Turkey Country Report Nov19 - November, 2019

November 6, 2019

Erdogan’s Syria attraction has ended. He invaded some parts of Syria and he is talking about building some cities there for Syrian immigrants although that sounds like a dream. His latest military adventure in Syria has brought Erdogan in a global demonisation rite that he has definitely not expected. However, he still feels safe under the wings of the Putin-Trump duo. Sure, he is sinking deeper into his hole but still manages to keep his head over the water. If there is a collapse, he may pull Turkey down together with him and his cronies.

Does the disquiet over Erdogan mean Ankara’s ambition to achieve net foreign inflows is now only pie in the sky?

Will Erdogan cling on in the fashion of his Venezuelan bestie Nicholas Maduro or is he destined to be overthrown with snap polls? Two possibilities definitely worth chewing over. Turkey’s next elections are not scheduled until 2023 but we had a bet, following the Istanbul revote in June, that it will not pass longer than one year until the next elections. We remain adhered to it.

The next attraction field in Syria is supposed to be Idlib, where recently the US forces killed the Islamic State leader a few kilometers near the Turkish border. There are some shy murmurs on what the Islamic State leader was doing that much close to the Turkish border in a region officially under control of Erdogan based on the Sochi agreement signed among Turkey-Russia-Iran.

There have been sufficient evidence on Erdogan’s businesses with the Islamic State (simply write Powertrans on Wikipedia) since the beginning (and currently for years) but do not forget Erdogan is just a figurant in the magnificent plan of carrying all jihadists from all-over the world to overthrow Assad. That plan was launched in 2011 when Hillary Clinton, not a neocon, was the US Secretary of State.

The current world order is collapsing and it is still unknown what will replace it. The world and the region where Turkey lays is subject to some unexpected developments during the collapse of neoliberalism/globalism. (See discussions under the headline “CONFERENCE CALL: Decline of the West and rise of the rest”, Section 2.4)

The House of Representatives has passed some resolutions to advise the US President to sanction Turkey, but requires Trump’s approval even if it passes through the Republican-held Senate. The US establishment is also digging into the inexplicably strong personal bond between Erdogan and Trump. Currently, they are mainly focused on Trump’s Ukraine scandal at the impeachment noise. They seem desperate in their efforts to stop Trump’s victory in November 2020 but some Erdogan-related scandals may create real troubles at home for the Turkish populist this time as he could not find what he expected from his Syria offensive and he is still losing ground at a quickening pace in parallel with deepening economic troubles.

Europe, including the UK, is also desperate and they have neither teeth nor will to create some real trouble for Erdogan ahead of noisy public relations activities. Erdogan bribes them with arms purchases (read the stories of “discussing/limiting/suspending arms sales to Turkey” as the list of Erdogan’s arms suppliers) and he threats them with sending Syrian immigrants.

Official data and Erdogan’s propaganda machine, which also dominates mainstream global news services and analysts for a while (See latest outlook upgrade from Fitch under Section 8.4.1), are still suggesting somehow turning from the dip but no-one should be convinced that any kind of recovery is at hand before getting through the upcoming winter. And, winter has come with November.

Turks are still getting angry when they see on media reports that inflation fell to single digits and the economy is growing but they have already bought dollars with all their liras and dollarization seems like slowing at its peaks.

In order to overcome his economic troubles, Erdogan is still trying to employ his trademark economy policy, namely stimulating the economy by turning on the credit taps, but such is the wretchedness out there that private lenders are still dragging their feet over extending new loans and domestic confidence in the government is still pretty much at rock bottom.

Concerns are still there about whether there will be an overshoot of monetary policy, and a renewed depreciation in the currency. However, public lenders have so far managed to defend the local currency at the cost of burning huge amounts of central bank reserves while the equity market is under an unofficial suspension with the short-sale ban introduced on the most liquid banking stocks and the lira shortages in London introduced following the new Halkbank indictment filed on October 16.

Turkish assets are even losing their attractiveness for vulture funds.

The second hearing of 'The US vs Halkbank' case will be held on November 5. Another date to keep in mind is November 13. On that day Erdogan is supposed to visit the White House. If the trip proves feasible, it’s doubtful that he will go anywhere near Congress.

Domestic borrowing market remains almost idle following a series of huge mistakes since last year while external borrowing channels are also not promising. The 2020 is supposed to be a trouble year for the government financing. Erdogan has the power so far to order the local private lenders and pension funds to finance the government and the central bank reserves but a crowding-out for 2020 seems already in the pocket. Budget deficit is booming, borrowing plan for 2020 is up 50% y/y, it is raining tax and prices hikes and there are fresh plans to transfer more money from the central bank (or to print more money). Meanwhile, official inflation and interest rates are nosediving, lira remains stable.

The Erdogan administration has not come yet to the page of zombie companies and hidden NPLs at bank balance sheets from spending energy on manipulating realities or on military attractions. Living dead companies are seen to weigh on his plan to turn on credit taps to stimulate the collapsed economy. As a solution to the NPLs problem, Erdogan says “now time to pay up” to banks but banks are dragging their feet. Since 2016, banks are carrying the Turkish economy.

The “official” growth for 2019 seems to be released at slightly above zero as forecasts are also sidelining with the finance minister’s early data releases. However, warnings as well as loan packages that flare around, meanwhile, highlight the real troubles the Turkish economy remain stuck despite the recovery observed in official data.

Syndicated loan renewals for banks progress undeterred. Turkish Airlines and Mersin Port ‘mandated lenders for eurobond/trust certificate issues’. (See Section 5.4)

The Q3 financials season, meanwhile, continues for Borsa Istanbul-listed corporates, but as anticipated there are no promising trades. (See Section 4.3.2) Top retailer BIM and Ford Otosan will pay additional dividends.


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