Geopolitical risks rise further

TURKEY - Report 19 May 2019 by Murat Ucer and Atilla Yesilada

US-Iran tensions, the exploration controversy in waters surrounding the divided island Cyprus and new attacks on rebel positions in Syria’s Idlib Province compound Turkey’s political woes. We consider only Idlib a serious problem for national security and for AKP’s chances of taking Istanbul back.

In terms of S-400s, a back-door deal appears to be shaping up, but President Erdogan will probably need more pressure from markets before signing up to it.

Six post-March 31st polls show Mr. Ekrem Imamoglu in the lead in Istanbul race, with rival camps trying to recruit protesting AKP voters. While AKP has developed a new strategy to this end, its effectiveness remains questionable. There seems to be no easy path to victory in Istanbul for the tired Mr. Binali Yildirim.

This week’s data releases were broadly in line with the scenario we sketched out in our recent quarterly report (of May 10, 2019). March industrial production data was better than expected confirming that GDP growth has likely entered positive territory in Q1, q/q, but the talk of Turkish economy having bottomed out misses the point, in our view.

Unemployment continued to rise in Q1, despite very substantial hiring by the public sector over the past year or so.

The central government budget has continued to deteriorate through April, despite some expenditure restraint, which should at any rate prove unsustainable, because it is driven mainly by cuts to investment spending.

On the BOP front, the current account deficit continued to narrow in March, at a somewhat faster than expected pace, but external financing remained awfully weak. Interestingly, unidentified inflows of late last year have morphed into outflows this year, on average, which need close monitoring. Meanwhile, according to the CBRT’s latest survey, consensus on the macro outlook deteriorated further.

Last but certainly not least, Ankara’s methods and interventions to square an open F/X regime with “financial repression” are becoming more discomforting and less sustainable with each passing day.

Cosmo points to weakening risk appetite for EM and deteriorating flow dynamics at home, predicting another currency spasm in two weeks, if President Erdogan doesn’t compromise on the S-400 purchase.

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