Week of July 17
The coup attempt has been put down, leaving behind several unanswered questions. Aftershocks from the disgruntled members of the military are still a possibility, but we are more concerned about new terror attacks by PKK and ISIS.
More broadly, Turkey’s future will be determined by the path that President Erdogan decides to choose. He can capitalize on his nation’s love of democracy to build a new order based on social peace, reconciliation and improving human rights. In a more likely scenario, repression might escalate, while Turkey heads for snap elections. Turkish politics will not be stable before Erdogan makes his move.
Recent political developments make focusing on economic data difficult, but life goes on. May IP print surprised on the upside, but the series is notoriously volatile and the rebound did not seem particularly broad-based. So let’s wait and see the June print, we would advise, before reading too much into it. The current account deficit shrank further in May, as expected, financing was relatively broad-based and CBRT reserves rose. But these improvements are primarily cyclical in nature, with a tricky outlook awaiting us, particularly in light of the recent political developments. The budget has worsened visibly in June, with the surge in primary expenditures becoming all the more apparent -- something we’ve been warning of all along.
What the MPC will do on Tuesday mainly depends on how markets will behave till then. Assuming that relative calm will prevail, a cut of the O/N lending rate – though perhaps a more modest one (25 bps) than previously envisaged (50 bps) – is still the most likely outcome.
Hoping that you shall sympathize with us, we feel it is too early to speculate on the impact of the recent political developments on the economy, which will partly depend on the market’s reaction this week, notably on the currency side. That said, we should expect further damage through both the hard (e.g., tourism, capital flows) and the soft (confidence) channels – an issue we’ll take up more thoroughly in our upcoming Quarterly at the end of this month.
Cosmo doesn’t think the coup attempt will have a lasting impact on markets, which shall remain driven by greed and carry. But Turkey is running on empty. Shaky politics, loss of tourism revenue and lax monetary and fiscal policies would trigger harsh sell-offs if and when the global risk appetite turns sour.
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