Enjoy it while it lasts
Relations with the US could improve further, if the Trump administration decides to probe Pastor Gulen’s involvement in the 2016 aborted coup. In any case, we detect few landmines in the diplomatic landscape for Erdogan, who has a very strong incentive to preserve the status quo with the US, Germany and Russia to better focus on local elections.
These elections remain critical to proving the acceptance of the presidential regime by the polity, and thus are a must-win for AKP, which is quietly slipping in the polls. We forecast futile and self-defeating policy tinkering, which could also upset the markets in the winter.
The central government budget deteriorated in October over the same month of last year, and underlying trends are concerning, which as an aside, suggest that last week’s auction cancellation was neither prudent, nor should its effect in lowering interest rates prove sustainable.
Balance of payments data has been a mixed bag in recent months – characterized by a sharply shrinking current account deficit, largely driven by a contracting economy in the background, and capital outflows – which September data provides more evidence for.
Industrial production shrank sharply in September, m/m, while the unemployment rate rose somewhat less than expected. As the latter owes to a puzzling and probably temporary resilience in service jobs, we would insist that the worst has yet to come on the jobs front.
Finally, CBRT’s November Survey of analyst expectations show that stagflation – weak growth with elevated inflation -- is fast-becoming the consensus view.
In a special section, we look at Turkey’s bankruptcy protection craze, which may have infected up to 1K companies some insiders claim, with many of those seeking protection being industry leaders. We view the swelling numbers of companies seeking relief from debtors as strong evidence of a “balance sheet recession”, which will be hard to reverse, as the administration sinks into complacency lulled by a calm currency.
Cosmo is confident that the rally in TL-denominated assets will see the end of November, but at some point, poor fundamentals and AKP’s election troubles ought to register on investors’ radar.
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