Pre-Referendum Stock Taking
We consider the presidential referendum a threshold event in Turkish history. Our poll-of-polls reveals a very tight race, but based on past experience and AKP’s “institutional advantages”, we assign 60% odds to a YES victory.
Nevertheless, we admit the low reliability of polls because of the “shy voter” phenomena and undecideds still hovering around 10%, and hence cover the implications of a NO result in detail. The most important consequence will be early elections and the continuation of radical or combative AKP policies through most of the year.
In case of YES, we foresee a bifurcated future. In our base-case scenario, President Erdogan sticks to his campaign rhetoric to settle all outstanding political accounts at home and adopts a more hawkish tone abroad. More trouble with the EU and the U.S. is likely to ensue.
It is also possible that Erdogan’s blustery rhetoric is only a propaganda tool, meaning that once he is vested with formal powers, he will manifest his statesman’s side. While he is very unlikely to adopt economic orthodoxy, there is much he can do at home and in diplomacy that can propel Turkey to a more desirable orbit.
In the econ section of the report, we do a brief Q&A, focusing on 10 questions that might nowadays be on our readers’ minds. Growth surprised again in Q4, which was driven by a stronger-than-expected rebound in private consumption, but the latter did not look particularly broad-based. Looking ahead, growth will be assisted by cyclical drivers, such as government stimulus and exports, but longer term factors continue to point to a structural slowdown, with little reason to be optimistic going forward.
The government now expects the budget deficit at 2.6% of GDP, a full percentage point higher than targeted, but even that is conditional on corrective measures being put in place during the second half – not a foregone conclusion. Monetary policy, political pressures notwithstanding, may need to stay tight in the post-referendum period, regardless of the outcome, given that inflation should stay in double-digits throughout most of this year by our calculations, while the lira remains under pressure.
The current policy mix – comprised of loose fiscal/tight monetary policies – may have to continue in the post-referendum period, yielding higher rates and mediocre growth, but unlike in the textbook model, lira may continue to weaken.
On the technical side of things, the Credit Guarantee Fund’s resources have been beefed up, which should lead to stepped up lending, but not as much as headline figures (TL250 billion) suggest, nor should this expansion translate to markedly higher growth. Meanwhile, the Sovereign Wealth Fund has yet to declare its strategy, which may have to wait until after the referendum.
Now read on...
Register to sample a report