The Se7en Weeks Theory
Health Minister Mr. Fahrettin Koca expects Turkey to wrap the epidemic up in about seven weeks. While this is not so unreasonable based on the declining case numbers, several tail risks ought to be kept in mind. We review evidence that the epidemic may not be that easy to tame.
One piece of negative evidence come from Syria, where doctors suspect COVID-19 is already spreading in Idlib’s squalid refugee camps, while the first patient has been diagnosed in North-East Syria in the Kurdish town of Qamishli. Possibility of a new wave of infections spreading to South and South Eastern provinces or Turkey may not be easily dismissed.
In as much as we frankly express our doubts about the rationality of Erdogan administration, we still try to make sense of its plans regarding the near future. It seems to have put all of its chips on the Health Minister’s “normalization in seven weeks” theory, meaning that it sees no need to change economic or social policy for such a brief emergency. This unhedged bet on quick recovery could backfire on the currency front or undermine Erdogan’s standing with constituencies.
Indicators available through the first half of April suggest that contraction in economic activity is deepening, which is not surprising. Budget weakened in March on the back of tax deferrals, as expected, while a modest current account deficit in February was more than financed by, in essence, a drawdown in F/X reserves of the banking sector.
As it races against time, Ankara wants more credit to flow into the economy, keeps pumping more money into the system through direct and indirect purchases of government debt and lose reserves, too, which, needless to say, make up a toxic mix. We do not rule out a pause at this week’s MPC meeting, given the difficult backdrop of F/X market pressures, but we think another 25-50 bps cut is the most likely scenario.
On the corporate side, we review two surveys by KPMG and Deloitte to gain insight on producer and consumer behavior at the age of corona. On the consumer side, the bad news is that Deloitte predicts very slow recoveries in important industries such as construction, automotive and tourism. According to KPMG, 80% of participants in its survey expect the economic after-effects to linger for a year, predicting an average drop of 40% in sales turnover in the interim.
The Cosmic Dude is now very, very frightened of what He politely dubs a “balance of payments event”.
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