Time for Plan B in pork-barreling?
As economic data published in January-February reveal an economy mired in recession, and the few polls available to public suggest AKP-MHP failing to gain ground, the administration may be switching to Plan B in electoral populism, namely fiscal and monetary expansionism. Unconventional methods of currying favor with voters, such as an ever-broadening range of necessities being sold in municipality-run stores at discount prices could also be part of the plan.
While rebellion and defections from CHP (to smaller DSP) is also rampant, the broadening of AKP-MHP alliance to new cities and to city assemblies suggest that private polls are not to the satisfaction of Messrs. Erdogan and Bahceli, who consider the approaching elections as vital to the unity of Turkey and the survival of the presidential system. A few fragments of poll data hint that AKP-MHP may lose Ankara and Adana in addition to the traditional CHP stronghold Izmir, but stand a good chance to capture Eskisehir.
Headline grabbing loan deferral negotiations as well as the ongoing spate of bankruptcy protection applications should remind readers that a stable currency doesn’t lessen the problems of Turkish corporates, which now suffer from declining cash flow on the back of contracting economic activity. This, in turn, is being transmitted to bank balance sheets, which are becoming clogged with distressed assets, the recovery of which are doubtful in the absence of a quick and V-shaped recovery. In fact, Ankara’s efforts to prevent insolvencies and lay-offs are creating zombie enterprises, sapping the vitality of the banking system and creating a ‘doom loop’. We maintain that until Ankara comes up with a well-financed and comprehensive circuit-breaker to end this vicious cycle, the economy can’t be considered safe and sound.
Industrial production declined by almost 10% in December, y/y, and 1.4%, m/m, which corresponds to quarterly contractions of about 7.5% and 5.5%, respectively. Likewise, the unemployment rate shot up visibly further in November to 12%, from 11.6% in October. These data confirm that GDP has likely declined quite sharply, q/q, in the final quarter of the year.
The Ministry of Treasury and Finance data corroborated what the cash data reveled – and we already reported -- last week. The budget ran an overall surplus of some TL5 billion, but that was thanks to the advance profit transfer from the CBRT (of some TL33 billion), as primary expenditures surged by over 60%, driven, among others, by investment spending.
The current account deficit (CAD) was $1.4 billion in December, ending the year at $27.6 billion or some 3.5% of GDP. There were modest outflows through the financial account ($0.5 billion) and a reserve build-up of almost $1 billion in December, all of which was financed by unidentified inflows, a.k.a. errors and omissions. The year as a whole was similar, with unidentified inflows and CBRT reserve drawdowns financing the CAD. Meanwhile, according to the CBRT’s latest expectation survey, analysts continue to downgrade their forecasts for 2019, but still see positive growth and a material CAD for the year, which seem a bit off to us.
The CBRT reduced reserve requirements on lira deposits by 100 bps, which, we reckon, could inject around TL5 billion liquidity into the system, while the move as such attests to the dilemma that the Bank is faced with -- between holding the lira steady through the elections, but helping to ease ongoing payment problems among firms and the credit draught.
Finally, in its review of Turkey’s sovereign rating last Friday, S&P kept things unchanged after all– the rating at 4 notches below IG and the outlook at stable. We had said admittedly without much conviction that an upgrade of the outlook was a possibility, given that the sovereign is already rated deeply in junk territory, more so than other agencies.
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