Racing against time
As autumn sets in, Turkey is under unprecedented pressure from markets and erstwhile ally US. Later in September, Assad’s attack on Syrian border province Idlib could create a new set of headaches for the country. President Erdogan and his administration are reacting to the pressure by announcing new measures each day, while seeking alternatives to the “American hegemony” abroad. But these measures are largely futile, in our view, while the search for allies abroad is very likely to run aground soon.
More broadly, the absence of any orthodox economic thinker in the administration’s ranks with enough of an influence over President Erdogan delays the discovery of the optimal policy response to the deepening malaise. It is extremely unpleasant for the President to surrender to US demands for a cornucopia of reasons, thus we don’t blame him for trying to find alternatives. Yet, the search for alternatives is likely to cost Turkey significantly.
We are now confident that the economic activity has begun to shrink, which may last several quarters unless relations with the US are repaired and a coherent and comprehensive set of policy responses are articulated. While Erdogan claims that “in a few months, everything will be alright”, the damage to corporate balance sheets is growing by the day, inflation is likely to increase to around 20% in the coming months, while domestic and foreign confidence is deteriorating fast. The Medium-Term Program, which is in progress – and might face delays reportedly -- should be given the benefit of doubt, but is quite likely to disappoint.
A quick review of the external financing numbers suggests that Turkey does not seem to have the luxury of several more months for President Erdogan to see the light, which makes us fear a “road accident” manifested as a full-blown financial crisis.
That said, we broadly stick to the base-case scenario of our recent Quarterly report, “The Silver Linings Playbook” (of August 2, 2018), which predicts that Ankara will “soon” capitulate to the US, adopt genuine belt-tightening measures and some degree of reforms per force.
Being skeptics by nature, we have never fallen in love with our own theorizing, perhaps ditching them too soon in the past. So, we grant the AKP administration until mid-November to do the right thing after which we might become suicidally pessimistic and start contemplating disaster scenarios.
Now read on...
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