Political and Economic Update
President Erdogan’s meetings with key EU leaders at the sides of the NATO Summit helped defuse tensions and confirmed the mutual desire to reengage. Yet, concrete progress is difficult. EU handed the President a list of reforms to be undertaken in the next 12 months, at which time the relationship will be reassessed.
At home, Erdogan’s new strategy vis-à-vis social policy entails solidifying the Islamist-conservative base and reaching out to liberals and Kurdish citizens. In the absence of democratic reform, the latter to are hard to convince. Ali Babacan is not expected to show up in the new Cabinet. The opposition is gearing up to defeat AKP in the 2019 election cycle and this time Kilicdaroglu might be worth watching.
Despite a 10-month purge and hundreds of thousands of people investigated, detained or sacked, key elements of the Gulenist network could be still alive in Turkey. Under the current judicial framework, eliminating Gulenists is nearly impossible. The Gulenist scare threatens to sink Turkey into a nightmare of witch-hunts and ever-increasing dissatisfaction with the regime.
May capacity utilization and confidence indices suggest that growth is doing reasonably well in Q2, but we also share a few observations that advise caution on the sustainability of this -- what seems like a – stimulus-driven growth spurt.
The IMF-defined primary balance for April pointed to a massive and most likely permanent deterioration in the budget stance, as we had alluded to in last week’s update.
Lira deposits have increased in the past two weeks according to the CBRT data, which have attracted some media attention, but that’s typically what happens to demand for an asset when its return increases. The trouble is that this won’t solve the government’s problem, which is looking for a magic formula to get stronger deposit growth at ever-declining interest rates.
There are a number of important data releases this week that will shed some further light on the state of growth, which we shall revisit in our upcoming Monthly.
Cosmo smells a financial bubble, as major central banks continue to pump moral hazard as well as money. True financial bubbles are rare, but if one is forming, Turkey will suffer hugely when it deflates.
Now read on...
Register to sample a report