The Turkish economy closed 2017 with turbo-charged growth -- of 7.4%, and heightened vulnerabilities as a result, with inflation running at double digits and the current account deficit at a disconcerting 5.6% of GDP. Going forward, the government has one priority in mind, which is to sustain this performance through next year’s local (March 2019) and general/presidential (November 2019) elections, but it’s highly doubtful that this is feasible. How this tension will play out, is the key question that stands ahead of us.
With monetary normalization underway and short-term funding costs on the rise, the global liquidity environment is no longer as accommodating, which is bad news for Turkey’s highly external financing-dependent economy. Unlike in 2017, stimulus space is severely hampered as well, basically because it all boils down to financial sector’s ability to finance it, which simply is not there. True, stellar growth headlines may continue for another quarter or two, but growth should inevitably and visibly slow some time during the second half of this year and beyond, given lack of adequate inflows, subdued credit growth and mounting distortions on the supply side of the economy.
In fact, recent indicators already point to a momentum loss of sorts, which has become somewhat more discernible in March. Moreover, long-feared corporate (credit) risk has begun to materialize -- which is certain to act as an additional drag on growth going forward -- as lira’s steady depreciation and heightened volatility continued to take its toll on corporate balance sheets, with a number reputable companies lining up for loan restructurings.
Because Turkey’s economic and to a lesser extent, foreign policy settings are immutable until the elections, but that they are at once looking increasingly untenable under the circumstances, we continue to take early elections as our baseline -- to be held sometime this fall. In this “good case” scenario, a clean sweep of elections by President Erdogan and the AKP-MHP alliance bears the potential for positive policy adjustment, and that of avoiding possible road-accidents along the way.
Put differently, after the early elections, it will be all up to President Erdogan, who we think will win the Presidential elections, to decide where he wants to take Turkey next. There is a chance that pragmatism may rule, partly in response to heightened turmoil, leading to improvements in Turkey’s relations with the West, a more consensual approach in domestic politics and more orthodoxy in the calibration of economic policies.
Alternative and much less constructive scenarios are also possible to conceive, but it is a little too futile to entertain or discuss them at this early stage.
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