Political and Economic Update
In the short-term, political risks that are relevant to markets and the economy remain modest to moderate, but we predict gradual escalation through 2018. Ankara, as well as all regional governments, is worried about the independence referendum by Iraqi Kurds, but there is no formula to stop it. Ankara’s real concern ought to be defending Barzani and its other allies in Iraq against Shia expansionism.
Other diplomatic threats dominate the political landscape. Relations with the U.S. have taken another turn for the worse, as President Erdogan committed to the purchase of Russian S-400 Air Defense Systems, about which the White House and NATO expressed regret. His summit with Trump on the sidelines of U.N. opening ceremony will not remedy existing problems.Meanwhile, Germany insists on punishing Turkey for ongoing detentions of its citizens. An arms embargo has been instituted, with reductions in EU pre-accession aid a strong possibility in October. There are anecdotal signs of modest damage to the economy from the plethora of diplomatic rows.
At home, two surveys reveal an unusually large population of uncommitted voters and a small decline in AKP support. A single poll claims Mrs. Aksener’s party will make a big splash. There are undeniable signs of disarray in AKP administration, which now includes Palace advisors. A new campaign to lower loan rates is possible, but the real fight is about retaining posts in the upcoming Erdogan purge of the party.
There were a plethora of data releases and an MPC meeting last week. We’ve already commented on the latter and the Q2 GDP data during the week. Regarding the rest, it was business as usual on the balance of payments front, with the core current account deficit steadily albeit modestly deteriorating (in seasonally-adjusted terms), and the financing remaining awfully flimsy in July. The deterioration in the budget is proving hard to reverse, as attested to by the sharp shrinkage in August primary surplus, compared with the same month of last year. The somewhat good news is that the unemployment rate has dropped in June to lowest levels since June last year, albeit almost entirely thanks to service sector jobs. Cosmo is getting worried about the safety of the lira, which will experience a new baptism by fire in the next fifteen days. Even if it survives, unless domestic savers get tired of holding F/X, risks of a winter depreciation episode are non-negligible.
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