Biding Our Time, But For What?

TURKEY - Report 05 Mar 2017 by Murat Ucer and Atilla Yesilada

The politics author is concerned that Turkey is becoming a dysfunctional party state. A vicious cycle of crackdowns and oppression infuriating the broader segments of the society is inevitable unless President Erdogan faces the bitter reality of long-term stagnation. We still have hope that he might embrace pragmatism, but just.
Our tabulation of polls reveals that the YES camp is still ahead by the slimmest of margins. But, AKP is demoralized, while Kurds and MHP voters don’t get along. We downgrade the chances of the presidential amendments being approved to 55% from 60% previously. In case of rejection, we predict early elections and wouldn’t rule out new unrest.
In Syria, Assad’s forces cut off Turkey’s routes to attack Manbij and Raqqa. This gives Ankara a golden opportunity to limit its involvement in this unwinnable war and work on peace-making. We doubt it will capitalize on it and predict further risky moves against Kurdish cantons.
Turkey’s honeymoon with Trump is over who simply doesn’t have the time or motivation to deliver Gulen or cooperate with Turkish Forces in Syria. Germany and other EU members are extremely angry for AKP’s efforts to campaign in Europe and spy on ethnic Turks. We predict full-court pressure on Turkey after German elections later this year.
The base-case scenario after the referendum is “secular stagnation” in every sense of the word, but a worsening global backdrop and pressure from key allies could force President Erdogan to embrace pragmatic social and economic policy. The odds are at best one in three, though.
We cut the econ section very short. Preliminary indicators suggest that growth might have stabilized at a moderate pace after the sharp fall and then modest rebound during Q3 and Q4 of last year, respectively. The government is desperately trying to stimulate growth ahead of the upcoming referendum, which may provide a cyclical boost of sorts – and distort the data flow in the months to come - but arguably at the expense of worsening the longer term dynamics. Recent pick up in credit growth, which is heavily driven by state banks, is particularly noteworthy in this connection.
With inflation already at double digits and the lira weakening again, monetary policy is in a tough bind, but further hikes or “going conventional” seems highly unlikely in the absence of further pressures on the lira.

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