2018 predictions for Turkish economy and markets
PA Intelligence commissioned me to write this article just before Christmas, but in the process of “intelligence gathering”; I got…
PA Intelligence commissioned me to write this article just before Christmas, but in the process of “intelligence gathering”; I got too caught up in reveling and merry-making. For a predominantly Moslem country, you wouldn’t believe how hard Turks party for Christmas and New Year’s Eve. Of course, then arrives Orthodox Christmas which as inheritors of the Eastern Roman Empire denizens of Istanbul must partake in celebrating…To make a long story short, after several blood infusions and a stomach pumping or two I was ready to share my findings with the world audience.
- Turkish economic and market performance in 2018 will be determined by only two factors: Politics and global risk appetite for risky assets.
- There is a perception that the worst is over in politics, which is actually a misperception. The guilty verdict for Hakan Atilla on charges related to evading Iran sanctions bodes ill for Turkey. Tensions with USA will escalate to the point of disrupting credit flows to the banking system.
- Attempts to reconcile with EU are futile, because State of Emergency and with it the relentless oppression of opposite, dissidents and journalists, is here to stay.
- At home, former president Gul might return to politics, while Good Party under Mrs. Meral Aksener appears nearly certain to replace nationalist MHP in the next parliamentary elections.
- It is possible that an Erdogan-Gul race will allow a third candidate to reach the finish line, while Good Party, CHP and pro-Kurdish HDP will have more seats than AKP in the next Grand Assembly.
- Perhaps none of these will transpire, with Erdogan and AKP running Turkey for the next five years but risks to this scenario are higher than ever.
- “Captains of the economy” and investors don’t like this kind of uncertainty. Fixed investments might be postponed; markets might stall as calls for an early election escalate.
- Fed is almost certain to hike rates 3 times. This will raise the borrowing costs for Turkish banks and corporates. Cash loan rates already reached 20% by the end of the year. Throughout 2018, loan rates will surge higher, undermining capex and purchase of homes and consumer durables.
- Global risk appetite is high, but will drop in the second half of the year, as Fed continues with rate hikes, while ECB signals an exit from negative rates. Declining appetite for risky assets augurs ill for shaky TL.
- Despite Erdogan’s desire for lower rates, Central Bank of Turkey (CBRT) will have to keep monetary policy very tight in 2018 to defend the lira and keep inflation at around 10%. Any more TL weakness would mean unmoored inflation expectation and a devastating devaluation-inflation spiral, which could spell the end of AKP administration.
- There is no more room for fiscal stimulus. The Credit Guarantee Fund used up all the domestic savings in 2017. More fiscal stimulus means higher deficits which will crowd out private borrowing and thus have no effect on GDP.
- GDP growth will decline precipitously. Turks will feel like they are in a recession.
- Despite tight monetary policy inflation expectations are so sticky and TL so unloved, CPI will end 2018 at no less than 10%.
- There is good news for current account deficits, though. Tourists are coming back and domestic demand is withering on the vine. CAD/GDP will shrink from an estimated 5-5.2% in 2017 to 4-4.3% by the end of 2018.
- TL should lose another 10% against the Euro-dollar Currency Basket in 2018. This the base-case scenario. It could get much worse in case of snap elections, Fed tightening 4 times, or CBRT delaying rate hikes. Only ending SoE and structural reforms will lead to a firmer TL.
- 10 year government bond yields will jump to 14% or higher. Nobody is stupid enough to hold those at a lower yield when the average deposit rate on three month savings is 14%.
- BIST, that is the Istanbul Stock Exchange, is cheap because it is not worth much. It will be among the worst performers in the EM universe in 2018. When investors realize that bond yields are NOT coming down, politics is NOT improving, but growth is evaporating, they will dump Turkish shares.
Damon H Grande
Visit our sister website www.istanbulanalytics.com for select English politics and economy articles on Turkey