Turkey at a Crossroads
Any seasoned observer of Turkey’s economy and politics would make a mockery of our title, but this time it seems for real. Following this month’s unsuccessful coup attempt, which was thwarted by an impressively unified response from a coalition of forces -- the government, the opposition, security forces, the media and most importantly, the public at large -- Turkey now truly stands at a crossroads; that of choosing between reconciliation and institutional restoration, versus further polarization and social instability.
Our political analyst is guardedly optimistic. It will take some time before Turkey normalizes, he argues, but initial signs of rapprochement between AKP and the opposition are very encouraging, which enables the construction of a relatively sanguine scenario for the near future. That being said, he sees a few (fat) tail-risks, as detailed inside. Against a backdrop of this “radical (political) uncertainty”, we keep this report relatively short, taking stock of developments to date and surmising on what the rest of the year may look like. We leave speculations for 2017 and beyond to our next update(s), assuming visibility will improve by then.
In a nutshell, we expect growth to slow visibly in the second half, ending the year at around 3%, while macroeconomic policies are geared toward boosting it. We expect the CBRT, against all odds, to continue the easing cycle -- or the policy “simplification” as the Bank prefers to call it -- as long as the lira weakens in an orderly fashion and/or residents keep coming to the rescue. The cyclical gains on both inflation and external fronts are largely over, but that doesn’t matter: growth and politics will drive monetary policy in the short-run, facing the risk of a backlash at some point down the road.
Fiscal policy, which has likewise been accommodative, loosened up further in June with growth in tax revenue slowing but that in primary expenditures surging ahead. On current trends, a sizeable miss on the budget target of 1.3% of GDP seems likely, though some reversals and accounting gimmickry (like deferring some payments to next year) may save the headline.
The recent initiatives by the government, such as the granting of another amnesty on tax and social security debt, a new wealth repatriation scheme and establishing a “sovereign wealth fund” are not only bad policy, frankly speaking, but also an indication of a bigger malaise, in our view: that the Turkish private demand-driven growth model is running out of steam, inviting ever-more government intervention. There is a risk, however, that these interventions may hurt rather than boost economy’s potential growth rate.
Against this backdrop -- of pro-growth policies and continued political uncertainty, it is hard to rule out a downgrade from Moody’s to below investment grade, which should adversely affect capital inflows and further heighten volatility. Then again, even under such a contingency, Turkey should be able to muddle through, as long as the global environment remains accommodative and a “perfect storm” scenario – one that combines a simultaneous worsening in global sentiment, further political volatility and policy mishaps – is hence avoided.
Now read on...
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