Weekly Tracker: Jan 31- Feb 6

TURKEY - Report 31 Jan 2016 by Murat Ucer and Atilla Yesilada

Peace talks in Geneva are finally underway, but expectations for a break-through to end the five-year war are very low. Meanwhile, Russia is cooperating with PYD, the Syrian Kurdish entity, to encircle Turkey from the South, a harbinger of more regional tensions to come.

The campaign to put down the insurgency in the Kurdish cities ought to be over in a couple of weeks, but it is too soon to declare final victory. AKP doesn’t have a feasible plan for a political solution. In its absence, unrest is likely to percolate once again.

As the new Constitutional Committee begins to draft a new basic law, President Erdogan launched his campaign for Executive Presidency. Turkey’s two-year long election cycle might not yet be over, if he is indeed serious about including such an amendment in the new Constitution.

There was virtually nothing new in the CBRT’s first Inflation Report presentation of the year. We think the Bank is in denial about what drives inflation and what to do about it. As for the rate outlook, the Bank will try to muddle though looking for an opportunity to lower the O/N lending rate, and consider tightening of any sort only when it is forced to.

Trade deficit ended last year at about 8.8% of GDP, down from 10.6% the year before, while core deficit deteriorated to 4.7% of GDP, from 4%, meaning that all adjustment owed to a sharp decline in energy bill and, to a lesser extent, gold trade turning positive.

After a surge in November-December, a host of confidence indicators already retreated back to their October levels. It is too early to tell, but we continue to find the government’s 4.5% target overly optimistic.

The key data release of the coming week is January inflation. The consensus forecast for CPI is around 1.7%, m/m, and 9.5%, y/y, mainly on the back of administrative price hikes and adverse effect of poor weather on food prices. We broadly concur, a huge amount of uncertainty around food inflation notwithstanding.

Cosmo predicts a profitable month for EM assets, where Turkey ought to lead the rally.The Achilles’ Heel remains politics, but as they say, “no pain no gain”.

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