Turkey’s Power Projection Pushbacks

Turkish stocks finished Q1 with a solid European showing after drifting on continued confusion over political and geopolitical stands and monetary and exchange rate policies as prime minister’s Erdogan’s health also invited doubts with scarce public appearances. Diplomats have led the charge to sanction and oust the Assad regime as Istanbul hosted an international meeting of ‘free Syria” groups and supporters considering weapons aid. The military at home again came under condemnation from the ruling party after alleged coup plotting as human rights abuses during its time in government decade ago were recalled with victims still seeking compensation. The grip on journalists which has included fines and detentions relented on EU criticism as writers investigating the ties between the government and the Gulenist Islamic school movement were let out of jail just before facing trial. Exposure of the relationship provoked a purge of the police and judicial ranks as new intelligence service heads were also installed. Skirmishes with Kurdish forces resurfaced and officials were drawn into a rancorous debate in France over legislation marking Armenia’s World War I losses and purported Turkish ethnic brutality often labeled genocide. 30 years after the army changed the charter constitutional reform remains a major agenda item despite the absence of a super-majority to facilitate a possible switch to a powerful presidential system. In the regional stakes, relations with Iran have cooled as it still backs Damascus and companies and banks are pressured to join the oil and financial embargos against its nuclear program and NATO maintains an important base as airstrikes are contemplated against Tehran. Its stock exchange has dipped on the tighter sanctions which have pummeled the currency and prompted the central bank to lift benchmark rates to 20 percent as a string of planned privatizations otherwise drains liquidity.

Turkish monetary head Basci has stood by the unorthodox approach using multiple tools in an effort to slow double-digit credit growth and reduce inflation to the 6 percent target, and added a twist as the weekly repo moved from a quantity to price model and then was suspended. Consumer lending has dropped markedly at 20 percent rates, which have also managed to curb import demand to tackle the 10 percent of GDP current account gap. A firmer lira has diminished the intervention need for dipping into reserves, which now cover only 4 months of goods purchase. Heavy domestic debt redemptions were successful over the quarter while foreign issuance diversified to the Samurai market. Although economic growth will halve from last year to around 4 percent, unemployment is under 10 percent. The primary surplus has upheld fiscal discipline in the absence of a responsibility law despite sudden attention to the glaring lack in other realms.