Diplomatic gains, domestic troubles
After a successful Pompeo visit to Ankara, odds for improvement in the Turko-American relations, albeit temporary and transactional, appear much higher. The sides will agree to defer thorny issues to 2019, while Ankara will receive some slack on Iran sanctions and Halkbank in return for a promise not to tolerate any more “Reza Zarrabs” in its bosom.
As regrettable and repugnant as it may be the death of Saudi journalist and dissident Khashoggi probably played an important part in improving relations between Turkey and the US, though the consequences for Turkey-Saudi dynamics remains to be seen.
There are several new polls which suggest AKP’s voter support is eroding, tough we are reluctant to pass judgment on municipal elections until parties field their candidates.
President Erdogan’s sudden interest in Is Bank shares probably reflects a desire to identify more opportunities for patronage before the critical March 2019 local elections, but foreign investors and secular Turks will continue to suspect deeper, more sinister ulterior motives.
Leaving a more detailed and comprehensive analysis of recent economic developments and outlook to our upcoming Quarterly report, which we plan to release Friday, we only touch upon two topics of importance here. On the fiscal side, central government registered a solid primary surplus in September, notably better than the same period of last year, but that was largely thanks to a surge in non-tax revenue. In fact, the IMF-defined balance, which adjusts for one-off revenues, was barely in surplus, according to our estimate.
As for the upcoming Monetary Policy Committee meeting on Thursday, we expect the Committee to leave the policy rate unchanged in line with the market consensus -- a call predicated on, as usual, not on what the Bank should do, but what it will do.
Cosmo thinks it is time to revisit TL-denominated assets, where fear is being priced out. They deserve to trade at their historical discounts (spreads) to EM averages.
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