Political and Economic Update
Three days of testimony by Reza Zarrab aired large amounts of dirt about Turkish politics and the shady deals made by some Turkish banks. Needless to say, these are accusations that need to be proven. The horror show is just starting. Once Zarrab is thoroughly grilled, the prosecution will parade a series of witnesses who will force AKP to relive the trauma of winter 2013/2014, when Gulenists flooded the social media with very damaging audio-visual material about corruption in the party.
On deck stands General Flynn, who might add to Turkey’s embarrassment with fascinating statements of his own. We will never prejudge a jury trial, but AKP fears a guilty verdict, which might go beyond a couple of employees and one bank. It is too premature to claim that markets have digested the full import of American legal processes on the bilateral relationship. The most troubling aspect of the whole affair is AKP’s apparent lack of a coherent strategy to deal with bad-case scenarios, which jeopardizes a political settlement.
Pressured by lawsuits in America and accusations of Erdogan’s relatives stashing money abroad, advanced by main opposition party CHP, AKP might be losing its grip on the agenda. There are signs of an impending crackdown at home, as well as resolution with Germany. The party is at the threshold of a major decision, but we don’t know which road it will take.
Growth indicators point to some degree of moderation in growth into the fourth quarter. November PMI data showed manufacturing activity remained firmly in the expansionary territory, but that the pace of expansion has been slowing, while the overall confidence index has weakened further in November, with all sectoral confidence indices now turning south, and the consumer confidence index remaining relatively repressed.
Trade deficit widened sharply in October, which was expected based on preliminary data released earlier. Growing energy imports, as usual, played a role, but the widening was mainly driven by core deficit this time, with core imports substantially outpacing core exports. We think the catch-up in import growth may have to do with the inventory cycle, i.e. firms beginning to replenish stocks after a few consecutive quarters of destocking through the first half of this year.
The key data release of this week is November inflation, which will come on Monday. Broadly in line with the consensus, we forecast CPI inflation at 1%, which, if correct, should take the 12-month CPI-rate to 12.4%, up from 11.9% in October. Given the recent lira weakness however, we must admit that the risks appear firmly on the upside. Moreover, while November data could mark the peak, our ride at double-digit inflation rates is by no means over.
On another noteworthy event, the CBRT will release its Monetary and Exchange Rate Policy for 2018 during which, the market will be looking for clues regarding the CBRT actions at the upcoming MPC meeting on December 14th. For the moment, we stick to our view – briefly expressed in last Sunday’s report -- that the Bank will try to buy time with a relatively moderate move -- like raising the Late Liquidity Window rate by some 100 bps -- but this, of course, also depends on how the lira will behave between now and then.
Cosmo sort of agrees, declaring, in His infinite wisdom, that if you bet on a rate hike, it won’t happen.
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