Political and Economic Update
The politics section lays out a detailed political map for the next three-to-six months in anticipation of the upcoming Quarterly Report. While threats to stability and markets dominate the outlook, some notable upsides are still present. The referendum process will occupy the headlines. Judging by the groans of agony rising from AKP ranks, the race must be very close. The performance of the economy, terror attacks and the behavior of the Kurdish voter will determine the outcome, while confidence-undermining volatility ought to characterize the campaign period. AKP is odds-on to win, which offers some upside for the economy.
Trump is evolving into a wild card for the world, Turkey not being an exception. His administration could initiate a probe against Gulen’s charter schools or grant Turkey’s wishes of a safe zone in Syria, where Turkish Forces reign supreme, but these scenarios remain merely speculations at this point. Apropos Syria, the Turkish involvement is becoming more hopeless and damaging to national interests, but a pullout is problematic.
The Refugee Readmission Treaty is the only viable link between the EU and Turkey in the foreseeable future, which both sides ought to preserve, unless Bahceli makes it a campaign issue.
Underlying growth looks weak through the month of January, as attested to by the likes of weak confidence data and a PMI reading still below the 50-mark, but stimulus measures are likely to add a lot of noise to data in the coming months, a most recent of which came last week in the form of SCT/VAT cuts on, among others, certain electronic goods and home sales.
Trade deficit narrowed in December, as expected, ending the year at $56 billion, which should leave us with a current account deficit in the $33-$33.5 billion range, or almost 4% of GDP for the year. Export growth in January was encouraging, suggesting exports may finally be responding to sharp lira weakness, but it is yet to be seen whether this will prove permanent, which we doubt.
The CBRT presented the first Inflation Report of the year, which revised inflation forecasts upward, as expected. The Bank’s new magic word is “dynamic”, which essentially means, applying full-discretion with a view to saving the day -- and thus, is bad news in terms of simplicity and predictability of monetary policy.
The Cosmic Strategist is not fooled by the current lira rally. He remains bearish for deep structural reasons, predicting that the sell-off would resume latest by the end of February.
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