After being sworn in for his second term last week, President Erdogan moved swiftly to strengthen his influence on economic policymaking. Politicians perceived as investor-friendly were excluded from the new cabinet and Erdogan’s son-in-law was appointed to run the now combined Finance and Treasury Ministry. Erdogan also gave himself extensive powers over the Central Bank and the Monetary Policy Committee and renewed his call for lower interest rates. Altogether this sent the TRY to a temporary new record low of 4.98 to the USD last Thursday. At the time of writing, the TRY trades at 4.84 to the USD which represents a -21% loss in value YTD. The latest developments are worrisome for a country that relies on portfolio inflows to finance its chronic external deficits. In fact, May was the fourth month in a row where portfolio investment posted a net outflow, bringing the net inflow in January-May down to +USD1bn. During the same period, the cumulative current account deficit rose to –USD28bn (up by +59% y/y). If investor sentiment remains adverse over a longer period, a balance of payments crisis and a hard landing of the economy are on the cards. Our current growth forecast is +3.7% in 2018.
