On elections and reserves
We found out that the number one concern of our international audience is the timing of early elections, which we still expect no earlier than late 2027. Kemal Kilicdaroglu’s blank check to AKP to determine the date of early elections at will, failed to resonate so far.
But, American elections are hugely important to Turkey. The political analyst compares scenarios of a divided or Democratic Congress for CAATSA, Iran and Ukraine Wars from Ankara’s angle. Net/net it is better for Turkish interests to witness a Democratic Congress.
For our international audience the Fund scandal plays second fiddle to early elections, but it remains the leading topic of national conversation. During the week, more evidence surfaced linking the scandal to AKP-appointed civil servants, as a blame race started in party ranks. There is still no plan on how to fully compensate victims, while a growing number of experts prophesize that the scandal will undermine economic performance significantly.
Aside from a few indicators, like the decline in confidence indices, we still can’t find enough evidence to back that conclusion --particularly because it is hard to disentangle the Fund Scandal-effect from the broader slowdown in the economy that was already underway before it. But, we are cognizant that it is still too early to tell and we keep monitoring the situation, needless to say.
With the September labor data having arrived, we look at a few labor market indicators for the third quarter as a whole, which point to – surprise, surprise – a pretty stagnant picture.
The trade deficit was $5.2 billion in September in line with the preliminary release, with the 12-month deficit thus narrowing visibly. As for its composition, the gold deficit narrowed and the energy deficit rose visibly, while the core deficit (overall less energy and gold) was reasonably well-behaved, broadly speaking.
The Treasury announced the 2027 borrowing program, which assumes a 100% domestic debt rollover ratio and $13 billion external borrowing in international capital markets in line with last year’s target, both of which seem manageable.
Finally, we take a quick look at reserve developments since the onset of the Fund Scandal, the damage from which is sizeable: both gross and net foreign assets of the CBRT are down by about $25 billion, broadly speaking, though a good chunk of the drop is associated with a sharply lower gold price, and hence, cannot be attributed to F/X demand. Although the data is incomplete, we surmise that the sizeable residual chunk which is FX demand can be broadly explained by swaps, dollarization and portfolio outflows.
There will be several important data releases this week, but October inflation will top the list. Consensus surveys and high frequency models place the forecast at 2.4% or higher, while we think the risks are tilted slightly to the downside (i.e. lower inflation).
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