Play it again, Sam
Operation Peace Spring is not yet over, as Turkey, Kurds and now Assad’s army (and its sponsor Russia) jostle for positioning in the contested geography, with sporadic violations of ceasefire continuing through this Sunday. US soldiers returning won’t help the uneasy truce.
According to some news flow, US Congress is still mulling various sanctions on Turkey, though timing and content are very uncertain. On the other hand, allegations of war crimes by the Syrian National Army (the Turkish ally) and new warnings by the State Department about “getting rid of S-400s” make a compelling case about Turkey’s trial by sanctions not being over.
Halkbank, the Flying Dutchman of Turko-American relations, was spotted in a Manhattan court recently, forcing us to regurgitate five years’ worth of dusty material about Reza Zarrab, Iran sanctions violations, potential fines and what not.
To save your appetite for the quarterly/forecast report that we plan to publish next Sunday, we contain economic commentary to this executive summary. Sectoral confidence indices continued their bumpy ride rising again in October, after a retreat in September. We estimate the overall index, due next Wednesday, should rise by 3-4 percentage points, but all indices remain generally depressed, sending, in our view, no convincing sign of a robust turnaround.
Given next year’s growing budget hole, which makes the 2.9% of GDP target way too optimistic, Ankara is scrambling to find new revenue sources, like the introduction of a few new taxes and tax brackets (which, at some 0.1%-0.15% of GDP, are not adding up to much for now) and entertaining some fairly dangerous (or imprudent, to say the least) ideas, like the transfer of (unrealized) F/X revaluation gains of the CBRT to the Treasury. The CBRT is likely to be queried on the latter in the Inflation Report presentation next Thursday, but we doubt the Bank staff can stand in the way even if they tried, if the Palace/Ministry decide to go ahead with it. These measures attest to the terrible impasse that Ankara is at: that of filling a growing budget hole while trying to boost growth, the solution to which often leads to some form of monetization.
Turning back to the Inflation Report, we should see the Bank revise its yearend inflation forecast markedly down to around 12% from 13.9% in the July report, as it already signaled in last week’s MPC statement (see Predictably, MPC cuts more than predicted, October 24, 2019). Parenthetically, we estimate the October CPI-inflation at little over 2% (due November 4th), which, if true, could drive the 12-month CPI-rate to around 8.6%, down from 9.3%.
Apropos the topic of inflation, President Erdogan reiterated his theories during a live interview on Turkey's state-run broadcaster, which, in a nutshell, went something like the following: “Thanks to recent changes (meaning, around the dismissal of the CBRT Governor), we shall, God willing, get to single-digit interest rates soon, after which inflation will fall faster, and after which, investment will surge”. (Click here for English; here for a lengthier Turkish coverage.) These words should be taken more seriously than ever because, as we’ve noted ad nauseum before, President Erdogan is running monetary policy at this stage for all practical purposes.
Lastly, the key data release of the week, alongside October manufacturing PMI (November 1), is September trade data (October 31st), which, based on the Ministry data released earlier, should yield a deficit of $2.0 billion, with the 12-month rolling trade deficit remaining broadly unchanged at some $26.5 billion.
The Cosmic Guru says: Turkish assets are not resilient, just as lemmings rapidly scaling steep cliffs is not a fitness exercise...as usual, He makes no sense.
Now read on...
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