Turkey Economic Outlook November 2018 Creating Opportunities - - PowerPoint PPT Presentation

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Turkey Economic Outlook November 2018 Creating Opportunities - - PowerPoint PPT Presentation

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Turkey Economic Outlook November 2018 Creating Opportunities Challenging times ahead needing policy determination 01 02 03 Rebalancing is underway and will Inflation will transitorily Turkish financial assets stabilize increase in 1Q19

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SLIDE 1

Creating Opportunities

Turkey Economic Outlook

November 2018

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SLIDE 2

Challenging times ahead needing policy determination

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

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

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

03

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

04

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

05

Restructuring options already under discussions The Government has started the evaluation period to implement a restructuring process to cope with corporate-bank problems

06

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SLIDE 3

Source: CBRT, BBVA Research Turkey

The Turkish Lira and Turkish financial assets continue to improve on a more benign EM outlook, policy changes and geopolitical ease…

Turkish Lira vs USD

(level)

  • 02%
  • 01%
  • 01%

00% 01% 01% 02% 02%

May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18

TURKEY EM Average

EM Currencies volatility

(% daily change moving average 1M moving Avg. One Standard deviation range)

TK differentiation EM Amplification FED stance tightens Doubts on CBRT Failed Coup Doubts

  • n

CBRT

3,7 4,1 4,5 4,9 5,3 5,7 6,1 6,5 6,9 Jan-18 Jan-18 Feb-18 Mar-18 Mar-18 Apr-18 May-18 May-18 Jun-18 Jul-18 Jul-18 Aug-18 Sep-18 Sep-18 Oct-18 Nov-18

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SLIDE 4

Turkey: Activity Indicators

(%YoY, mov. Avg. 3m)

Source: CBRT, TURKSTAT, BBVA-Research Turkey

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: GDP Monthly Indicator*

(%YoY mov. Avg. 3m)

  • 4%
  • 2%

0% 2% 4% 6% 8% 10% 12% 14% 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 Jan-18 Apr-18 Jul-18 Oct-18 GDP Growth BBVA-GB GDP Growth (Monthly) GDP growth nowcast August: 2.2% (100% of inf.) September: 2.2% (96% of inf.) October: -0.6% (47% of inf.)

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 1 6.7 1 0.3 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 1 7.7 1 4.0 Number of Employ ed 3.9 4.4 3.7 3.0 2.5 2.1 1 .9 Number of Unemploy ed 1 .6

  • 1

3.5

  • 1

0.9

  • 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 1 8.7 37.3 24.3 9.5 5.3 4.8 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 49.6 46.4 42.7 44.3

0.00

Total Loans growth 13-week 1 9.0 1 3.1 1 5.9 1 7.0 1 4.5 1 0.2 1 .8

  • 3.9
  • 9.1

Real Sector Conf idence 1 06.5 1 1 1 .9 1 1 1 .2 1 09.9 1 04.6 1 02.7 96.4 89.6 87.6 MICA Forecast 2.2%

  • 0.6%

GDP YoY 5.2% Boom Contraction Slow-down Growth

2018

*We produced our GDP montly Indicator by using our retail sales forecast for September and October

+7.3%

  • 2.0%

+2.0% +5.2%

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SLIDE 5

Turkey: Private Consumption*

(%YoY, mov. Avg. 3m)

Source: CBRT, TURKSTAT, BBVA-Research Turkey

A sharp slowdown in domestic demand is partially buffered by a strong reversal of external demand…

Turkey: Total Investment

(%YoY, mov. Avg. 3m)

Turkey: Net Exports

(% Contribution to GDP Growth)

  • 10%
  • 8%
  • 6%
  • 4%
  • 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 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 Jan-18 Apr-18 Jul-18 Oct-18

  • Inv. Growth

BBVA-GB Inv. Growth (Monthly)

  • Inv. Growth Nowcast

Aug: 1.1% (100% of inf.) Sep: -1.7% (100% of inf.) Oct: -2.6% (50% of inf.)

  • 6%
  • 4%
  • 2%

0% 2% 4% 6% 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 Mar-18 Jun-18 Sep-18

Net Exp. Contribution BBVA-GB Net Exp Contribution (Monthly) Net Exp. Contribution Nowcast July: 2.2% August: 3.2% September: 5.4%

  • 8%
  • 6%
  • 4%
  • 2%

0% 2% 4% 6% 8% 10% 12% 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 Jan-18 Apr-18 Jul-18 Oct-18

  • Cons. Growth

BBVA-GB Cons Growth (Monthly)

  • Cons. Growth nowcast

Aug: 2.1% (100% of inf.) Sep: -0.8% (83% of inf.) Oct: -5.5% (33% of inf.)

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SLIDE 6

Employment trend is not immune and in some sectors the adjustment is becoming sizeable… (i.e. those boosted by the CGF)

Unemployment rate

(SA, %)

Turkey: Employment growth by Sector

( 3MA, YoY) 8,5% 9,0% 9,5% 10,0% 10,5% 11,0% 11,5% 12,0% 12,5% Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18

  • 7%
  • 4%
  • 1%

2% 5% 8% 11% Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Industry Construction Service

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SLIDE 7

Source: CBRT, TURKSTAT, BBVA Research Turkey

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

Source: CBRT, TURKSTAT, BBVA Research Turkey

Credit Growth (FX adj)

13-week, Quarterly Annual trend

  • 13%
  • 19%
  • 8%
  • 13%

13w ann. 6% yoy

  • 20%
  • 10%

0% 10% 20% 30% 40% Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18

  • 20%
  • 10%

0% 10% 20% 30% 40% Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Credit 13-week GrowthTrend Public Banks Private Banks

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SLIDE 8

Source: CBRT, TURKSTAT, BBVA Research Turkey

…with some differences in the consumer segments…

Credit Growth: Commercial vs Consumers

13-week, Annualized trend

Source: CBRT, TURKSTAT, BBVA Research Turkey

Credit Growth (FX adj): Consumer

13-week, Annualized trend

  • 35%
  • 25%
  • 15%
  • 5%

5% 15% 25% 35% Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Mortgage Credits Auto Credits General Purpose Loans

  • 14%
  • 31.7%
  • 13.5%
  • 13.4%
  • 15%
  • 5%

5% 15% 25% 35% 45% Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Consumer Credits Commercial Credits

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SLIDE 9

Source: CBRT, Turkstat and BBVA Research Turkey

Credit is linked to the external imbalance (overconsumption or low savings”) and is leading to a reversal of the current acount deficit…

Current Account Financing

12M sum, % GDP

  • 5.5
  • 2%

0% 2% 4% 6% 8% 10% 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 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Net FDI Net Other Investment Net Portfolio Flows Reserves Net Error and Omissions

  • 10%
  • 9%
  • 8%
  • 7%
  • 6%
  • 5%
  • 4%
  • 3%
  • 2%
  • 1%

0%

  • 10%
  • 5%

0% 5% 10% 15% 20% 25% 30% 35% 40% 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 Jun-18 Dec-18 Jun-19 Dec-19 FX Adj Credit Growth(yoy, inverted and forwarded 4M)-Left Current Account Deficit/GDP BBVA CAD/GDP Projections

Turkey: Current Account and Credit Growth

(% GDP and Credit YoY inverted and forwarded 4 months)

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SLIDE 10

Source: CBRT, TURKSTAT, BBVA Research Turkey

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

October CPI Realization BBVA Research Forecasts 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 CPI Core

23.5%

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SLIDE 11

1,00 1,50 2,00 2,50 3,00 3,50 4,00 4,50 5,00 5,50

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Turkey: Exchange Rate vs USD

Source: CBRT, TURKSTAT, BBVA Research Turkey

Upside risks from “far from homogeneous” pass-thru impact and duration on inflation… it will start to die out after the elections

*Bubble size corresponds to the weight of each item in FX pass-thru to Core D CPI

Turkey: FX Pass-thru on Core D CPI Items*

Housing Furniture Health Entertainment Transportation Processed Food Communication Clothing Education Hotel Others Energy

5 10 15 20 25 30 35 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Cumulative FX Pass-Through (%) Months taken to complete FX pass-thru July 2018 Dec 2018 Mar 2018

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SLIDE 12

CBRT Interest Rates

(Annual Level, %)

Source: CBRT and BBVA Research Turkey

Monetary Policy: The CBRT stayed on hold in October and given the recent exchange rate appreciation and the oil price evolution it will stay

  • n hold until inflation expectations start to revert

7 9 10 12 13 15 16 18 19 21 22 24 25 27 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 CBRT One-Week Repo CBRT LLW CBRT Funding Cost

Inflation Expectations

(YoY) 5% 7% 9% 11% 13% 15% 17% 19% 21% 23% 25% 5% 7% 9% 11% 13% 15% 17% 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 May-18 Aug-18 Nov-18 12-month ahead 24-month ahead

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SLIDE 13

The fiscal plan is coherent but also challenging…

  • 2,5%
  • 2,0%
  • 1,5%
  • 1,0%
  • 0,5%

0,0% 0,5% 1,0% 1,5% 2,0% Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Budget Balance Primary Balance

CG Budget Balance and NEP Forecasts

% of GDP

Government New Forecasts BBVA Forecasts

Lower adjustment in Nominal Balance on High Interest Payments

Sustainable PB 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 (Y ear 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. Budget Balance (% GDP)

  • 1.5
  • 1.9
  • 1.8
  • 1.9
  • 1.7

Central Gov. Primary Balance (% GDP) 0.3 0.1 0.8 1.0 1.3 Current Account Balance (% GDP)

  • 5.6
  • 4.7
  • 3.3
  • 2.7
  • 2.6

EU Defined Gov. Debt (% GDP) 28.3 31.1 28.5 28.2 27.2

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SLIDE 14

As includes huge fiscal consolidation efforts in 2019 which the government will have to accelerate…

Turkey: Central Government Balance

% of GDP)

  • 1,5
  • 1,0
  • 0,5

0,0 0,5 1,0 1,5 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Fiscal Easing Fiscal Tightening

*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

  • 1,5
  • 1,0
  • 0,5

0,0 0,5 1,0 1,5 2012 2013 2014 2015 2016 2017 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-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

Turkey: Fiscal Effort Tracker*

( 12m Cumulative change in cyclically adjusted balance, % GDP)

*2018 figures correspond to 12-month sum

Structural Fiscal Effort Planned Structural Fiscal Effort Implemented Local Elections

  • 2,5
  • 2,0
  • 1,5
  • 1,0
  • 0,5

0,0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Central Government Budget Balance Cyclically adjusted balance

With support of some one-offs

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SLIDE 15

Geopolitics have provided some tailwinds…

Turkey: Foreign Relationships Index

(negative change in cyclically adjusted balance, % of GDP)

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

0,1 0,2 0,3 0,4 0,5 0,6 0,7 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 USA EU

Safe Neutral High Extreme

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SLIDE 16

GDP Forecast

(YoY)

  • 3%
  • 2%
  • 1%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 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 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Our GDP forecast remains “balanced” in the short term. Some downside inflation risks, supported by exchange rate and oil prices

Source: Xxxxxxxxxxxxxxxxxx

Inflation Forecast

(3m YoY)

6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 34% Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19

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SLIDE 17

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

Monetary Policy Forecasts

% CBRT Funding Cost

Exchange Rate Forecasts

USDTRY Level

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

6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19

2,6 3 3,4 3,8 4,2 4,6 5 5,4 5,8 6,2 6,6 7 7,4 7,8 8,2

Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19

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SLIDE 18

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

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SLIDE 19

Creating Opportunities

Turkey Economic Outlook

November 2018