On a knife-edge till March 2019
This month’s report arrives in your inboxes in a Q&A format once again, allowing us to address a myriad of questions that we receive from our esteemed colleagues and clients, in the most effective way.
With Gul declining to enter the race, Erdogan remains our favorite to clinch the Presidency, though this is by no means a foregone conclusion. The impending SP-IP (Felicity-Good Party) alliance could undermine the slim lead AKP-MHP alliance is enjoying in the current polls, possibly giving way to our worst-case scenario of the executive and the legislative being held by opposing blocks. Contrary to accepted wisdom, the Grand Assembly in the new system is not a rubber stamp for President’s executive orders. On the way to elections, rising economic discontent and possible sanctions or threats thereof from the US could diminish support for the pro-Erdogan camp.
Local elections, to be held on March 2019, are as important to Erdogan as the parliamentary ones, meaning that significant policy change in either a “good” or a “bad” sense is not realistic until then. The State of Emergency might be lifted and a less aggressive policy in Syria vs. the US might be adopted, but solutions to Turkey’s nagging domestic and foreign policy problems will have to await March 2019. At this point, we are fairly sure there are no “fat rabbits” left in AKP’s hat to rescue the economy from a slowdown.
Post-June election efforts will focus on preserving what little momentum there is, though some very unpleasant tail risks need to be considered as well.
Having laid out our thoughts in a Quarterly report just two weeks ago, we cut the Econ section very short. In a nutshell, we think growth slowdown is underway, while core inflation should edge up and import growth should decelerate further in April. Fiscal risks are elevated, though we think the central government deficit target can still be met, broadly speaking, because of the costs -- tangible (higher interest rates) as well as intangible (the signaling effect of losing the fiscal anchor) – associated with a substantive slippage.
The CBRT hiked slightly more than the median expectation last week, which showed that the Bank eventually does the right thing no matter how belatedly, but the bigger picture remains unchanged – the pro-growth bias against a difficult backdrop should keep pressures on the lira elevated and inflation in double-digits.
Barring an awful policy mistake (and other hugely negative shocks), Turkey should be able to muddle through, through June 2018 and then March 2019 elections, though we cannot, by any means, rule out much less pleasant scenarios.
Please note that there will be no Weekly Update today.
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