On sanctions, COVID and the downgrade
The final trimester of the year may turn into the season for sanctions on Turkey, with EU and a potential Biden administration turning to the stick approach to punish perceived transgressions. There is no prospect of war between Turkey and Greece in East Med, but hostility to her now extends to Gulf states, and potentially to some sub-Saharan African states.
At home, the convention of the Grand Assembly in October will be more important than ever, as AKP-MHP contemplate legislation for further gerrymandering and re-introducing the death penalty. Erdogan is at the shores of Rubicon once again. He needs to decide whether to pull out of Istanbul Convention, go ahead with the confiscation of CHP shares in Is Bank, as well as with a hint he dropped recently: private pension funds may be required to allocate some of their assets to loans for capex in “critical industries”, which could lead to panic.
As COVID-19 cases and the number of active patients continue to rise, the administration is slyly re-introducing quarantines, curfews and new social mobility restrictions. The economic cost of the new strategy will bolster our economic scenario of a difficult winter.
Moody’s downgrade came as a surprise. But rather than the downgrade itself, which moves the Turkish sovereign even deeper into junk territory, we felt the tone and the specificity of the statement were noteworthy. That the downgrade came after Minister Albayrak’s interview with Bloomberg is also something to take note of perhaps.
Labor market improved in June, with employment rising by some 400K, but there is a long way before pre-COVID levels are restored. Cash budget, as we had alluded to in last Sunday’s report, improved markedly in August, but we expect the deterioration to resume in the final quarter of the year.
The July balance of payments data makes it all the more clear that the BOP situation is unsustainable, and a course correction is called for.
Cosmo is tired of His chronic bearishness, going out on a limb to recommend some potentially non-loss-making trades.
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