At the shores of Rubicon

TURKEY - Report 14 Apr 2019 by Murat Ucer and Atilla Yesilada

It will take a week or two to find out who the victor is in Istanbul’s hotly-contested and contentious mayoral race, as AKP devised a convoluted appeals scheme. At the end, it comes down to what President Erdogan truly wants and how much independence the supreme electoral body, the High Election Council retains. The HEC will probably fold if Erdogan persists in an annulment of the election, but we are not sure he wants to do so.

A very public infighting is taking place inside AKP among factions with different interests. Currently, a group called the Pelicanists based in Istanbul and allegedly financed by crony interests seems to have Erdogan’s ear, but the electorate and two more factions want him to concede Istanbul. We argue that demanding a reelection in Istanbul at any cost could hasten the birth of a new party within AKP, as well as backfiring with the constituency.

At the diplomatic front, the mutual anger between Turkey and the US has nearly reached the point of no return, with war drums being banged loudly in both capitals. The US Congress may try to sanction Turkey under CAATSA, which has severe financial implications.

At the end, Istanbul election and the S-400 tensions present us and the world with the ultimate litmus test of President Erdogan’s rationality. We argue with a very large margin of error that pressured by an unruly rank-and-file and a sickly economy he will do “the right thing”.

Last week’s reform program announced by Minister Albayrak underwhelmed, while a few of the initiatives on the financial sector side will need to be monitored closely.

The IMF thinks Turkish economy will shrink considerably this year, which is what we also think, but then a recovery of sorts will resume later this year, the Fund projects. Insallah, let’s say, but we don’t see how this will happen, given the various troubles the economy is mired in.

The current account deficit continued to shrink in February, as financing remained structurally weak -- and reliant on public sector borrowing – as the banking sector continued to deleverage.

Lack of transparency continues, but we think the decline in CBRT’s net reserves might have stopped last week, based on daily data from Monday through Thursday, though we are by no means out of the woods.

Cosmo says Albayrak’s performance in front of some 400 investors in Washington DC feels like a second “Bloomberg TV” moment for Turkey, recalling President Erdogan’s interview with the financial channel last May, that had started the demise of the TL.

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