Turkey: Fundamentals get worse as Erdogan consolidates power - BBH

Masahi Murata, Vice President at Brown Brothers Harriman is sharing his assessment of the Turkish economy:

"Turkey’s fundamentals have started to worsen again. Its inflation pressures have become stronger. In February, Turkey’s headline CPI accelerated to 10.1% y/y, the highest since April 2012."

"Yet growth remains low, as GDP is expected to rise 2.2% in 2016 and 2.5% in 2017. Economic sentiments have deteriorated under high inflation, weak growth, and persistently high geopolitical risks. Turkish consumer sentiment has remained close to the global financial crisis low in 2009. Private consumption has been hurt by high inflation and deteriorating consumer sentiment. Turkish tourism continues to contract mainly due to deterioration in the security situation. The external accounts have stopped improving."

"The Turkish central bank continues to lose credibility. It should tighten monetary policy but is unlikely to do so under President Erdogan’s pressure. In January, the central bank hiked the overnight lending rate by 75 bp and the late liquidity window rate by 100 bp but left the repo policy rate at 8.00% and overnight borrowing rate at 7.25%. Further tightening will likely be via the rates corridor and not the policy rate."

"Turkey will hold a constitutional referendum on April 16, aimed at giving more executive powers to the president. President Erdogan has increased his power since the attempted coup on July 2016. The referendum suggests Erdogan will continue to build his power base. Erdogan could hold a snap election after the referendum in order to further consolidate power. The EU has been concerned about the authoritarian stance of Erdogan, which has led to increased tensions and decreased foreign direct investment. The opposition parties strongly oppose the constitutional reform and polls show the nation is split on the matter. Whatever the outcome, it seems Turkish politics will remain unsettled."

"The lira has underperformed in 2017, even as most emerging currencies have risen against the dollar. Weak fundamentals and heightened political risks in Turkey should continue to weigh on the lira."