Political and Economic Update
Turkey enters autumn season with harshly enforced calm at home, but the opposition is gathering force. The short-term threats to political risk premium emanate from abroad. Tensions with Germany escalated another notch, when Turkey arrested yet another Germany couple. Berlin will have to retaliate forcefully. The bigger question is whether the rest of EU will tag along.
Threats to Turkey’s unity from Iraq and Syria are proliferating, as Iraqi Kurds head for an independence referendum and Syrian Kurds broaden their geographic reach. Ankara’s efforts to find a diplomatic solution have failed, meaning military intervention might be the next step.
At home, Erdogan sounds alarmed at the lack of enthusiasm in his party organization. A massive overhaul is expected to take place after the Eid Holiday, which will last through Monday. He might reinvigorate the demoralized troops, but it is more likely that more true believers will be pushed out.
Sectoral confidence indices rose further in August, taking the overall Economic Confidence Index to an almost 4-year high, but the consumer side remains weak, the capacity utilization appears to have peaked and lending by private banks has slowed sharply.
Trade deficit widened sharply in July in 12-month rolling terms. Although more than half the increase is driven by a growing gold deficit, the core deficit (overall less energy and gold) also widened by about $1 billion, on the back of surging core imports.
The key data release of the week is August inflation (due on Tuesday), for which the market consensus (Reuters) is 0.15% -- very close to ours (0.1%). If true, the 12-month rate should rise back up to over 10% from 9.8% in July.
Cosmo trusts in President Trump to sustain the rally in Turkish assets in September. In October, harsh realities should sink in, however.
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