Troubling Times
These are unprecedented times for Turkey, with each passing day bringing new uncertainties and troubling developments. The environment makes forecasting a fool’s errand, but we nevertheless try to take stock, and share some -- admittedly preliminary -- thoughts on the macroeconomics of 2017.
The global backdrop is edgy but generally supportive. It is the domestic politics that is getting trickier by the day. The Gulenist surge continues unabated, which now encompasses all dissidents and pro-Kurdish HDP. Adding to political turbulence, AKP might call a referendum on Executive Presidency in alliance with the nationalist MHP. Perceiving existential threats to its security, Ankara stands ready to intervene in Iraq, after Syria. The juxtaposition of such diverse risks makes working with a single scenario unfeasible, though the intersection of the most-likely cases is broadly supportive of a qualified muddle-through scenario that we flesh out here.
We think growth should inevitably slow further in 2017, from its average pace of just over 3% of recent years and the unemployment rate continue to edge up, while inflation and the current account deficit as a percent of GDP should both remain elevated at around 7.5%-8% and 4.5%-5%, respectively.
To generate faster growth, the government is intensifying interventions of all kinds -- through direct (higher spending) as well as indirect means (e.g., moral suasion on banks, provision of guarantees), but the problem is structural. Productivity growth is non-existent, which, in fact, is most likely to worsen with the ongoing institutional erosion, social polarization and increased government involvement, while on the demand side, all engines of private demand seem to be faltering. More generally, Turkey’s debt-fuelled growth model seems to have run out of steam because of inadequate capital inflows, worsening credit risk and rapid growth in debt, particularly in the post-global crisis period. Formulating a credible and comprehensive macro/reform strategy is a must, but political turbulence and lack of social consensus make this an esoteric idea, efforts of a few ministers notwithstanding.
Fiscal headlines may continue to look relatively resilient a while longer, but ongoing weakness in the underlying stance suggests that the government’s deficit targets of 1.6% and 1.9% of GDP for this and next year, respectively, will be difficult to meet. Monetary policy is in a very difficult bind. The Bank would like to continue the easing cycle --euphemistically called “simplification”-- a few steps further, but the lira has not permitted it last month, and is unlikely to do so any time soon. Meanwhile, the economy has managed to cope with the adverse effects of a Moody’s downgrade (to below investment grade), and should be able to so in the highly probable event of another downgrade from Fitch.
We do not wish to sound complacent, however. The current state of affairs is unsustainable, although predicting the exact timing and nature of the proverbial straw, and what will follow in its aftermath, remains an elusive task.
Now read on...
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