Political and Economic Update
There was dearth of new branded polls last week, which is rarity for Turkey. Several pollsters commented that because of the high ratio of undecideds they have chosen not to publish results.Less reliable evidence confirms our finding that the race is a dead heat. We suspect AKP will find new gimmicks to win, which might spook the markets and cause permanent damage to diplomatic relations.
We currently bet that the row with EU members is just a ploy to win the referendum, but EU might have drawn different lessons. We would not rule out a suspension of accession process by the EU, unless Turkey decides to return to the path of democracy soon.
In Syria, new evidence suggests that the U.S. is unlikely to include the Turkish Army in the Raqqa campaign, while Russia wants it out of Syria. Syrian Kurds are exploit ing Turkey’s diplomatic isolation to accelerate nation-building, which renders it difficult for Ankara to pull out.
There were a number of important data releases this week. The 12-month rolling current account deficit (CAD) widened a bit more than we expected. Inflows recovered somewhat in the month, but in 12-month rolling terms, they continue to fare markedly below CAD, necessitating the use of CBRT reserves and/or increasing reliance on unidentified inflows. (Un-)employment and budget data were both poor, while the 24-month ahead inflation expectations were at their highest level since the data has begun to be compiled.
Corporate sector’s foreign exchange position is finally receiving the attention it needs from the government, it looks like, but being a CAD country poses a dilemma of sorts in the tackling of the problem.
Moody’s downgraded Turkey’s sovereign outlook to negative from stable, citing growing “domestic and external pressures on Turkey's credit profile”. The Agency seems particularly concerned about government’s efforts to boost growth in the short term observing that, “weaker growth is negatively impacting Turkey's key credit anchor -- its healthy public finances and low government debt.” A bigger problem is that leaving the referendum behind will solve little in the way of soothing the concerns raised by Moody’s.
Cosmo says thanks to a newly vigilant CBRT, markets are safe and possibly profitable until the referendum, but a sell-off is very likely afterwards.
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