An election to end all elections
The Politics Section begins with a brief exposition to introduce the rival camps in Turkey at the eve of March 31st local elections, which boils down to AKP-MHP versus CHP-IYIP, the latter with tacit support of pro-Kurdish HDP in non-Kurdish majority provinces. Poll data, more scarce compared to previous elections, suggest that in addition to Izmir, AKP-MHP could lose Ankara, and of lesser importance, Adana and Antalya.
There is still widespread indifference towards local elections in Western media and among the financial community, which is misplaced, because Messrs. Erdogan and Bahceli consider victory a do-or-die matter, taking dangerous risks with the economy. The Political Analyst asserts that this election is different in the sense that it may affect political stability, as well as the policy path to be pursued in its aftermath. Meanwhile, there are incessant rumors of new parties to be born off the bosom of AKP to be led by former heavy-weights premier Davutoglu and/or economy czar Babacan.
Our base-case scenario still remains an IMF stand-by post-elections, without which Turkey appears doomed to a prolonged recession. In case of defeat by AKP-MHP, chances of President Erdogan considering the IMF stand-by will be materially higher. A victory would be perceived as validation of current policies, possibly opening the way for Albayrak to execute his own stability program, which will lack funding to clean up the metastasizing bad debt problem and force the nation to deep belt-tightening for several more months. This election is truly different, ignore it at your own peril.
On the economy front, growth is still looking in the doldrums, despite official pronouncements to the contrary. We think there is too much complacency regarding the inflation and the policy rate outlooks. While the inflation outlook is “unusually uncertain” -- and there is indeed strong and favorable base effects in store in H2, we expect stickiness to continue in the medium-term despite a negative output gap, while forecasts of several hundred basis points of rate cuts by the CBRT in the post-election period sound a bit too sanguine to us.
We should brace for a sizeable breach of this year’s budget target, should the authorities decide to “go it alone” this year, given the growing structural weaknesses in the budget and the ongoing weakness in economic activity.
On the external side, the current account deficit should shrink sizably yet again in January, which attests to the depth of the economic contraction rather than a run-of-the-mill “demand rebalancing” that is in train. As for financing, despite all the hype around renewed investor interest toward emerging markets, portfolio inflows are not all that strong – so far.
Please note that there will be no Weekly Update today.
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