On a wing and a prayer (again)
As the end of 2019 approaches, the future is cast in two radically different narratives. Ankara wants us to believe that the worst is over, thanks to all the right policy interventions of the past year or so, and the very successful “rebalancing” that is now complete should pave the way toward 5% growth next year. The alternative narrative, needless to say the one we are still subscribed to, insists that growth will likely remain in the doldrums for the foreseeable future, as the leveraging excess of the last decade associated with a credit-fueled construction boom works itself out. Placing it back on a sustainable path calls for a comprehensive program, but that can only happen after Ankara is forced to make the right choices, faced by considerable market turmoil.
True, this “proverbial fork in the road” has been postponed, thanks to the Fed ‘pivot” of earlier this year and President Trump’s personal yet ill-greeted efforts to save Turkey – so far -- from potential US sanctions. But we still believe Ankara’s narrative is way too complacent, the reality on the ground is much closer to ours and hence, a crunch time should sooner or later arrive.
For one thing, notwithstanding the rebound from last year’s troughs, economic recovery looks fragile, as the wobbly nature of the recent indicators attests to. The credit channel remains largely clogged with private bank credit growth hovering barely in positive territory, despite a massive 1000 bps reduction of the policy rate since September and myriad of other interventions by Ankara.
The current account adjustment is surely a positive, but it is a partial success at best, because it is largely driven by a collapse in investment, rather than “competitiveness gains”, contrary to some claims. That the portfolio inflows remain weak also attests to the problematic nature of this adjustment that has clearly failed to impress investors.
There was some good news on the inflation front, which should fall materially further in October, but a good chunk of the positive “surprises” was driven by unprocessed food prices that systematically undershot seasonal averages. Looking ahead, inflation should edge up to low double-digits in November/December, and in all likelihood, remain sticky thereafter. At the presentation of the latest Inflation Report, the CBRT sounded much more optimistic than this, but that’s probably because it has no choice: the Bank will continue the rate cuts longer than the current market pricing indicates, given that its sole mission nowadays is to reduce policy rates to single digits.
In fact, the additional round of deposit dollarization that this may trigger, combined with heightened political and geopolitical risks from the usual suspects, namely Syria, the US and domestic fronts, constitute the key triggers for a potential market backlash, no matter how elusive the timing and nature of these things may be.
All in all, we stick to our baseline scenario. We do not see how Turkey could muddle through for another year or two without major road accident(s), which means that we should brace ourselves for considerable market volatility, and hence, the crunch time to arrive in a not-so-distant future.
Now read on...
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