The proof of the pudding is...
Mr. Erdogan has proven his keen political instincts and pragmatism once again, rapidly changing the mood music that has been playing non-stop in Ankara especially for the last two years. He now promises austerity, human rights reforms and better relations with the West. A significant amount of skepticism is warranted in converting these promises to investment strategy. There are many symbolic acts he can undertake immediately to prove his intentions, but he has not done that yet. There is a bitter infighting in AKP about the advisability of the sudden course change, as well as the MHP veto to be considered.
Finally, the reinstatement of COVID-19 related curfews is likely to undermine the nascent recovery, forcing the state to spend more. We and the Turkish public are in a “prove it to me” mode.
Apropos the COVID-19 outbreak, the true daily case count could be as high as 45K rather than the 5.5K or so figures announced by the Ministry of Health. In any case, lockdowns and curfews are likely to hit the economy significantly, causing sizeable job losses again, at a time when the private sector has piled up leverage to its gills, meaning insolvencies are almost certain to rise. How the Erdogan administration will reconcile austerity with the pressing need to spend more for welfare and health care is a mystery, which only an IMF loan can solve.
The economics author – like the proverbial guy with the hammer that sees everything as a nail – continues to believe that the key driver of Erdogan’s U-turn is/was the dire state of the economy, but that sustaining the current market optimism --and have it trickle down to the real economy-- requires a very comprehensive plan. We like to give the new economic management the benefit of the doubt, but so far, as in politics, there is little sign of that happening.
Meanwhile, as signaled earlier by the cash budget data, the central government budget improved in October over the same month of last year, thanks to buoyancy in tax collections. We must say that our relative pessimism on tax collections and deferrals has not been justified, which, of course, is good news, but we stick to our broader view on the fiscal outlook: that it is very challenging, leaving no room for complacency, or the “space” for a second COVID wave.
Cosmo is worried that while positive developments are only beginning to be discounted, a health crisis and recession could spoil the sentiment. He advises patience and waiting for opportunities to present themselves.
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