This time is different
After an exceptionally volatile August, markets have stabilized and turned even constructive in recent weeks, relatively speaking, on the back of myriad of interventions by the government, but most importantly thanks to the release of Pastor Brunson from prison. Yet, the damage is done. We fear that a vicious cycle or a “doom loop” dynamic is now at play, with shrinking economic activity and a growing bad debt problem exacerbating the credit crunch and causing further economic weakness as a result.
Current calm notwithstanding, we still believe a comprehensive and “with money” IMF program is needed to restore policy credibility, deliver the requisite fiscal adjustment, enable credit flow back into the economy -- and ultimately, bring back growth. In this sense, while the numbers have surely changed since our last Quarterly (of August 2, 2018), our baseline thereof hasn’t: we are still betting that after enough trials, errors and punishments, Ankara will eventually change tack and deliver Turkey to salvation.
We are now working with consumer price inflation ending the year around 26%, and growth slipping sharply into negative territory, q/q, late this year/early next, with a sizable contraction at around 3%-3.5% for the year as a whole. The sort of good news is that the latter, combined with the sharp lira depreciation so far, should narrow the current account deficit substantially in the months ahead, to around $34-$35 billion or 4%-4.5% of GDP this year, and to some $14 billion or around 2% of GDP next year.
Needless to say, the future is “unusually uncertain”. Our 2019 forecasts are predicated on the above-mentioned assumption that after a few volatile months, the government will have agreed to an IMF program sometime during the first half of next year, possibly soon after the March local elections. In such a scenario, we would see a very weak first half turn into a mild recovery in the second half, while inflation would also start decelerating by the middle of next year, perhaps ending the year around 17%, thanks to relative lira stability, improved policy credibility and tighter financial policies. The lira, looking undervalued now from a fundamental perspective, would also possess some scope for real appreciation under such a scenario.
To be sure, an IMF program would carry its own risks, notably on the implementation side, and how exactly we get there remains a very big, open question. Furthermore, Ankara staying defiant and choosing to go it alone – along a more experimental and disorderly path -- is also a very strong possibility. But we leave surmising on the macroeconomics of such unpleasant scenarios to future reports.
Now read on...
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