Week of September 25
During his New York City visit, President Erdogan failed to persuade the White House to deport Pastor Gulen or abandon Syrian Kurds. His comments on economic policy might also have scared off a few investors. Despite ongoing differences with the U.S., however, we don’t expect a new fallout.
Peace in Cyprus is closer than ever but the world demands Ankara to make significant concessions. We don’t know if Erdogan is ready to sacrifice Turkish hegemony over the North of the island for longer term benefits such as natural gas pipelines or faster accession prospects.
At home, there are rumors of large number of AKP deputies being affiliated with Gulen, as the main opposition party CHP is threatening to pull out of the anti-Gulen coalition. AKP needs to make some hard decisions. Closer cooperation with CHP is the best option, but bad-case scenarios are also possible.
Operation Euphrates Shield slowed down, as the Free Syrian Army brigades failed to push back ISIS. More Turkish troops seem inevitable.
Moody’s downgrade came with a strange timing, but the reasons for the downgrade are not so easy to object to, which are high funding requirement as well as a deteriorating institutional backdrop coupled with weaker growth dynamics.
The government’s recent relaxation of a number of macro-prudential measures suggests that it is, naturally, becoming deeply concerned about the weakening growth outlook and the rapidly rising unemployment rate. Notably, the latter has jumped by a full percentage point during May-June, to just below 11%. The measures, which target consumption, are somewhat paradoxical because Turkey presumably has to rebalance its economy away from consumption, but at any rate, they are unlikely to have too much of an impact.
Budget has held up well in August, thanks to strong revenue growth, which, we acknowledge, may continue a while longer. But underlying trends continue to stay weak, which should call for a more comprehensive adjustment than a tweaking of tax rates on the “usual suspects”, like fuel and tobacco.
As for the upcoming data, we know – from the preliminary release -- that the shrinkage in the 12-month rolling trade deficit must be more or less over, and that the deficit must have stabilized in August.
Cosmo wrote two weeks ago that Turkey had no story. The Moody’s downgrade indicates the country had also run out of luck. The question is whether the sell-off will be temporary, or mutate to a vicious cycle.
Important note to our readers on our report schedule: Because of our heavy travelling schedules this coming week, there will be no Weekly Tracker this coming Sunday (October 2nd), while our September monthly report will be slightly delayed to the first week of October. We are grateful for your understanding…
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