You can tell things have gotten truly bad in Turkey because the authoritarians-that-be, or more to the point their loyalist press lapdogs, have started shooting the messenger (the foreign media).

Well, following last year’s currency crisis, the newly appointed finance minister Berat Albayrak—who just happens to be President Recep Tayyip Erdogan’s son-in-law—can’t say he didn’t enjoy generous praise for his “rebalancing” program. He somewhat settled the markets last September with some reassuring tete-a-tetes with financiers in London and brought home the goods—the essential hot money funding the Erdogan administration needs to keep its Turkey show on the road—but lo and behold, on just a single day—on March 22 to be precise as the run-up to the March 31 local elections grew intense—global capital recalled that the country’s economy stands on feet of clay (as if it hadn’t been damn well obvious all along) and everything started to unravel.

Should one of the said messengers actually be a true Turkish patriot, they might, if offered the requisite wizardry blow their brains out to make the building financial torment—and yes, folk are miserable, look how they rebelled in the municipal polls—disappear in a burst of smoke, but alas that option is not available to them because while Turkey’s problems are all too real, Gandalf’s apparently got lost in Fangorn forest.

None-too-rave reviews
Albayrak, as we know from the none-too-rave reviews, is currently in Washington to convince the banks too big to fail to again let the hot money flow, as he aims to avoid an IMF bailout (not that it is even possible to visualise Erdogan, who’s puffed himself up numerous times during his last 10 years at the top declaiming that Turkey no longer has any need for the institution, ever agreeing to such a programme). But each day brings more grim macro news. Each data release shows that the country’s real economy is crumbling.

Turkey’s official unemployment rate grew again in January, moving up to 14.7%, the highest level seen since March 2009, from 13.5% in December, statistical institute TUIK said on April 15. That 10-year-high includes a youth unemployment rate that has hit a record high of 26.7%, growing more than 2 percentage points from 24.5% in December. TUIK has provided youth unemployment figures since 2005.

It should be noted—yes, it really should—that these figures are relatively mild compared to the actual situation out there, thanks to TUIK’s suspect methodology for calculating what constitutes joblessness.

While Turkey’s population aged over 15 is growing—it reaching 61.02mn in January from 60.95mn the month before—the country’s workforce is officially contracting—month on month, it fell to 31.83mn from 31.96mn—since the TUIK’s perception of unemployment does not include people who have not searched for jobs in the past three weeks even if they are ready to work.

There seems little prospect that Turkey’s unemployment rate will improve before July or August at least due to the recession-hit country’s contracting GDP, Tatha Ghose of Commerzbank told Reuters.

Seasonal jobs in tourism—one area Turkey is picking up thanks to the weak Turkish lira—and agriculture will help the headline figure to fall starting from April-May, but most probably not the seasonally-adjusted figure which the markets follow.

Cheap veggie, expensive PPI
Although the markets were happy as recently as March to buy the government’s line suggesting that the cheap veggie stalls set up by state officials to head off alleged price gougers (and swing a few votes) have helped to curb food inflation, the TUIK’s latest data release on agriculture producer price inflation (PPI) show a March rise in official agriculture PPI. That means the PPI figure went up for five straight months. The March gain was clocked at 27.33% y/y, compared to 25.79% y/y in February. Last November, the figure was recorded at 14.37% y/y.

TUIK’s latest data on poultry and milk products, released on April 12, showed the deterioration also continued in food production.

Separately on April 15, central government budget data showed that the deficit continued to grow, albeit at a relatively limited pace compared to the first two months of 2019. It was up 21% y/y to TRY24.5bn in March. The cumulative deficit grew by 77% y/y to TRY36.1bn in Q1 as the pre-election boost arranged in expenditures outmatched early transfers to the state budget from the central bank and other public institutions.

Also on April 15, data from the Automotive Manufacturers Association (OSD) showed that vehicle production continued to worsen in March. Vehicle production fell by 17% y/y to 132,189 units in the third month, causing the Q1 cumulative contraction to hit 15% y/y, with output at 361,156 units.

The domestic automotive market contracted by 45% y/y to 90,888 units in Q1 while exports fell by 7% y/y to 320,213 units.

Doesn’t add up
Back to Washington, where Albayrak, under heavy bombardment from analysts and investors who keep saying his economic plan doesn’t add up, continues to seek sufficient financing.  

“The big question for foreign investors and for Turkish households is whether the lira is still an investable currency. In our opinion the reform package did not answer that question,” Frank Gill of S&P Global told Reuters on April 15.

On April 4, however, Gill initiated a short-lived rally on the Borsa Istanbul after suggesting during a webcast that Turkey’s credit rating was not presently at risk of a downgrade.

Timothy Ash of BlueBay Asset Management, who is not fast to lose faith in the Erdogan administration and from September to March was quite keen to back its chances of staying on the economic rails, now ceaselessly highlights Turkey’s fragilities from every possible vantage point with growing frequency.

BlueBay was among the funds with which Albayrak held private meetings in London at the beginning of last September when he had an upcoming bold rate hike and the recent release of jailed US Pastor Andrew Brunson—crucial to improving that vital sentiment where relations with the US are concerned—in his gift bag. Ash shared the details of the London meeting as late as last month after he appeared to have offloaded his Turkey risks.

BlueBay was again among the asset managers Albayrak held private meetings with over the weekend. However, Ash has not given away whether he was at the meeting, but noted: “I spent last week at the IMF Spring meetings where Turkey was really the hot talking point, with deputy PM, Albayrak in town. Indeed I spent most of the week meeting Turkish and US connections trying to gauge where we are in the US-Turkey relationship, and frankly came away the most concerned I have been in 20 years covering the country. At point here there seems to be a chasm opening up between the US and Turkish perspectives of the problems/issues in the relationship. Much has been made of the S400 [Turkey missile purchase from Russia] issue as the touch paper for the current tensions, but they now run deep from both sides across a whole host of topics.”

In fact, Albayrak is not deputy PM as there is no PM post in Turkey any more given the executive presidency Erdogan has taken on.

“Getting too close to US foes”
But let’s quote Ash’s note at length as it gives a gateway into where the fraught Ankara-Washington relationship is at. Ash wrote: “Turkey is getting too close to US foes—Iran, Russia and Venezuela. Erdogan’s personal friendship with President Maduro of Venezuela is inexplicable to the US body politic, and this is especially notable for people in DC, given that ensuring a democratic transition in Venezuela is currently a top priority for the Trump administration. On Iran—the Zarrab/Atilla cases [relating to Iran sanctions busting the US says was linked to Turkish public lender Halkbank] were particularly damaging in terms of the US-Turkey relationship, with some in the US identifying this as an example of Turkey’s willingness to flaunt the US sanctions regime around Iran. Possible sanctions for the Zarrab/Atilla case are still awaited, and indeed expected, the only question being their extent/scope.

“Generally the US sees its interests in Syria, not always aligning with those of Turkey—tensions over US support for ethnic-Kurdish groups.

“Probably a lot of the current tensions really relate to what Ankara sees as the generally ‘unsupportive’ (I am being diplomatic here) US response to the failed coup in July 2016—as compared to the response from Russia, Venezuela (and actually the UK). Suspicions run deep (at the highest level in my view) in Turkey as to whether the US was somehow behind the coup attempt (or knew about it beforehand and failed to give the Erdogan administration the ‘heads up’), and the presence of the leader of the Gulenist movement, Fetullah Gulen, in self-imposed exile in the US just does not help.

“US wants to pivot… to a new arc”
“There is a view in Turkey that the US wants to pivot away from Turkey as its key NATO ally on its Southern flank, to a new arc of Greece, ROC, Egypt and Israel, against the threat from Russia and Iran. These view are propagated by Eurasianists in Turkey itself.

“I am sure that I will have missed a few sore spots from either side, herein, but across the board the tensions/suspicions now run really deep. The most immediate issue seems to be S400s and the future of the F35 [fighter plane] project [which the US is threatening to kick Turkey out of if it acquires S400s], or Turkey’s participation therein.

“What is striking though is that both sides now seem resigned to a scenario where S400s are delivered in Turkey, and that the US proceeds to sanction Turkey for that particular arms purchase. Note that Congressional CAATSA legislation passed in 2017 to counter ‘significant’ Russian arms sales, will likely capture the sale of S400s, with the arrival of the weapons system in Turkey requiring action from the US executive branch from a predetermined list of actions (pick list) – unless the WH deems that ‘national security’ concerns deserve the use of a presidential veto. My sense is that the sentiment in Congress is so negative now towards Turkey that it would be very difficult for the WH to veto any such transaction, and especially when it involves the loss of contracts and jobs to the US via lost Patriot sales. There is an assumption in Ankara I think that Trump might veto any CAATSA sanctions, but this looks like an erroneous assumption.”

“Willing to ride through S400 consequences”
“Interestingly, in interactions with the Turkish side, my feeling is that they are now resigned to taking the delivery of S400s, and are willing to ride through the consequences, as they see the delivery of S400s as an important sovereign decision and raises Turkey’s defence capability again all threats (including from the West). They are willing to take any consequences therein—and on this issue, if it is a choice between NATO membership and what it sees as a decision critical to its own defence, it would choose securing S400s.

“What now seems most likely is that the S400s get delivered, the US suspends the F35 contract, and CAATSA sanctions are applied on Turkey—the only issue in this would be what the pick n ‘mix would be from the US Executive. But likely Turkey stays in NATO, but US/Western defence cooperation is scaled down. And, more generally in terms of Turkey’s geopolitical orientation I think this would make a huge statement (game changer), of Turkey’s further move out of the Western orbit and into the hands of Russia and Iran.”

So, is there any way back?

“It seems that Turkey has paid a large up-front payment to Russia for the S400s, and generally the view is that it would now be difficult for Turkey to renege on that deal—Erdogan seems eager to keep all his options open with the US and Russia, so burning his bridges with Putin would create particular difficulties and notable also when Turkey is also engaged in a strategic USD20bn project to build a nuclear power capability with the assistance (credits) of Russia. There has been talk of Turkey buying S400s and selling them on to a third party (Saudi, Qatar or India) but this looks like wishful thinking.  The other one is buying S400s but not installing them—but CAATSA is based on the actual purchase which would be defined as the delivery of S400s.”

“I sense here that with the establishments in both Turkey and the US resigned to the delivery of S400s, and the prospect of sanctions, then the only way back from the brink, is a direct intervention from President Trump himself, who is known to have good personal relations with President Erdogan. But therein, any such intervention would surely still have to involve Turkey buying Patriots, and presumably also still paying for S400s but not having them delivered. Hard therein to see the latter (and S400s) flying at this stage.”

Another observation from Ash is that the Armenian genocide vote is again expected to come up in the US Congress, potentially roiling relations with Ankara further.

Moreover, he disclosed that a JPMorgan survey at the IMF spring meeting showed 80%-plus of investors already did not have confidence in the ability of the Turkish authorities to turn things around.

“So investors were already more or less positioned that way—hard to sell something you don't own I guess. So not sure that the event really changed the story that much,” he said.

Albayrak aftershocks
Meanwhile, the aftershocks of Albayrak’s panned presentation at a JPMorgan-hosted gathering of investors at an invitation-only event in a Washington hotel at the end of last week continued on April 15.

Some attendees called Albayrak’s thin-on-the-details slideshow the worst presentation they’d ever seen from a high-ranking government official, Axios reported on April 15 in a story entitled “Turkey's finance minister held the worst IMF-World Bank meeting ever” and including the remark from one emerging market fund manager that "It was an absolute shit show" and the complaint from another inv        estor that "I've literally never seen someone from an administration that unprepared."

Michael Cornelius of T. Rowe Price, told Axios his biggest takeaway from the week's events was that he became more pessimistic about the chances for a turnaround in Turkey.

"Not only are the fundamentals not improving, Erdogan is doing worse, investor sentiment is very, very bearish and they still have significant refinancing needs. This could be a systemic issue for emerging markets," he also said.

However, Axios also noted that none of the asset managers who spoke with its reporters said they had no immediate plans to sell Turkish assets.

Chances of a cabinet reshuffle
“A couple of people asked me this morning about chances of a cabinet reshuffle, which might in particular cover the economy portfolio. Actually these people indicated they had heard the rumour—I had not, and thought it unlikely. I guess the talk has come on the back of fall-out from the IMF meetings,” Ash said in an emailed note to investors entitled “Turkey-cabinet reshuffle?”

Removing Albayrak at this stage would surely be seen as an admission of failure in the economic battle. 

“At least with Albayrak his close links to Erdogan means that policy can be delivered—he can get the green light for rate hikes—albeit that requires good policy in the first place,” Ash concluded.

Right now, with Erdogan thought very unlikely to go to the IMF, the markets await approval for a currency devaluation to be followed by another bold rate hike. But either with the IMF providing support or with hot money such as was found last September, observers wonder whether Erdogan could employ a stupendous U-turn, even with respect to Erdogan standards who is famous for his dramatic about-turns, when it comes to the S-400 deal.