Monthly Economic Review
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1 Monthly Economic Review Economic Research Division İzlem Erdem Chief Economist Alper Gürler Unit Manager H. Erhan Gül Asst. Manager İlker Şahin Economist Gamze Can Economist Ayşim Kalkan Asst. Economist Turkish Economy Financial Markets Banking Sector Concluding Remarks. Graphs Global Economy High level trade negotiations between the US and China are moving in a positive atmosphere with expectations that the two countries can sign a trade agreement before the end of March. In the last quarter of 1, the US economy grew above expectations by 2.% yoy. Leading indicators, on the other hand, draw a mixed picture. Expectations that the Fed, which announced to pause balance sheet reduction, might halt interest rate hikes this year are strengthening. Whereas March 29, the Brexit deadline, is closer than a month, it remains unclear whether UK will leave the EU. In the middle of March, many possibilities, including postponing the Brexit deadline to a later date and no-deal Brexit, will be voted in the UK Parliament. Economic activity in the Euro Area continued to lose momentum. While industrial production in the region shows the weakest performance of the last decade, it is considered that the ECB might implement easing policies to support economic activity in the following period. Starting the month with a flat course, oil prices turned up in the second half of the month thanks to supply-side developments and the US-China talks. Turkish Economy In November 1 period unemployment rate rose by 2 points to.3% compared to the same period of 17. Contraction in industrial production continued to deepen. According to the calendar adjusted figures, industrial production decreased by 9.% yoy in December, displaying its worst performance since June 9. Manufacturing PMI, which was realized as 4.4 in February, pointed out that the slowdown in the sector continued for 11 consecutive months. Foreign trade deficit continued to fall in January 19. Export volume rose by.9% yoy to 13.2 billion USD, while import volume was realized as.7 billion USD, decreasing by 27.2% yoy. In 1, current account deficit was realized as 27. billion USD. Portfolio investments displayed a weak performance throughout the year, while official reserves and net errors-omissions stood out in financing the current account deficit. Central government budget gave.1 billion TRY surplus in January. Transfer of the CBRT's profit to the budget in advance played a decisive role in this development. CBRT reduced the Turkish lira reserve requirement ratio by - basis points in all maturities. In its meeting on March, CBRT kept the policy rate unchanged at 24%. S&P maintained Turkey s sovereign rating at B+ with a stable outlook. Tables.....9
2 Turkish Economy Unemployment rate at its highest level since February 17 Unemployment rate rose by 2 points yoy to.3% in November 1 period. Having increased for 7 consecutive months, unemployment rate reached its highest level since February 17. Labor force participation rate declined to 3%. While seasonally adjusted unemployment rate rose to % in this period, labor force participation rate came in at 3.4%. 14 Industrial production contracted more than expected in December. Contraction in industrial production continued to deepen. According to the calendar adjusted figures, industrial production decreased by 9.% yoy in December, displaying its worst performance since June 9. Thus, in the last quarter of 1, industrial production contracted by 7.% compared to the same period of the previous year. In December, annual production decreased in 1 out of 24 sectors. According to main expenditure groups, fall in intermediate goods and capital goods production gained momentum in line with the slowdown in economic activity Labor Market Unemployment Rate Labor Force Participation Rate (right axis) Industrial Production (caj, annual change %) Manufacturing PMI posted an increase in February May-1 Nov-1 May-17 Nov-17 May-1 Nov J F M A M J J A S O N D -9. Manufacturing PMI increased by 2.2 points mom to 4.4 in February. Although the index reached the highest level in the last months, it was still below the threshold of, indicating that the contraction in the sector continued. During this period, the recovery in new export 4 2 orders was remarkable. The said index rose to.3 in February, indicating a growth in the sector. The slowdown in the production sub-index also lost some momentum. Capacity utilization rate had a slight decline in February. Seasonally adjusted capacity utilization rate (CUR) decreased by.2 points mom to 74.1%. While seasonally adjusted real sector confidence index increased by 1. points to 9.9 on a monthly basis in the same period, consumer confidence index fell to 7. compared to the previous month. Thus, consumer confidence index remained close to the lowest level in the last years. House sales remained weak in the first month of the year. House sales decreased by 24.% yoy to 72,937 units in January. During this period, mortgage sales dropped by 77.2% yoy, while other sales fell by 2.%. House sales to foreigners, on the other hand, continued the strong course. House sales to foreigners increased by 1.9% to 3,1 units in the same period. House price data for December 1 also confirmed the weak outlook in the housing market. Hedonic price index increased by.4% in December compared to the same month of the previous year, while house prices in real terms fell by.4%. 4 - Domestic House Sales and House Price Index (yoy % change) House Sales House Prices (right axis) Automotive and white goods sales continue to decline. According to the data published by the Automotive Distributors Association, automobile and light commercial vehicle sales decreased by 47% yoy in February, despite the reduction in SCT and VAT. According to White Goods Manufacturers Association of Turkey data, white goods sales fell by 9% yoy in January. In this period, exports and white goods production contracted by 3% and 14%, respectively. Domestic white goods sales shrank by 17% in 1 despite tax incentives. Central government budget posted a surplus of.1 billion TRY. In the first month of the year, central government budget revenues increased by.% yoy to 97 billion TRY, while budget expenditures rose by 2.% yoy to 91.9 billion TRY. Thus, budget surplus tripled compared Source: Datastream, Markit, Turkstat 2
3 Turkish Economy to the same month of the previous year and came in at.1 billion TRY. Transfer of the CBRT's profit to the budget in advance played a decisive role in this development. Central Government Budget January % 1 19 Change Expenditures Interest Expenditures Non-Interest Expenditures Revenues Tax Revenues Other Revenues Budget Balance Primary Balance Numbers may not add up to total value due to rounding. Foreign trade deficit kept contracting. Foreign trade deficit has fallen for the eighth consecutive month in January 19. Export volume rose by.9% yoy to 13.2 billion USD, while import volume was realized as.7 billion USD, decreasing by 27.2% yoy. Thus, foreign trade deficit decreased by 72.% compared to the same period of the previous year and became 2. billion USD. Import coverage ratio, which was 7.% in January last year, increased to 4% in the first month of Im port Coverage Ratio (-month cumulative, %) According to the -month cumulative figures, exports surged to a historic high of 1.7 billion USD, while imports decreased to billion USD. Thus, foreign trade deficit fell to 4. billion USD, the lowest level since March. Import coverage ratio reached 77.7%, the highest level since 2. According to the provisional data announced by the Ministry of Commerce based on New General Trading System, the foreign trade deficit continued to contract on an annual basis in February. In this period, exports increased by 3.7%, while imports decreased by 1.7%. Thusly, foreign trade deficit narrowed by 9.% yoy and was realized as 1. billion USD. Current account deficit was 27. billion USD in 1. In 1, current account deficit (CAD) decreased by 41.% yoy to 27. billion USD, the lowest level since 9. Contraction in CAD was mainly driven by the fall in foreign trade deficit. Besides the slowdown in domestic demand, the annual fall in Brent crude oil prices (almost 3%) was effective in this contraction. Annual rise in net tourism revenues (1.%) also supported the recovery in CAD. In 1, CAD excluding net energy trade gave a surplus of.9 billion USD. Excluding gold trade from this figure, CAD rose to 19.7 billion USD Portfolio investments displayed a weak performance throughout the year, while official reserves and net errors-omissions stood out in financing the current account deficit. Annual CPI inflation was 19.7%. CPI came in below expectations, rising by.1% mom in February. According to the Reuters' survey, the monthly CPI inflation was expected to be.4%. Domestic PPI (D- PPI) followed a flat course in February, increasing by.9% mom. Having remained above % since September 1, annual CPI inflation declined to 19.7% in February thanks to relatively stable course in Turkish lira, slowdown in domestic demand and measures taken by government. Annual D-PPI inflation, which followed a downward trend since October, continued this trend and declined to 29.9% in February. Thus, annual D-PPI inflation fell below 3% for the first time since July 1. January Current Account Balance (-month cumulative, USD billion) - CAB CAB excl. Net Energy and Gold Trade - Excl. Net Energy Trade CPI D-PPI (change %) Monthly Annual Annual Average Source: Turkstat, Datastream, CBRT, Ministry of Trade, Ministry of Treasury and Finance 3
4 Financial Markets TL depreciated in February. 31/Jan 2/Feb -Y CDS (basis points) bps TR 2-Y Benchmark Yield 1.39% 1.79% 4 bps BIST- 4,74 4,3.4% USD/TRY % EUR/TRY % Currency Basket* % (*) (. USD/TRY +. EUR/TRY) USD/TL, which fell to. on 31 January thanks to CBRT s statements about preserving the current tight monetary stance, followed an upward trend in the following days due to the appreciation of USD in the global markets in the first half of February and, CBRT's reserve requirement decision. USD/TL increased by 3.1% mom to.334 at the end of the month. S. Africa Turkey Brazil Poland Mexico Thailand Indonesia Hungary Russia India Malaysia Colombia BIST- index followed a fluctuating course. Having posted a rapid rise in January, BIST- index followed a fluctuating course. The index rose by.4% mom and ended February at 4,3. Turkey's -year CDS spreads, which have been declining since mid-january, fell to 29 on February, the lowest level since July 1. However, CDS spread was flat and was realized as 33 at the end of February USD / Local Currency (1/31/19-2/2/19, change %) Change CDS and BIST- BIST- (thousand points) -year CDS (right axis) depreciation in local currency Sep-1 Oct-1 Nov-1 Dec-1 Jan-19 Feb Treasury completed its borrowing program slightly below anticipations. Treasury borrowed a total of 1.4 billion TRY in February. According to the the program, Treasury planned to borrow 17 billion TRY against 22. billion TRY debt redemption during this period. While interest rate was realized as 1.34% in the re-issuance of 2-year benchmark bond, 2-year benchmark bond yield was 1.% in the secondary market on the same day. 2-year benchmark bond yield rose by 4 basis points mom to 1.79% as of 2 February year Benchmark Bond Yield. Feb-1 Apr-1 Jun-1 Aug-1 Oct-1 Dec-1 Feb-19 CBRT cut the required reserve ratios. CBRT reduced the Turkish lira reserve requirement ratio by basis points for deposits and participation funds with maturities up to 1-year and for other liabilities with maturities up to (and including) 3-year, and by basis points for all other liabilities subject to reserve requirements. Furthermore, the upper limit of the facility of holding standard gold converted from wrought or scrap gold collected from residents has been increased from % to % of Turkish lira reserve requirements. While CBRT did not made any statements regarding the impact of the regulation, required reserves of 3.3 billion TRY and 2.3 billion USD are expected to be released. S&P affirmed Turkey s credit rating and outlook. S&P maintained Turkey s sovereign rating at B+ with a stable outlook. S&P stated that Turkey s credit rating could be lowered if the institution sees an increasing likelihood of systemic banking distress with the potential to undermine Turkey's fiscal position. S&P foresees that the economy will contract by.% in 19, adding that the uncertainties which affect the growth forecast remain. It was also stated that the credit rating may stay under pressure if growth weakens beyond the projections. Moody s indicated that measures taken by the government in order to increase loan growth had a negative impact on banks credit ratings. In Moody s Credit Outlook report, Turkish economy is expected to contract 2% and inflation is anticipated to be 17% in 19. Source: CBRT, Datastream, Reuters, BIST 4
5 Banking Sector Annual rise in deposit volume was %. According to the Weekly Bulletin published by the BRSA, as of February 22, deposit volume increased by % yoy and by 2% ytd to 2, billion TRY. TRY deposits rose by % compared to the same period of the previous year and was realized as 1,2 billion TRY. On the other hand, FX deposits in USD terms declined by 4.3% in this period. FX deposits in USD terms increased by.2 billion USD compared to year-end. Annual loan growth remained weak. As of February 22, total loan volume increased by 13% yoy and.% ytd to 2,4 billion TRY. While TRY loans rose by 1.1% yoy to 1,4 billion TRY, FX loans in USD terms declined by 2.2% to 1 billion USD during the same period. On weekly basis, TRY loans seem to recover. In the last 4 weeks, TRY loans surged up by 19 billion TRY FX adjusted volumes The impacts of foreign exchange developments on banking indicators continued in 19. According to FX rate adjusted figures annual rise in deposits volume declined to 2.4% while loan volume did not display a significant change as of February 22. Deposits Loans Deposits and Loans (annual change, %) Exchange Rate Adjusted Deposit and Loan (annual, % change) Deposits Loans. 13. Feb.1 Apr.1 Jun.1 Aug.1 Oct.1 Dec.1 Feb Feb-1 May-1 Aug-1 Nov-1 Feb period, vehicle loans decreased by.1% yoy in parallel with the contraction in the automotive market, while the annual fall in housing loans was 4.%. Besides, annual rise in personal finance loans which has been declining since August 1 fell to 1.3% Upward trend in NPL ratio continues. As of February 22, gross non-performing loans surged up by.% yoy to 1. billion TRY. Having followed an upward trend recently, NPL ratio reached 4.1% as of February 22. In the same period, NPL ratio for consumer and commercial loans were 4.34% and 3.77%, respectively Housing Personal Finance Consumer Loans (annual % change) NPL Ratio Net foreign currency position Vehicle Consumer Loans 2. Total Consumer Commercial ,77 As of February 22, banks on-balance sheet FX position was (-) 4,719 million USD, while off-balance sheet FX position was (+) 42,7 million USD. Hence, banking sector s net FX position was realized as (+) 2,9 million USD. Consumer loans declined on an annual basis. Contraction in consumer loans excluding consumer credit cards since January 11 accelerated. As of February 22, consumer loans declined by 1.7% yoy. During this Source: BRSA Weekly Bulletin
6 Concluding Remarks Developments regarding trade wars, which have been out of scope for a while, have come to the forefront after the start of negotiations between senior officials of the United States and China in February. In addition to the positive course of the negotiations, postponing the deadline of additional tariffs and the developments which indicate that the trade war between the world's two largest economies can be solved in March were watched closely. While the damage of the trade war on global economy is widely discussed, the leading indicators show the loss of momentum in economic activity. Although the US economy grew above the expectations in 1, the data for 19 display a mixed picture. A similar outlook is still valid for the Euro Area as well where the data for the first quarter of this year indicate a moderate outlook. In China, PMI data indicate that the manufacturing industry started to 19 with a contraction. The momentum loss on the global scale increases the expectations that the major central banks will adopt an accommodative monetary policy in the following period. This expectation has an upward impact on commodity prices and support capital flows towards developing countries. Domestic data show that the slowdown in economic activity has become more evident. Calendar adjusted industrial production, which displayed its weakest performance since June 9 in December, contracted by 7.% yoy in the last quarter of the year. On the other hand, the current account deficit was at its lowest level since 9 with 27. billion USD in 1. The improvement in the inflation indicators since November due to the rebalancing in economic activity and the relatively stable outlook in the Turkish lira continued in 19. Momentum loss in food prices thanks to the measures taken played a role in this development. F orecasts 1 19 Growth Current Account Deficit/GDP Inflation (year-end),3 (A) 1. (A) Actual
7 Binler Turkish Economy- Macroeconomic Indicators Contributions to GDP Growth (% point) - Private Consumption Public Consumption Investment Net Exports - Change in Stocks Q3 GDP Growth: 1.% Growth 1, 4 GDP GDP (USD billion) GDP Per Capita (USD thousand, right axis) Leading Indicators Industrial Production and Capacity Utilization CA Industrial Production (annual % change) Manufacturing Industry CUR (%, right axis) Feb-17 Aug-17 Feb-1 Aug-1 Feb Confidence Indices Real Sector Confidence Consumer Confidence (right axis) Feb-17 Aug-17 Feb-1 Aug-1 Feb-19 Labor Market Employment Indicators (seasonally adjusted) Labor Force Participation Ratio 9 1 Unemployment Rate (%, right axis) Nov-1 May-17 Nov-17 May-1 Nov Employment (seasonally adjusted, million persons) 2. 2 Nov-1 Mar-17 Jul-17 Nov-17 Mar-1 Jul-1 Nov-1 Foreign Trade and Current Account Balance Imports Exports -4 Jan-17 May-17 Sep-17 Jan-1 May-1 Sep-1 Jan-19 (CA) Calendar adjusted Foreign Trade (annual % change ) Current Account Balance (USD billion) Monthly (right axis) month Cumulative - Dec-1 Apr-17 Aug-17 Dec-17 Apr-1 Aug-1 Dec Source: Datastream, CBRT, Turkstat
8 Turkish Economy- Macroeconomic Indicators Inflation D-PPI Monthly Inflation CPI.1.9 Feb-17 Aug-17 Feb-1 Aug-1 Feb-19 Annual Inflation D-PPI CPI Feb-17 Aug-17 Feb-1 Aug-1 Feb CBRT Survey of Expectations - Annual CPI Inflation Expectations (%, year-end) 1(R):.3 17(R): (R): CBRT Survey of Expectations - & 24-month Ahead CPI Inflation Expectations 24-month Ahead -month Ahead Foreign Exchange and Bond Market Exchange Rates EUR/TRY USD/TRY 2. Jan-17 Jul-17 Jan-1 Jul-1 Jan CBRT WACOF and 2-Y Benchmark Bond Yield CBRT Weighted Average Cost of Funding 2-Y Benchmark Bond Yield Feb-17 Aug-17 Feb-1 Aug-1 Feb Average Compound Yield in Treasury Auctions 1.7 Feb-17 Aug-17 Feb-1 Aug-1 Feb Expected Real Yield of TRY GDDIs 3. Feb-17 Aug-17 Feb-1 Aug-1 Feb-19 (R) Realization Source: BİST, Datastream, Reuters, CBRT, Turkstat, Treasury 1
9 Turkish Economy - Macroeconomic Indicators Growth Q1 1-Q2 1-Q3 GDP (USD billion) GDP (TRY billion) 1, 2,4 2,339 2,9 3, ,13 GDP Growth Rate Inflation Dec-1 Jan-19 Feb-19 CPI (annual) Domestic PPI (annual) Seasonally Adjusted Labor Market Figures Sep-1 Oct-1 Nov-1 Unemployment Rate Labor Force Participation Rate FX Rates Dec-1 Jan-19 Feb-19 CPI Based Real Effective Exchange Rate USD/TRY EUR/TRY Currency Basket (.*EUR+.*USD) Foreign Trade Balance (1) (USD billion) Nov-1 Dec-1 Jan-19 Exports Imports Foreign Trade Balance Import Coverage Ratio Balance of Payments (1) (USD billion) Oct-1 Nov-1 Dec-1 Current Account Balance Capital and Financial Accounts Direct Investments (net) Portfolio Investments (net) Other Investments (net) Reserve Assets (net) Net Errors and Omissions Current Account Balance/GDP Budget (2)(3) (TRY billion) Nov-1 Dec-1 Jan-19 Expenditures Interest Expenditures Non-interest Expenditures Revenues Tax Revenues Budget Balance Primary Balance Budget Balance/GDP Central Government Debt Stock (TRY billion) Nov-1 Dec-1 Jan-19 Domestic Debt Stock External Debt Stock Total Debt Stock ,49.2 1,7.1 1,9.1 (1) -month cumulative (2) Year-to-date cumulative (3) According to Central Government Budget Aralık 17 Source: CBRT, Datastream, Ministry of Finance and Treasury, Reuters, Turkstat 1 9
10 Turkish Economy - Banking Sector Outlook BANKING SECTOR ACCORDING TO BRSA's MONTHLY BULLETIN FIGURES (TRY billion) Jan.1 Jan.1 Change ( 1 ) TOTAL ASSETS 1,732 1,994 2,37 2,731 3,2 3,7 3,1 1. Loans 1,47 1,241 1,4 1,734 2,9 2,39 2, TRY Loans ,13 1,131 1,414 1,439 1, Share FX Loans Share Non-performing Loans Non-performing Loan Rate Securities TOTAL LIABILITIES 1,732 1,994 2,37 2,731 3,2 3,7 3,1 1. Deposits 94 1,3 1,24 1,44 1,711 2,3 2, TRY Deposits ,42 1,34.4 Share FX Deposits , Share Securities Issued Payables to Banks Funds from Repo Transactions SHAREHOLDERS' EQUITY Profit (Loss) of the Period RATIOS Loans/GDP Loans/Assets Securities/Assets Deposits/Liabilities Loans/Deposits Capital Adequacy (1) Year-to-date % change Source: BRSA, Turkstat LEGAL NOTICE Our reports are available on our website This report has been prepared by Türkiye İş Bankası A.Ş. economists and analysts by using the information from publicly available sources believed to be reliable, solely for information purposes; and they are not intended to be construed as an offer or solicitation for the purchase or sale of any financial instrument or the provision of an offer to provide investment services. The views, opinions and analyses expressed do not represent the official standing of Türkiye İş Bankası A.Ş. and are personal views and opinions of the analysts and economists who prepare the report. No representation or warranty, express or implied, is made as to the accuracy or completeness of the information contained in this report. All information contained in this report is subject to change without notice, Türkiye İş Bankası A,Ş, accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is copyright-protected. Reproducing, publishing and/or distributing this report in whole or in part is therefore prohibited. All rights reserved. Aralık 17 1
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