An unstable equilibrium

TURKEY - Report 16 Jun 2019 by Murat Ucer and Atilla Yesilada

Our political thesis, which also has a strong bearing on the economy, can be summed up in one sentence: “It’s such a mess that things will probably get better”. In terms of Turkey’s purchase of S-400s, the die appears cast, yet, underneath the surface, there is heavy shuttle diplomacy and hectic rethinking in Ankara to avoid the fallout.

Regarding the upcoming rerun of Istanbul elections next Sunday, all available polls with the exception of one reveal National Alliance candidate Mr. Ekrem Imamoglu the winner, with which we wholeheartedly agree. Our base-case remains cautiously optimistic, projecting that latest by end-July, President Erdogan will act to stop the lemming-like collective jump from the cliffs. Politics author’s conviction rate for the good-case scenario is about 65%, though he shall mention bad-case scenarios.

After a pick-up in the first quarter, economic activity seems to be weakening again, while the consensus now expects the economy to contract this year relatively sizably. Inflation has fared better than envisaged in the past two months and the base effect – from August onward – is probably largely intact but transitioning from here to a reasonably smooth-going CBRT easing cycle, is still largely wishful thinking, in our view.

Fiscal indicators continue to weaken, and what’s happening outside the central government budget needs close monitoring, but this is marred by a host of data transparency issues.

We review a few of the reasons why the lira might have been calmer than expected recently, suggesting that we should not be betting on this state of affairs continuing for much longer. Meanwhile, the current account deficit continues to shrink, but financing is shrinking even faster, which means that the situation is hardly sustainable.

Please note that there will be no Weekly Update today.

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