U.S. deal hopes, stark IMF warnings
The U.S. Secretary of State Rex Tillerson left Turkey with promises of empathy, cooperation and compromise, but cynicism runs high in Ankara. America’s ability to persuade Kurds to withdraw from Syrian city Manbij to the eastern shore of Euphrates Rivers is seen as the litmus test of credibility by Turkey, which is a formidable task to accomplish. We craft two scenarios going forward, with a renewed bout of tensions in the relationship being the base-case.
A Turkish court released Turkish-German journalist Mr. Deniz Yucel, who has become synonymous with German gripes about Turkey, but a quid pro quo is not very likely. EU told Ankara Schengen visa waiver would require relaxation of the all comprehensive Anti-Terror legislation largely used to stomp on dissent.
At home, a formal electoral alliance between AKP and nationalist MHP is expected to be announced next week, but we defer an analysis of domestic developments to our monthly report that we plan to issue later this week.
At the conclusion of Article IV staff visit to Turkey, the IMF mission said that the Turkish economy is showing signs of overheating, needs to reduce vulnerabilities for which a recalibration of policies is needed – an advice, which, needless to say, is right on the mark, but is almost certain to be ignored.
In December, the current account deficit was somewhat higher than expected, but the year has likely ended with some 5.5% of GDP deficit, as predicted, up from 3.8% a year earlier.Financing side was very poor in December, while for the year as a whole, it remained heavily dependent on portfolio flows and the CBRT reserve drawdowns.
The budget was very weak in January, with a notable weakness in tax revenue, while lack of fiscal transparency is fast becoming a problem, in our view. Thanks to strong GDP growth and the attendant strong growth notably in service-sector jobs, the unemployment rate continued to fall albeit slightly through the final quarter of the year.
Cosmic Strategist sees no decline in the political risk, predicting only brief respite for markets. He remains extremely worried about renewed financial panics upsetting the economy, too.
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