Politicians’ statements and economic data contribute to fragility

While the economy’s fragility is increasing, the statements from politicians are contributing to this existing fragility. Once again, President Recep Tayyip Erdoğan’s harsh words on international ratings agencies and discussions in the banking sector due to the Bank Asya situation have greatly disturbed the markets.

Despite ongoing efforts to seize Bank Asya by the Turkish State Fund, the bank increased its capital yesterday, demonstrating its resistance. Information obtained indicates that the head of the Banking Regulation and Supervision Agency (BDDK) is pushing for Bank Asya to be seized by the state fund in line with the government’s wishes, but members of the BDDK are resisting this decision because they would be committing a felony. This clash is reaching such a height that it puts the entire banking system at risk, and nobody can predict how it will end.

While the upward trend in foreign exchange rates is continuing, growth rates have started falling and inflation rates are increasing, all of which frighten the markets. Several signs from international rating agencies of upcoming lower ratings are also fueling the anxiety of the markets. We should add President Erdoğan’s statements on his return from Qatar, when he said: “We have cut our ties with one of them. If necessary, I can also tell the prime minister to stop cooperation with Fitch and Moody’s.” All of these statements have increased expectations of lower ratings in the markets.

Markets have already been tense while waiting for new signs from the FED on the interest rate increase. They are also observing how differences in opinion between the West and Turkey over developments concerning the Islamic State of Iraq and the Levant (ISIL) will unfold.

At this stage, negative coverage of Turkey in the Western media, primarily the American media, is notable. Instead of properly responding to these publications, President Erdoğan’s harsh answers, totally denying them, decrease hopes of reconciliation.

In a nutshell, both the data and the political climate are getting worse….

The only positive development is fiscal discipline

Two important economic data were released at the beginning of the week. The unemployment rate data for the June period was demoralizing, because in a month when employment should have increased, the unemployment rate actually increased, to 9.1 percent. when seasonally adjusted it reached 9.9 percent. This is a sign that unemployment will hit two digits again by the end of the year.

The Finance Ministry also recently disclosed the July-August budget data. While the budget balance had a surplus of 0.7 billion Turkish Liras in the July-August period, the primary balance, excluding interest expenditures, had a surplus of 7.8 billion liras. According to the realizations of the first eight months, while the budget balance had a surplus of 2.7 billion liras, the primary balance had a surplus of 30.9 billion liras. It has been observed that due to the drop in interest expenditures, the recovery in the budget balance is continuing.

In short, fiscal discipline has been left as the economy’s only anchor, but the increase in expenditures was perceived as the beginning of a degeneration of the quality of fiscal discipline.

The Cabinet is mobilizing to revive relations with the EU, an important norm for the economy and politics. But we may be too late.