Tragically disconnected
Turkey’s, what the politics author had dubbed, “saddle-point political equilibrium”, faded into a governance crisis over the past two weeks, with President Erdogan almost completely losing touch with the basic exigencies of the political and economic ecosystem he is in charge of. As a result, the sullen grumbling of the society is slowly turning into passive and active resistance, which feeds back into the political system as more noise, complicating Erdogan’s decision-making. The persistent Covid-19 outbreak, government scandals, souring of relations with the US and Russia appear to have contributed to Erdogan’s growing detachment from reality.
He thus needs to get his senses together and choose one of the three paths we have been outlining in our recent reports: a return to pragmatism, early elections or even more oppression to silence all dissent and criticism in the country. But he looks confused, which makes it even harder for us to decide which road he will take. We have no choice but to wait, during which period the economy and markets are unlikely to improve.
Economic activity has likely expanded moderately in the first quarter, but the momentum loss in recent growth indicators should morph into a more visible slowdown – even contraction, sequentially speaking—during the second half.
The CBRT’s inflation path and the yearend forecast of just over 12% looks very optimistic to us. Monetary policy uncertainty is enormous, as the Bank is stuck between a rock and a hard place more so than usual, but the likelihood of a policy mistake in this environment is very high.
The budget is doing well, comparatively speaking, but we highlight several caveats suggesting this does not mean that all is good nor that Turkey has much fiscal space to use against the ongoing Covid wave.
On the external sector front, we are racing against time. The current account has yet to turn to a surplus, to make balance of payments numbers add up. We see sharp deceleration in growth -- and thus, imports -- on the back of heightened market volatility as the only way out, though timing, needless to say, is more elusive than ever.
Please note that there will be no Weekly Tracker today. We will also not publish our Covid Watch on Monday, as we cover the latest developments as an annex to this report.
Now read on...
Register to sample a report