The Beginning of the End?

TURKEY - Report 01 Sep 2015 by Murat Ucer and Atilla Yesilada

With the formation of the Davutoglu “Election Government” Turkey officially set foot on the trail of reelections, which will be held on November 1st. AKP made a historic decision to declare war on ISIS, which may shorten the time to defeat this vicious virus, but the fall-out may be more bloody terror. The level of PKK activity in Turkey no longer warrants the descriptive “terror”, it is civil war in 15 provinces. As such, we wonder whether there can be a safe ballot or whether President Erdogan would postpone the elections.

Along the same vein, a crackdown on the opposition media and journalists seems to have begun at our deadline. The latest polls reveal that once again AKP’s fortunes have begun to sag, with the party losing up to 2 percentage points within a month. We predict that if elections were to be held on time, AKP will perform worse than June 7th.

Political limbo, combined with a central bank that has no intention to lead, leaves the economy entirely on autopilot. This means that the economy is completely at the mercy of the global sentiment and hence, is accident-prone. Unsurprisingly, recent announcements from Fitch and Moody’s suggest that the rating agencies are concerned about the heightened political uncertainty.Although these are still very close calls, an outlook downgrade on September 18th by Fitch, and an actual downgrade on December 4th by Moody’s -- the latter in the absence of a government by then -- are now probably the likelier outcomes.

Growth has been relatively resilient, thanks to accommodative monetary and fiscal policies, but recent confidence data, among others, suggest that further weakness may be in store. The CBRT’s reluctance to act boldly reflects political pressures and the weaker currencies world over, but a further 10%-15% weakness in the lira is very likely to compel the Bank to act.

July trade data disappointed, as export weakness continued, with the 12-month rolling trade deficit rising to $78.6 billion from $78.1 billion earlier.Given the trend in recent months (partly driven by weaker tourism revenues), this should lead to an even sharper widening in the current account deficit, but we stick to our $35 billion or 5% of GDP forecast for now, acknowledging that risks are on the upside.

Now read on...

Register to sample a report