Gas hopes, harsh realities
Ankara is trying to turn around a weak economy and poor local sentiment through divisive politics, confrontational foreign policy and promises of great riches from gas discoveries. Will it work? We don’t see how it possibly could, which means further market volatility is highly likely, making the business of offering forecasts, even for the near term, exceptionally difficult.
The CBRT --to avoid, needless to say, the Palace’s ire-- is making the same mistake again. It has started a backdoor rate hike cycle that involves raising short-term interest rates “with stealth” and “within the corridor”, which are now some 250 bps higher. There is little sign though, that the pressures on the lira are gone, which is not so surprising, because balance of payments leakages and dollarization seem to continue, which are being met from CBRT reserves.
The trouble is that President Erdogan, and from what we see his protégé and son-in-law, Minister Albayrak, too, prefer to put the blame on foreign adversaries and speculators that are allegedly trying to thwart Turkey’s inexorable rise, whereas the problems -- weakened institutions, lack of social cohesion, an extremely discretionary policy environment and the like-- are manifestly home-grown.
On politics, we see the key risks more inside, than in the realm of foreign policy. Meanwhile, we are, of course, very worried that COVID seems to be staging a comeback, though there is enormous lack of transparency over the issue.
This is a rather unstable backdrop to offer forecasts on the economy, as noted, but we try anyway. Economic activity will surely rebound in the third quarter after the steep contraction in the second, but the rest is much less clear. We see the odds of a slowdown --even a second dip-- late this year/early next fairly high, as weaker confidence, lost incomes and jobs and financial volatility take their toll.
With little room for monetary and fiscal stimulus, with the budget deficit in particular, excluding one-off revenues, already running at around 6-7% of GDP, we forecast growth to stay weak in 2021, after contracting by about 2% this year, even if fully-fledged financial turmoil is avoided.
Inflation has been sticky, and there is little reason to expect that it will fall to single digits, unlike what the CBRT is saying, which, combined with lira weakness, should force the Bank to deliver outright tightening at some point, though it is very difficult to tell how and when because it’s all up to the Palace.
The external side, or the lira-reserves nexus more specifically, remains the Achilles’ Heel of Turkish macroeconomics, which is likely to remain under pressure, given the balance of payments outlook, still-low real rates and an elevated country risk premium.
All this makes, we believe, more market turbulence and an ultimate course correction inescapable. The timing is surely elusive, but this time, the clock seems to be ticking more loudly than ever.
Please note that there will be no Weekly Tracker today.
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