Turkey’s Trumped Triple Triumph

Turkish financial assets held firm as two-term limited Prime Minister Erdogan continued political dominance with an over 50 percent first round victory in the first direct presidential election and named Foreign Minister Davutoglu as party successor. The finance minister and deputy prime minister posts key to economic policymaking were retained by incumbents as the central bank split the difference on Erdogan’s rate cut insistence by lowering overnight but keeping the weekly repo cost as inflation drifted to 9 percent on higher food expense. It cited continued weather and geopolitical risks in maintaining tight monetary policy and a flat yield curve although another 25-50 basis point drop is expected soon. GDP growth will come in around 3 percent as net exports to Europe picked up through the first half to offset the loss of Mideast markets and slower domestic demand under consumer credit curbs. The current account deficit narrowed to 6.5 percent of GDP as tourism increased 10 percent in June and combined government and bank-corporate bond inflows were $7 billion. Long-term rollover ratios for private borrowers stayed above 100 percent and the public debt/output ratio is under 40 percent with average maturity six years and non-residents with one-quarter ownership. Domestic debt fixed and floating rate respective shares are 55 percent and 45 percent and 60 percent of Eurobonds are held locally, according to official statistics.  The fiscal gap was 1.5 percent of GDP through the election period as traditional spending was obviated by the Prime Minister’s commanding lead with only token opposition. The tax take was solid and private pension schemes progressed although new infrastructure guarantees for $500 million-plus projects could add liabilities. Agricultural sales could benefit from Moscow’s EU food sanctions as Emerging Europe allocation diverts generally from Russian exposure. The central bank there again raised rates in July as corporate and retail lending was off to a 15 percent annual increase. Bank capital adequacy slipped as the system has over $150 billion in liquid foreign assets but must preserve the domestic deposit base with scarce external funding. Mandatory pension contributions have again been frozen to aid the state pay as you go regime and the management position of sanctioned VEB as the fiscal rule is honored in the breach. Bond auctions have regularly failed on 10 percent yield demands and privatization revenue will be minimal and less budget flexibility is likely to trigger sovereign rating downgrades from all three agencies. Private capital outflow will readily outpace 2008’s $135 billion under prevailing trends as financial services FDI already encountering post-WTO confusion could hit record bottom.

Crimea’s annexation and the toll from border battles in Donetsk and Luhansk have yet to be incorporated into national accounts which made dire reading for the IMF’s second Ukraine installment review granting waivers for missed targets. Reforms have been sidetracked by the war footing and lack of parliamentary support for President Poroshenko, who called early elections for October. Including disputed gas payments now referred for international arbitration hard currency debt is at least $10 billion this year and next with reserves reported at $16 billion with full exporter conversion requirements pointing to surrender on that front.