Election economics takes odd twists

TURKEY - Report 06 Jan 2019 by Murat Ucer and Atilla Yesilada

Winning local elections has become the sole priority for AKP, around which all policy decisions, including those concerning foreign affairs shall revolve between now and March 31st.

There are very few polls, but plenty of commentary from pollsters. Trying to correlate those as impartially as one can and adjusting for the inherent ideological biases of the said agencies, it can be said that AKP is ahead in Istanbul, has thrown the towel in Izmir and running scared in Ankara. Despite MHP support, its national vote tally may run 4-5 percentage points short of June 2018 general elections outturn.

The party has no option but to engage in pork-barreling. The opening salvo of which was a whopping 26% hike to the statutory minimum wage, guaranteeing inflation stickiness through 2019. So far, a modicum of fiscal and monetary discipline is maintained, with populism shifting to disruptive non-market interventions in the economy and book-keeping tricks to save funds for social spending. Knowing AKP’s penchant for “policy innovation” more surprises of the most frustrating kind lays in store.

On the positive side, Turkey and the US are talking to each other once again, with Ankara hopeful that an inquiry may be launched about the shadowy activities of Pastor Gulen and his network of pseudo-religious NGOs. The prospect of some cooperation in Syria looms on the horizon, too, but it might be a mirage caused by the heat of the War. All we know is Erdogan is still holding off on the promised military campaign to cleanse East of Euphrates off “Kurdish terrorists”, and he may be offered two alternative plans by Washington and Kremlin to resolve the problem peacefully.

On paper, the purported American plan appears more advantageous for Turkey, but more concrete analysis will have to await next week’s high-level meetings in Ankara with the visiting team of Bolton, Gen Dunford and Special Envoy Jeffrey.

On the econ front, recent data releases – notably December manufacturing PMI and November-December trade figures -- suggest economic activity remains depressed, as we review quickly inside. Based on the trade data, we now see the current account deficit finishing the year at around $27 billion or 3.5% of GDP, markedly lower than most recent forecasts, on the back of a very steep decline in imports.

Meanwhile, the Treasury’s borrowing program for the first quarter of the year points to rather optimistic estimates on primary and overall budget balances, as far as we can see. Stuck between a rock and a hard place, or the need to limit borrowing to drive rates lower on the one hand, and the need to step up spending in the run-up to local elections on the other, we’ll be nervously watching what new tricks Ankara/Treasury will be pulling throughout the quarter.

Cosmo likens last week’s tremor in the lira to a dress-rehearsal of a possible attack in the spring, citing reasons to be mindful of going long on the currency.

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