Tim Ash of Standard Bank -
We are currently in Istanbul, as part of an on-going Turkey trip. A couple of general observations are perhaps worthy herein, after meeting with a range of diplomats, journalists, corporates/banks.
First, what is absolutely striking is the universal surprise at developments over the past few weeks from everyone we have met - no one had expected both the scale of the anti-government demonstrations and also the severity of the government response. On this latter note there is an absolute lack of clarity in terms of what is driving the current hard line strategy of the Erdogan administration, and real uncertainty in terms of where this is all heading. But there is a universal concern that something has fundamentally changed in the government's approach - the uncompromising attitude is something new, and especially after the market/diplomats had got used to an administration which tended to be fairly pragmatic. If anything, the administration seems to be doing little to end the increasing polarisation in Turkish society. Arguably it was always polarised between pro-AKP supporters and the secular tradition, but the AKP administration seems to be doing little to bridge the gap, while many argued that at face value its actions are serving to increase this polarisation.
And why would it do this, given that its track record has been successful in taking the middle ground? Again - the general perception is that something has changed, with scapegoats being sought in the foreign media, foreign governments, and the domestic (secular oligarchic groups) and international financial sectors. Foreign governments/diplomats appear to have little leverage over the administration - the rhetoric against the EU, for example, has been pretty hard line.
Second, there is surprise that the market reaction has been relatively muted given the seismic and uncertain developments on going in Turkey. The consensus is that the Central Bank of Turkey has been very interventionist in terms of calming market volatility, and has been helped out in this respect by the state owned banks.
Third, demonstrations around Taksim appeared to have eased somewhat over the past 24 hours, reflective of the huge police presence, and the heavy use of force over the weekend to clear the square and its environs. The police are restricting access to the square - and have shown a willingness to restrict transport services to prevent public gatherings. However, the general assumption is that demonstrations are likely to continue as soon as access to the square is opened back up - is the administration intent on keeping the capital's main square closed to public access for the entire summer? Note that outside of Taksim, the city seems to be operating normally, with little evidence of a change in traffic conditions.
Fourth, from the corporates/banks we met the message is that the economy had begun to pick up pace quite nicely in the first few months of 2013, with recovery in credit demand, helped by record low loan rates, but also improving consumer confidence. Corporates/banks generally appeared to be planning (before the current crisis) for 4-5% real GDP growth this year, a recovery on the 2.2% real GDP growth in 2012. Hence again there was surprise that the AKP administration would risk such a recovery when success in delivery of growth, jobs and improving living standards has been key to the party's success over the past decade. The assumption is that heightened political risks will likely subdue domestic demand, and the pace of recovery now - the only question is how far.
Fifth, budget data for May and for the first five months of the year published by the finance ministry Monday, June 17 again supported this idea of a recovery in the economy. Note that revenue growth was very strong, rising by over 13% year on year in May and by over 16% for the first five months of the year. Consumption and import related tax receipts were particularly robust, with special consumption tax receipts up by around one third over the first five months of the year. The strength of the revenue side has enabled the government to bolster spending, with expenditures higher by 12.7% on year, and primary spending was up by 17.7% for the first five months of the year, and in this latter respect double digits real growth. Despite this, the budget remained in surplus, of over TRY4bn for both periods, suggestive still of the fact the government has considerable fiscal space still to try and pump prime growth in the short term to respond to the outbreak of civil unrest. That said, the revenue side could quickly deteriorate, if economic activity slows in response to the crisis.
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