Political and Economic Update
Because CHP appealed to the Constitutional Court to have the constitutional reform bill declared null and void, the date for the referendum is still not certain. However, AKP is running scared, as even its constituency is having doubts about the wisdom of an executive presidency. Latest poll data is not illuminating; this is going to be a very close race, which is likely to raise the level of uncertainty for economic agents.
The Syria story is becoming more intractable by the day. Astana talks yielded very little progress towards a final peace process, just as Trump decided to establish safe zones in the country, but where? Turkey is worried that the American leader might opt out for Syrian Kurds. Erdogan is finally realizing the horrific cost of Turkey’s military entanglement in Syria, but it is too late to pull out.
Turkey’s love-and-hate relationship with the EU writes a new chapter each week. The U.K. and Germany are willing to tolerate Ankara’s vicious crackdown and loud trash-talk for different reasons, but the Parliamentary Assembly of the Council of Europe is up in arms. Greece’s refusal to return 8 allegedly Gulenist soldiers could cause a new eruption in conflict, but we think the real problem is that of EU slowly giving up on rehabilitating Turkey.
As expected, Fitch downgraded Turkey to below IG, which seems to be driven almost entirely by political concerns, while keeping outlook at stable. S&P, too, had a downgrade to deliver on Friday – of the outlook from stable to negative -- but because the Agency is already rating Turkish credit two notches below IG, it was received almost sarcastically.
The two key releases of the upcoming week are January inflation and December trade data. Consensus forecast on January CPI is 1.8%, while ours is slightly lower. December trade deficit should come in at around $5.6 billion and should hence narrow, according to preliminary Customs Ministry data, to a 12-month rolling $55.9 billion from $56.6 billion in November.
Another attraction of the week is the first Inflation Report of the year, which should, in principle, lead to a visible increase in CBRT’s yearend CPI-inflation forecast of 6.5% in the last report (of October 2016).
Cosmo says after Fitch downgrade, TL-denominated markets might find peace for a brief period, but until Ankara repents its weird inflation theories, there is little upside for Turkish assets.
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