Taking stock after an eventful week
President Erdogan should be given credit for staging a F-1 driver quality U-turn on the spot. Yet, the man himself has not changed and what we are witnessing is a tactical retreat to “fight another day”. That being said, he is likely to stay in his good behavior for the next three months. Afterwards, events will force him to either revert to his bad old ways, or bite the bullet and take actions he swore he would never do: Mothball the S-400s, call the IMF.
One of the pressures on Erdogan is a COVID-19 epidemic which is out of control. Full time lockdowns are necessary, as evident from EU, and now parts of US, both dealing with a health crisis the magnitude of which is very similar to Turkey. Erdogan will likely do the decent thing and deploy “the hammer” to stump down on the virus, but the economic costs would be horrendous. This is why Covid-19 fighting and fiscal and monetary tightening can’t co-exist for a long time.
We are now more optimistic that next week’s MPC meeting, under the new Governor, will deliver around 500 bps hike of the policy rate broadly in line with the consensus, because the risk of under-delivery is too great. This should keep market sentiment constructive a bit longer, but sustaining it will take further hikes, as well as tangible actions and measures in other areas.
Can the latter happen? Although we sure are encouraged by the recent show of pragmatism by President Erdogan -- and will keep an open mind, we are highly skeptical because the economic “to do” list is just too daunting to carry out without IMF help, and, as argued in the politics section, because Erdogan’s deeply-held beliefs have likely not changed.
September balance of payments showed more of the same: a current account deficit and some outflows financed entirely from reserves.
With the release of September data last week, we now know that industrial production rebounded by about 30% in Q3, q/q, after some 20% contraction in the previous quarter, which heralds a sharp rebound in GDP (to be released on November 30).
The labor market is improving somewhat, thanks to the rebound in economic activity, but the “curious case of the missing labor force” is still looming in the background.
Cosmo is bullish on Turkish assets, displaying no fear whatsoever that Erdogan would halt the hand of Agbal or Elvan, for about three months. The only risk in the interim is a global retreat of EM risk appetite. For Erdogan and markets, it is the New Year that will bring bad tidings.
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