Political and Economic Update
Turkey’s habit of arresting people suspected of anti-government activity at the slightest doubt has exhausted the patience of Germany, which now has three of its citizens in prison. Berlin threatens economic and political sanctions, a new low in Turko-EU relations. We predict with 75% odds that the spat will escalate.
The Cabinet change had little signaling content. It reflects Erdogan’s personal assessment of the previous staffs’ qualities according to some criteria we can’t directly measure, but will have no discernible impact on diplomacy, economic or social policy.
We are relieved to see some branded polls and rumors of other ones. In branded polls, as biased or inaccurate as they may be, AKP has a commanding lead at 50% or above of the national vote. The “anecdotal evidence” hints at a deterioration of support. We stick to our base-case scenario of early elections by mid-2018.
The central government budget data for June has shown that the primary balance performance for the first half of the year was the worst on record, which was driven by both weaker revenues and higher expenditures. What is more troubling is that, we continue to believe the deterioration will be hard to reverse.
The unemployment rate has continued to ease modestly, thanks to job growth in construction and service sectors, but remains too high for comfort.
As expected, Fitch did not change Turkey’s sovereign credit outlook, keeping it at stable.Likewise, we do not expect the CBRT to make any material changes to its short-term interest rates at the upcoming MPC meeting this Thursday.
Cosmo says it is too early to panic on account of tensions with Germany, but it might be wise to buy some hedge against rising TL volatility. His gut tells Him the conflict will get much worse, but the same organ remains silent as to when markets might take it seriously.
Please bear with us and note the following info regarding our report schedule. We plan to publish our July monthly report next Sunday, which makes this the last Weekly Trends before its customary summer holiday. The Weekly Trends will resume on Sunday, September 3rd. As usual, we shall continue with other updates in the interim, including a quarterly report that we plan to publish around the third week of August.
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