What’s in Our Minds?
This month’s report arrives in your inboxes in a Q&A format, thanks to several meetings with groups of investors and experts that allowed us to focus on the FAQ, and areas we consider important yet have been missing from the radar.
In politics, Turkish Forces and allies are rapidly moving towards Afrin city, which they’ll conquer after bloody battles. It is important to understand that Turkey’s Syrian policy is not so much motivated by elections, but by deep fears about a Kurdish state and Assad victory. Turkish military will march to Idlib or Manbij next, to avert these outcomes, risking conflict with Iran-Russia or the U.S.
On the most queried issue of sanctions, there are at least 4 areas where presumed violations/offenses of existing legislation could allow U.S. to impose sanctions on Turkey. Whether sanctions will actually be imposed depends on Turkey’s level of cooperativeness in Syria, which is a point also ill-understood. Ankara can’t compromise in Syria before President Erdogan and AKP win the next election.
At home, AKP and MHP officially forged an electoral alliance, which should secure them a majority in the next parliament, but caveats exist, such as a rival alliance stealing AKP votes or wholesale Kurdish desertion of the party. Erdogan remains our favorite to clinch the presidential elections.
There is no upside to EU relations, in fact the long-awaited Erdogan summit with EU leaders to sort out differences by the end of March might be canceled.
In economics, notwithstanding continuing investor interest in the country’s fortunes, there seems to be a consensus of sorts that Turkey is by far one of the more vulnerable emerging markets, given the shifting macro environment globally, and rising political risks domestically.
Generally speaking, growth data is still coming in strong, but pockets of weakness (e.g., in the housing market) are emerging, while forward-looking indicators, like credit growth, signal further weakness ahead. The government seems fixated on achieving at least 5% growth for this year and beyond, and has been desperately seeking stimulus measures to achieve this. But the effectiveness of these measures is likely to be limited, simply because the real constraint is the financial sector’s (lack of) capacity to finance such growth rates – a reality that the government has yet to come to grips with.
We see lira staying under pressure and the CBRT to muddle through, maintaining the current stance as long as it is feasible.
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