Life in a parallel universe
Ankara is continuing with its whatever it takes approach in order to boost growth to a 5% trajectory, as it propagates the now-familiar narrative that this can comfortably be achieved without giving rise to imbalances -- and with a broadly stable lira. It also seems to believe this narrative wholeheartedly itself, trying to make it stick through myriad policy interventions, including in the currency market through state banks.
The reality on the ground is still looking different, however. True, the recession of 2018 was short, and economic activity, rather than contracting, will have moderately expanded in 2019, but this took a lot of stimulus, and the recovery doesn’t look all that strong, either. Importantly, we don’t think growth could ever accelerate to the targeted 5% trajectory under the circumstances – of weak capital inflows, no (total factor) productivity growth, poor confidence and extremely discretionary policy interventions in an environment of weakened institutions and liberties.
So, where, then, are we heading? We would surmise that Ankara’s ultimate hope is to turn its narrative to a self-fulfilling prophecy of sorts –or “manufacture a consensus” around it-- and muddle-through its way till the 2023 presidential elections. We are pretty certain that this won’t work, with these two narratives -- or shall we say parallel universes? – clashing at some not-too-distant future, culminating in significant market turbulence, and ultimately forcing a course correction of sorts.
We can’t tell exactly when and how we would get there, but we are pretty certain that we will. One possible trigger could come from politics, i.e. the Idlib War and the American sanctions, in particular. An alternate trigger could be the toxic combination of stimulus-driven growth (particularly through ever-lower interest rates and lax fiscal policy) and another bout of dollarization-cum-reserve losses (a ’la March/April 2019) unnerving the markets.
Assuming that the turbulence will hit sometime during the course of this year, we expect growth to remain weak at around 2.5-3% for the year as a whole, and inflation at around 12-13% by yearend, with downside and upside risks, respectively. In this sort of a stagflationary scenario, we do not see the current account deficit widening much, staying at around 1% of GDP – deteriorating through the middle of this year, largely on the back of base effects, but stabilizing thereafter.
Surely, at least two alternative scenarios could be considered, such as a replay of 2017, i.e. overheating with elevated imbalances because of excessive stimulus, or 2019, i.e. lackluster growth yet no major market turbulence, as Ankara continues to broadcast the “all is well view” thanks to a broadly supportive global environment. We think our baseline is by far the most likely one of these three scenarios.
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