Financial repression galore
Ankara is getting increasingly desperate in its efforts to stop TL weakness and slow credit growth, against a backdrop of hugely negative real interest rates. The introduction of myriad ad hoc and distortionary measures – or ever-growing “financial repression”, in short – is having limited effect, particularly on the TL side, while inflicting great damage on the economy – a dynamic we still think will be hard to sustain until the elections of May/June 2023, without another “currency event”.
That said, we expect a temporary period of tranquility in Turkish politics and foreign policy through August, with certain caveats. Elections are most likely to be held in May 2023, at which President Erdogan and the AKP-MHP alliance will likely lose. Summer presents Erdogan his final chance to reverse the slide in poll standings, but we don’t expect this to happen. The main opposition is taking things too slowly and acting too strategically, in our view, but its chances of widening the margin of victory in the summer months is somewhat better.
On the economy front, growth stayed in positive territory through Q2, we reckon, but the outlook is extremely uncertain. Inflation approached 80% in June, and it has yet to peak, we think. Ankara has no disinflation strategy other than counting on the proverbial “base effect” late this year/early next, but inflation dynamics are already entrenched. The budget is holding up better than we anticipated, thanks to very strong revenue growth, but this picture will likely change visibly later this year. The key thing to watch in the near-term -- needless to say, perhaps – is the balance of payments, CBRT reserves and the dollarization nexus. The summer months may see some respite, but things should notably heat up, come October/November.
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