Turkey is at a very critical juncture with regards to political risk premia. There are a host of issues ranging from Syria to EU, some of which present new troubles to pile on top of the existing ones, and others, which may bring opportunities for markets and the economy. The politics section of this Weekly is different, because its ultimate aim is to measure the potential change in the political risk premium rather than analyze certain events in detail. Unfortunately, it is also not conclusive, because there are too many “unknown unknowns”, as Donald Rumsfeld had once put it. In the opinion of the politics author, the downsides dominate in the short-run, but a clearer picture should emerge in a month or so. Yet, reasonable people can disagree with this analysis, emphasizing the potential upsides like EU accession.
There is not much to report on econ side this week, so we throw our two cents here in the Executive Summary. The CBRT/MPC did the expected and left rates unchanged, as we’ve reported during the week. Governor Basci subsequently confirmed from Davos that “simplification” is on hold for now, basically saying that it is too early to quit the wide interest rate corridor in the face of heightened market volatility. But this sounds a bit awkward or even naïve to us, because market volatility in all likelihood would increase, not diminish, with Fed normalization, and as clouds keep gathering over the global economy, which, in turn, makes us think that “simplification” was more than anything a way to buy time perhaps. No wonder, then, that the CBRT policy is considered a major source of uncertainty by various observers, most recently by Fitch, even though our Cosmic Strategist thinks, as He details below, markets might have gotten used to it.
The presentation of the first Inflation Report of the year and December trade data are the two main attractions of the week. There should be no surprise on the former, as yearend inflation estimate has already been raised to 7.5%, while trade deficit should come in around $6.1 billion, i.e. around the preliminary data released earlier this month, narrowing to some $63 billion in 12-month rolling terms, from $65.5 billion in November.
The black sheep of the family, the Cosmic Strategist, is not a reasonable person and is given license to speculate. He thinks unless a “higher authority” such as rating agencies alert investors to political risks, they will not be priced further until calamity strikes, or upsides come into serious play. With investors having learned to live with an erratic CBRT, Turkey should lead a potential EM rally thanks to low commodity prices and depressed valuations.
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