Is regime change possible?
Turkey’s ordeal with political risks is not over. At the very tail-end, postponement of elections still lurks behind. ‘Cohabitation’ is the most likely outcome on June 24th, after which time Erdogan and the opposition controlled Grand Assembly are likely to bicker on many topics, but agree on even more fiscal generosity. Erdogan’s threat of repeating elections in this scenario is not logical, though reason did not stop him from acting before. It would be difficult to bring forward municipal elections to end this destabilizing cycle of ballots and compromise on through-going policy overhaul.
Investors still pay little attention to Turkey’s long-term struggle to retain a say in Syria’s future and the unsustainability of its alliance with Russia-Iran Axis. More imminently, the upcoming June 4th summit between the US Secretary of State Mike Pompeo and his counterpart Mr. Cavusoglu is the last chance to deflect painful and destabilizing sanctions by the US. At the end, Turkey’s political risk premium is set to rise no matter which camp wins the June 24th elections.
After much delay, torment and miscommunication, the CBRT stepped in to save the lira (and the financial system) with relatively bold action that entailed rate hikes and a long overdue simplification -- and it sort of worked. Yet, saving Turkey -- through a comprehensive program -- is what’s needed now, and only then, the lira can be called out of the woods.
In the meantime, growth is slowing visibly, core inflation is readying to set new records in the coming months, the queue for corporate loan restructuring is growing, balance of payment flows remain weak and the fiscal anchor has been unmoored. Putting all this back on track calls for a comprehensive approach not incremental action, but the burning -- political economy -- question is, how do we get there?
Please note that there will be no Weekly Update this Sunday.
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