Week of September 18
It is astonishing that what we, Turks, hold to be a universal truth, namely that Gulen organized the 15th of July coup, is not shared by the rest of the world. Moreover, world media has already passed its verdict. Erdogan is exploiting the putsch attempt to build his authoritarian state. As much as we argue that AKP should be given the benefit of doubt for a while longer, we lost the battle; the perceived political risk premium in Turkey is rising.
The reasons behind the massive purge are complex and even AKP admits it has gone too far, but we are not sure it has the means to restrain the monster it has unleashed. In addition, the government is now starting a second one against PKK-KCK sympathizers, which could alienate even larger segments of the society. The twin purges could undermine economic sentiment and the support for the party.
In Syria, Turkey-supported Free Syrian Army brigades are rapidly closing in on ISIS-held town of al Bab, where we anticipate heavy clashes and first serious casualties for Turkish forces. If Turkey stops at al Bab, relations with Kurds, U.S and Russia will not be materially affected, but moving to Raqqa, attacking PYD-YPG held territory or aiding the rebels in Aleppo could lead to serious consequences.
The key upcoming event of the week is the MPC meeting on September 22nd. We see another 25 bps reduction of the O/N lending rate as by far the most likely outcome, given the weakening growth environment, though we would not rule out a “tactical pause” because of Moody’s pending decision on Turkey’s IG rating.
Cosmo is not optimistic about Turkish markets. The EM rally might give way to trepidation on account of Trump and a potential rate hike by Fed in December. At home, further rate cuts by the CBRT would weaken the lira, while Moody’s could downgrade the country.
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