Something has to give
A supportive global backdrop, combined with the recent changes in economic management, a rate hike and a somewhat more helpful posturing by President Erdogan vis-à-vis reforms on the domestic front, have created, rightly so, a more constructive investor sentiment toward Turkey.
But make no mistake, the challenges are simply too daunting. In the economic sphere alone, the damage from fighting the first COVID wave --chiefly through monetization and reckless loan growth-- has been too great, which left Turkey with little policy space or buffers to fight a second wave, now fully underway. Inflation is on the rise, growth is slowing, job market remains weak with unemployment set to rise, and consumers and corporates both overburdened by debt; local sentiment is skittish, and last but certainly not least, CBRT’s (net) reserves are in deeply negative territory.
Turning to politics, the challenges are equally daunting, with President Erdogan stuck in a quandary of having to impose austerity in the face of a COVID-driven recession, potential EU-US sanctions and a nationalist partner, MHP, who is dead set against reform. The politics author thus asserts that something will have to give in due course, but that Erdogan does not have much time left to sort all this out.
We regret to press the same point over and over again, but this is an extremely fragile dynamic, the sorting of which requires a very comprehensive approach, no less than a full-fledged program – ideally with the IMF-- which needs to be unequivocally supported by the Palace. Will it happen? We do not think at all that this is the most likely option at the moment, and there is, in any event, little sign of it coming from the new economy team, which has, some positive steps notwithstanding, taken a fairly piecemeal and passive approach thus far.
So, what, sort of a 2021 is awaiting us? It is extremely hard to divine, much more so than usual. The current –relative-- optimism could perhaps prevail in the very near term, but we don’t think “muddle through” is an option for another full year, certainly not through 2023, with early elections of course a possibility.
Then again, because chaos or turmoil is not a workable baseline, we work with a ‘stagflationary’ outlook of sorts for 2021, which means a combination of low growth-elevated inflation, deteriorating fiscal balances, continued currency weakness and not much of a current account deficit, because it will not be possible to finance it under the circumstances.
Now read on...
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