remains to be seen whether Erdogan will concede to that kind of sacrifice.
The econ author concurs that the fiscal package was an utter disappointment, which, in normal times, would receive a negative reaction, but we are not in normal times. To the contrary, having left the elections and the insane pre-May 2023 policies behind, and Minister Simsek having kept his job, both locals and international investors seem in a euphoric mood to make the most out of the summer months in what looks like a “rational bubble” to us. Let’s, of course, enjoy it as it lasts, which could indeed be quite a while, but what we witnessed last week is yet another indication that chances of Ankara achieving low double-digit inflation by end-2025 under the current policy settings are rather slim.
Turning to data releases, in a nutshell, retail sales were stagnant in March over February, but grew sharply in Q1 as a whole; the April budget was broadly in line with the cash budget released earlier, the March balance of payments data were ugly, with a larger than expected current account deficit, but that’s history by now, inflation expectations in the CBRT’s May Survey improved, but remained above the CBRT’s trajectory, and finally, reserves continued to improve sharply through May 16.
The key attraction of the upcoming week is the MPC meeting on Thursday at which, in line with the consensus, we expect the CBRT/MPC to keep the policy rate at 50%, with the wording of the statement shifting in a more confident direction on the back of the reserve developments of the past few weeks.
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