Political and Economic Update

TURKEY - Report 16 Jul 2017 by Murat Ucer and Atilla Yesilada

The Justice March and the first anniversary of the attempted coup have been completed without violence. The odds of sudden military strike in Syria also remain low. Political risks remain acceptable in Turkey in the short-term.

At the first anniversary of the coup attempt, Turkey is worse-off in many ways. The first section counts our losses, highlighting AKP’s mistakes in handling the post-coup transition. The next section makes predictions about the second year of the coup. The fundamental objective of exterminating Gulenists and PKK is not in sight, which would lead to a hardening attitude in the administration and deteriorating relations with the West. We then review the developments at the opposition front, which now offers more potential to confront AKP, but potential is not tantamount to higher votes. Finally, we discuss Turkey’s Syria dilemmas in the aftermath of Mosul’s liberation from DAESH.

May industrial production data, though not as strong as implied by a string of recent PMI releases, was solid, suggesting that the economy continued to gain momentum in Q2. The current account deficit was higher than expected in May, which has taken the 12-month rolling deficit to $35.3 billion, from $33.2 billion in April, on the back of deteriorating energy and gold balances. In monthly terms, core balance also seems to have started to deteriorate, however.The financing side was driven by portfolio (debt) flows, while errors and omissions have turned positive again.

Meanwhile, the government and the banks are trying to work out their differences -- regarding elevated deposit rates -- behind closed doors, but neither party seems willing or daring enough to face up to and attack the root causes of the problem. So we do not expect the issue to subside fully.

There are a number of key data releases and a Fitch review this week. We wouldn’t completely rule it out, but we do not expect an upgrade of the outlook from neutral to positive.
With no calamity in sight, Cosmo reports in one of the most uninspired essays of the year, that the rally in TL assets will continue.

Now read on...

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