Monthly Economic Monitor Turkey BBVA Research February 2018 Adem İleri Ali Batuhan Barlas Deniz Ergün Seda Güler Serkan Kocabaş Yiğit Engin
Key messages 1. Global demand remains solid and well-synchronized, while uncertainties on the pace of global central banks policy normalization trigger volatility in financial markets 2. Preliminary data signals only a smooth moderation in economic activity at the start of the year. We expect 7% GDP growth in 2017 to moderate towards 4.5% this year 3. The recovery in labor market is still supported by robust growth but losing some momentum 4. Base effects on inflation started to help as of January. Relatively stable levels of exchange rate against US dollar keep the risks balanced on our year-end inflation estimate of 9% 5. The Central Bank remains tight due to high inflation expectations. Fiscal policy stays accommodative on continuing high expenditures and recently announced incentives 6. Strong activity and investment recovery (intensive in imports) pose risks on current account deficit, while expected normalization in gold imports might compensate the higher energy bill this year
GLOBAL Supportive growth, increasing volatility in financial markets
Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 1Q18 data so far suggest a slight uptick in global growth at rates observed over the last year (1% QoQ) World GDP Growth (Forecasts based on BBVA-GAIN %QoQ) 1.2 1.0 0.8 0.6 Despite the stability of industrial production in December, 4Q data improved after the moderation observed in 3Q17 Confidence is at very strong levels so far in 1Q, though it gives some signs of expected exhaustion (in the Eurozone) 0.4 CI 20% CI 40% CI 60% Point Estimates Period average Global trade gained further momentum by the end of 2017, benefiting from the recovery in investment and the industrial sector, including in EM s BBVA-GAIN model estimates global GDP to grow at 1% QoQ in 1Q18, after 0.9% by end-2017 Source: BBVA Research & Bloomberg 4
Last month key events in financial markets: diagnosis and prospects KEY EVENTS Bond selloff, US yields 2.80%-3%, mainly driven by higher real rates and risk premium Spike in equity volatility, extreme event due to technical factors, gradually normalizing Selloff (overprized) equity, generalized correction, but almost reverted after the US fiscal deal Contained contagion to other markets, credit largely unaffected as well as EM Financial tensions have increased across the board, but still below historical average High yield and EM funds have started to register outflows DIAGNOSIS AND PROSPECTS Economic fundamentals remain strong globally with inflationary pressures growing gradually Major central banks will proceed with monetary policy normalization Financial markets adapting to: higher volatility (above ultra low level) and tighter financial conditions (on shrinking global liquidity and higher global risk premia). The end of complacency and, probably, higher sensitivity to any shock To monitor closely in the short run: persistence and contagion to other markets, particularly credit and EM, the evolution of financial tensions (it has the potential to affect growth), the Fed (faster tightening) and US bond yields (fiscal impact) Source: BBVA Research 5
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jun-16 Nov-16 Sep-17 Feb-18 Bond yields have risen globally led by real yields. The sell-off was driven by UST Although inflation expectations have been rising since 2016, the recent increase in nominal yields in the U.S. has been mostly driven by increases in real rates. The movement in the UST was also driven by higher term premium (highly correlated with swap volatility): uncertainty about inflation and Fed tightening 10Y UST, Bund and Gilt, YTD changes (bps) UST 10y, term premium and Swaption volatility 50 45 40 35 30 25 20 15 10 5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 200 180 160 140 120 100 80 60 40 20 0 0 Source: BBVA Research US Gilt Bund 10y real rates 10y Breakevens 10y Nominals 10YT 10Y Term premium USD swaption vol 1Y10Y (rhs) 6
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jul-16 A spike in equity volatility by technical factors, though spillovers to other risky assets were contained 2.0 BBVA Financial Tension Index and VIX (Level) 40 Credit spread: BAA, US HY and EMBI (bps) 1.5 1.0 0.5 30 20 750 650 350 300 0.0-0.5-1.0-1.5-2.0 10 0-10 -20 550 450 350 250 200 250 150 BBVA FTI Developed VIX Index (rhs) BBVA FTI Emerging EMBIspread HYUS BAA US (rhs) Source: BBVA Research, Bloomberg 7
Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 New episode of higher volatility: rising sovereign yields with a weak US dollar but still preference for EM assets BBVA Research Financial Stress Index (normalized index) 1.5 BBVA Research Financial Stress Index Regional Map 1 1 0.5 0.5 0 0-0.5-0.5-1 -1.5-1 -1.5 Developed Emerging This recent episode of volatility is expected to be short-lived (it was not driven by a deterioration of economic fundamentals) but it is not expected to return to previous levels (around 10). EM and high-yield will be key points to monitor onwards. 8
Turkish Economy High growth & High Inflation
Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Feb-17 Mar-17 May-17 Jun-17 Aug-17 Sep-17 Nov-17 Dec-17 Feb-18 Nov-17 Dec-17 Feb-18 Local factors play on the depreciation side for TL against US dollar on geopolitical tensions, while deteriorating global factors on lower risk appetite also start to push Turkish Lira vs US Dollar & Euro (Level) Turkish Lira: Global and Local Factors (weekly change) 4 4.7 3.5% Appreciation 3.8 4.5 2.0% 3.6 4.3 3.4 4.1 3.9 0.5% 3.2 3 2.8 TRL/EUR 3.7 3.5 3.3 3.1-1.0% -2.5% Depreciation Global Component % Local Component % TL Weekly Change % Source: CBRT, Bloomberg and BBVA Research 10
Feb-17 Mar-17 Mar-17 May-17 Jun-17 Jun-17 Aug-17 Aug-17 Sep-17 Nov-17 Dec-17 Dec-17 Feb-18 Flows to Turkish financial assets have also weakened, resulting in a upward shifted yield curve in both ends due to both higher risk premiums and elevated inflation expectations Flows to Turkish Assets Level, mn$, 13-week moving sum 7000 6000 5000 4000 3000 2000 1000 0-1000 -2000 Yield Curve (%) 14 13.5 13 12.5 12 11.5 11 10.5-3000 Equities Bonds Total 10 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Feb.18 Jan.18 Dec.17 Feb.17 Source: Garanti Research, CBRT, Bloomberg 11
Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Economic Activity: GDP continues to remain solid but faces some moderation Activity Indicators (3 MA, YoY Change, %) Monthly GDP Estimate and Realization (YoY Change, %) 2017 2018 M ean Jun Jul Aug Sep Oct Nov Dec Jan Industrial Production 3.9 2.3 7.8 7.8 13.9 8.7 9.7 7.5 Non-metal Mineral -0.7 0.8 8.1 8.4 14.2 7.7 8.7 10.9 Electricity Production 3.2 4.5 8.4 8.5 12.2 9.5 9.7 6.5 4.0 Auto Sales 0.7-9.7 2.4 7.1 14.6 6.2-2.2-16.2 Tourist Arriv als 6.2 26.5 36.5 45.5 45.3 38.2 31.0 24.4 Number of Employ ed 31.4 2.7 3.5 4.4 4.6 4.8 5.0 Number of Unemploy ed 2.4 10.5 6.1 1.5-0.8-5.2-8.2 Auto Imports 65.2-14.4-6.7-3.4 3.1-0.8-8.4-18.0 Auto Exports 10.1 24.0 23.2 9.8 6.4 1.8 2.9 0.5 Financial Conditions 75.7 35.6 40.5 35.4 38.9 38.7 38.0 37.6 41.4 Commercial Int. Rate 13.8 16.3 17.0 16.2 16.6 16.5 16.5 17.1 17.9 Retail Sales 3.6 0.8 1.8 2.0 1.5 1.3 1.9 4.0 Real Sector Conf idence 106.1 108.8 107.7 110.2 111.2 112.2 109.8 109.2 110.9 MICA Forecast 9.7% 7.2% 7.5% GDP YoY 5.4% 11.1% Contraction Slow-down Growth Boom 14% 13% 11% 8% 7% 5% 4% 2% 1% -1% -3% -4% BBVA-GB GDP Growth (Monthly) GDP Growth GDP growth nowcast November : 9.7% (100% of inf.) December : 7.2% (96% of inf.) January : 7.5% (26% of inf.) Source: Garanti Research, Turkstat, Bloomberg 12
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Consumption and investment still remain high, while net exports is now dragging growth. Monthly Consumption Nowcast (YoY Change, % 3M MA) Monthly Investment Nowcast (YoY Change, % 3M MA) Monthly Net Exports Nowcast (% contribution to GDP growth, 3M MA) 14% 12% 8% 6% 4% 2% 0% -2% -4% 22% 18% 14% 6% 2% -2% BBVA-GB Cons Growth (Monthly) November: 10.8% (100% of inf.) -6% Cons. Growth December: 9.5% (100% of inf.) Cons. Growth nowcast January: 7.6% (67% of inf.) - BBVA-GB Inv. Growth (Monthly) Inv. Growth Inv. Growth Nowcast November: 8.2% (100% of inf.) December: 9.6% (100% of inf.) January: 11.1% (33% of inf.) 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% BBVA-GB Net Exp Contribution (Monthly) Net Exp. Contribution Net Exp. Contribution Nowcast October: 0.6% November: -0.4% December: -0.8% Source: BBVA Research 13
Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Jun-17 Aug-17 Dec-17 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Jun-17 Aug-17 Dec-17 Moderation in industrial production stemmed from domestic demand oriented sectors, while exporting sectors kept its growth momentum on weak exchange rate and strong activity in the global economy Sectors in Industrial Production (IP) (3MA, calendar adj, YoY) Retail Sales and IP exc. Auto and Electricity 3MA, calendar adj, YoY 11% 14% 9% 4% -1% 9% 7% 5% 3% 1% -1% -6% -3% -5% IP Exporting Sectors Domestic Oriented Sectors IP Excluding Auto & Electricity Production Retail Sales Source: Garanti Research, Turkstat, CBRT 14
Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Nov-17 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Nov-17 Solid activity continued to support the labor market in 4Q Unemployment Rate (SA, %) Employment Growth in Sectors (%YoY) 12.0% 25% 13% 11.5% 11.0% 10.5% 10.0% 9.5% 23% 21% 19% 17% 9% 5% 1% -3% 9.0% 15% -7% Unemployment Rate Youth people unemployment rate-rhs Industry Construction Service Source: Turkstat and BBVA Research
Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 Base effects on inflation started to help in January. Core inflation stays rigid on inertia, robust domestic demand and lagged effects of exchange rate depreciation CPI and Core Inflation (CBRT C Index) YoY 13% 12% 11% 9% CBRT Survey: Inflation Expectations YoY 9.5% 9.0% 8.5% 8.0% 7.5% 8% 7% 7.0% 6.5% upper bound of the inflation target 6% 6.0% Core CPI 12-month ahead 24-month ahead Annual headline inflation climbed to double digits again in August. Increasing food and energy prices, as well as core inflation drew the jump in the headline.12-month and 24- Source: Garanti Research, Turkstat, CBRT month inflation expectations stayed hovering around high levels. 16
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 May-16 Sep-16 May-17 Sep-17 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 May-16 Sep-16 May-17 Sep-17 Exchange rate pass-through and cost-push factors from still high levels of producer prices inflation keep pressures on inflation Core Inflation and Currency Basket YoY Domestic PPI and USD/TL YoY 30% 20% 40% 12% 11% 25% 20% 18% 16% 14% 35% 30% 25% 9% 15% 12% 8% 20% 15% 8% 5% 6% 5% 7% 0% 4% 2% 0% -5% 6% -5% 0% - Core Inflation Currency Basket 2M Lag - rhs Domestic PPI USDTRY - rhs Source: Garanti Research, Turkstat, CBRT 17
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jul-16 Jan-15 May-15 Sep-15 May-16 Sep-16 May-17 Sep-17 The CBRT maintains the tight policy stance, supported by verbal statements CBRT Interest Rates (Annual Level, %) 15% 14% 13% 12% 11% 9% 8% 7% 6% 5% CBRT Monetary Policy Statement Sentiment (Standardized, estimated through Big Data LDA Techniques from Minutes & Statements) 4 3 2 1 0-1 -2 Tight Monetary Policy Sentiment ON Borrowing CBRT Cost of Funding CBRT One-Week Repo CBRT LLW -3-4 Loose Monetary Policy Sentiment Source: CBRT Source: BBVA Research 19
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Jun-17 Aug-17 Dec-17 Feb-18 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 Loan growth rates continue to normalize, while interest rates remain high Loan Growth Rates 13-week annualized 50% 45% 40% 35% 30% 25% 20% 15% 5% Loan Interest Rates 4-week average 19% 17% 15% 13% 11% 9% 0% -5% 7% Commercial Loans (FX adjusted) Consumer Loans Commercial Loans Deposit Interest Rate Consumer Loans Source: Garanti Research, Turkstat, CBT, BRSA, Bloomberg 19
Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Central Government budget performance worsens in January as a result of strong expenditures growth, weak tax revenues and absence of privatization revenues Budget Revenues and Expenditures 12-month sum, YoY Change Tax Revenues and Non-Interest Expenditures 12-month sum, YoY Change 20% 18% 16% 14% 12% 22% 20% 18% 16% 14% 12% 8% 6% 4% 8% 2% Revenues Expenditures Budget revenues were supported by the jump in tax revenues in July, confirming the rebound in activity in terms of both consumption and investment. Budget expenditures were still high, though losing momentum as the Government scales back it expenditures on current transfers. Source: Garanti Research, Turkstat, CBT, BRSA, Bloomberg Tax revenues Non-Interest Expenditures 20
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun-15 Mar-16 Dec-16 Sep-17 Expected normalization in gold imports might compensate the higher energy bill. However, investment recovery (intensive in imports) could pose risks on CA deficit in 2018 Current Account Balance 12M sum, % GDP Current Account Financing 12M sum, % GDP 3% 1% 8% -2% -0.3% 6% 5.5% -4% 4% 2% -6% -5.5% 0% -8% -2% - Net Portfolio Flows Net FDI CAB CAB Exc. Energy & Gold Net Other Investment CAD Source: CBRT, Turkstat and BBVA Research 21
Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Feb-17 Mar-17 May-17 Jun-17 Aug-17 Sep-17 Nov-17 Dec-17 Feb-18 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 May-16 Sep-16 May-17 Sep-17 Safe Low High Intense The security climate has improved markedly allowing tourism arrivals and revenues to recover Turkey: Conflict Index (Conflict News op Total News in News Media) Number of Tourists and Tourism Revenues (3MA, YoY) 21% 20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 45% 35% 25% 15% 5% -5% -15% -25% -35% -45% Foreign Tourist Arrivals Tourism Revenue Source: BBVA Research,, GDELT, Turkstat 21
Baseline forecasts 2016 2017e 2018f 2019f 2020f 2021f 2022f 2023f GDP (%) Private consumption(%) Public consumption (%) Gross fixed investment (%) Exports (%) Imports (%) Inflation (end of period. YoY %) Exchange Rate vs US dollar (end of period) Exchange Rate vs US dollar (average) Official Interest Rate (end of period) Official Interest Rate (average) Current Account Balance (% of GDP) Central Government Budget Balance (% of GDP) EU Defined Public Debt (% of GDP) 3.2% 7.0% 4.5% 4.3% 4.5% 4.5% 4.5% 4.5% 3.7% 6.2% 4.0% 3.6% 4.3% 4.1% 4.1% 4.3% 9.5% 2.2% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% 2.2% 7.9% 3.0% 4.6% 5.1% 5.7% 5.6% 5.5% -1.9% 11.8% 8.4% 6.5% 6.0% 5.6% 5.6% 5.5% 3.7% 6.1% 5.2% 5.6% 6.5% 6.5% 6.5% 6.5% 8.5% 11.9%* 9.0% 8.0% 7.5% 7.0% 6.7% 6.0% 3.52 3.77* 4.15 4.45 4.65 4.84 5.04 5.25 3.02 3.65* 4.01 4.31 4.56 4.75 4.95 5.16 8.3% 12.8%* 12.8% 10.0% 8.3% 7.5% 7.5% 7.5% 8.4% 11.5%* 12.8% 11.6% 8.6% 7.8% 7.5% 7.5% -3.8% -5.5% -5.6% -5.6% -5.4% -5.4% -5.4% -5.5% -1.1% -1.5% -2.2% -2.2% -2.1% -1.8% -1.6% -1.4% 28.3% 29.3% 30.9% 31.6% 31.7% 31.4% 31.1% 31.0% F= forecast, * realization 23
This report has been produced by the Turkey, China and Big Data Unit Chief Economist for Turkey, China and Big Data Unit Álvaro Ortiz alvaro.ortiz@bbva.com Adem İleri ademil@garanti.com.tr +90 212 318 10 63 Ali Batuhan Barlas alibarl@garanti.com.tr +90 212 318 10 67 Deniz Ergun denizerg@garanti.com.tr +90 212 318 10 59 Seda Güler sedagul@garanti.com.tr +90 212 318 10 64 Serkan Kocabaş serkankoc@garanti.com.tr +90 212 318 10 57 Yiğit Engin yigite@garanti.com.tr +90 212 318 10 60 With the collaboration of Global Economic Situations Miguel Jiménez mjimenezg@bbva.com BBVA-Research Jorge Sicilia Serrano Macroeconomic analysis Rafael Doménech r.domenech@bbva.com Global Economic Situations Miguel Jiménez mjimenezg@bbva.com Global Financial Markets Sonsoles Castillo s.castillo@bbva.com Long-Term Global Modelling and Analysis Julián Cubero juan.cubero@bbva.com Innovation and Processes Oscar de las Peñas oscar.delaspenas@bbva.com Financial Systems and Regulation Santiago Fernández de Lis sfernandezdelis@bbva.com International Coordination Olga Cerqueira Olga.cerqueira@bbva.com Digital Regulation Álvaro Martín alvaro.martin@bbva.com Regulation María Abascal maria.abascal@bbva.com Financial Systems Ana Rubio arubiog@bbva.com Financial Inclusion David Tuesta David.tuesta@bbva.com Spain and Portugal Miguel Cardoso miguel.cardoso@bbva.com United States Nathaniel Karp Nathaniel.karp@bbva.com Mexico Carlos Serrano carlos.serranoh@bbva.com Middle East, Asia and Geopolitical Álvaro Ortiz alvaro.ortiz@bbva.com Turkey Álvaro Ortiz alvaro.ortiz@bbva.com Asia Le Xia Le.xia@bbva.com South America Juan Manuel Ruiz juan.ruiz@bbva.com Argentina Gloria Sorensen gsorensen@bbva.com Chile Jorge Selaive jselaive@bbva.com Colombia Juana Téllez juana.tellez@bbva.com Peru Hugo Perea hperea@bbva.com Venezuela Julio Pineda juliocesar.pineda@bbva.com FOR ANY QUERIES PLEASE APPLY TO: BBVA Research: Calle Azul, 4. Edificio de la Vela - 4ª y 5ª plantas. 28050 Madrid, Spain. Tel.+34 91 374 60 00 and +34 91 537 70 00 / Fax+34 91 374 30 25 - bbvaresearch@bbva.com www.bbvaresearch.com
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Monthly Economic Monitor Turkey BBVA Research February 2018 Adem İleri Ali Batuhan Barlas Deniz Ergün Seda Güler Serkan Kocabaş Yiğit Engin