All Eyes on the Referendum
Economy remains weak and the political atmosphere toxic, which makes the road to the presidential referendum, scheduled for April 16th, crucial as well as rocky. If AKP loses the referendum, Turkey could enter an existential crisis. If it wins, which is our base-case scenario for now, it gets a last chance to redeem itself by reverting to its old pragmatic days. We remain inherently bearish in the short- to medium-term, but still hold hope for that redemption.
Against the backdrop of challenging global and political environment, we do not expect growth to accelerate visibly until a credible economic narrative emerges that addresses Turkey’s well-known vulnerabilities – those of an elevated inflation rate, and high levels of external financing requirement and private sector indebtedness. The catch is, President Erdogan and his advisors seem to hold a very different vision over what needs to be done, from what’s in the orthodox economics playbook. We think the recent transfer of the Treasury-owned shares of several major companies to Turkey’s newly established Sovereign Wealth Fund, with possibly more in the pipeline, is a particularly vivid manifestation of this vision, which assigns the state an increasingly important role in economic development, and makes all else subservient to that broader goal.
If our reading is correct, this is a rather dramatic paradigm shift, which is unlikely to end well in Turkey’s circumstances, but how exactly things would unravel -- and in what time frame-- is difficult to foresee.
We predict growth staying weak this year at around 2.5%, as a cyclical pick up in the near term thanks to various stimulus measures and to a lesser extent exports, looses momentum by mid-year. Consumer price inflation should reach double-digits soon, before ending the year at around 9%, on the back of ongoing stickiness, currency pass-through and elevated food and energy prices. Monetary policy, stuck between low growth and a weak lira should maintain its pro-growth bias and remain on a “dynamic”, i.e. a completely discretionary path, as long as feasible.
Despite another year of significant growth in primary expenditures, headline budget deficit was contained last year at around an estimated 1.2% of GDP, thanks to stronger-than expected non-tax revenue, tax amnesty proceeds and lower interest expenditures. A visible slippage in this year’s 1.5% target is likely, but the bigger concerns on the fiscal side pertain to the medium term.
Last year’s windfall from lower oil prices has been largely offset by lower tourism revenue, leaving us with an estimated current account deficit of around 4% of GDP, broadly in line with 2015. We forecast the deficit to increase further this year to some 4.6%, as the energy bill edges up and nominal GDP shrinks further in U.S. dollar terms.
Meanwhile, the lira looks fairly- or even under-valued by some metrics but not so, once we take into account, inter alia, a tougher global environment, a dovish CBRT, a turbulent region, a shifting development paradigm and a high external financing requirement.
Now read on...
Register to sample a report