Weekly Tracker: January 10-16

TURKEY - Report 10 Jan 2016 by Murat Ucer and Atilla Yesilada

A bi-partisan commission of 4 parties should soon begin to draft a new Constitution. The exercise is expected to run aground in about six months, however, because AKP insists on an Executive Presidency. The failure of the commission might result in a referendum or early elections.

Turkish security forces should cleanse PKK affiliates from the remaining insurgent townships within a month or so, but the war is yet to be won. AKP is not ready to offer Kurds an honorable peace. Supported by Iran, Iraq and Russia, PKK will be back soon. Turkey’s regional woes are mounting, as President Erdogan is implicated by Iran in the execution of the Shia cleric by Saudi Arabia, her Bashika training camp allegedly comes under renewed attack by ISIS and PKK-affiliated Kurds move to encircle our Syrian border. Expect more bad news from the regional developments.

Governor Basci spoke to the Budget and Planning Commission last week. The story line in the presentation is too rosy for the circumstances and the language on “simplification” still too loose, suggesting that the Bank might be taking a big risk of a backlash in this environment.

Growth has proven resilient also through Q4; the cash budget showed a big surge in primary deficit in December, though the October MTP target should still be met; latest ‘Burgernomics’ estimates on the lira leave no room for complacency regarding its fair value, and preliminary data showed that the trade deficit continued to shrink through December.

As for the upcoming attractions, Deputy PM Simsek will speak on the (new) Medium Term Program on Monday where we do not expect major revisions to the macro aggregates, but will be watching the 2016 budget figures closely. On Monday, we shall also see the November balance of payments data; our forecast on the November current account deficit is around $2.3-$2.4 billion.

Cosmo predicts that EM risk appetite will return this week, but Turkish assets are not safe until the CBRT/MPC adopts a more responsible and tighter monetary policy framework. Rapidly declining F/X reserves and mounting regional troubles bode ill for risk premiums.

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