Political and Economic Update
Sundays have become synonymous with the word “crisis” in Turkey. We start with unconfirmedand not too credible news of the U.S. State Department getting ready to levy fines on some Turkish banks for violating Iranian sanctions, which might disturb markets on Monday.
At home, President Erdogan’s effort to reform the party is causing deep anxiety, as three mayors refuse to resign. According to preliminary polls, reform has not thus far brought back disillusioned voters.
Abroad, EU leaders decided to reduce pre-accession aid to Turkey, while expansion of Customs Union remains out of question. This is not the end of the story, as Turkey continues to persecute Turkish and European human rights activists, while German authorities complain of broadening spying efforts. The U.S. State Department stated that concrete progress has been made in resolving the visa bans, but we see no sign of it, as Erdogan continues to criticize American policy publicly. Finally, in Kirkuk and Idlib (Syria) a fragile calm reigns, but a Kurdish civil war and attacks on Turkish troops can’t be ruled out.
September budget performance was strong, as signaled by cash-based data released earlier, thanks to both strong growth in tax revenue and restraint in primary spending. It is way too soon to uncork the champagne, however. The unemployment rate edged up slightly in July, as service jobs dropped unexpectedly, m/m. Although we expected this, it came a bit sooner than envisaged. Finally, inflation expectations kept deteriorating in October, while private economists, unsurprisingly, see a different kind of 2018 unfolding than envisaged by the government, as conveyed to us by its latest MTP.
The key event of the upcoming week is the MPC meeting on Thursday. We see no change in short-term rates and the maintenance of a relatively hawkish language as by far the most likely outcome, but we would not completely rule out a modest upward move – like an increase in the Late Liquidity Window rate -- given the ever-deteriorating inflation expectations.
In corporate news, telecoms giant Turk Telecom might be nationalized, while the Turkish Wealth Fund is reported to be seeking a $5 billion loan from international banks.
Assuming news of U.S. fines on Turkish banks is shot down, Cosmo predicts relief for the grief-stricken TurkishLira and bonds.
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