Where do we stand?
Turkey’s fund scandal is by no means over, with small odds of contagion in the fund industry and a confidence crisis in equities. The conversation is shifting to AKP connections of alleged manipulators, with a deputy chairman of the party resigning on Saturday, pending an investigation. Contrary to usual rumors, Mehmet Simsek’s job is safe.
Ankara mayor Yavas resigned from CHP, but will not join Yeni Party. He still intends to battle Erdogan in the next presidential race, his interim goal being to delay the inevitable judicial onslaught against him to remain eligible for the next elections. Yavas’ navigation of political hurdles requires an alteration to the end-game scenario of the politics author, where Erdogan may have to battle him, which would slightly increase the odds for a competitive contest.
Ankara and the White House will eventually hash out a solution to the CAATSA sanctions, but we will have to await the outcome of American mid-term elections to chart the precise parameters of how the issue will be dealt with. Meanwhile, animosity between Turkey and the Israel-Greece- Greek Cypriot axis has become a permanent feature of Turkish foreign policy with equal reciprocation from her three antagonists. Odds for a military clash are very low in 2027, but as Turkish elections approach, Erdogan may actively seek one.
Domestic demand likely remained weak in the third quarter, but whether this will be enough to tame inflation is an open question, given the highly entrenched and inertial nature of inflation by now. With two key engines of demand--private consumption and investment-- faltering, the growth slowdown could morph into a secular trend, even though experience suggests Turkish growth typically surprises to the upside.
With the CBRT stuck between a rock and a hard place, forecasts as to what will happen on October 22 seem to be a bit fluid right now. Net/net, while a close call, the odds of a rate cut are higher, the econ author thinks. In any event, he remains of the view that interest rates will have to stay elevated for the foreseeable future because that’s the only way of sustaining the current, what may be dubbed, “unstable equilibrium”, particularly as elections approach.
Meanwhile, the balance of payments math may become increasingly less supportive of the CBRT’s USD/TL policy, as the current account deficit continues to creep up and as, notwithstanding the improvement in the past few months, unidentified outflows likely continue. All this being said, while we cannot rule out a perfect storm scenario for 2027 – a topic we shall revisit more carefully in a few weeks’ time – a muddle-through scenario looks more likely.
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