Mind the political fat tails
Latest developments have shown that President Erdogan does retain enough flexibility to move in the right direction, when he has to. His recent actions proffer some evidence to partially support for the thesis, that has long been advocated by the politics author.
The EU has delayed sanctions, which remain on the table in case of future transgression by Turkey in Cyprus or Ionian-Mediterranean Sea, but it has also offered a carrot. Turkey’s entanglement in the Azeri-Armenian clashes is not in the cards, but Turkey’s unwavering backing of the former could annoy Russia. Apropos, Russia, retaliation is a possibility, but Turkey holds strong cards to go tit-for-tat. As regards the US presidential elections, a Biden victory would force Ankara to choose between Russia and the Western Alliance.
At home, an uneasy and unsustainable political equilibrium is predicted to last for another quarter or two, but public unrest, a split with Bahceli of MHP or AKP-MHP losing MPs to opposition parties can’t be ruled out.
On COVID, Turkey finally admitted that it is not counting asymptomatic patients among daily case tally, which patients may be in magnitudes larger than the official numbers, as the economic impact of the outbreak is becoming more palpable.
All in all, we see only moderate political risk in the final quarter from investors’ perceptive, but remain wary of downsides.
On the econ front, a lot has happened over the past month since the release of our quarterly (of September 6), including a rate hike, some “normalization steps” toward easing restrictions/taxes in certain financial transactions, lots of new data releases, and the arrival of Ankara’s New Economy Program (NEP). We provide some updates on these, though we must add that our views remain broadly intact – so far, at least.
We start with the NEP, continue with the recent activity data, look at where we are on monetary policy --and the budget, and conclude with the external accounts – all vert briefly. In a nutshell, the NEP, unfortunately, is not something we can take too seriously in terms of the macro framework, which leaves a lot to be desired as a program that can reverse sentiment, attract inflows and stabilize the currency once and for all.
Growth is rebounding strongly, but it will not last, we insist, because several headwinds stand in the way, and we are, arguably, already seeing some signs of slow-down, no matter how tentative. The CBRT rate hike was encouraging, but this is exactly the kind of “gradualism” we’ve been arguing is unlikely to work, as long as Ankara remains focused on growth and/or the leakage through the balance of payments (BOP) continues.
Apropos the BOP, the figures through September suggest that leakage has indeed continued, the reversal of which requires higher interest rates and, unfortunately, a recession to bring the current account into surplus.
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