The presidential epoch about to begin
President Erdogan will unveil his Cabinet on Monday night at 9:30 pm. He hinted that it may contain mostly technocrats. Ankara’s point men with markets and creditors, Messrs. Simsek and Agbal may not be part of the new team. The new personnel will be probably selected on their “closeness” to the non-financial sector of the economy and may be reinforced with a few star names from the private sector.
Erdogan not only introduces a much compressed and mostly apolitical Cabinet but new institutions with vaguely-defined responsibilities. The new architecture could result in upheaval and paralysis in the civil service or introduce a new vibrancy and cutting of red tape.
Erdogan and Yildirim promised humility, more democracy and human rights under the new regime, which deserves the benefit of doubt, because the dreaded State of Emergency will be allowed to expire on July 18th. Despite talk of austerity and reform, the context in which these phrases are used doesn’t leave much room for optimism. Instead, expanding the social welfare net to catch deserting voters for March 2019 local elections may gain priority.
It is difficult to guess whether Trump-Erdogan meeting at the sidelines of the upcoming NATO Summit will be symbolic or substantial. One of the most contentious issues between partners, the detention of Pastor Brunson may be resolved, but the other -- joint control over Syrian city of Manbij -- is hard to arrange.
As the economy slows, and even begins to shrink, external deficits are stabilizing, albeit from rather elevated levels. The June cash budget weakened as badly as we had feared.
The key attractions of the upcoming week are the May balance of payments data (Wednesday) and the Fitch review (Friday). We forecast, broadly in line with the consensus, the current account deficit to come in at around $5.3-$5.4 billion, which, if correct, should leave the 12-month rolling deficit broadly unchanged at around $57 billion. As for the Fitch review, this will be one of the trickiest in a long time. While it is possible that Fitch may once again be lenient toward Turkey, the downgrade of the outlook and/or the rating itself are the more likely outcomes, as we discuss in a bit more detail inside.
Turkey’s year-to-date “loan restructurings” reached $20 billion by our count, as Bereket Energy, an Aegean utility company, joined the ranks. Bereket is probably not the end, but the beginning of the end.
Cosmic Strategist is not impressed by the recent rally in TL and equities. His crystal ball reveals bear traps in summer months.
Please note that instead of a Monthly, we are issuing another Weekly this Sunday, postponing the former to next Sunday to wait for, among others, President Erdogan’s cabinet announcement this Monday evening. We will follow the Monthly with a Quarterly report during the last week of July, when we will share our forecasts for the remainder of this year and the next.
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