Welcome to a Turbulent Spring

TURKEY - Report 03 Apr 2016 by Murat Ucer and Atilla Yesilada

The politics section is dedicated to explaining AKP’s three contradictory policy goals; the building of a patronage society at home, gaining regional influence and fitting in with the Western alliance. The growing threat from PKK and Syrian Kurds, as well as Russia, rendered immediacy to the accomplishment of these goals. A series of trials and tribulations await the party as it tries to convince her allies to accept her goals and then the public, about the necessity of a new Constitution.
The tests start with the appointment of a new CBRT Governor, where we will see just how much influence Premier Davutoglu has on the party. The refugee deal with the EU is important in terms of fitting in with the West, but new complications have cropped up, as Ankara will have to make concessions to buy a peace accord in Cyprus. As Syrian Kurds expand across Turkey’s borders, Ankara is faced with the unpleasant choice of threatening the U.S. with the closure of airbases, or making peace with the Kurds. Yet, the severest test for AKP will come in the form of a new Constitution, the rejection of which in parliament might force the party to call snap elections.
In the economics section, we once again opted for a Q&A format where we addressed a number of questions that seem to be on our minds nowadays. Despite the resilient and stronger than expected performance in 2015, we insist that growth should slow this year, which seems to be happening already.
The MPC’s reduction of the O/N lending rate was not that big of a surprise because the Committee has a well-established track record of easing when it could, paying only lip service to inflation dynamics. The latter, too, should moderate for a month or two, strengthening the Bank’s hand to continue cutting opportunistically. But aside from continued support from global monetary policy, particularly Yellen’s Fed, Turkey’s own fundamentals suggest that a reversal sometime down the road may be inevitable.
Trade deficit narrowed further in February on a 12-month rolling basis, but mainly on the back of lower energy imports, while monthly core deficit (seasonally-adjusted) has begun to deteriorate. The lira looks at fair value by some accounts, but leaves little t room for complacency by some others.
The authorities are done with handing out almost all of their populist pre-election promises, but they have been quite slow in delivering reform. But given the messy political context and the carry-trade money that is flowing toward Turkey for now, this should hardly surprise anyone.

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