Eerily calm before elections
Our thesis is that so far moderate and unconventional pre-election stimulus failed to attract the unusually large share of undecideds to AKP, but preserved the fragile balance in the currency and bond markets. We pose answers to three known unknows, namely who the undecideds are, how they are likely to swing and who is perceived to be responsible for the economic downturn. Our answer is that AKP must improve economic performance in February-March to attract this bunch to secure municipalities in cities that count. This is why we think President Erdogan will soon bring out the big guns of conventional monetary-fiscal stimulus into play.
We also make our first call for a dozen cities, including Istanbul, Ankara and Izmir where we have sufficient poll data.
Syria always befuddles us, but as far as we can see, Erdogan is very reluctant to act unilaterally in Kurdish territory, which would anger US and Russia. Ankara is currently evaluating opposing US and Russian plans for the post-US period, the acceptance of either would require major policy changes. Erdogan would rather stretch out the negotiations until after the elections than make a decision now
Sectoral confidence indices fared poorly in January. We estimate that the overall index, which will be released this week, might have fallen noticeably by a few percentage points.
In a Bloomberg interview, the Treasury and Finance Minister Mr. Albayrak said that things are going better than he had expected. He is quite right from the perspective of financial markets perhaps, but we are not sure we could say the same for the real economy. This is why the Treasury is borrowing aggressively in external markets in fact, to step up spending ahead of the local elections on the one hand, and keep domestic interest rates low on the other. Meanwhile, the CBRT profit transfer to the government has already taken place, and more than half has already been spent, but the CBRT, wisely so, has sterilized it --so far.
Quite a few important data releases are lined up for this week, as well as the release of the first Inflation Report of the year. On trade, based on the data released earlier this month, we should see a deficit of around $2.6-2.7 billion in December (December 2017: -9.2 billion), and hence, the 12-month rolling deficit narrow sharply to around $55 billion from $61.6 billion in November. As for the Inflation Report, we could see the Bank revise its 2019 inflation estimate down, from 15.2% (mid-point) in the October report.
Cosmo points out that the current pricing in currency and bond markets discount AKP behaving nicely until election time in terms of economic policy, which is not born out by past experience. He expects rising turbulence.
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