Winter Is Coming
The referendum by Iraqi Kurds, assuming it is held, doesn’t pose a major threat to Turkey’s unity, but its aftermath is almost certain to require Turkish involvement in Iraqi affairs in unpleasant ways. Turkey’s descent into the Middle Eastern “event horizon” will accelerate as Turkish Forces make landfall in the Syrian province of Idlip, where fundamentalist warlords are expected to put up fierce resistance. For Turkey, the demise of DAESH signals the start of a prolonged struggle to defend its access to Middle East.
Germany and to a lesser extent EU are serious about forcing Turkey to modify its errand behavior. The problem is that Turkey, too, has very genuine complaints about the European behavior. A lengthy stand-off, leading to more economic or financial sanctions is the most likely scenario. On the positive side, Erdogan’s relationship with Trump seems to be improving on a transactional basis, but Turkey’s trials by the American judiciary (pun intended) is just beginning.
At home, rumors of unraveling in AKP have gained currency, when Mr. Topbas, the mayor of Istanbul, resigned. New polls herald some slippage in AKP’ssupport, while MHP outcast Mrs. Meral Aksener seems to be making inroads into MHP-AKP bases.
On the macro front, there is not much new to add to the framework we’ve fleshed out in last month’s report (Fundamentals vs. Rabbits, August 21, 2017) -- that this year’s strong headline growth, driven by stimulus and a temporary boost from net foreign demand, will slow visibly next year, posing a dilemma for the authorities and creating inescapablepressures for easier policies. In the background, Turkey’s by-now chronic imbalances – an above-target inflation and an above-norm current account deficit (as a percent of GDP) - will ease up a bit, assuming growth will indeed slow, but not enough to please the markets.
The upcoming Medium Term Program, reportedly scheduled for release early next week, should shed some light on how the authorities see the road to November 2019 elections unfolding, the diminished importance of these documents in recent years notwithstanding.
Turkish econo-political fundamentals and a broader view of flow dynamics have now turned against Turkish assets. A rebound would require markedly more dovish behavior from the usual duo, Fed and the ECB.
We have opted for a Q&A format in this Monthly in order to help our readers to focus on the most essential issues. Please note that there will be no Weekly Update today as well as next Sunday, the latter because of our upcoming travels and conference participations. As usual, we shall keep you posted on important developments, if need be.
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