Political and Economic Update

TURKEY - Report 15 Oct 2017 by Murat Ucer and Atilla Yesilada

As the Turko-American visa ban enters its second week, hopes for a compromise are high, but concrete developments are meager. Ankara continues to implicate the American “Deep State” in the July 2016 coup attempt. Escalation of the conflict is unlikely, but the mutual ban appears here to stay.

Turkey’s dilemmas at its south are rising by the day, with investors still paying scant attention. We claim that this is the front where the next big shock will emanate from. War for the dominion of the contested city of Kirkuk may be just around the corner in Iraq, as Turkish forces settle at the Afrin-Idlip border, with potential for resistance still looming on the horizon.

At home, AKP’s crisis is confirmed by President Erdogan who wants at least three big city mayors to resign. There is widespread resistance among the rank and file to the so-called reform. The new polls we analyze reveal only minor loss of support for the party and no discernible increase for the opposition, but an unusually large amount of uncommitted voters could be the harbinger of AKP’s woes.

It was a relatively quiet week on the data, or more generally on the econ front. The current account deficit surprised favorably on the downside, with the 12-month rolling deficit declining slightly, but: (i) it should rise back up significantly in September, (ii) monthly data continues to show deterioration in the core balance, and (iii) financing remains extremely reliant on portfolio inflows, with little sign of a visible pick-up in private sector net borrowing.

With the very strong July base-effect out of the way, industrial production growth slowed to a more reasonable pace in August, but remains robust, which should continue to be the case a few more months.

Cosmic Strategist sketches a long run view of the exchange rate and bond market, explaining why global EM risk appetite won’t save them.

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