Political and economic update
On Saturday evening, the Turkish government heralded the commencement of Operation Olive Branch to root out PYD-YPG and remaining ISIS elements out of Northwest Syrian canton of Afrin. It will not be easy to achieve that objective, considering how well-prepared and committed the pro-PKK Kurdish militia is. Yet, despite several risks the campaign poses, it is a bold and necessary move for Ankara to defend its stake in the Syrian end-game.
In the longer-term, Washington’s decision to raise an army of largely PKK-affiliated Kurdish militias in Northeast Syria will force Turkey to reevaluate its long-standing alliance with it and take further military measures in Syria, which could lead to a painful crisis involving banking sanctions.
At home, AKP and the nationalist MHP are slowly but surely forging an election alliance, which guarantees MHP seats in the next parliament, to AKP a working majority and Mr. Erdogan much better chances of being re-elected president. For those who like continuity in politics, this is a very positive development.
As we’ve already reported during the week, the CBRT did the expected by not moving short term interest rates. The little “clarification” that it added to the statement – that there will be no easing because of base effect-related drops in the inflation rate – was perceived as a hawkish twist as we had predicted, given the Bank’s very dovish and opportunistic track-record and the market’s sometimes absurd expectation as to what the Bank will do based on that record.
Central government budget finished the year with a deficit of around 1.5% of GDP, some 0.5% lower than the MTP estimate, largely owing to a better than expected revenue performance, but the broader budget trends leave no room for complacency. On other news, the labor market continued to improve, thanks to the lagged effects of strong growth; home sales dropped, and the consumer confidence rebounded. The latter should be taken with a grain of salt, however, as we briefly discuss inside.
Finally, Fitch made no changes to Turkey’s sovereign rating or the outlook on Friday, as expected, but it also said that it is closing shop in Turkey, which sends a negative signal of sorts regarding the general state of affairs in the country.
Last week, Cosmo rang the alarm bell about rising political risks. He doesn’t anticipate further fall-out from Operation Olive Branch. But there is no upside for contrarians, either.
Now read on...
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