Weekly Tracker: September 6-12

TURKEY - Report 06 Sep 2015 by Murat Ucer and Atilla Yesilada

On the day of the publication of our monthly report last Tuesday, the police raided the headquarters of pro-Gulen KOZA-IPEK Holding on charges of money-laundering. We remain concerned that a new crackdown may be in progress, which may spill over to KOZA-IPEK’s media arm, and other dissident press groups.

The events in the Southeast and East are more than terror, with Turkey and PKK engaging in an unwinnable war, which ultimately threatens the desire of Kurds to coexist with Turks. It will probably get worse and may significantly affect the course and outcome of the elections. So far AKP is ahead in the polls, but unable to secure a margin sufficient for a single party government according to our math. Yet, contemplated alliances with SP and BBP may change the calculus.

August manufacturing PMI data was weak, with a below-50 print, suggesting further weakness is in store. This is confirmed by preliminary August trade data, which showed non-energy imports shrinking by over 10%, y/y. Combined with relative strength in exports, this has led to a sharp narrowing in the trade balance over the same month of a year ago. The bottom line is that the Wile E. Coyote’s fall – or the much-anticipated narrowing of the deficit -- might have finally resumed. Meanwhile, the CBRT’s CPI-based real effective exchange rate index dropped, as predicted, to its lowest level since 2003, which, combined with weak growth ahead, should help to continue curbing imports.

But this is all forward-looking stuff. This week’s (second quarter) GDP and (July) current account data are likely to paint a somewhat different picture: a relatively resilient economy (still growing at around 2.5%, y/y) and a widening current account deficit (estimated at around $3 billion this July vs. last July’s $2.4 billion).

Parenthetically, statement by Moody’s analyst this week – that the agency’s baseline does not entail a rating downgrade -- was encouraging, which confirmed our reading that, should there be a government by November, a downgrade may indeed be avoided. The problem is that enormous amount of uncertainty prevails on that very issue.

Cosmo claims He smells an opportunity to go long on Turkish assets, as the EM sell-off accelerates and CBRT is forced to hike rates. Could it be that He smells a rat instead?

Now read on...

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