Another critical two weeks
Turkey is at war with the Syrian National Army in Idlib, with both sides swearing not to back off an inch. Only Putin can avert a bloody war, but he is very unlikely to act on behalf of Turkey, unless President Erdogan puts the threat of breaking up the relationship and returning the S-400 anti-missile systems on the table. Both Erdogan and Putin have about two weeks to decide. This is the ultimate rationality test for Erdogan, for whom losing Idlib is demonstrably much more costly than losing Putin’s favor.
At home, Ali Babacan’s unnamed party ought to be launched in March, begging the twin questions of whether he can make it solo and save Turkey? We look at the poll data in different ways to answer the first question. The answer to the second question is yes. Politics is about choosing the lesser evil and Babacan can do no worse as a coalition partner in the opposition ranks than the current economic management.
Industrial production surged in December, which is good news, but the big picture – at least the way we see it -- is little changed. The current account finished last year with a surplus, which is noteworthy, but is hardly a cause for celebration. The unemployment rate fell further in November, bringing the cumulative drop since July to a full percentage point, but a good chunk of it was driven by a puzzling stagnation in the labor force.
We expect the MPC to reduce the policy rate by another 25-50 bps this Wednesday, but because this is such a wrong route to follow even by Turkish standards that we would not rule out a pause.
Fitch will have a review of Turkey’s sovereign rating this Friday, which stands at 3 notches below IG, with a stable outlook. We do not expect a change, assuming Fitch, like us, is also taking note of Ankara’s unsustainable dance around the “Unholy Trinity”.
Cosmo is rooting for Covid-19 vs Humanity and remains extremely bearish on TL assets. Only an Erdogan victory in Idlib will cheer him up.
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