Local election dilemmas
With less than five months left to critical municipal elections, AKP is rapidly losing support from voters. This means that it shall henceforth focus on the economy and elections, trying to preserve the status quo in foreign policy.
The need to balance Kurdish and nationalist votes require tough talk on Syrian Kurdish entity PYD-YPG, but no military action. In addition, with reports of a new indictment being prepared for Halkbank in a New York federal court, Ankara can ill-afford to antagonize the White House. The same White House is working on a plan to reconcile Turkey and the Syrian Kurds, which will be vehemently opposed by Ankara because of election-related concerns, but may have been received better behind the scenes. In any case, there is limited scope for improvement in the Turko-American relationship, but the downside, too, appears capped by deepening dialogue. All in all, few foreign policy shocks are lurking in the shadows for the time being.
At home, voters are slowly coming around the view that it is AKP and not evil foreigners which are to blame for the economy’s woes. This will increase pressure on the Palace to reflate the economy, but how? We review several attempts at “sly populism”, anticipating more to come, which is unlikely to end the stagflation, but almost certain to spook investors and creditors.
October cash budget improved over the same month of previous year, suggesting that Ankara is trying to contain the deficit, but the improvement owed largely to a favorable (most likely, nontax) revenue performance, as primary expenditure growth remained relatively elevated in nominal terms.
Citing reduced funding needs and a desire to contain interest costs to the budget, the Treasury said it cancelled three out of the 6 upcoming domestic auctions of next week, but keeping the auctions and reducing the borrowing amounts instead, would be the more prudent and market-friendly thing to do.
There are several important data releases next week, which also includes September balance of payments. We forecast the current account deficit (CAD) at around $1.9 billion slightly lower than the consensus ($2 billion), which, if more or less right, should reduce the 12-month rolling CAD sharply by over $6 billion, to around $45 billion, down from just over $51 billion in August.
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