Latest Macroeconomic Developments Turkey

Transcription

1 Latest Macroeconomic Developments Turkey July 12, 2011 Economic Research This report has been prepared by T. Garanti Bankası A.Ş. is provided for information purposes only. Although the information on which the report is based has been obtained from sources which we believe to be reliable, no representation or warranty is made by T. Garanti Bankası A.Ş. for the accuracy or completeness of the information contained herein. Information contained herein is subject to change without notice. T. Garanti Bankası A.Ş. and/or any person connected with it accepts no liability whatsoever for any direct or consequential loss of any kind arising out of the use of this document or any part of its contents.

2 Table of Contents Macro Comment: Why Do Public Savings Have to Increase? Inflation: Adjustment in Food Prices Lowered the Inflation... FX & Int Rates: TL At Its Lowest Since March Growth: The Highest in the World, But the Last DoubleDigit Growth Rate in Sectoral Details: Rise in Auto Sales in June Labor: Unemployment Rate was at PreCrises Level in the Last Two Months Public Finance: Acceleration in Noninterest Expenditures in May Debt: Public Debt to GDP Ratio Fell Only Slightly in 1Q11 Foreign Trade: The Deficit Is Still Widening... Balance of Payments: CA Deficit Continues to Rise... CBT Balance Sheet: CBT Signals No Rate Hike Banking: The Growth Rate of Loans Was Still High as of end June Emerging Markets: Growth was the Highest in Turkey during 1Q11 Charts of the Month Macroeconomic Indicators Rating

3 Macro Comment Why Do Public Savings Have to Increase? According to the latest balance of payments data released this week, Turkey s 12month current account deficit reached US$68bn, a record high level. When the second quarter GDP figures are announced, we will probably see that this deficit is equivalent to almost 9% of GDP. The pace of increase in current account deficit is signaling that the savings ratio is falling. Indeed, the graph below shows that Turkey has one of the lowest level of savings ratio with of its GDP. The ratio was between 1618% before % 32% 32%31% Savings Ratio 27% 26% 23% 21% 21% 17% 16% China India Thailand Korea Venezuela Indonesia Chile Hungary Peru Poland South Africa Brazil Turkey As the savings ratio is falling, it is important to see who is borrowing as these groups might be subject to more risks with the increasing current account deficit levels. Household debt to GDP is only 17% and it is quite low when compared to other countries. When mortgage debt is excluded, the ratio falls to 11% of GDP. The fact that household debt is low in Turkey and it is denominated only in domestic currency TL, has helped Turkey to recover fast out of the recent economic downturn. Yet, it is worth Ireland UK Portugal Household Debt/GDP US Spain Canada 17% Japan Euro area France Greece Germany Belgium Italy Turkey noting that the pace of increase in household debt has been accelerating since the second half of. As of end of 1q11, the yearonyear increase in household debt is 34%, significantly above the precrisis levels. Household assets on the other hand, have been stagnant around 4344% of GDP since the second half of. Financial debt of the real sector was around 3637% of GDP between and mid and it has recently reached 4 of GDP with the acceleration since 3q10. Compared to end of, the increase in TL debt of real sector is 4 compared to 127% increase in FXdenominated debt. Financial Debt of Real Sector/GDP % %

4 Macro Comment In the aftercrisis period, only public sector brought down its debt level as a percentage of GDP. After increasing to 4 of GDP in, public debt to GDP ratio fell back to 42% at the end of Greece Italy Ireland Belgium Public Debt / GDP (%) US Portugal France England EU Hungary Germany 08 average Maastricht Spain Holland Even though the stock levels of debt in household, real sector and public sector do not give alarming signals (and on the contrary leave room for comfort), the pace of increase in the debt levels, especially on the household and real sector call for measures to control the increasing risks. In that respect, the measures taken by the Central Bank and recently by the Banking Regulatory and Supervisory Agency should be perceived as the decisions on the right direction. Yet, looking at fiscal accounts, there seems to be more room to control the risk. The graph below shows how the public debt to GDP ratio fell in Turkey since Between 2003, primary surplus made the highest contribution in bringing the debt levels down. High levels of growth rate also made an important contribution to the decrease in debt while the real interest burden had an opposite impact between Turkey In, with negative growth rate and primary deficit, public debt increased to 4 of GDP. The debt started decreasing in but unlike the 2003 period, the decrease in debt comes from only high growth rate and primary balance did not contribute to bring the debt down. The fall in real rates after limited the debtincreasing impact of the interest rates, making up for the decrease in public savings. Now that the economy is growing at high speed, it is important that savings ratio is brought back upwards. The economy policy makers might persuade both the households and the real sector to save more by policy actions but that would take more time and it might be more costly than increasing public savings. With fiscal tightening, there is room to control the increasing risks in the Turkish economy, an opportunity not to be missed. Impact on Public Debt/GDP Decreases the debt % % 4.8% % % 4. Increases the debt Primary Surplus Real Interest Burden Growth Impact 2

5 Inflation Adjustment in Food Prices Lowered the Inflation... Consumer prices fell by 1.43% (MoM) in June above the 0.7% expectation. Thus, annual inflation fell from 7.2% to 6.2%. Also, producer prices rose just by 0.01%, below the expectations, while annual PPI inflation rose from 9.6% to 10.2%. Graph 1: YoY Inflation Unprocessed and processed food price inflation fell from 16.7% to 8.7% and from 8.6% to 7.9%, respectively in June on a year on year basis. Graph 2: CPI & Food Inflation (YoY) In June, the fall in inflation stemmed from the fall in food prices... Graph 3: June CPI Inflation 2 16% 8% 4% 4% 8% CPI In June 11, goods price inflation fell to 6.7% from 8.3% (YoY) while there was a rise in service price inflation, which rose to 5.1% from 4.. Graph 4: YoY Services & Goods Inflation PPI 10.2% 6.2% CPI Unprocessed Processed , Garanti Bank calculations There was a rise in rent inflation and restaurant&hotels prices from 4.2% to 4.4% and 7.2% to 7. respectively (YoY). Also, tour prices rose sharply (15.) on a month on month basis in June. Graph 5: Service Sector in Subgroups (YoY) Education Recr. &culture Misc. Communication Clothing&text. Household Rest &hotels Transportation Housing Health Beverage &tob. CPI Food 7% 6% 4% 3% 2% 1% 1% 2%, Garanti Bank calculations There was a rise in the I index, which is referred to as the core inflation, to 5.27% from 4.72%... Graph 6: Core Inflation (S.A., 3MA, YoY) 14% 8% 6% 4% 2% Service Goods % 14% 11% 8% 2% 1% 4% 7% Other Services Rest.&Hotel Communication Serv. 02/08 08/08 02/09 08/09 02/10 08/10 02/11 Rent Transportation Serv ices 16% 14% 8% 6% 4% 2% 2% 4% * Core inflation : CPI excluding food, energy, alcoholic beverages, tobacco and gold 3

6 FX & Int. Rates TL At Its Lowest Since March TL depreciated by 2.8% in June against the currency basket. The cumulative depreciation of the TL since the beginning of November is 17%... In real terms, TL depreciated by 3.4% against the currency basket in June, after having depreciated by 0.9% in May. This is TL s lowest value against the currency basket since March... Swap rates on all maturities increased above 7% by the end of June. The increase compared to the previous month was the highest in maturities up to 3 months... Graph 7: Nominal Exchange Rates Graph 8: CPI Based Real Exchange Rates (2003=100) Graph 9: FX Swap Rates Basket (0.5USD ) USD/TL EUR/TL Basket Emerging Markets Advanced Economies Dec09 Feb10 1M 6M 12M Apr10 Jun10 Aug10 Oct10 Dec10 Feb11 Apr11 Jun11 Source: CBT Source: CBT Source: Reuters 14% Benchmark yields (20Feb13) increased above 9% level in the second half of June and came down slightly after the announcement of lowerthanexpected June inflation figures... Graph 10: Benchmark&OneWeek Repo Interest Rates (Compound) 6% Source: CBT, ISE, GarantiBank Repo (OneWeek) Benchmark Int. Rate Very shortend and longend of the yield curve rose as of July 8th compared to end of May... Graph 11: Yield Curve Yield (%) 17Sep Source: Reuters, GarantiBank calculations 8Jul 31May 22Apr 10Jan Days to Maturity The fall in annual inflation in June to 6.2% from previous month s 7.2%, carried the expost real interest rate to 2.6%... Graph 12: Real Interest Rates 19% 16% 13% 7% 4% 1% 2% Exante (Expectation Survey) Exante (Garanti) Expost Source: CBT, Reuters, GarantiBank calculations 4

7 Growth The Highest in the World, But the Last DoubleDigit Growth Rate in The Turkish economy registered the world s fastest growth rate in 2011Q1. Despite the negative contributions of foreign demand (5.) and inventories (0.3%), GDP rose by 11% (YoY) through strong domestic demand... Graph 13: Contributions to Yearly GDP Growth Rate Q1 2005Q1 2006Q1 Q1 Q1, GarantiBank calculations Q1 Q1 2011Q1 Foreign demand Domestic demand Change in inventory In the first quarter, private consumption and private investment jumped by and 38%, respectively. The total contribution of the two was 16% in Q1 Graph 14: Main Drivers of Growth (YoY Change) Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 Q1 Q1 Q1 Q1 2011Q1 Private consumption (Left) Private investment (Right) Yearly growth rate of Industrial Production (IP) has been decelerating since January Moreover, leading indicators show that the slowdown continues... Graph 15: Industrial Production, CUR and Electricity Production (YoY) 2 IP 2 Capacity utilization rate Electricity production 2 2 Jun07 Oct07 Feb08 Jun08 Oct08 Feb09 Jun09 Oct09 Feb10 Jun10 Oct10 Feb11 Jun11, CBRT But the deceleration in IP results from foreign demand. Compared to yearend, IP for external market rose just by 1% as of May, while IP for domestic market jumped by 3%... Graph 16: IP for External&Domestic Market (S.A.) Production for external market Production for domestic market , GarantiBank calculations According to our estimates, yearly growth rate will fall to approximately 7% in the second quarter from 11% in the first quarter... Graph 17: GDP and IP (3MA, YoY) 2 2 2Q '06 4Q '06 GDP Industrial production (3MA) 2Q '07 4Q '07 2Q '08 4Q '08 2Q '09 4Q '09 2Q '10 4Q '10 2, GarantiBank calculations * As of May *2Q '11 Seasonally and calendar adjusted numbers point out that growth is losing momentum. GDP growth rate fell to 1.4% (QoQ) in Q1 from 3.6% Q4. Furthermore, growth rate might be slightly negative in Q2 for the first time after Q1... Graph 18: GDP and IP (SA, Q1=100) GDP IP 2Q '05 4Q '05 2Q '06 4Q '06 2Q '07 4Q '07 2Q '08 4Q '08 2Q '09 4Q '09 2Q '10 4Q '10 *2Q '11, GarantiBank calculations * As of May 5

8 Sectoral Details Rise in Auto Sales in June After a fall during March May 11 period, on a seasonally adjusted basis, there was a slight rise in auto sales in June Graph 19: Passenger Car Domestic Sales (S.A) Auto sales rose by 36% and 52% in 2Q 11 and 1H 11, compared to the same period last year. Graph 20: Total Auto Sales (YoY) The rise in auto credits (MoM) continued with an acceleration in line with the rise in auto sales in June Graph 21: Passenger Car Domestic Sales & Credits Ç'06 4Ç'06 2Ç'07 4Ç'07 2Ç'08 4Ç'08 2Ç'09 4Ç'09 116% 79% 36% 2Ç'10 4Ç'10 2Ç'11 110, ,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 auto sales (S.A) auto credit (MoM) % 11% 9% 7% 3% 1% 1% 3% Source: ODD, Garanti Bank Calculations Source: ODD Source: ODD, BRSA, Garanti Bank Calculations On a seasonally adjusted basis, white goods domestic sales, continued to fall in May 11. Despite the fall, the nominal sales level was still high. Graph 22: White Goods Domestic Sales (S.A.) Despite the same trend in domestic sales of auto and white goods sectors, there was a divergence in exports side, since the second half of the. Graph 23: Exports (Aug 08=100, S.A) After the deceleration during March May period, electricity consumption rose by in June 11 (YoY)... Graph 24: Electricity Consumption & Production (YoY) 600, , , , Production Consumption 400, , , Auto White goods Source: TURBESD, Garanti Bank Calculations Source: OSD, TURKBESD, Garanti Bank Calculations Source: TEIAS, Garanti Bank Calculations 6

9 Labor Unemployment Rate was at PreCrises Level in the Last Two Months In March 11, unemployment and seasonally adjusted unemployment rate fell to 10.8% and 9.9% respectively. Graph 25: Unemployment Rate On a seasonally adjusted basis, unemployment rate was at precrises levels as of February and March 11. Graph 26: Unemployment Rate (S.A.) On a seasonally adjusted basis, nonfarm employment also continued to fall from 12.6% to 12. in March 11. Graph 27: Total and nonfarm Unemployment (S.A) 17% 16% 14% 13% 11% 9% Unemployment rate S.A Unemployment rate % 13% 11% 9% 14.9% 13.3% 10.1% 9.9% Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec Non farm (S.A) Total (S.A) 18% 16% 14% 8% , Garanti Bank Calculations On a seasonally adjusted basis, workforce participation rate was at its new peak level (49.8) as of March 11. Graph 28: Workforce (S.A) The fall in job opportunities in the next 6 months index in real sector, which is a leading indicator for the labor market, continued in June 11. Graph 29: Real Sector Confidence Index There was a rise in the number of people who applied to unemployment insurance, as of June 11. Graph 30: Unemployment Rate & Insurance 27,000 26,000 25,000 24,000 23,000 22, Workforce (S.A) left Workforce participation rate Unemployed right Unemployment , Garanti Bank Calculations

10 Public Finance Acceleration in Noninterest Expenditures in May As of end March 2011, budget deficit to GDP ratio fell to 2.8% from 3.6% at the end of. For 2011 government targets to be achieved, the budget performance for the rest of the year should be at least the same as in the previous year. Graph 31: Budget Performance 7% 6. Primary Surplus/GDP 4.9% % 3. Budget Balance/GDP 3% 1% 1% 3% 7% 5.2% % 1.8% % 1.3% 1.2% 0.1% % 2.8% 3.6% Mar GT Source: Ministry of Finance, Turkstat GT: Government Target While the acceleration in income tax revenues growth rate continued in May, there was a slowdown in tax revenues based on consumption. Graph 34: Revenues (12Mnth Avg. Y/Y Change) Tax revenue performance improved only slightly in 1Q2011, pulling tax revenues to GDP ratio up to 19.2% as of March 2011 from 19.1% the quarter before. Graph 32: Tax Revenues/GDP % 18.1% 18.1% 18.1% 17.9% 17.7% % 19.2% 19.1% GT Source: Ministry of Finance, Turkstat GT: Government Target Other than goods&services procurements, all noninterest expenditure subgroups indicated an acceleration in May Graph 35:Expenditures (12 Mnth Avg. Y/Y Change) As of March 2011, non interest tax revenues to GDP ratio fell to 21.8% from 22.2% the quarter before. For the overall 2011, government target is almost at the same level (21.8%). Graph 33: NonInterest Expenditures/GDP 23% 22% 21% 2 19% 18% 17% 16% 18.4% % 17.1% 17.1% % 21.8% 21.8% GT Source: Ministry of Finance, Turkstat GT: Government Target After falling to TL 26.9 bn as of April 2011, the 12 month cumulative budget deficit rose to TL 29.8 bn as of May Year end target is TL 33.5 bn. Graph 36:Budget Performance (12 month total) Total Tax Revenue VAT Income Tax SCT 3 2 Personnel Payments Current Transfers Goods&Servs Proc. NonInt Payments (bln TL) Expenditures Revenues /07 04/08 08/08 12/08 04/09 08/09 12/09 04/10 08/10 12/10 04/ Dec07 Apr08 Aug08 Dec08 Apr09 Aug09 Dec09 Apr10 Aug10 Dec10 Apr11 Source: Ministry of Finance Source: Ministry of Finance Source: Ministry of Finance 8

11 Debt Public Debt to GDP Ratio Fell Only Slightly in 1Q11 EUdefined public debt stock to GDP ratio fell by 0.6 point to 41. in the first quarter of Due to revisions, the ratio rose slightly for the previous years. For, the revision was 0.6 point pulling the ratio up to 42.2%. Graph 37: EU Defined Public Sector Debt Stock/GDP As of May 2011, half of the domestic debt was composed of floating rate notes, while the share of fixed rate notes was slightly lower at 49%. Graph 38: Domestic Debt by Instruments According to our calculations made on current debt stock, in the next two years, the highest debt payments will be made in 1Q12, 4Q13 and 3Q11. Graph 39: Domestic Debt Redemption Schedule % 47% 46% % 42% 41% 39% Q GT 2012GT Source: Treasury Source: Treasury Source: Treasury, Garanti Bank calculations External debt stock to GDP ratio of Turkey has remained almost constant at 4 as of March Short term external debt to GDP ratio fell slightly to from 11% as of end Fixed Rate Floating Rate FX 4% 4% 3% 2% 2% 1% 1% 8% 44% 46% 46% In the first quarter of 2011, private sector external debt to GDP ratio declined slightly by 0.1 point, while public sector external debt to GDP ratio rose 0.3 point compared to end. Graph 40: External Debt/GDP Graph 41: External Debt/GDP Table 1: Financing Table 46% 51% 44% 51% 4 3/10 53% 43% 6/10 49% 48% 9/ % 12/10 49% 5 03/11 49% 49% 04/ % 05/11 (TL bln) Q Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q Q13 4Q13 June cash budget indicated an improvement in budget performance on the back of high revenue transfers due to debt restructuring and decelerating noninterest expenditures % 31% 32% 31% 3 29% 29% % Short Term Long Term 8% 7% 7% 8% % 1Q % 23% % 26% 26% 2005 Private Sector Public Sector Central Bank 3% 14% 11% 11% % 2% 2% 14% 2% 2% 2% 1Q2011 TL Billion Financing Gap Domestic Debt Service Foreign Debt Service Financing Domestic Borrowing Foreign Borrowing Primary Balance Privatization Return on Debt Cash Dom. Borrowing/ Dom. Redemption Realization % 2011 JanJun % 2011 Treasury Program % Source: Treasury Source: Treasury Source: Treasury, Garanti Bank calculations 9

12 Foreign Trade The Deficit Is Still Widening... Foreign trade deficit continues to widen due to weak external demand. In May, the deficit reached a record level, rising by %104 (YoY) to US$ 10.1 bn. Moreover, preliminary TEA figures indicated that the growth rate of exports rose to 2 in June from in May... Graph 42: Exports and Imports (Calendar Adjusted, YoY Change) 6 Exports Imports , Turkish Exporters Assembly (TEA) According to the seasonally adjusted figures, the 3month average imports rose to a new record level as of May, as exports remained stable... Graph 43: Exports and Imports (S.A., 3MA, Mn US$) 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7, Exports Imports Real imports jumped by 2 (YoY) in May, while real exports decreased by 4% (YoY). Deterioration in real foreign trade balance became more pronounced in May 2011, due to oneoff high gold exports in the same month last year... Graph 44: Real Exports and Imports (3MA, YoY) Real exports Real imports Oil&natural gas imports jumped by 53% (YoY) in JanuaryMay, due to 43% rise in oil prices and also robust domestic demand... Graph 45: Oil Bill & Brent Price On a 3monthaverage basis, investment goods imports jumped by 64% (YoY) as of May, significantly above the imports of intermediate and consumption goods... Graph 46: Breakdown of Imports (3MA, YoY) Exports to the EU25 countries rose by 2 (YoY) in May, while exports to emerging countries has been decelerating due to regional problems Graph 47: Exports By Country Group (3MA, YoY) Oil&naturalgas imports (3MA) 3,500 Brent Price (3MA) 3,000 2,500 US$ mn 2,000 1,500 1, US$ per barrel Consumption Goods Intermediate Goods Investment Goods Total Imports Emerging countries North America EU25 Total , Reuters, GarantiBank calculations, GarantiBank calculations 10

13 Balance of Payments CA Deficit Continues to Rise... As of May 11, the 12 month current account deficit reached USD 68.2 billion with a USD 7.8 billion deficit in May 11. Also, the 12 month cumulative nonenergy current account deficit reached USD 30.0 billion. Graph 48: Current Account Balance (Bn USD) The seasonally adjusted nonenergy current account deficit also rose to USD 3.2 billion in May 11 from USD 2.8 billion in April 11. Graph 49: Non Energy Current Account (S.A., Bn USD) As of May 11, there was a USD 2.4 billion rise in loans while deposits fell slightly by USD 400 million compared to previous month, on a 12month cumulative basis. There was a USD 600 million rise in the net FDI. Table 2: External Financing (12month, Million US$) Current Account Deficit Net Energy Bill 2, ,000 Current Account Balance Capital and Financial Account Direct Investment ,124 52,417 9, ,365 53,567 9, ,174 55,972 10, ,000 6,000 8,000 10,000 Current account Non energy current account Abroad In Turkey Real Estate (Net) Portfolio Investment Assets 1,957 11,688 2,449 23,005 1,619 2,027 11,930 2,485 23,799 1,342 1,802 12,306 2,502 23, Liabilities Equity Securities 24,624 1,609 25,141 2,297 24,190 2,605 Source: CBT Net tourism revenue reached USD 4.1 billion in the January May period with USD 1.4 million revenue only in May 11. The rise in the net tourism revenue was in line with the rise in the tourist number... Source: CBT, Garanti Bank Calculations As of May 11, (12month cumulative basis, MoM) there was a USD 1.2 billion fall in non resident s portfolio while resident s portfolio rose by USD 1.9 billion. Thus total hot money rose by USD 3.1 billion with a USD 2.4 billion rise in net error & omissions. Bond Eurobond Banks Other Investment Assets 15,993 4,721 2,092 35,568 12,161 16,925 2,709 3,001 32,795 10,404 15,148 2,709 3,518 36,184 11,239 Graph 50: Tourism Net Revenue (YoY) departing tourist number net tourism revenue Table 3: Hot Money (12 month mn USD) NonResident Government Securities Equity securities Deposits (TL+FX+Repo) Resident ST lending of ban. to oversees ST ext. debt of banking sector ST ext. debt of private sector Net Error & Omissions TOTAL % of Current Account ,502 18,085 1,609 3,808 16, ,452 1,563 7,707 47,351 50,901 79% ,913 19,926 2,297 5,690 13,220 1,062 12,973 1,309 9, ,664 18,666 2,605 5,393 15, ,240 1,673 12,202 54,034 79% Currency Deposits Liabilities Banks Long Term Short Term Other Sectors Long Term Short Term Currency and Deposits Banks Reserve Assets Net Errors and Omissions 14,828 23,407 17,997 2,545 15, ,168 1,563 3,076 4,596 15,840 7,707 13,667 22,391 15,624 2,651 12, ,122 1,309 4,897 6,500 12,853 9,768 13,979 24,945 17,202 2,962 14,240 1, ,673 4,496 6,139 14,109 12,202, Ministry Of Culture & Tourism Source: CBT, Garanti Bank Calculations Source: CBT, Garanti Bank Calculations 11

14 CBT Balance Sheet CBT Signals No Rate Hike As there were no further RR hikes in May and June, money deposited at the CBT as reserve requirements averaged between TL 6770 bn throughout June and the first week of July... Graph 51: CBT s funding and withdrawals (TL billion) Money provided through OMO were also steady between TL 5458bn during the same period and the OMO to reserve money ratio touched an alltime high of 49.3%... Graph 52: OMO /Reserve Money CBT s funding through open market operations kept banks cost of funding their liquidity shortage between %, just above the 6.2 policy rate... Graph 53: Weighted average cost of ISE Repo and CBT s OneWeek Repo Funding Billion TL Sep10 Oct10 Nov10 OMO Dec10 Deposits at the CBT Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul11 7.2% % 6.6% 6.4% 6.2% 6. N10 D10 J11 F11 M11 Banks' cost of funding liquidity shortage Policy Rate A11 M11 J11 J11 Source: CBT Source: CBT Source: CBT, ISE Interest rates at the ISE Repo Markets fluctuated within a wide band of 37.9% during the last two months. In a note released in June, the CBT signaled no policy rate change for the time being but hinted that it might change the rates in the interest rate corridor, if necessary... Graph 54: Interest Rate at the ISE Repo Market and CBT ON Borrowing Rate Oct 10 Nov 10 ISE Repo Market Rate Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 CB Borrowing May 11 Jun 11 In June, the CBT cut down its daily FX buying auctions to US$30mn with a US$10mn cut. The auctions were reduced US$10mn in May as well. Graph 55: International Reserves (US$ bn) The yearonyear change in monetary indicators came down more in June compared to the CPI but there is still a significant gap between them and the inflation... Graph 56: YoY Change in Monetary Indicators M1 M2Y M3Y CPI M2 M3 Emission M09 J09 S09 D09 M10 J10 S10 D10 M11 J11 Source: CBT, ISE Source: CBT, Garanti Bank Source: CBT, Turkstat 12

15 Banking The Growth Rate of Loans Was Still High as of end June Acceleration in loans was significant in the last week of June. YoY growth rate of commercial loans and consumer loans reached 39% and 4 as of 1st of July. Graph 57: Loan Growth Rate (Yoy) 37% 32% 27% 22% 17% 7% 2% 3% 01/09 Source: BRSA *Consumer loans include credit cards Compared to the end of March, the TL denominated deposits rose by TL 19.6 bn, while FX denominated deposits declined by USD 0.8 bn as of July 1st, indicating a continued investment appetite for TL... Graph 60: Deposits Commercial Loans Consumer Loans 04/09 07/09 10/09 01/10 04/10 07/10 10/10 01/11 04/ % The growth rate of SME loans decelerated after March 2011, while other commercial loans continued to accelerate. Graph 58: : Growth Rate (Yoy) Source: BRSA SME Loans Among deposits up to 3 month maturities, the fall in the share of deposits up to 1 month maturity was significant, falling 17% from 3 in November May Graph 61: Share of TL Deposits Commercial Loans Except SME 48.2% 29.1% The rise in the interest rates of loans was much higher in the past one month compared to previous months. The interest spread between benchmark bond and loans widened. Graph 59: Interest Rates 19% 17% 13% 11% 9% 7% 6/09 7/09 8/09 Source: CBT The share of 36 month maturity deposits surpassed 9% as of May 2011, reaching its highest level since December Graph 62: Share of TL Deposits Auto Loans Housing Loans C ommercial Loans Benchmark Bonds 10/09 11/09 12/09 2/10 3/10 4/10 6/10 7/10 8/10 10/10 11/10 12/10 2/11 3/11 4/11 6/ Source:BRSA TL deposits (TL billion, left) FX deposits (US$ billion, right) 12/07 07/08 02/09 09/09 11/09 01/10 02/10 04/10 05/10 07/10 09/10 10/10 12/10 01/11 03/11 05/11 06/ Source: BRSA Demand Deposit 13 Month Up to 1 Month % 54% 17% % 8% 7% 6% 4% 3% 2% 1% Source: BRSA More than 1 Year 36 Month Month 9.3% % % 0.8%

16 Emerging Markets Growth was the Highest in Turkey during 1Q11 Policy rates were raised in Brazil, Korea, Poland, Chile, Thailand, India and Colombia by 25 basis points in June. In early July, China raised policy rate by 25 basis points to 6.56%. In Taiwan the rise was slight at points in June. Graph 63: Average Policy Rates in EM /07 02/08 05/08 08/08 11/08 02/09 05/09 08/09 11/09 02/10 05/10 08/10 11/10 02/11 05/11 Source: Bloomberg, Garanti Bank *Czech Republic, South Africa, Hungary, Mexico, Poland, Romania, Russia, Ukraine, Turkey, Indonesia, Colombia, China, S. Korea, Taiwan, Thailand, Malaysia, India, Peru, Brazil, Chile Annual CPI inflation accelerated in China, Brazil and Turkey, while it remained almost constant in Russia in May. Graph 66: Consumer Annual Inflation In Russia and Romania policy rates are higher than annual inflation. In Poland, China and Turkey, they are almost the same. Real rate is still the highest in Brazil. Graph 64: Policy Rates & Annual Inflation 9% 6% 3% 8.4% 6.2% % 4. Poland Policy Interest Rates 3.2% Mexico South Africa Hungary Turkey Source: IIF, Bloomberg, GarantiBank Among the Eastern Europe countries, growth rate in Turkey continued to be significantly higher in the first quarter of Graph 67: Growth Rate (y/y, SA) Annual Inflation Romania 6.4% China 9.7% Russia 6.6% Brazil Depreciation Appreciation TL depreciated by some 1% against currency basket compared to the month before, while other selected local currencies appreciated compared to the month before as of 7th of July. Graph 65: EM Currencies Against Basket (0.5*EUR+0.5*USD) ( =100) 130 TRY ZAR 120 RUB HUF 110 BRL Source: Reuters, Garanti Bank Growth rate accelerated in Chile and Mexico in the first quarter of Graph 68: Growth Rate (y/y, SA) Source:IIF Jan08 May08 Sep08 Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 China Turkey Russia Brazil Hungary Czech Republic Poland Turkey 8% 6% 4% 2% Q2 Q3 Q4 Q12011 Source: CECD South Africa Indonesia Chile Mexico Brazil 8% 6% 4% 2% Q2 Q3 Q4 Q12011 Source: OECD 14

17 Charts of the Month According to real sector expectation survey, there was a sharp divergence between domestic orders expectations for the last and next three months. Despite the slowdown expectations in the second half of the year, auto sales will reach a new record high level with thousand units according to market expectations in As of 1Q11, credit growth was significantly higher than the GDP growth, pulling change in loans to GDP ratio up to 12.8% from 12.1% the quarter before. Graph 69 : Domestic Orders Expectations (S.A) Graph 70 : Auto Sales (thousand units) Graph 71 : Change in Loans/GDP last 3 months next 3 months F 14% 8% 6% 4% 2% % % 12.1% 9.4% Source: CBT, Garanti Bank Calculations Source: OSD, Garanti Bank Calculations Source: BRSA, Turkstat, Garanti Bank calculations Inflation in Turkey has decreased below average inflation of BRIC countries for the first time in Graph 72: Inflation in BRIC&MIST Countries Compared to selected EM countries, the rise in real manufacturing hourly earnings was the highest in Turkey since the end of. Graph 73: Real Manufacturing Hourly EarningsSA According to our calculations, as a ratio of GDP, domestic savings were close to its lowest level as of 2011Q1, while foreign savings (current account deficit) have been increasing... Graph 74: Savings/GDP (4QuarterAverage) 13% 11% 9% 7% 3% 2004 Turkey BRIC MIST Q1 Czech Republic Turkey Q2 Q3 Q4 Q1 Q2 Q3 Hungary Poland Q4 Q1 Q2 Q3 Q4 Q Q1 2000Q1 2001Q1 2002Q1 Foreign savings/gdp Domestic savings/gdp 2003Q1 2004Q1 2005Q1 2006Q1 Q1 Q1 Q1 Q1 2011Q1 Source: IIF, Reuters, Garanti Bank calculations Source: OECD, Garanti Bank calculations * BRIC: Brazil, Russia, India, China MIST: Mexico, Indonesia, South Korea, Turkey 15

18 Macroeconomic Indicators I Realizations 2011 Forecast Latest Four Realizations Growth Garanti Government 2Q 10 3Q 10 4Q 10 1Q 11 GDP (TL billion, nominal prices) ,105 1,243 1, GDP (US$ billion) GDP (12month, TL billion, nominal prices) GDP (12month, US$ billion) GDP Per Capita (US$) 9,240 10,438 8,559 10,079 10,730 10,624 GDP Yearly Growth Rate 4.7% 0.7% 4.8% 8.9% 5.6% % 5.2% 9.2% 11. Industrial Production Garanti Government Industrial Production (YoY) % 9.9% 13.1% 7.1% 10.2% 8.8% 8. Capacity Utilization Rate 80.2% 76.7% 65.2% 72.6% 73.2% 74.9% 75.2% 76.7% Labor Garanti Government 2Q 10 3Q 10 4Q 10 1Q 11 Real Wage Index in Industry (Per hour, 2005=100) YoY Change % 7.7% 6.7% 6.2% 8.1% 9.7% 10.4% Productivity Index in Industry (Per hour, 2005=100) YoY Change 2.4% 0.3% 1.1% 8.2% 7.9% 5.2% 6.4% 7.2% Garanti Government Unemployment Rate 9.9% % 11.3% % 11.9% % Inflation Garanti Government CPI (MoM) 0.4% 0.9% 2.4% 1.4% CPI (YoY) 8.4% 10.1% % 7.8% 5.3% % 7.2% 6.2% CPI (Annual average) 8.8% 10.4% 6.3% 8.6% 6. PPI (MoM) 1.2% 0.6% 0.2% 0. PPI (YoY) 5.9% 8.1% 5.9% 8.9% 10.1% 10.1% 8.2% 9.6% 10.2% PPI (Annual average) 6.3% 12.7% 1.2% % Deflator 6.2% % %, State Planning Organization, CBT and Garanti Bank 16

19 Macroeconomic Indicators II Realizations 2011 Forecast Latest Four Realizations Interest Rates Garanti Government Benchmark bond (Average) 17.2% % % 8.9% 8.6% 8.7% 9. Primary (Discounted AuctionsAverage) 18.3% 19.1% 11.4% 8.2% 8.9% 8.9% 8.3% 9. Dom. Borrowing Cash Maturity (Month) O/N (average) 18.3% 19.3% 9.2% 5.8% Eurobond (2030, Yield) 6.8% 7.7% 6.4% 5.7% % 5.7% 5.7% Foreign Currency Garanti Government Basket (0.5*USD+0.5*EURO, end of period) EURO/US$ (end of period) TL/USD (average) TL/USD (end of period) TL/EURO (end of period) Balance of Payments (US$ million) Garanti Government Exports (f.o.b) 107, , , , , ,000 10,064 11,817 11,883 10,948 Imports (c.i.f) 170, , , , , ,500 17,519 21,638 20,951 21,005 Current Account Balance 38,434 41,959 13,991 47,739 64,000 42,200 6,101 9,727 7,588 7,753 Current Account Balance (12month) 38,434 41,959 13,991 47,739 64,000 42,200 54,656 60,124 63,365 68,174 Current Account Balance/GDP 5.9% 5.7% 2.3% % 5.4% Nonenergy C.A. Balance (12month) 8,651 1,217 11,495 15,085 19,913 24,248 26,549 30,037 Tourism Revenue 18,487 21,951 21,250 20,807 23, ,258 1,257 1,778 Foreign Direct Investment (Net) 19,941 16,955 6,858 7, , Capital Account Balance 36,677 37,256 8,925 43,126 4,460 8,957 7,779 3,235 Eurobond Issues 4,627 4,000 3,750 6, , Source: Treasury, CBT, TURKSTAT, State Planning Organization, Reuters and Garanti Bank 17

20 Macroeconomic Indicators III Realizations 2011 Forecast Latest Four Realizations Total External Debt Stock Garanti Government 2Q 10 3Q 10 4Q 10 1Q 11 Total External Debt Stock (US$ Billion) Public Private Shortterm Longterm Total External Debt Stock/GDP 38.4% 37.4% 43.6% 39.3% % 39.3% 39. Public/GDP 13.8% 12.4% 15.7% 13.7% 14.2% 14.8% 13.7% 14. Private/GDP 24.7% % 25.6% 24.8% % 25. Shortterm/GDP 6.6% 6.8% % % 10.6% 10.2% Longterm/GDP 31.8% 30.6% % % 29.3% EU Defined Debt Stock/GDP 39.9% % 42.2% 40.6% 40.6% 42.2% 41. Reserves (US$ million) Garanti Government Total Foreign Reserves 74,027 73,346 74,810 85,960 92,149 95,578 96,753 99,471 Central Bank Reserves 71,263 70,075 70,689 80,696 86,792 90,221 91,396 93,847 CB Net FX Position 32,827 36,213 37,182 50,156 53,803 54,876 54,417 55,559 Monetary Aggregates (US$ billion) Garanti Government M M M2Y M3Y Base Money Open Market Operation (End of period) Source: Treasury, CBT and Garanti Bank 18

21 Macroeconomic Indicators IV Realizations Banking Sector (TL Billion) Assets Assets/GDP % 87.6% Loans Loans/GDP 33.9% 38.7% 41.2% Commercial Loans/GDP 22.6% 26.3% 27.6% Consumer Loans/GDP 11.3% 12.3% 13.6% Housing Auto Other Credit Cards Deposits FX Deposits (Billion US$) Deposits/GDP 42.3% 47.8% 54. Shareholders' Equity Shareholders' Equity/GDP % 11.6% Central Government Budget (TL Billion) Revenues Expenditures Interest Payments Budget Balance Primary Balance Central Government Domestic Debt Stock Interest Expenditures/GDP 5.8% 5.3% 5.6% Budget Balance/GDP 1.6% 1.8% 5. Primary Balance/GDP 4.2% % Central Government Debt Stock C.G. Domestic Debt Stock/GDP 30.3% 28.9% 34.6% C.G. External Debt Stock/GDP 10.3% 9.4% 12. Total Public Debt Stock/GDP 42.2% % Total Public Net Debt Stock/GDP % 32. Source: BRSA, CBT, TURKSTAT, Ministry of Finance, Treasury and Garanti Bank 1, % % % % % % 3.6% 0.8% 31.9% 10.6% % 2011 Forecast Garanti Government Garanti Government % 3.9% 2.8% 2.8% 1.2% 1.2% Garanti Government 2Q % % 29.9% 14.4% % % Q % 46.8% 30. Latest Four Realizations 3Q 10 4Q , % 91.1% % 47.6% 29.9% % 15.6% % % Q 10 4Q % 31.9% 11.1% 10.6% 45.4% % 28.7% 1Q 11 1, % % 33.3% 15.8% % % Q % 10.8% 44.3% 27.9% 19

22 Rating Foreign Currency Local Currency Turkey S&P LongTerm Outlook/Watch LongTerm Latest Change Direction B+ Stable B B+ Positive BB BB Positive BB BB Stable BB BB Negative BB BB Stable BB BB Negative BB BB Stable BB BB Positive BB+ Turkey Moody's F.C. LT Outlook/Watch L.C. LT Latest Change Direction B3 Positive from Stable B B2 Stable B B1 Positive B Ba3 Stable Ba Ba3 Positive Ba Ba2 Stable Ba Ba2 Positive Ba2 Turkey Fitch F.C. LT Outlook/Watch L.C. LT Latest Change Direction B Negative B B Positive B B Positive B B+ Stable B B+ Positive B BB Stable BB BB Positive BB BB Stable BB BB Stable BB BB+ Stable BB BB+ Positive BB+ Other Emerging Markets S&P F.C. LT Outlook/Watch L.C. LT Latest Change Direction Russia BBB Stable BBB+ Hungary BBB Negative BBB Brazil BBB Positive BBB+ Poland A Stable A 20