Where does the buck stop?

TURKEY - Report 18 Oct 2020 by Murat Ucer and Atilla Yesilada

On Saturday midnight Azerbaijan and Armenia agreed to a second ceasefire, which may prove durable unlike the first one. Turkey began testing of the Russian made S-400s on Saturday, which raises the threat of the new Congress immediately attending to passing the CAATSA legislation on Turkey. New tensions in East Med will most likely not lead to EU sanctions. The most imminent threat from foreign affairs is the embargo on Turkish exports by the Arab World ex-Qatar.

President Erdogan upped Turkey’s gas find from 320 to 405 bcm, which is quite a disappointment. The Ministry of Health still withholds data on actual COVID-19 cases, which may be as high as 11K per day.

At home, there is a silent voter revolt, as the society loses hope in the polity solving its nagging problems. Mass protests can’t be predicted, but Turkey is facing a winter where all the ingredients for an outburst come to a head. What then?

Industrial production (IP) rose sharply in August, y/y, but home sales, on the back of rising rates and drying up of credit, have declined, showing yet again that stimulus can take us only so far. We expect IP to visibly lose momentum late this year/early next, as negative shocks continue. On the labor market front, while the unemployment rate is rather stable, and even started declining, there is still a long way from complete normalization, and the outlook, unfortunately, is quite grim.

As signaled by cash data last week, the budget deficit began to deteriorate again in September. Tax revenues remain resilient, but we do not expect that to continue, while curbing spending will prove very difficult, as we’ve noted numerous times before.

August balance of payments data confirmed quite clearly that locals’ portfolio preferences --in an environment of low rates and low policy credibility-- are a major driver of the reserve drain.

Broadly in line with the consensus, we expect the MPC to raise the policy and other short-term rates by about 200 bps, which, of course, will not be enough, forcing the Bank to hike again later. Why, then, you may ask, if what is required is so obvious, will Ankara not deliver a bolder move? The simple answer is that, given that its ultimate priority is growth, it is still hoping to get away with the minimum amount of hikes, as we elaborate a bit inside.

Cosmo is shivering in His breeches, when He thinks of the shocks awaiting risky assets in 4Q2020. CBRT must raise policy rates at least 200 basis points to prevent the worst.

Now read on...

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