Turkey's continuing travails

Turkey's move back into positive GDP growth looks both fragile domestically and under threat more broadly

Presidents Donald Trump and Recep Tayyip Erdoğan had a phone conversation on 30 May which led to the struggling Turkish lira appreciating 1.5%, pretty much just on the fact that the two leaders spoke and agreed to meet in the margins of the G20 on 28/29 June. A particularly egregious example of the sort of headline-driven market movement which, in my view, seems to be increasingly common.

The reality is that Turkey remains a very likely target of US sanctions. It still plans to take delivery of Russia's S-400 anti-aircraft system. It is unlikely to stop buying oil from Iran on the black market, press reports that it has closed its ports to shipments notwithstanding. And it would not be at all surprising if Mr Erdoğan were to go after America's Kurdish allies in Syria (although, of course, given the number of occasions the West has abandoned the Kurds, we can reasonably speculate that such a move may cause no more than a collective shrug of the shoulders in Washington).

As for domestic politics, the Istanbul election will be re-run on 23 June after Mr Erdogan refused to accept that his AKP had been defeated by the CHP candidate Ekrem Imamoglu who, according to press reports, currently leads in opinion polls. If Mr Imamoglu loses there are going to be serious concerns about possible rigging; if he wins (again) Mr Erdogan is not likely to react well at all.

And when we are done with all the political risk around Turkey there is its economic plight. This from the 31 May edition of the Economist Espresso.

"[Turkey] sank into recession in the second half of last year. Now analysts expect the economy to bounce back when quarterly growth figures are announced later today. The rebound comes on the back of a spending spree ahead of municipal elections earlier this spring, as well as an increase in lending by local banks. State-owned banks in particular have come under pressure from President Recep Tayyip Erdogan’s government to lower borrowing rates. None of this appears sustainable. The inflation rate continues to hover around 20%. By burning through billions of dollars in foreign reserves, the central bank seems to be postponing, instead of preventing, another currency crisis. The country also faces possible American sanctions for going ahead with the purchase of a Russian missile defence system. The gap between the end of one recession and the start of another may turn out to be painfully brief."

As it happens, the forecasts of a bounce back in GDP growth proved to be spot on. But, as Bloomberg's Kagan Coc reflects, the road to economic recovery still looks to be a long one...even if politics does not exacerbate Turkey's travails.

Alastair Newton

www.alavan.biz

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