Weekly Tracker: October 16-22

TURKEY - Report 16 Oct 2016 by Murat Ucer and Atilla Yesilada

Turkey’s Executive Presidency saga resurfaced once again, as MHP leader Bahceli invited AKP to submit its constitutional proposal to parliament. AKP is expected to comply with the request, but it is still not certain whether the article will garner enough support -- of 330 votes -- for a referendum. Will AKP choose to resort to early elections if the amendment fails? We discuss several scenarios but suffice it to say political uncertainty suddenly increased by orders of magnitude.

We then discuss AKP’s diplomatic paradigm dominated by the Ubermind theory and how this applies to the post-ISIS world. For AKP, defending the geography to be vacated by the radical Islamist terror organization against “enemies” is an existential necessity. As Turkey’s proxies reach the gates of apocalyptical city of Dabbiq in Syria, risks of a permanent clash with Baghdad increase in the context of the liberation of Mosul and the sectarian infighting likely to follow.

Despite the recent lira weakness, the MPC/CBRT is very likely to continue easing this week, by cutting the O/N lending rate by another 25 bps. This would, no doubt, be a risky move, but political pressures are huge and growth has the priority. Industrial production bounced back in August, recouping some of its losses from July, but the broader trend points to weakness, while, as expected, the current account deficit began to visibly widen in August. Both releases broadly confirm our take on the macro outlook – of a visible slowdown in growth in H2, combined with a widening current account deficit.

Cosmo has already given up on Turkey, which lost its economic mojo and had a murky political outlook. Referendum or early elections would add to investors’ woes.

Now read on...

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