Early elections?
Early Sunday morning Turkish commandos entered the center of Afrin to join what we think will be a bloody urban warfare. Since we are not war correspondents, there is not much to write about Afrin, except expressing a hope for minimal casualties.
Instead, we turn our attention to the question of early elections, cited by financial press as one of the triggers of last week’s meltdown in TL assets. We still think early elections late summer or in the autumn are a strong possibility, because holding them on schedule (i.e. in March and November 2019) would substantially increase the risk of loss for the AKP-MHP alliance, as voter support evaporates and risk of road accidents in the economy proliferate.
In the following two sections, we review diplomatic drivers of early elections. The new American Secretary of State Mr. Pompeo is very unlikely to show more appreciation for Turkish concerns in Syria than his predecessor, raising the specter of a costly clash. The end-of-month Varna Summit between President Erdogan and EU leaders, too, will not deliver the former any goodies to market at home. Stuck at home and abroad, Erdogan will have to concede to early elections.
Industrial production (headline) expanded by a whopping 12.9% in January, y/y, but dropped over the previous month and growth was somewhat less broad-based this time. Thanks to strong growth and to a lesser extent government incentives, the unemployment rate continued to drop through December, to under 10%. Yet, the growth picture remains a lot more challenging than these headlines suggest, which explains the government constantly scrambling for new measures and schemes to boost growth. Another one of these – a large investment incentive scheme to finance projects over TL100 billion worth (around $25 billion) – will be reportedly detailed at the end of this month. We remain skeptical that such schemes could get us to the 5%+ growth rates that the government is targeting.
Budget was in a damage control mode in February, but performance in the first two months of the year combined, was poorer than last year. Needless to say, pressures continue and there is no room for complacency.
The current account deficit widened sharply in January, broadly as expected, while the ample funding that Turkey acquired in the month was mostly in the form of short-term loans and portfolio debt flows, reminding us that a demanding external financing picture continues to be the economy’s key source of vulnerability.
Thanks to a brand-new homeotherapeutic regime by His witch doctors, Cosmo has regained His groove, calling for a short-term rally in TL assets after the FOMC shake down.
Now read on...
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