Between Scylla and Charybdis
Turkey is now advancing into the Third Wave of COVID-19 epidemic, with daily cases soaring above 15K/day. As President Erdogan resists the urgency to reverse “controlled normalization”, the outbreak is very likely to get out of control. We have already covered the destabilizing impact of the epidemic on the political equilibrium and economic recovery. We merely add that soon analysts will have to downgrade their 2021 tourism revenue forecasts.
At home, the long-forgotten and dormant center-right might have found its long-prophesized savior in the guise of IYIP Chairwoman Mrs. Aksener. We review domestic political developments from the lens of Aksener. Her rise to prominence could catalyze early elections, for instance.
In diplomacy, the normalization of relations with Egypt turned out to be another domestic propaganda scam. The silence from the White House is deafening to the ears of Ankara. We predict that silence could soon turn into thunder, as Ankara continues to passively and actively defy Western policy prerogatives in her sphere of influence.
In the Econ section, we begin by sharing some thoughts on the Economic Reform Package --because it is our job to do so— and the verdict of two recent reports on the state of freedoms in Turkey. It is sort of self-evident, but is nevertheless worth saying, that without tangible progress on the latter, the former will always lack credibility and sincerity.
On the data front, January industrial production data showed growth has had a strong start into 2021, with some moderate loss of momentum, while retail sales index slowed more visibly – a divergence that, by definition, cannot last for very long, since exports are not doing all that great, either.
The current account deficit came in at a slightly higher than expected $1.9 billion in January, as the 12-month rolling deficit shrank slightly, while the core balance continued to deteriorate. Capital inflows were relatively modest, but thanks to some $3.8 billion unidentified inflows, which we think at least partly represent the return of “under-the-mattress” money back to the system, central bank reserves rose by some $3.6 billion.
Finally, according to the new statistics that Turkstat began to publish, the unemployment rate, by one comprehensive definition, stood at around an alarming 30%, in sharp contrast to the markedly more benign --yet rather misleading—headline rate of just over 12%.
At this Thursday’s MPC meeting, Governor Agbal will arguably face his first real challenge since his appointment in November. After two rate hikes in November-December and then pausing in January-February, the median expectation (which, incidentally, is also very close to the mean), is a 100 bps hike, according to one poll we saw (Forex) compiled from 24 participants.
Regarding the odds, we think the median – or “take it and leave me alone”—scenario is by far the most likely (~65%). We would not completely rule out an upside surprise, like a 150-200 bps hike (~5-10% odds), while at other extreme, the odds of MPC making a mistake, like remaining on pause, is not trivial (~25-30%), in our view.
Cosmo says “Wait, it ain’t over yet for Turkish assets” in His inebriated and cryptic way.
Now read on...
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