Weekly Tracker: October 18-24

TURKEY - Report 18 Oct 2015 by Murat Ucer and Atilla Yesilada

Turkey and EU began negotiations on a deal that would see Turkey stop the flow of Syrian migrants to the latter in return for, among other things, opening of 6 new chapters. A break-through would be magnificent in terms of reinvigorating the “convergence play", but it is too early to bet on it because many EU members remain opposed to appeasing Erdogan.

While Turkey is not officially at war with Syria, she might as well be so. The evidence points to ISIS members as the perpetrators of the Ankara tragedy, while we still suspect Assad or Russia, as risks to stability from Syria are proliferating as we speak. Turkey managed to alienate Syrian Kurds during the week, as a new offensive by the Syrian army might push new refugees towards the border.

At home, a batch of October polls indicates that the elections will once again yield a hung parliament, with little change to the June seat distribution.

The interim government published the Medium Term Program (MTP) for 2016-18, somewhat unexpectedly, but the document produced little excitement, which is probably attributable to a number of factors, like the uncertain political context and the poor track record in meeting the targets set out in the MTPs. In terms of the key highlights, growth was revised down, inflation was revised up, and primary expenditure ceilings were breached once again, as it has become typical in recent years.

August BOP data showed a sharply lower current account deficit, but also outflows through the financial account; September budget data was poor, which suggests that the relatively solid performance through August could quickly reverse in the final months of the year; and July labor data showed that relative strength in the labor market continues, with employment growth somewhat outpacing GDP growth, y/y, which is quite puzzling still.

In this week’s MPC meeting, we expect the Bank to stay put and continue with its “wait and see” (or “let me see the Fed first”) approach, while keeping the (soft) language broadly intact as well. The Bank may start preparing us for another round of revisions in its inflation estimates, though, given that those revisions have already shown up in the MTP.

Cosmo sticks with His moderately bullish call on Turkish assets with a view on the next three months, but investors are very likely to begin asking hard questions about the aftermath of elections just about now, which may trigger a bout of sharp-ish profit taking.

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