Turkey in figures: an economic snapshot

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Clifford Tate
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in figures: an economic snapshot Over the following pages EuroWeek provides a snapshot of s economy and banking sector, with the latest data, peer group comparison

rating agencies Standard & Poor s, Moody s and Fitch. For detailed more information, please refer to these institutions.

Abdullah Cantimur, Deputy Finance Minister Erdem Başçı, Governor Turalay Kenç, Deputy Governor İbrahim Halil Çanakcı, Treasury Undersecretary KEY ECONOMIC INDICATORS

Financial Balance/GDP (%) -1.6-2.5-5.9-3.4 -.7-1.7-2. -2. Gen. Gov. Debt/GDP (%) 39.9 4. 46.1 42.3 39.1 36.1 33.6 31.5 Gen. Gov. Debt/ Gen. Gov. Revenue (%) 123.

4-1. -5.9-7.5-7.4 External Debt/Current Account Receipts (%) 163. 151. 177.3 179.7 16.8 157.5 184.9 186.5 External Vulnerability Indicator (%) * 14.1 124.2 153.6 148.

1 in figures: an economic snapshot Over the following pages EuroWeek provides a snapshot of s economy and banking sector, with the latest data, peer group comparison and analysis available from a range of sources, including the Turkish Treasury, the Banking Regulation and Supervision Agency, the Banks Association of and the rating agencies Standard & Poor s, Moody s and Fitch. For detailed more information, please refer to these institutions. Moody s: Baa3 Standard & Poor s: BB+ Fitch: BBB- All Stable Outlook SELECTED KEY OFFICIALS FINANCE MINISTRY CENTRAL BANK TREASURY Mehmet Şimşek Finance Minister Abdullah Cantimur, Deputy Finance Minister Erdem Başçı, Governor Turalay Kenç, Deputy Governor İbrahim Halil Çanakcı, Treasury Undersecretary KEY ECONOMIC INDICATORS F 214F Real GDP (% change) Inflation (CPI, % change Dec/Dec) Gen. Gov. Financial Balance/GDP (%) Gen. Gov. Debt/GDP (%) Gen. Gov. Debt/ Gen. Gov. Revenue (%) Gen. Gov. Int. Pymt/Gen. Gov. Revenue (%) Current Account Balance/GDP (%) External Debt/Current Account Receipts (%) External Vulnerability Indicator (%) * *(Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/Official Foreign Exchange Reserves Source: Moody s in the Global Marketplace December 213 EUROWEEK

2 CENTRAL GOVERNMENT REVENUE (AS % OF TOTAL) CENTRAL GOVERNMENT EXPENDITURE (AS % OF TOTAL) Property income Other revenues and grants Interests 7% Income tax 17% Lending 3% Personnel Expenditures 2 Social Security Contributions Other taxes 5% Custom duties 2% Other taxes on good and services 3% Corporate tax 9% Property taxes 2% Capital Transfers 2% Capital Expenditures 9% Purchase of Goods and Services 9% Interest Payments 13% Special consumption tax 22% VAT 25% Current Transfers 36% Source: Haver Analytics, Turkish Treasury, Moody s, 212 figures Source: Haver Analytics, Turkish Treasury, Moody s, 212 figures PEER COMPARISON: TURKEY VS MEDIANS CURRENT ACCOUNT BALANCE % OF GDP GENERAL GOVERNMENT DEBT % OF GDP f 213f 214f f 213f 214f GENERAL GOVERNMENT BALANCE % OF GDP NET EXTERNAL DEBT % OF CURRENT EXTERNAL RECEIPTS f 213f 214f f 213f 214f EUROWEEK December 213 in the Global Marketplace

3 EMERGING EUROPE GDP PER CAPITA (US$) IN 213 STANDARD & POOR S OPINION 4, 35, 3, 25, 2, 15, 1, EMERGING EUROPE CENTRAL GOVERNMENT DEBT/GDP (%) Local-currency debt/gdp Foreign-currency debt/gdp Bulgaria Bosnia Macedonia Romania Lithuania Latvia Czech Montenegro Serbia Poland Albania Croatia Hungary Republic Source: Standard & Poor s EMERGING EUROPE GROWTH IN NON-BANK PRIVATE SECTOR CREDIT (%) , Albania Bosnia and Herzegovina Macedonia Source: Standard & Poor s Hungary Latvia Lithuania Bulgaria Source: Standard & Poor s Serbia Bulgaria Montenegro Romania Hungary Poland Croatia Latvia Lithuania Czech Republic EU - 27 Average EZ - 17 Average Overview We expect the weaker Turkish lira, stemming partly from changes in the global environment, to contribute to an increase in s net external liability position to 62% of GDP this year. s dependence on external financing remains significant, but we note that monetary policy flexibility and meaningful scope for fiscal expansion provide important buffers. We are therefore affirming our BB+/B foreign currency sovereign credit ratings and BBB/A-2 local currency sovereign credit ratings on. The outlook is stable, balancing risks from persistent current account deficits and more expensive external financing against s strong economic growth prospects. Rationale The key ratings constraint continues to be s high external risks, which are associated with its large current account deficits and substantial net external liability position. Data from the Central Bank of the Republic of (CBRT) indicate that the corporate sector s net short foreign currency position is about 2% of GDP, implying that Turkish investment activity- -and therefore growth--is considerably vulnerable to exchange rate developments. Additional ratings constraints include the country s moderate income levels, reflecting relatively low productivity and labor force participation, as well as what we consider to be a large grey economy and a continued dependence on rapid credit growth as a driver of economic expansion. s relatively effective institutions and governance, flexible monetary policy, well-capitalized and generally well-regulated financial sector, and its moderate general government debt burden support its ratings. Given its heavy dependence on external financing, is vulnerable to changes in global markets. We estimate that s net external liability position will increase to more than double its current account receipts (CARs) this year. We project external debt, net of official reserves and financial sector external assets, to rise to more than 12% of CARs, from less than 1% before 29, reflecting increased dependence on debt financing in recent years. With the growth of the local currency market and considerable nonresident interest in Turkish-liradenominated assets, we now consider the lira an actively traded currency, as defined in our criteria. However, external liquidity risk remains significant as has high and persistent current account deficits above 2% of CARs and needs to roll over an estimated 78% of CARs of external short-term debt by remaining maturity every year on average between 213 and 215. Financing costs have edged upward since May 213, probably related to an expected gradual tightening of global monetary conditions. Given its large external funding needs, we believe that will be among the most vulnerable emerging sovereigns if global liquidity dwindles. Its vulnerability could be exacerbated if political dissatisfaction within increases, weakening our current view of the government s policy flexibility. A temporary confluence of these factors led to a sharp reversal in portfolio equity flows in mid-213, although we note that offsetting net FDI inflows have remained robust. We expect s increased external financing costs to reduce the rate of credit expansion among Turkish banks and lead to weaker economic growth in the second half of 213. In September, the financial regulator, Banking Regulation and Supervision Agency (BRSA), proposed to raise risk weights on bank and credit card loans to consumers, which could potentially constrain domestic demand and, at the same time, reduce imports. We expect export growth to decelerate from its 212 high as the contribution from gold exports diminishes. That said, we believe export growth will remain robust in the medium term as external demand recovers, particularly in its trading partners in Europe, the destination of more than 5% of s goods exports. November 22, 213 in the Global Marketplace December 213 EUROWEEK

4 TURKISH CONSUMER CREDIT GROWTH MOODY S OPINION 6% 5% 3% 2% 1% % -1% TURKISH BANKING SECTOR SHARE OF DEPOSIT BANKS,* BY TYPE (IN %) Foreign Banks 14.2% State- owned Banks 29.8% *As of 3 September 212, one deposit bank (Birleşik Fon Bankası A.Ş) is under the admistration of SDIF Source: Banks Association of, 212 figures TURKISH BANKING SECTOR FUNDING PROFILE 1% 9% 8% 7% 6% 5% 3% 2% 1% Total loans Consumer loans Housing loans Personal finance Credit cards Source: Banking Regulation and Supervision Agency, Moody s Deposits Privately- owned Banks 56.% Payables to money market and banks Shareholders' Equity Funds from repo transactions Other liabilities % Source: Banking Regulation and Supervision Agency (BRSA) Overview and Outlook s Baa3 government bond rating is underpinned by the diversification and dynamism of its economy now the world s 17th largest and the government s robust balance sheet and track record of prudent fiscal policy. Recent policy reforms designed to structurally reduce external vulnerabilities have helped the country build up its shock-absorption capacity and were key drivers of our decision to upgrade s sovereign rating to Baa3 in May 213. The muted impact that the shortlived recession in 29 (and the associated reversal in capital flows) had on the Turkish government s balance sheet is a key indicator of the sovereign s strengthened shock-absorption capacity. Since then, the government s balance sheet has continued to strengthen, with debt-to-gdp falling by 1 percentage points since 29 and the composition of debt becoming more resilient through lengthened maturities and a reduced share of foreign-currencydenominated liabilities. Nevertheless, s rating is constrained by the high level of external vulnerabilities present in the economy, with a current account deficit and an external vulnerability indicator (which measures short-term foreign debt obligations in the economy as a proportion of foreign-exchange reserves) among the highest in the investment-grade sovereign rating universe. Moreover, despite having narrowed recently, we expect the current account deficit (projected at 7.5% in 213) and the associated external financing needs (projected at around 25% of GDP in 213) to remain elevated over the medium term. is also susceptible to an escalation of political risk, both domestic and geopolitical. Looking ahead, the major challenge for the authorities will be to continue reducing external vulnerabilities while ensuring healthy and sustained economic growth. Upward movement in s sovereign rating will remain constrained by balance-of-payments factors as long as external imbalances remain substantial. Upward rating pressure could materialise in the event of structural reductions in these vulnerabilities or further improvements in s institutional environment or competitiveness. We would consider downgrading s sovereign rating if improvements in public finances were to be materially reversed. A sudden and sustained halt in foreign capital flows would also exert downward pressure on the rating. Economic Strength: High s average income level of $1,653 is slightly higher than the median for Baa-rated countries. The country s economy has grown rapidly over the past decade: nominal GDP has risen from $267 billion in 2 to $788 billion in 212 and is now the world s 17th largest. This rapid growth has been driven by a number of factors, including generally favourable domestic and external economic conditions and reform of the financial sector and political institutions. Growth continues to be driven by domestic demand During the global financial crisis, experienced a severe but relatively short-lived recession. The contraction in domestic demand, particularly investment and private consumption, led to a sharp reduction in imports. However, growth rebounded very quickly in 21 and 211 on the back of robust domestic demand, which in turn increased import levels and amplified the country s structural current account vulnerabilities. Following a slowdown in growth in 212 (+2.2% compared to +8.8% a year before) accompanied by some rebalancing towards external demand (see Figures 1 and 3), economic activity picked-up in the first half of 213 despite speculation about a change in US monetary policy and anti-government protests in in June 213. The uptick was achieved on the back of accelerating domestic demand alongside rapid credit growth, while net exports re-started to contribute negatively to growth as a result of rapidly increasing imports. We expect real GDP growth of 3.5% in 213, and only a slight acceleration to 3.7% in 214. However, we note that the risks to economic growth are mainly skewed to the downside and our forecasts remain very sensitive to developments around US monetary policy. On the upside, a stronger-thanexpected recovery in the euro area could boost s export performance. December 2, 213 EUROWEEK December 213 in the Global Marketplace

5 TURKISH BANKS ASSET GROWTH BY SEGMENT FITCH OPINION TRY billion 1,6 1,4 1,2 1, Loans Investment in securities Receivables from money market and banks Required reserves Other assets Key Rating Drivers Ratings Affirmed, Stable Outlooks: Retrenchment of global risk appetite in the face of the US Federal Reserve s forward guidance on QE3 has refocused the spotlight on s outsize current account deficit (CAD), triggering a re-pricing of Turkish assets and a depreciation of the lira. Fitch Ratings believes that s sovereign creditworthiness is resilient to these shocks, bolstered by its underlying credit fundamentals that can contain a wider financial fallout. Temporary or Permanent Shock: Official data point to a sharp slowdown in net capital inflows in May-July and a fall in international reserves of USD1bn. Reserves have since recovered a little and the CAD is fully financed on a 12-month rolling basis. However, it is unclear whether the downturn in net capital inflows constitutes a temporary shock or a more enduring state of affairs that could challenge s growth aspirations. Source: BRSA TURKISH BANKING SYSTEM LOANS AND LOANS-TO-GDP RATIO (%) Hesitant Policy Response: The central bank (CBRT) acted hesitantly, raising the upper limit of the interest rate corridor from 6.5% to 7.75% over the summer, where it is set to remain for the remainder of 213. However, investors doubt that the CBRT can remain indifferent to the exchange rate, given the implications for inflation and the heavily exposed corporate sector. Fitch believes that the authorities would adjust domestic policy settings in a timely manner to avert a more disruptive shock to economic stability. TRY billion Total bank loans Loans-to-GDP % 6% 5% 3% 2% 1% % Loan/GDP (%) Resilient to Shocks: is no stranger to external shocks, having successfully navigated the global financial crisis and the eurozone debt crisis. Sovereign external market access remains intact. Similarly, banks and corporates continue to report high rollover rates. Nonetheless, Fitch would expect a re-pricing of Turkish risk to eventually take its toll, holding back private investment and growth and forestalling any significant reduction in the CAD, leaving exposed to renewed bouts of financial uncertainty and global investor unease. Mitigating Shocks: retains significant bulwarks against external shocks, including a strengthening sovereign debt profile, a robust banking system, a deep domestic capital market and a dynamic private sector accustomed to shocks. Still, a lasting retrenchment of net capital inflows, while not Fitch s base case, would pose difficult policy challenges when set against a predilection for higher growth amid less accommodating global financial conditions. Source: BRSA (loans) and IMF (GDP) Political Risk: Widespread domestic protests in May and rising regional tensions were a reminder that political risk weighs on s sovereign ratings. However, has a democratically elected government with a strong majority that has delivered much of its original mandate over three electoral terms, not least in economic stability and prosperity. TURKISH BANKS CAPITAL ADEQUACY RATIO (%) Rating Sensitivities Macro Imbalances: A lasting reversal of net capital inflows, hurting the economy and financial stability, would be negative for the sovereign rating, as would a material increase in net external debt over the medium term. Conversely, a track record of lower and more stable inflation would be credit positive, as would structural reforms that raised domestic savings and FDI, leading to a durable and significant reduction in the CAD and an improvement in the financing mix. Political Shocks: Severe economic and financial fallout from an escalation of domestic political risk and/or a deepening of the conflict in neighbouring Syria would be credit negative. November 13, Source: BRSA, IMF-FSI in the Global Marketplace December 213 EUROWEEK

6 TURKISH BANKING SECTOR SHARE OF TOTAL ASSETS BY BANK TYPE BANKS SHARES OF TOTAL ASSETS Participation banks 5.% Development & Investment 3.9% 23.5% Finans Bank 3.8% İş 12.8% Cumhuriyeti Ziraat Bankası 11.9% Deposit banks 91.2% Vakıflar Bankası T.A.O. 7.5% Halk 7.8% Yapı ve Kredi 9.1% Akbank T. 11.5% Garanti 11.9% Source: Banks Association of, 212 figures Source: Banks Association of, 212 figures CONSUMER LOAN TYPES BANKS SHARES OF TOTAL DEPOSITS Individual Credit-Other 37% Individual Housing Credit 31% Finans Bank 4.2% 15.1% Cumhuriyeti Ziraat Bankası 14.7% Vakıflar Bankası T.A.O. 8.7% İş 13.8% Individual Automobile Credit 3% Credit Cards 29% Yapı ve Kredi 9.1% Halk 1. Garanti 12.2% Akbank T. 11.7% Source: BRSA, 212 figures Source: Banks Association of, 212 figures BANKS LOAN BOOK COMPOSITION BANKS SHARES OF TOTAL LOANS Agriculture, hunting and forestry Transportation, storage and communication Electric, gas and water resources 1 Consumer loans 33% Finans Bank 4.5% 25.6% İş 12.7% Garanti 11.5% Akbank T. 11.% Financial intermediation Construction 6% Wholesale, retail trade, etc 12% Manufacturing 19% Halk 8.1% Vakıflar Bankası T.A.O. 8.3% Yapı ve Kredi 9. Cumhuriyeti Ziraat Bankası, 8.8% Source: BRSA, 212 figures Source: Banks Association of, 212 figures EUROWEEK December 213 in the Global Marketplace

Recent developments. Note: The author of this section is Yoki Okawa. Research assistance was provided by Ishita Dugar. 1

Recent developments. Note: The author of this section is Yoki Okawa. Research assistance was provided by Ishita Dugar. 1 Growth in the Europe and Central Asia region is anticipated to ease to 3.2 percent in 2018, down from 4.0 percent in 2017, as one-off supporting factors wane in some of the region s largest economies.