Political and Economic Update
The second major attack in as many weeks suggests that terror might become a leading political risk for Turkey in 2017. We discuss the implications, which go beyond economics to ethnic polarization and a deeper military involvement in Syria.
The text of the presidential reform bill contains powers for the future Executive President that goes beyond our former concerns. The President may end up directly controlling the state agencies, such as the CBRT. Meanwhile, a new poll reveals 61% support for the Executive Presidency, though the polling agency is known to be strongly pro-AKP and has only a mildly accurate track record.
EU leaders wisely refrained from freezing accession and even threw in an intergovernmental conference in the next three months as a peace offer. We continue to believe that the worst is over in the relationship.
The fall of Aleppo raises new risks for Turkey in Syria. The relationship with Russia is budding, but the specter of military confrontation with proxies of Iran and Assad, or Syrian Kurds are on the ascent.
GDP shrank by more than expected in Q3, as we reported during the week, but surprisingly enough, we also learnt that the economy grew at a hefty rate of 6.1% p.a. during 2012-15, instead of the 3.3% rate of the old data. Admittedly, we are still trying to understand the drivers of this massive revision and share a few of our observations/puzzles inside.
A second data surprise came on the budget front, which registered a hefty primary surplus in November, mainly on the back of restructuring revenue and a surge in SCT tax, as primary spending also remained high. News on the labor market front was not bad either. The unemployment rate eased slightly to 11.3% in September, as the economy generated some 265K jobs. Finally, the current account deficit widened further in October, but that might more or less stabilize in November, gauging from preliminary trade data and the fact that tourism flows will have lost importance in the final months of the year.
On the whole, this week’s data releases attested to economy’s surprising capability for muddling through or buying time, but this should not deceive us, as the outlook remains as difficult as ever.
Tuesday’s CBRT/MPC meeting is the key event of the upcoming week. According to a Reuters poll we saw, participants, generally speaking, expect another 25 bps hike of the O/N lending rate (12 out of 18), which happens to match our expectation. The question is, with lira still under pressure, whether the Bank could brave a bolder, like 50 bps hike. While we cannot rule this out, we think a 25 bps hike (and perhaps a similar adjustment to the one-week repo rate) looks to be the most likely scenario.
Cosmo is not fooled by the recent relative calm in TL asset prices. He thinks real trouble is brewing, which could strike as early as Tuesday afternoon, if the Bank holds back on hikes.
We are putting our Weekly Updates on the traditional X-mas holiday till January 8th, 2017, but we shall be around reporting on important stuff. Let us take this opportunity to wish all our readers a very Merry X-mas and a very happy New Year.
Now read on...
Register to sample a report