Political and Economic Update
We now rate Turkey’s political risk profile as high and rising among peer EMs. The upcoming trial of Mr. Reza Zarrab is likely to throw negative news Turkey’s way. He may have already chosen to cooperate with the prosecution. If this is true, the odds of a guilty verdict for the other defendant(s) and the state-owned commercial bank Halkbank, as well as former and current members of AKP being implicated as co-conspirators, would rise significantly.
As an upside, there is a debate within AKP about relaxing the State of Emergency, which we bet will not happen in the next six months.
We have written on the Bank’s Inflation Report and October inflation print during the week, so we won’t repeat these inside. In summary, there is little good news: CPI-inflation rose further in October, and probably will touch 12% in November, while core (C-index) has reached its highest level since January 2004 – the first month for which the figure is computable -- and notably, when inflation was still normalizing from a post-2001 crisis shock. But the Bank, stuck between a rock anda hard place, can’t do much: it seems to be hoping instead, as it typically does, that inflation will come down somehow, thanks to base effects and optimistic assumptions, in particular regarding the behavior of the output gap and the currency.
Latest growth indicators – manufacturing PMI and economic confidence index for October -- keep coming strong, but point to a momentum loss of sorts. Trade deficit widened sharply in September and preliminary data suggest also in October. Strong growth together with rising inflation and deteriorating external balances mean that the 2017 will go down in history as another year in which Turkey managed to boost growth, thanks to aggressive use of the policy space and a relatively accommodative global environment, at the expense of growing imbalances. But this dynamic, we insist, is looking ever more unsustainable.
Cosmic Strategist wishes to warn His audience that the circumstances in Turkey increasingly resemble those of the winter of 2016, when the currency tanked big time. Ankara needs to act to prevent yet another exchange rate shock.
Now read on...
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