Our Winter of Discontent
As Reza Zarrab is believed to be cooperating with the prosecution, odds of a guilty verdict in the Iranian sanctions case against Turkish persons and entities are increasing. AKP admits that the conclusion of the trial could do serious damage to Turkey’s economic interests. Pressure from Germany and EU add to economic spill-overs of diplomatic tensions.
At home, economic confidence is declining, while the never-ending Gulenist and pro-PKK purges are deeply hurting the Islamist and Kurdish constituencies. AKP might be parting ways with its urbanite and youth vote permanently, though we admit poll data only partially supports our assertion.
To the south, Iran has completed the Shia Crescent, cutting Turkey off from the rest of the Middle East. Washington and Kremlin still veto a Turkish incursion into the Western Kurdish canton of Afrin. Turkey stands to suffer economic damage from the Iranian encirclement and political fall-out from the inevitable rise of a hostile Kurdish state in Syria.
Erdogan is in a bind and at this juncture, it is impossible to predict which way he’ll go. We construct two scenarios based on cooperation or competition with the West, the latter being a formula for deep economic hardship. We shall make our choice between the scenarios after the first session of the Zarrab trial.
In the econ section, we touch upon a few topics, very briefly as usual, that are nowadays at the top of our minds. We’ll most likely see Chindia-like GDP growth in Q3, when data is released on December 11th, which we briefly review here, but a marked slowdown is still inevitable in 2018, we believe.
Recent home price and sale data suggest residential housing sector is finally undergoing adjustment. The damage will be contained, we surmise, but it looks like Turkey’s growth dynamics has lost one crucial engine, going forward.
Next, we recap where we stand on the Credit Guarantee Fund. Mixed news on its extension notwithstanding, we share some familiar thoughts of ours as to why regardless of willingness to extend the scheme, the capacity to do so is not exactly there.
Finally, we speculate on what the CBRT might do at the upcoming MPC meeting on December 14th, if it can afford to wait that long. We think a relatively sizeable adjustment to Late Liquidity Window rate and gradual increase in the average funding rate are probably the most sensible and likely outcomes.
Please note that there will be no Weekly Update this Sunday.
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