Turkey: Recent Developments and Future Prospects ISBANK Economic Research Division May 2018
Macroeconomic Outlook
Strong Economic Growth Cycle GDP of 851 bn USD (2017), 10.6k USD (2017) per capita Average GDP growth rate of 5.5% between 2005-2017 17 th largest economy in the world & 6 th largest economy amongst the EU countries More than 9 mn job creation since 2005 Prudent fiscal policy since 2002 3
500 548 7,304 7,906 677 647 9,656 8,980 777 772 10,931 10,560 832 11,205 871 862 863 851 11,588 11,019 10,883 10,597 12,480 12,112 950 935 Gross Domestic Product Turkey s GDP came in at 851 billion USD in 2017. GDP (billion USD) Per capita GDP (USD) 2005 2007 2009 2011 2013 2015 2017 2005 2007 2009 2011 2013 2015 2017 4 Source: Datastream, Turkstat
-4.7 0.9 3.2 5.0 4.8 5.2 6.1 7.1 7.4 9.0 8.5 8.5 11.1 Economic Growth Growth was largely driven by private consumption and investments in 2017. Real GDP Growth (%) Contributions to Growth (2009=100 chain linked volume index % points) 12 10 8 6 4 2 0 2005 2007 2009 2011 2013 2015 2017-2 -4 Stock Change Net Exports Investment Consumption -6 GDP 2014 2015 2016 2017 5 Source: Datastream, Turkstat
Leading Indicators Economic activity maintained a strong performance in the first quarter. 25 Calendar Adjusted Industrial Production (yoy, % change) 120 Confidence Indices 20 110 15 100 10 5 9.8* 90 80 Real sector confidence index Economic confidence index Consumer confidence index 70 0 60-5 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 50 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Source: Turkstat, Datastream 6
Labor Market More than 9 million new jobs were created since 2005. 45 45 44 9.7 8.9 9.2 Labor Market Indicators* (%) Unemployment Labor Participation Rate 45 12.0 11.9 47 47 47 10.0 8.5 49 49 8.8 9.1 51 52 52 53 53 10.3 10.2 12.0 9.9 9.8 20 20 20 20 21 23 Employment* (millions) 23 24 25 26 27 27 29 29 2005 2007 2009 2011 2013 2015 2017 2005 2007 2009 2011 2013 2015 2017 (*) Seasonally adjusted figures. Latest figure as of February 2018. 7 Source: Turkstat, Datastream
Fiscal Discipline Fiscal discipline has been the main pillar of economic policy. Budget Deficit (% GDP) General Government Debt Stock (% GDP) Maastricht criterion: 3% Maastricht criterion: 60% 1.9 1.9 1.5 1.0 1.1 1.0 1.1 32.6 31.3 28.6 27.5 28.1 28.2 30.0 2012 2013 2014 2015 2016 2017 2018F* (*) Medium Term Program forecasts 8 2012 2013 2014 2015 2016 2017 2018F* Source: Turkstat, Treasury, Ministry of Development
73 86 107 102 114 132 135 144 143 152 152 158 157 160 Exports Export volume reached all-time highs. Exports* (billion USD) Exports* (% of total) Motor vehicles 15.5 Boilers and machineries 9.1 Precious stones 5.8 Knitted and crocheted goods 5.6 Iron and steel 5.4 Electrical machinery and equipment 5.3 Non knitted and crocheted goods 3.8 Articles of iron and steel 3.6 Plastic and articles 3.5 2005 2007 2009 2011 2013 2015 2017 Edible fruits and nuts 2.5 (*) 12-month cumulative figures as of March 2018 Source: Turkstat, Datastream 9
Exports Turkey has been successful in diversifying export markets. 2005 Top 10 export markets % of total 2018* % of total Exports* (% of total) 1. Germany 12.9 1. Germany 9.8 56.5 2. UK 8.1 2. UK 6.2 3. Italy 7.6 3. Iraq 5.6 EU 48.4 4. US 6.7 4. US 5.5 5. France 5.2 5. Italy 5.5 6. Spain 7. Iraq 4.1 3.7 6. UAE 7. France 4.5 4.3 Near and Middle East 20.8 8. Netherlands 3.4 8. Spain 4.2 9. Russia 3.2 10.Romania 2.4 The share of first 10 57.3 9. Netherlands 2.6 10.Israel 2.3 The share of first 10 50.4 13.9 2005 2007 2009 2011 2013 2015 2017 (*) 12-month cumulative figures as of March 2018 10 Source: Datastream, Turkstat
117 140 141 170 186 202 207 199 241 237 252 242 234 245 Imports Import volume exceeded 240 billion USD. Imports* (billion USD) Imports* (% of total) Minerals and Fuels 15.7 Boilers and machineries 11.5 Electrical machinery and equipment 8.8 Precious Stones 8.0 Iron and steel 7.4 Motor Vehicles 7.4 Plastic and articles 5.7 2005 2007 2009 2011 2013 2015 2017 Organic chemicals Optical products Pharmaceutical products 2.4 2.1 1.9 (*) 12-month cumulative figures as of March 2018 Source: Datastream,Turkstat 11
Imports 27% of imports are from China, Germany and Russia. 2005 Top 10 import markets % of total 2018* % of total Composition of Imports (%) 1. Germany 2. Russia 3. Italy 11.7 11.1 6.5 1. China 2. Germany 3. Russia 9.8 9.1 8.6 2005 12.0 17.4 2018* 12.0 13.9 4. China 5.9 4. USA 5.1 5. France 5.0 5. Italy 4.8 6. USA 4.6 6. France 3.5 7. UK 4.0 7. Iran 3.1 70.1 73.7 8. Switzerland 9. Spain 3.5 3.0 8. UK 9. Switzerland 3.1 2.9 Capital Goods 10.South Korea 3.0 10.South Korea 2.9 Intermediate Goods The share of first 10 58.3 The share of first 10 52.9 Consumption Goods (*) 12-month cumulative figures as of March 2018 12 Source: Turkstat
Tourism Tourism sector has recovered considerably. Tourism Revenues* (USD bn) Russia The Number of Tourists (million persons) 4.8 28 30 27 Germany 3.7 19 17 19 23 23 23 25 25 19 22 23 Iran Georgia Bulgaria 1.9 2.5 2.7 2018** 2017 UK 1.7 2016 Ukraine 1.3 2005 2007 2009 2011 2013 2015 2017 Iraq Netherlands Azerbaijan 0.8 0.8 1.0 Number of Tourists 2015: 36.2 mn 2016: 25.4 mn 2017: 32.4 mn 2018*: 33.7 mn (*) 12-month cumulative figures as of February 2018 (**) 12-month cumulative figures as of March 2018 13 Source: CBRT, Ministry of Culture and Tourism
Savings & Investments Saving-investment gap of Turkey Investments and Savings (% of GDP) 27.0 31.3 28.3 29.8 29.0 28.3 28.3 Saving Gap 23.0 21.4 21.3 22.5 22.8 23.2 24.4 24.8 24.5 Savings 8.8 1.7 5.7 5.5 6.6 4.6 3.6 3.8 Investments 2009 2010 2011 2012 2013 2014 2015 2016 14 Source: Turkstat, Medium Term Program (2018-2020)
Current Account Balance Current account deficit to GDP ratio came in at 5.6% in 2017. Current Account Deficit (% of GDP) 100 Financing of CAD (12-month cumulative, billion USD) 8.9 80 60 March 55.4 4.2 5.7 5.5 5.1 5.8 5.5 6.7 4.7 3.7 3.8 5.6 40 20 0 1.8 2005 2007 2009 2011 2013 2015 2017-20 -40 Foreign Direct and Long Term Investments* Portfolio and Short Term Investments** -60 Current Account Deficit 2011 2012 2013 2014 2015 2016 2017 2018 (*) Long term capital movements are sum of banking and real sectors long term net credit and bonds issued by banks and the Treasury (**) Short-term capital movements are sum of banking and real sectors' short term net credits and deposits in banks. Source: Turkstat, CBRT 15
Capital Flows Weaker foreign direct investments... 30 25 20 15 10 5 0-5 -10 Portfolio Inflows (12-month cumulative, billion USD) Debt Securities Equity Securities 25 20 15 10 5 Foreign Direct Investment Inflows (12- month cumulative, billion USD) -15 Jan.16 Jul.16 Jan.17 Jul.17 Jan.18 0 Jan.16 Jul.16 Jan.17 Jul.17 Jan.18 16 Source: CBRT
Monetary Policy Central Bank has implemented tight liquidity policy. 14 13 12 11 10 9 8 7 6 Annual CPI Inflation* (%) 5 2012 2013 2014 2015 2016 2017 2018 10.85 14 13 12 11 10 9 8 7 Interest Rates (%) Interest Rate Corridor One Week Repo Rate CBRT Weighted Average Cost of Funding Late Liquidity Window 6 Jan.17 May.17 Sep.17 Jan.18 May.18 (*) Latest figure as of April 2018 17 Source: CBRT, TURKSTAT, Datastream
Nominal depreciation in local currency Financial Markets Emerging market currencies fluctuated in the first quarter of the year. USD vs Local Currencies (Dec. 31, 2016 = 100) Equity Indices (Dec. 31, 2016 = 100) 130 Turkey 160 Turkey 120 110 Brazil Russia Indonesia South Africa 140 Brazil Russia Indonesia South Africa 120 100 90 100 80 Jan.17 Apr.17 Jul.17 Oct.17 Jan.18 Apr.18 80 Jan.17 Apr.17 Jul.17 Oct.17 Jan.18 Apr.18 Latest figure as of May 15, 2018 18 Source: Datastream
Financial Markets Risk premiums of emerging markets 19 17 15 13 5Y Government Bond Yields (%) Turkey Brazil Russia Indonesia South Africa 300 250 200 5Y CDS Spreads (bps) Turkey Brazil Russia Indonesia South Africa 11 150 9 100 7 5 Jan.17 Apr.17 Jul.17 Oct.17 Jan.18 Apr.18 50 Jan.17 Apr.17 Jul.17 Oct.17 Jan.18 Apr.18 Latest figure as of May 15, 2018 19 Source: Datastream
Banking Sector Dynamics
Banking Sector Dynamics Increased intermediation activity by financing the growth of Turkish economy Diversification of funding sources by increasing access to international markets Shifting focus from growth to asset quality and stable funding structure Strengthened asset quality confirmed by low NPL ratios High capital adequacy ratio Strong growth potential 21
Basic Indicators Increase in foreign bank presence Public Foreign Domestic Private Number of Banks* Share in Total Assets (%) 48 49 Public 38 36 25 27 Foreign 3 28 15 13 Domestic Private 58 8 9 36 2004 March 2018 2004 March 2018 (*) Excluding the banks under the administration of the SDIF 22 Source: BRSA
6,521 7,256 8,071 138,169 150,462 9,250 9,526 10,000 167,212 10,440 10,981 182,100 183,614 190,586 194,617 11,903 12,125 200,745 12,185 11,664 11,508 11,477 213,431 216,063 216,722 210,112 207,532 207,209 Basic Indicators Branch network and banking sector employment Number of Domestic Branches Number of Domestic Staff 2005 2007 2009 2011 2013 2015 2017 2005 2007 2009 2011 2013 2015 2017 Latest figure as of March 2018 23 Source: BRSA
Basic Indicators Strong growth performance in the banking sector 57 Nominal GDP Growth (%) 50 40 Loan Growth (%) 34 30 29 30 32 16 19 20 21 17 23 20 17 17 7 19 16 12 13 15 13 13 14 12 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Assets (bn USD) 856 Loans (bn USD) 557 Deposits (bn USD) 451 Equity (bn USD) 95 X3.7 X7.5 X3.2 X2.8 228 74 143 34 2004 March 2018 2004 March 2018 2004 March 2018 2004 March 2018 24 Source: BRSA, Turkstat
Balance Sheet Items Increasing financial intermediation role of banks Asset Composition (%) Liability Composition (%) 12 8 Other Assets 11 17 Other Liabilities 15 15 12 Cash+Banks Securities 15 0 11 11 5 Shareholder's Equity Securities Issued 40 Loans 15 Banks Deposits 65 62 53 32 2004 March 2018 2004 March 2018 25 Source: BRSA
Deposits Deposits have been the main funding source of the banking sector. Deposit Volume (annual % change) Share of TL Deposits in Total (%) 30 25 20 15 10 5 0 TL Deposits -5 FX Deposits in USD Terms -10 Total Deposits (exchange rate adjusted) -15 2013 2014 2015 2016 2017 2018 70 68 66 64 62 60 58 56 54 52 50 2013 2014 2015 2016 2017 2018 52.7 Latest figure as of May 4, 2018 26 Source: BRSA
Loans Loan growth losing momentum since the last quarter of 2017. Loan Volume (annual % change) Share of TL Loans in Total (%) 30 76 25 20 15 10 TL Loans 5 FX Loans in USD Terms Total Loans (exchange rate adjusted) 0 2013 2014 2015 2016 2017 2018 74 72 70 68 66 64 65.1 62 2013 2014 2015 2016 2017 2018 Latest figure as of May 4, 2018 27 Source: BRSA
2.7 2.9 2.7 2.8 3.1 3.0 2.9 3.2 3.5 3.7 3.7 3.7 4.7 5.3 Non-Performing Loans NPL ratio has remained at low level. Non-Performing Loan Ratio* (%) 2005 2007 2009 2011 2013 2015 2017 Greece S. Cyprus Portugal Italy Slovenia Ireland Bulgaria Hungary Romania Poland Spain Austria EU Average Malta France Turkey Belgium Latvia Denmark Germany Netherlands UK Norway Finland Luxembourg Sweden 19.5 15.3 14.4 13.6 12.5 11.5 10.1 6.1 5.7 5.3 5.1 4.4 3.7 3.2 3.2 3.2 3.1 2.5 2.5 1.9 1.9 1.6 1.1 1.0 NPL Ratio (%, 2016) 45.9 44.8 (*) Latest figure as of March 2018 28 Source: BRSA, EBA
Loans by Sectors Manufacturing industry has the highest share in total loans. Loans by Sectors (% share, March 2018) Manufacturing industry 18.0 Wholesale trade Construction 8.9 8.7 Electricity, Gas and Water Resources 6.3 Transportation, Storage and Communication Retail trade Agriculture Research, Consulting, Advertising etc. Textile and textile products Tourism Main Metal Industry 5.1 4.1 4.0 3.5 3.2 3.1 3.0 29 Source: BRSA
Non-Performing Loans by Sectors Non-performing loans ratio by sectors NPL Ratio (%, March 2018) Wholesale trade 4.5 Retail trade 4.1 Manufacturing industry Textile and textile products Main Metal Industry Construction Tourism Agriculture 3.2 3.2 3.1 3.1 2.9 2.9 Transportation, Storage and Communication 1.7 Research, Consulting, Advertising etc. 0.9 Electricity, Gas and Water Resources 0.5 30 Source: BRSA
Net FX Position of NFCs Short-term FX risks have been managed carefully by the non-financial sector. 10.3 10.1 Net FX Position of the Non-Financial Sector (bn USD) 2009 2010 2011 2012 2013 2014 2015 2016 2017 Feb 2018-3.8-0.8-3.5 1.2 5.2 1.4 8.0 3.2-77 -99-114 -136 Long Term Net FX Position -67-89 -167-180 -195-207 -221-226 Short Term Net FX Position -118-136 -171-179 -190-205 -213-223 Net FX Position 31 Source: CBRT
FX Assets & Liabilities of NFCs Majority of FX loans of non-financial companies were raised from domestic banks. FX Liabilities of NFCs (bn USD) 15 81 50 22 20 18 81 78 76 82 102 122 28 81 28 30 33 41 42 81 86 93 104 108 155 172 174 178 183 187 Import Payables External Loans Domestic Loans 2009 2010 2011 2012 2013 2014 2015 2016 2017 Feb 2018 FX Assets of NFCs (bn USD) 13 16 17 22 18 19 13 16 9 11 12 13 12 12 12 11 57 62 55 61 64 67 69 68 21 21 16 15 78 78 Direct Investment Abroad Export Receivables Deposits 2009 2010 2011 2012 2013 2014 2015 2016 2017 Feb 2018 32 Source: CBRT
Public - Private Partnership Projects A total of 197 PPI projects, worth of 130.4 billion USD, have been completed / under construction since 2006. Annual Infrastructure Investment Amounts and Sectoral Distribution of Projects Contracted since 2006 (bn USD) Sectoral Distribution of Total Infrastructure Investment Amount (2006-15, bn USD) 33 Source: CBRT
Short Term External Debt Stock Turkey s external financing needs in the coming 12 months February 2018 (*) (bn USD) Share (%) Central Bank 0.7 0.4 General Government 5.8 3.1 Banks 105.6 56.8 Credits 52.9 28.5 FX Deposits 20.6 11.1 Bank Accounts 17.1 9.2 Branches and Affiliates Abroad 9.4 5.1 TRY Deposits 14.9 8.0 Branches and Affiliates Abroad 6.3 3.4 Other Sectors 73.8 39.7 Trade Credits 46.3 24.9 Other Credits 27.5 14.8 Public 0.2 0.1 Private 27.3 14.7 Total 185.9 100.0 12-Month Long-Term Debt Roll Over Ratio (%) Banking Sector Non-banking Sector 111119 198 101 188 126 332 149 147 113 122 108 102 104 2012 2013 2014 2015 2016 2017 Feb 2018 (*) External debt maturing within 1 year or less regardless of the original maturity. 34 Source: CBRT
Breakdown of FX Loans In line with strict regulations, FX liabilities belong mostly to large-scale corporates that generate or have potential to generate FX revenues. Firm Size Breakdown of Domestic FX Corporate Loans (% share) Breakdown of Corporate FX Loans by Amounts (% share, # of companies) Large (Rha) Medium Small Micro Not: Loans extended abroad and used via the intermediacy of domestic banks are included. Source: CBRT 35
Non-Deposit Sources Banks have diversified their funding sources. 60.0 Net FX Position* (billion USD) External Borrowings of the Banks** (outstanding amount, billion USD) Eurobonds Syndication Loans Securitization Loans 40.0 Double Investment Grade (May 2013- Sep.2016) 28.3 20.0 20.7 0.0 13.8-20.0-40.0-60.0 Net On Balance Off Balance 2005 2007 2009 2011 2013 2015 2017 2005 2007 2009 2011 2013 2015 2017 (*) Latest figure as of May 4, 2018 (**) Latest figure as of March 2018 36 Source: BRSA
Capital Adequacy Ratio Turkish banks continued to be very well capitalized. 23.7 21.9 18.9 18.0 20.6 Target Rate of 12% Legal Limit of 8% Capital Adequacy Ratio* (%) 19.0 16.6 17.9 15.3 16.3 15.6 15.6 2005 2007 2009 2011 2013 2015 2017 (*) Latest figure as of March 2018 16.9 16.6 37 Netherlands Ireland Latvia Croatia Bulgaria Slovenia Slovakia Germany EU Average Belgium Czech Rep. Malta France Austria Greece Hungary Poland S. Cyprus Turkey Spain Italy Portugal Capital Adequacy Ratio (%, 2016) 11.0 22.7 21.1 20.8 20.4 20.3 19.6 19.2 18.7 18.5 18.4 18.3 17.7 17.7 17.6 17.1 16.3 16.1 15.9 15.6 14.6 13.7 Source: BRSA, EBA
Alternative Banking Channels A promising innovative future for mobile banking in Turkey Internet Banking (number of active customers, thousand persons) Mobile Banking (number of active customers, thousand persons) X2 13,125 29,541 7,227 X128 230 2011 Q1 2017 Q4 2011 Q1 2017 Q4 38 Source: The Banks Association of Turkey
Profitability Net interest margin is almost 4%. NIM* Cost / Income Ratio 5.4% 4.3% 3.5% 4.1% 3.7% 3.5% 3.5% 3.6% 3.8% 3,7%** 36% 41% 44% 41% 43% 45% 46% 40% 38% 35%*** 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (*) Net interest income / average total assets (**) 12-month cumulative as of March 2018 (***) As of March 2018 39 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: BRSA
Profitability Profitable banking sector... ROAA ROAE 2.6% 2.5% 23% 20% 1.7% 1.8% 1.6% 1.3% 1.2% 1.5% 1.6% 1.8% 15% 16% 14% 12% 11% 14% 16% 17% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 40 Source: BRSA
Stock Exchange Performance Turkish equity market has been under downward pressure in recent weeks. Stock Exchange Performance (thousands) 130 260 120 110 BIST-100 Index Banking Sector Index (right axis) 240 220 100 200 90 180 80 160 70 140 60 120 50 100 40 80 30 2013 2014 2015 2016 2017 2018 60 Latest figure as of May 15, 2018 41 Source: Datastream
60 63 66 74 83 87 87 87 96 98 101 105 105 Banking Sector Comparison Despite the fast growth in the sector, penetration ratios are still low. Banking Sector s Assets in Turkey (% GDP) Banking Sector s Comparison with Euro Area (2017) (%, 2015) Assets/GDP 105 272 Loans/GDP 68 164 Housing Loans/GDP 6 38 EA-19 Deposits/GDP 55 157 Turkey 2005 2007 2009 2011 2013 2015 2017 42 Source: BRSA, Turkstat, ECB, Eurostat
Banking Sector Comparison Strong and underpenetrated banking market relative to peers France Netherlands EU-28 Sweden Belgium Germany Spain Italy Portugal Greece Czech Rep. Croatia Bulgaria Turkey Hungary Slovenia Poland Slovakia Sweden Netherlands Turkey France Czech Rep. EU-28 Croatia Poland Germany Greece Italy Bulgaria Slovakia Slovenia Belgium Portugal Spain Hungary Assets / GDP 127% 127% 107% 105% 104% 99% 96% 90% 291% 283% 261% 248% 244% 235% 232% 200% Loans / Deposits 122% 119% 113% 109% 107% 106% 102% 102% 98% 98% 95% 95% 92% 88% 87% 87% 84% 374% 351% 169% France Netherlands Sweden EU-28 Germany Spain Italy Belgium Portugal Greece Croatia Czech Rep. Bulgaria Slovenia Turkey Poland Slovakia Hungary France Spain Netherlands Portugal Belgium Italy EU-28 Germany Greece Sweden Croatia Czech Rep. Bulgaria Slovenia Slovakia Hungary Poland Turkey Loans / GDP 91% 84% 72% 67% 66% 65% 63% 55% Deposits / GDP 99% 86% 77% 76% 73% 67% 66% 64% 56% 167% 159% 149% 146% 145% 133% 131% 119% 121% 206% 198% 182% 169% 162% 151% 150% 149% 148% 147% As of 2016 43 Source: BRSA, EBF
Future Prospects
Future Prospects inherited assets and achievements provide sufficient cushion for Turkey geographical location young population dynamic private sector sound fiscal picture strong banking sector comprehensive structural reform agenda high external financing needs geopolitical tensions main challenges should be addressed carefully 45
Structural Reform Agenda The transformation programs should be implemented by reprioritizing them. 1. Productivity growth in production 2. Reducing dependence on imports 14. Energy efficiency improvement 15. Effective use of water in agriculture 3. Increasing domestic savings at the national level 16. Structural transformation in healthcare industries and preventing wastefulness 17. Improvement in health tourism 4. Istanbul international financial center 18. Transition from transportation to logistics 5. Rationalization of public expenditures 19. Development of basic and occupational skills 6. Raising the quality of public revenue 20. Attracting qualified human resources from 7. Improving the business and investment climate abroad 8. Improving the effectiveness of the labor market 21. Healthy life and mobility 9. Reducing the informal economy 22. Preserving the family and dynamic population 10. Development of the statistical information infrastructure 11. Commercialization of priority technology areas 12. Technology development and local production through better public procurement 13. Energy generation based on local resources structure 23. Institutional capacity development at the local level 24. Urban redevelopment program to increase competitiveness and social cohesion 25. Improving international cooperation infrastructure for development 46 Source: Ministry of Development
ISBANK Forecasts 2017 (R) 2018 Real GDP Growth (%) 7.4 4.1 Current Account Deficit (% of GDP) 5.6 5.5 CPI (%) 11.9 10.2 Banking Sector Total Assets (% of GDP) 104.9 104.0 R: Realization 47
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