A Pre-Election FAQ Sheet

TURKEY - Report 04 Oct 2015 by Murat Ucer and Atilla Yesilada

The big “Syria story”, i.e. the one concerning Russian involvement in the Syrian war has only marginal relevance for Turkey. But the capture of a Turkish soldier by ISIS may lead to renewed cooperation between the terror organization and certain elements within the Turkish state. New attacks on ISIS by Syrian Kurdish militia towards the West could also anger Turkey, raising the prospect of a prolonged war with PKK.

The savage beating of a prominent Hurriyet columnist, Mr. Ahmet Hakan, by four thugs -- three being party members of AKP -- raised new questions about Turkey’s human right standards.

We reiterate that there is war between PKK and security forces in East and Southeast, but we predict a ceasefire after the elections in our base-case AKP-CHP coalition. Yet, with smaller probabilities, there are bad-case scenarios on the horizon as well. Based on the current status of polls, we can’t rule out a third set of elections or a single party government by AKP. To the extent such a government will be led by Erdogan, it could lead to full-blown Putinism and economic ruin.

Growth is slowing sharply judging from a plethora of indicators ranging from credit and import growth to PMIs, and to confidence indicators -- a resilient first-half notwithstanding. On the monetary policy front, the CBRT is on autopilot, and is unlikely to react to the sharp deterioration in inflation outlook that is underway, until the markets force it to. The headline budget stance and a rapidly shrinking trade deficit in the past two months are the bright spots in an otherwise vulnerable Turkey story.

As a side, we reiterate our take on Turkey’s corporate debt levels and mismatches, and glance through the state of the housing market.

On the markets side, thanks to a weak American non-farm payroll data and a shrinking current account deficit that is finally underway, Cosmo feels that the worst is probably behind for Turkish markets. Hence, investors might soon begin to buy into the good-case AKP-CHP scenario fleshed out by the political analyst.

Now read on...

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