Few tangible results from the roadshow
As one of us is technically on holiday, and the other is inundated with meetings and travels, we keep this Weekly short, promising a more comprehensive Monthly for next Sunday.
There was no progress towards a truce between Turkey and the US during President Erdogan’s visit to the UN. Contrary to reporting by the WSJ, there is no evidence of much progress made on key issues -- from the modest gesture of releasing Pastor Andrew Brunson, to negotiating more important disputes. As expected, Erdogan received lectures on human rights and democracy in Germany rather than promises of help or favors.
The ball is now in President’s court. There are palpable signs of economic stress, which are more likely than not to undermine AKP’s performance in March 2019 local elections. While the entire economic distress can’t be blamed on the threat of US sanctions or Turkey’s poor image in EU, sorting out these two obstacles will go a long way towards restoring faith in markets and among creditors. With the next stage of American sanctions on Iran coming due in November, President Erdogan needs to make up his mind as to whether to fight or play ball.
It is encouraging to see that Ankara is making some progress on some of NEP's objectives, namely the execution of bank stress tests and the creation of a new public finance office, but the details and implementation, especially as regards the former, will be the key.
The trade deficit shrank sharply in August, as we already knew from preliminary data released earlier, with a particularly steep decline in core imports. This, combined with another sharp dive in Economic Confidence in September, suggests that the economy must certainly be contracting now.
The key data release of the upcoming week is September inflation. Consensus (Reuters) expectation for CPI-inflation is around 3.6%, m/m, which, if correct, should take the 12-month rate to some 21.3% from 17.9% in August. Given the scale of lira depreciation in August, we think risks may be slightly on the upside.
Cosmo demurs at the sudden rally in TL assets, questioning its durability in the absence of any progress on the diplomatic front.
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