Week of July 24
Our political analyst is not yet ready to capitulate to the majority scenario that AKP will exploit the coup attempt to institute a more authoritarian regime. We empathize with AKP’s draconian purges given the realistic threat assessment from the Gulen Order. We first analyze the evidence for authoritarian elements in AKP’s actions after the declaration of State of Emergency. We then review the counter-evidence and lay out a roadmap against which we will weigh AKP’s intentions. We also provide a logical argument as to why AKP can’t deviate too much from the path of democracy. Finally, we do see a remote but important upside.
We confine this week’s economics commentary to this Summary. The moves by the two rating agencies – by Moody’s to place Turkey’s external currency sovereign rating under review for a possible downgrade in the next 1-3 months (currently investment grade (IG) with a negative outlook) and S&P to drive Turkey another notch below IG (placing it two notches under) – are a bit of a rush decisions, in our view. But this hardly matters. In order to avoid an ultimate downgrade from Moody’s, Turkey will have to deliver on policies like, inter alia, through a rate hike and announcement of a fiscal package perhaps, and adopt a less defiant language toward the agencies. Yet, the odds for such action do not seem very high for the moment.
The messages from the CBRT Governor at the delivery of the July Inflation Report this Tuesday will be monitored closely. We do not expect a major revision to the yearend inflation estimate (of 7.5%) – perhaps the weaker lira effects offset by a lower food inflation assumption -- but we’ll be looking to the Bank’s take on recent developments and any signals it may give on the future course of monetary policy.
The key release of this week is June trade data on Friday, which, based on preliminary data from earlier this month, should yield around a $6.4 billion deficit (June 2015: $6.3 billion), suggesting a slight widening in the 12-month rolling deficit. The widening seems driven by a sharp jump in non-energy imports (of almost 15%, y/y, we estimate), the nature of which, we’ll need to see, i.e. whether it looks like a one-off occurrence or points to a trend-reversal of sorts. Meanwhile, a host of confidence indices will be released this week, but having been compiled before July 15th, they will not tell us anything about the impact of the attempted coup on confidence.
Cosmo doesn’t find an investment case for Turkey, agreeing with the majority that over the medium-term economy and markets could deteriorate. But, the global risk appetite is so audacious, nimble readers could find trading opportunities in the short run.
Please note that we are putting our Tracker on its customary summer holiday today -- a week earlier than usual -- because we plan to publish a brief Quarterly report next Sunday, which will look, as best as we can under the circumstances, to the remainder of the year and a little beyond.
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