Gegen Die Wand
Growth may have sequentially moved to moderately positive territory in Q1, after sharp contractions in the previous two quarters, thanks to substantial fiscal spending and a surge in state bank lending. But this relative pick-up is entirely transient, we think, as the reality on the ground, fundamentally speaking, is hardly any better: markets remain edgy, political risks have been mounting, the lira has weakened markedly despite stealthy foreign exchange sales by state banks, confidence remains low, Ankara’s much-boasted fiscal anchor appears unmoored and the ‘credit impulse’, which Turkish growth heavily relies on, should soon turn negative again.
On politics, Turkey has probably entered a state of permanent disequilibrium, characterized by multiple challenges to President Erdogan’s one-man rule. Uncertainty caused by repeat Istanbul elections, which will now be held on June 23rd, rising terror threat from PKK and ISIS, as well as the ongoing S-400 tension with the US promise a very high political risk profile for Turkey in the next three months.
We still cannot see how Turkey can get out of this economic and political malaise without a comprehensive economic program that involves, inter alia, a coherent macroeconomic framework, fiscal consolidation, ample external financing and last but certainly not least, a bold and transparent plan to once and for all fix the bad debt problem, which, incidentally, is yet to be fully acknowledged. This is another way of saying that an “IMF program” is a must, although, needless to say, the question(s) of how we get there, if at all, and in what time frame and at what cost, remain as elusive as ever.
Call us the nutty old gamblers, but we’re still betting that the market mayhem, combined with heightened pressures from the business community of all stripes that calling the IMF would be the politically “Pareto superior” strategy, will persuade President Erdogan to sign up to a program sometime in the next several months. Put differently, we stick to our baseline that Ankara will soon hit the “proverbial fork in the road” -- and will take the right path. After the recent political developments, in fact, we think the chances of President Erdogan redeeming himself by returning to orthodoxy and inviting the IMF have risen.
If that indeed happens, we would see growth rebound later this year/early next, thanks to a resumption of capital inflows and a turnaround in confidence, but the economy to still contract by some 3% this year. Inflation would end the year around 16%, before decelerating to high single digits by end-2020, on the back of, inter alia, currency stability and improved inflationary expectations.
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