Turkey Economic Outlook November 2018 Creating Opportunities
Challenging times ahead needing policy determination 01 Turkish financial assets stabilize after reaching lows in summer A firmer policy response and easing relations with US facilitate the stabilization of Turkish Lira and risk premium 02 Rebalancing is underway and will accelerate from now onwards The level and the duration of adjustment is still uncertain but will accelerate soon on the tightening credit conditions 03 Inflation will transitorily increase in 1Q19 The exchange rate pass-thru and likely reversal of recent campaigns will keep inflation high in the short term. It should start to stabilize afterwards 04 Monetary policy stays on hold but will remain tight Higher inflation should prevent the CBRT from easing in the short term. Movements could be more aggressive in the 2nd half of 2019 05 Fiscal consolidation in a realistic New Economic Program Fiscal policy is already tightening and the targets of 2018 will likely be met. The real challenge will become the next year 06 Restructuring options already under discussions The Government has started the evaluation period to implement a restructuring process to cope with corporate-bank problems
Feb-18 Jun-18 Oct-18 Nov-18 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Nov-18 The Turkish Lira and Turkish financial assets continue to improve on a more benign EM outlook, policy changes and geopolitical ease 6,9 Turkish Lira vs USD (level) EM Currencies volatility (% daily change moving average 1M moving Avg. One Standard deviation range) 02% 6,5 02% Doubts on CBRT 6,1 5,7 01% 01% Failed Coup Doubts on CBRT FED stance tightens 5,3 0 4,9-01% 4,5-01% EM Amplification TK differentiation 4,1-02% 3,7 TURKEY EM Average Source: CBRT, BBVA Research Turkey
Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Oct-18 The financial adjustment is now under control Now it is time for the real economic adjustment we still expect 3% GDP growth in 2018 Turkey: Activity Indicators (%YoY, mov. Avg. 3m) 2018 M ean Mar Apr May Jun Jul Aug Sep Oct Industrial Production 7.8 9.9 7.3 6.4 5.0 6.0-0.2 0.5 Non-metal Mineral Production 7.8 16.7 10.3 6.0 3.1 2.8-4.8-4.0 Electricity Production 4.9 3.0 2.4 1.9 0.9 0.9-0.4 0.2-1.2 Auto Sales 6.9 2.2-0.4-5.8-20.0-29.6-42.1-51.5-66.5 Tourist Arriv als 5.5 34.9 31.2 29.4 28.3 21.0 17.7 14.0 Number of Employ ed 3.9 4.4 3.7 3.0 2.5 2.1 1.9 Number of Unemploy ed 1.6-13.5-10.9-7.1-2.3 0.6 4.1 Auto Imports 8.6-1.0-3.2-7.4-21.2-35.3-50.9-59.3-69.9 Auto Exports 9.2-3.1 9.6 18.7 37.3 24.3 9.5 5.3 4.8 Turkey: GDP Monthly Indicator* (%YoY mov. Avg. 3m) 14% 12% 8% 6% 4% August: 2.2% (10 of inf.) September: 2.2% (96% of inf.) October: -0.6% (47% of inf.) +7.3% +5.2% Retail Sales 6.4 8.9 7.7 6.7 5.8 4.4 1.5 Manuf acturing PMI 51.4 49.6 51.7 49.5 48.4 0.00 49.6 46.4 42.7 44.3 Total Loans growth 13-week 19.0 13.1 15.9 17.0 14.5 10.2 1.8-3.9-9.1 Real Sector Conf idence 106.5 111.9 111.2 109.9 104.6 102.7 96.4 89.6 87.6 MICA Forecast 2.2% -0.6% GDP YoY 5.2% Contraction Slow-down Growth Boom 2% -2% -4% BBVA-GB GDP Growth (Monthly) GDP Growth GDP growth nowcast +2. -2. Source: CBRT, TURKSTAT, BBVA-Research Turkey *We produced our GDP montly Indicator by using our retail sales forecast for September and October
Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Oct-18 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Oct-18 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Jun-18 A sharp slowdown in domestic demand is partially buffered by a strong reversal of external demand Turkey: Private Consumption* (%YoY, mov. Avg. 3m) Turkey: Total Investment (%YoY, mov. Avg. 3m) Turkey: Net Exports (% Contribution to GDP Growth) 14% 12% 8% 6% 4% 2% -2% -4% -6% -8% Aug: 2.1% (10 of inf.) Sep: -0.8% (83% of inf.) Oct: -5.5% (33% of inf.) BBVA-GB Cons Growth (Monthly) Cons. Growth Cons. Growth nowcast 2 18% 16% 14% 12% 8% 6% 4% 2% -2% -4% -6% -8% - Aug: 1.1% (10 of inf.) Sep: -1.7% (10 of inf.) Oct: -2.6% (5 of inf.) BBVA-GB Inv. Growth (Monthly) Inv. Growth Inv. Growth Nowcast 6% 4% 2% -2% -4% -6% July: 2.2% August: 3.2% September: 5.4% BBVA-GB Net Exp Contribution (Monthly) Net Exp. Contribution Net Exp. Contribution Nowcast Source: CBRT, TURKSTAT, BBVA-Research Turkey
Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Apr-16 Aug-16 Apr-17 Aug-17 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Employment trend is not immune and in some sectors the adjustment is becoming sizeable (i.e. those boosted by the CGF) Unemployment rate (SA, %) 12,5% 12, 11,5% 11, 10,5% 10, Turkey: Employment growth by Sector ( 3MA, YoY) 11% 8% 5% 2% -1% 9,5% -4% 9, -7% 8,5% Industry Construction Service
Feb-17 May-17 Aug-17 Nov-17 Feb-18 Nov-18 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Nov-18 The domestic demand adjustment is related to the sudden stop in the loans evolution the credit contraction is now more broad-based Credit Growth (FX adj) YoY, Quarterly Annual Rate Credit Growth (FX adj) 13-week, Quarterly Annual trend 4 4 3 3 2 2 - -2 6% yoy -13% 13w ann. - -2-8% -13% -19% Credit 13-week GrowthTrend Private Banks Public Banks Source: CBRT, TURKSTAT, BBVA Research Turkey Source: CBRT, TURKSTAT, BBVA Research Turkey
Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Nov-18 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Nov-18 with some differences in the consumer segments Credit Growth: Commercial vs Consumers 13-week, Annualized trend Credit Growth (FX adj): Consumer 13-week, Annualized trend 45% 35% 25% 15% 5% -5% 35% 25% 15% 5% -5% -15% -25% -13.4% -13.5% -31.7% -15% -14% -35% Consumer Credits Commercial Credits Mortgage Credits Auto Credits General Purpose Loans Source: CBRT, TURKSTAT, BBVA Research Turkey Source: CBRT, TURKSTAT, BBVA Research Turkey
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 Jun-16 Jun-17 Jun-18 Dec-18 Jun-19 Dec-19 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Jun-18 Credit is linked to the external imbalance (overconsumption or low savings ) and is leading to a reversal of the current acount deficit - -5% 5% 15% 2 25% 3 35% 4 Turkey: Current Account and Credit Growth (% GDP and Credit YoY inverted and forwarded 4 months) -1% -2% -3% -4% -5% -6% -7% -8% -9% - 8% 6% 4% 2% -2% Current Account Financing 12M sum, % GDP -5.5 FX Adj Credit Growth(yoy, inverted and forwarded 4M)-Left Current Account Deficit/GDP BBVA CAD/GDP Projections Net FDI Net Portfolio Flows Net Error and Omissions Net Other Investment Reserves Source: CBRT, Turkstat and BBVA Research Turkey
Dec-14 Apr-15 Aug-15 Apr-16 Aug-16 Apr-17 Aug-17 Dec-18 Inflation could decelerate in the short term due to tax reductions (1pp) and lagged effects of discount campaigns but there will be a transitory reversal in 1Q-19 on base effects Turkey: CPI and Core Inflation YoY Turkey: CBRT Inflation Projections October Inflation Report 26% 24% 22% 2 23.5% 18% 16% 14% 12% 8% 6% CPI Core Source: CBRT, TURKSTAT, BBVA Research Turkey October CPI Realization BBVA Research Forecasts
Cumulative FX Pass-Through (%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Upside risks from far from homogeneous pass-thru impact and duration on inflation it will start to die out after the elections Turkey: FX Pass-thru on Core D CPI Items* 40 35 30 25 20 15 Energy Communication Transportation Entertainment Health Furniture 5,50 5,00 4,50 4,00 3,50 3,00 2,50 2,00 1,50 1,00 Turkey: Exchange Rate vs USD 10 5 Clothing Education Hotel Housing Others Processed Food Source: CBRT, TURKSTAT, BBVA Research Turkey 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Months taken to complete FX pass-thru Dec 2018 July 2018 Mar 2018 *Bubble size corresponds to the weight of each item in FX pass-thru to Core D CPI
Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Feb-18 Jun-18 Oct-18 Nov-13 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 Nov-18 Monetary Policy: The CBRT stayed on hold in October and given the recent exchange rate appreciation and the oil price evolution it will stay on hold until inflation expectations start to revert CBRT Interest Rates (Annual Level, %) Inflation Expectations (YoY) 27 25 24 22 21 19 18 16 15 13 12 10 9 7 17% 15% 13% 11% 9% 7% 5% 25% 23% 21% 19% 17% 15% 13% 11% 9% 7% 5% CBRT One-Week Repo CBRT LLW CBRT Funding Cost 12-month ahead 24-month ahead Source: CBRT and BBVA Research Turkey
Dec-12 Dec-13 Dec-14 Dec-18 Dec-19 Dec-20 Dec-21 The fiscal plan is coherent but also challenging CG Budget Balance and NEP Forecasts % of GDP 2, 1,5% 1, 0,5% 0, -0,5% -1, -1,5% -2, Sustainable PB Lower adjustment in Nominal Balance on High Interest Payments 2017 2018 (e) 2019 (f) 2020 (f) 2021 (f) GDP Growth(%) 7.4 3.8 2.3 3.5 5.0 Domestic Demand 7.3 2.4 0.8 3.3 4.8 External Demand 0.1 1.4 1.5 0.2 0.2 Unemployment Rate(%) 10.9 11.3 12.1 11.9 10.8 USD/TRY(Year Avg) 3.6 4.9 5.6 6.0 6.2 Inflation Rate(eoy %) 11.9 20.8 15.9 9.8 6.0 Central Gov. BudgetBalance (% GDP) -1.5-1.9-1.8-1.9-1.7-2,5% Central Gov. PrimaryBalance (% GDP) 0.3 0.1 0.8 1.0 1.3 Current AccountBalance (% GDP) -5.6-4.7-3.3-2.7-2.6 Budget Balance Government New Forecasts BBVA Forecasts Primary Balance EU Defined Gov.Debt (% GDP) 28.3 31.1 28.5 28.2 27.2
2012 2013 2014 2015 2016 2017 Feb-18 Jun-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Local Elections As includes huge fiscal consolidation efforts in 2019 which the government will have to accelerate Turkey: Central Government Balance % of GDP) 0,0-0,5-1,0 1,5 1,0 Turkey: Fiscal Effort Tracker* ( 12m Cumulative change in cyclically adjusted balance, % GDP) -1,5-2,0 0,5 0,0-2,5 1,5 1,0 0,5 0,0-0,5-1,0-1,5 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Central Government Budget Balance Cyclically adjusted balance Fiscal Easing Fiscal Tightening 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021-0,5-1,0-1,5 With support of some one-offs Structural Fiscal Effort Planned Structural Fiscal Effort Implemented *The 2019 savings amount 60bnTL (1.3% of GDP) coming from: - postponing investment (0.7% of GDP), - reducing incentives (0.3% of GDP), - cutting social security (0.2% of GDP) - reducing current expenditures (0.1%). - higher interest expenditures (2.2% and 2.8% of GDP in 2018 and 2019). On the revenue side, the Government extra revenues (0.4% of GDP) in 2019 *2018 figures correspond to 12-month sum
Feb-18 Jun-18 Oct-18 Nov-18 Geopolitics have provided some tailwinds Turkey: Foreign Relationships Index (negative change in cyclically adjusted balance, % of GDP) Safe Neutral High Extreme 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 USA EU Reverend Brunson was finally released after the reduction of the penalty. A critical step in the right direction. The removal of Magnitsky act was good news and a manageable Halkbank penalty could be delivered But still important issues to restore trust between US and Turkey particularly AS-400, YPG and Iran The Saudi Arabia Consulate Affairs ease negotiations
Dec-14 Mar-15 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Jun-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Feb-18 Jun-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Our GDP forecast remains balanced in the short term. Some downside inflation risks, supported by exchange rate and oil prices GDP Forecast (YoY) 17% 16% 15% 14% 13% 12% 11% 9% 8% 7% 6% 5% 4% 3% 2% 1% -1% -2% -3% Inflation Forecast (3m YoY) 34% 32% 3 28% 26% 24% 22% 2 18% 16% 14% 12% 8% 6% Source: Xxxxxxxxxxxxxxxxxx
Apr-16 Aug-16 Apr-17 Aug-17 Dec-18 Apr-19 Aug-19 Dec-19 Apr-16 Aug-16 Apr-17 Aug-17 Dec-18 Apr-19 Aug-19 Dec-19 Monetary policy should remain tight until inflation expectations are curbed, with some downside risks in the second half of 2019. Exchange rate positive reaction poses clear appreciation risks Monetary Policy Forecasts % CBRT Funding Cost Exchange Rate Forecasts USDTRY Level 3 28% 26% 24% 22% 2 18% 16% 14% 12% 8% 6% 8,2 7,8 7,4 7 6,6 6,2 5,8 5,4 5 4,6 4,2 3,8 3,4 3 2,6 Monetary policy should remain tight until inflation expectations will be under control. There are some risks on the upside as there is some uncertainty on the exchange rate pass-thru to final prices The incoming economic adjustment, a non supportive global environment and a new political cycle lead us to maintain a prudent exchange rate forecast
Turkey: Base Case Scenario BaseLine Scenario 2017 2018 2019 2020 2021 2022 2023 GDP (yoy) 7.4 3.0 1.0 2.5 4.5 4.5 4.5 Unemployment Rate (% avg) 10.9 11.3 13.5 12.8 11.5 10.5 10.0 Domestic Demand 7.3 1.8-1.1 2.1 4.8 4.6 4.5 External Demand (pp) 0.1 1.2 2.1 0.3-0.2 0.0 0.0 Inflation (eoy) 11.9 23.5 17.0 12.0 9.0 8.0 7.0 Inflation (avg) 11.1 16.7 22.5 13.2 10.7 8.4 7.4 Policy Rate (% eoy) 12.75 24.00 21.50 15.00 12.00 11.00 10.50 TRY/USD (eoy) 3.77 6.20 6.40 6.55 6.75 7.00 7.00 TRY/USD (avg) 3.65 4.96 6.31 6.48 6.66 6.89 7.00 Central Government Balance/GDP -1.5-2.1-2.2-2.0-1.7-1.6-1.5 Current Account Balance / GDP -5.5-5.1-2.7-2.6-3.4-3.6-3.8 Loans Growth (FX adjusted) 24.0 5.4 3.3 10.0 14.3 14.6 14.6
Turkey Economic Outlook November 2018 Creating Opportunities