Political and Economic Update
With the Grand Assembly approving the constitutional reform bill, Turkey will hold a referendum on Executive Presidency during the first week of April. We assign 60% odds to Erdogan winning the ballot. Main downside risks are economic slowdown, terror and MHP supporters turning their back to the proposal. There is one-in-three chance that Erdogan would become more pragmatic in case he wins the ballot. Even in case of a referendum victory, however, we can’t rule out early elections. We also offer preliminary answers to the question of what might happen if AKP were to lose the vote.
Threats posed to stability from Iraq and Syria are on the rise. Thousands of violent jihadists from Mosul might have escaped to Turkey. The Army is stuck at the gates of al Bab in Syria. No progress is expected in Astana peace talks.
Ankara has an unhealthy fascination with Trump. We doubt whether Turkey plays a major role in the agenda of the new U.S. President. New disappointments might lie ahead.
The two key attractions of the upcoming week are the CBRT meeting on Tuesday and the Fitch rating decision on Friday. We elaborate on the former inside concluding that some action, albeit modest, is the most likely course, while we think a downgrade from Fitch is also the likelier (70-30) outcome. A hawkish move by the CBRT on Tuesday would increase the odds of Turkey preserving its investment grade rating, but that is not our baseline.
The budget ended the year with a relatively modest overall deficit – at some 1.2% of GDP, we estimate -- but beneath the solid headlines, trouble is brewing. Meanwhile, the unemployment rate continues to creep up and inflation expectations, according to CBRT’s first survey of the year, continue to deteriorate.
Cosmo thinks some interest rate action from the CBRT and a flattish dollar index could provide a brief respite to the TL, but the referendum campaign is very likely to undermine confidence in TL-denominated assets.
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