Don’t Worry, Be Happy–For Now

TURKEY - Report 04 Jun 2017 by Murat Ucer and Atilla Yesilada

Turkey is enjoying an exceptional period of political calm, albeit one enforced by an iron fist. The impending cabinet change is unlikely to signal better policies or early elections. On the other hand, during the transition from the parliamentary to the presidential regime, policy visibility is extremely low, widening our margin of error.

Looking beyond the next three months, we describe Turkish politics as “fundamentally fragile”. AKP has lost legitimacy abroad, and may soon witness an erosion of support among its core constituencies. We can’t rule out snap elections in mid-2018. Relations with the U.S. and EU remain frozen amidst several unresolved disputes. We now suspect elements in the American state may be protecting Gulen to blackmail Turkey. The EU is very unlikely to upgrade relations until Turkey adopts a more humane regime.

The post-DAESH world in Iraq and Syria promises to be hostile to the interests of Turkey. Pro-Iran militia, Assad and Kurds affiliated with PKK are rapidly filling the vacuum. While Turkey’s past mistakes have brought the country to these circumstances, it would be naïve to expect it to stay passive in the face of multiple threats. The disappearance of DAESH could signal a new and prolonged power struggle between Turkey and its antagonists.

In economics, having recently laid out our thoughts in detail (The Road to November 2019, May 14, 2017), we provide a brief update on a few current headlines. Some improvement in headline economic data may be in store for the next few months, such as respectable growth rates, a falling inflation rate and a turnaround of sorts in fiscal and reserve data. This does not change our fundamental view, however, that secular story remains weak.

We estimate that growth in Q1, due for release on June 12th, was probably respectable and has likely accelerated in Q2, mainly thanks to the massive stimulus measures. We continue to expect growth to weaken visibly late this year/early next, however, on the back of weaker inflows and rising interest rates against a backdrop of weaker productivity growth.

Inflation has likely dropped in May (due for release this Monday) and may continue doing so a few more months. Fundamentally speaking, however, there is little reason to cheer about the outlook, which is implicitly confirmed in a recent CBRT research. Meanwhile, we expect the Bank to stay put at the next MPC meeting on June 15th, and keep interbank rates elevated in the very short-term, but this may have to change in a few months’ time.
On the external side, the trade deficit has widened sharply in May according to preliminary data, as exports were markedly outpaced by imports. Full details are yet unavailable, but core imports appear to have risen as well, probably reflecting the pick-up in economic activity. On a more encouraging note, tourist flows improved notably in April, but it is doubtful this will translate to substantial revenue increases over last year.

Please note that there will be no Weekly Update today.

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