Turkey Economic Outlook November 2018 Creating Opportunities - PowerPoint PPT Presentation

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 accelerate from now onwards after reaching lows in summer The exchange rate pass-thru and The level and the duration of A firmer policy response and easing likely reversal of recent adjustment is still uncertain but will relations with US facilitate the campaigns will keep inflation accelerate soon on the tightening stabilization of Turkish Lira and risk high in the short term. It should credit conditions premium start to stabilize afterwards 04 05 06 Fiscal consolidation in a realistic Monetary policy stays on hold Restructuring options already New Economic Program but will remain tight under discussions Fiscal policy is already tightening Higher inflation should prevent the The Government has started the CBRT from easing in the short and the targets of 2018 will likely be evaluation period to implement a term. Movements could be more met. The real challenge will become restructuring process to cope with the next year aggressive in the 2nd half of 2019 corporate-bank problems

The Turkish Lira and Turkish financial assets continue to improve on a more benign EM outlook, policy changes and geopolitical ease… EM Currencies volatility Turkish Lira vs USD (% daily change moving average 1M moving Avg. One Standard deviation range) (level) 02% 6,9 Doubts 02% 6,5 on CBRT 6,1 01% Failed Doubts on FED stance Coup CBRT tightens 5,7 01% 5,3 00% 4,9 -01% 4,5 -01% EM Amplification TK differentiation 4,1 -02% Jul-16 Jan-17 Mar-17 Jul-17 Jan-18 Mar-18 Jul-18 May-16 Sep-16 Nov-16 May-17 Sep-17 Nov-17 May-18 Sep-18 Nov-18 3,7 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 TURKEY EM Average Source: CBRT, 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: Activity Indicators Turkey: GDP Monthly Indicator* (%YoY, mov. Avg. 3m) (%YoY mov. Avg. 3m) 14% August: 2.2% (100% of inf.) September: 2.2% (96% of inf.) 2018 12% October: -0.6% (47% of inf.) Mar Apr May Jun Jul Aug Sep Oct M ean 9.9 7.3 6.4 5.0 6.0 -0.2 0.5 Industrial Production 7.8 10% 1 6.7 1 0.3 6.0 3.1 2.8 -4.8 -4.0 Non-metal Mineral Production 7.8 3.0 2.4 1 .9 0.9 0.9 -0.4 0.2 -1 .2 Electricity Production 4.9 +7.3% 2.2 -0.4 -5.8 -20.0 -29.6 -42.1 -51 .5 -66.5 Auto Sales 6.9 8% 34.9 31 .2 29.4 28.3 21 .0 1 7.7 1 4.0 Tourist Arriv als 5.5 +5.2% 4.4 3.7 3.0 2.5 2.1 1 .9 Number of Employ ed 3.9 6% -1 3.5 -1 0.9 -7.1 -2.3 0.6 4.1 Number of Unemploy ed 1 .6 -1 .0 -3.2 -7.4 -21 .2 -35.3 -50.9 -59.3 -69.9 Auto Imports 8.6 4% -3.1 9.6 1 8.7 37.3 24.3 9.5 5.3 4.8 Auto Exports 9.2 Retail Sales 8.9 7.7 6.7 5.8 4.4 1 .5 6.4 2% +2.0% Manuf acturing PMI 51 .4 49.6 51 .7 49.5 0.00 48.4 49.6 46.4 42.7 44.3 1 3.1 1 5.9 1 7.0 1 4.5 1 0.2 1 .8 -3.9 -9.1 Total Loans growth 13-week 1 9.0 0% Real Sector Conf idence 1 1 1 .9 1 1 1 .2 1 09.9 1 04.6 1 02.7 96.4 89.6 87.6 1 06.5 BBVA-GB GDP Growth (Monthly) 2.2% -0.6% -2.0% MICA Forecast -2% GDP Growth GDP YoY 5.2% GDP growth nowcast Contraction Slow-down Growth Boom -4% 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 Source: CBRT, TURKSTAT, BBVA-Research Turkey *We produced our GDP montly Indicator by using our retail sales forecast for September and October

A sharp slowdown in domestic demand is partially buffered by a strong reversal of external demand … Turkey: Private Consumption* Turkey: Total Investment Turkey: Net Exports (%YoY, mov. Avg. 3m) (%YoY, mov. Avg. 3m) (% Contribution to GDP Growth) 14% 20% Aug: 1.1% (100% of inf.) Aug: 2.1% (100% of inf.) July: 2.2% 18% Sep: -1.7% (100% of inf.) 6% 12% Sep: -0.8% (83% of inf.) August: 3.2% Oct: -2.6% (50% of inf.) 16% Oct: -5.5% (33% of inf.) September: 5.4% 10% 14% 4% 8% 12% 10% 6% 2% 8% 4% 6% 2% 4% 0% 2% 0% 0% -2% -2% -2% -4% -4% BBVA-GB Inv. Growth (Monthly) BBVA-GB Cons Growth (Monthly) -4% BBVA-GB Net Exp Contribution (Monthly) -6% -6% Inv. Growth Cons. Growth Net Exp. Contribution -8% Cons. Growth nowcast Inv. Growth Nowcast Net Exp. Contribution Nowcast -8% -10% -6% 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 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 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 Source: CBRT, TURKSTAT, BBVA-Research Turkey

Employment trend is not immune and in some sectors the adjustment is becoming sizeable… ( i.e. those boosted by the CGF) Unemployment rate Turkey: Employment growth by Sector (SA, %) ( 3MA, YoY) 12,5% 11% 12,0% 8% 11,5% 5% 11,0% 2% 10,5% -1% 10,0% 9,5% -4% 9,0% -7% Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 8,5% 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 Industry Construction Service

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) Credit Growth (FX adj) YoY, Quarterly Annual Rate 13-week, Quarterly Annual trend 40% 40% 30% 30% 20% 20% 10% 10% 0% 6% yoy 0% -8% -10% -13% -10% -20% -19% -13% Mar-17 May-17 Jul-17 Mar-18 May-18 Jul-18 Jan-17 Sep-17 Nov-17 Jan-18 Sep-18 Nov-18 13w ann. -20% Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Credit 13-week GrowthTrend Public Banks Private Banks Source: CBRT, TURKSTAT, BBVA Research Turkey Source: CBRT, TURKSTAT, BBVA Research Turkey

…with some differences in the consumer segments… Credit Growth: Commercial vs Consumers Credit Growth (FX adj): Consumer 13-week, Annualized trend 13-week, Annualized trend 45% 35% 25% 35% 15% 25% 5% 15% -13.4% -5% 5% -15% -13.5% -5% -25% -31.7% -35% -14% -15% Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 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 Consumer Credits Commercial Credits Source: CBRT, TURKSTAT, BBVA Research Turkey Source: CBRT, TURKSTAT, 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 Turkey: Current Account and Credit Growth 12M sum, % GDP (% GDP and Credit YoY inverted and forwarded 4 months) -10% 0% 10% -5% -1% 0% -2% 8% -5.5 5% -3% 6% 10% -4% 15% -5% 4% 20% -6% 25% -7% 2% 30% -8% 0% 35% -9% 40% -10% 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 -2% 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 FX Adj Credit Growth(yoy, inverted and forwarded 4M)-Left Net FDI Net Other Investment Net Portfolio Flows Reserves Current Account Deficit/GDP Net Error and Omissions BBVA CAD/GDP Projections Source: CBRT, Turkstat and 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 Turkey: CBRT Inflation Projections YoY October Inflation Report 26% 24% 23.5% 22% 20% 18% 16% 14% 12% 10% 8% 6% 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 October CPI Realization CPI Core BBVA Research Forecasts 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 Turkey: FX Pass-thru on Core D CPI Items* 40 Turkey: Exchange Rate vs USD Transportation 35 5,50 Cumulative FX Pass-Through (%) 5,00 Energy 30 4,50 4,00 Entertainment 3,50 25 3,00 Health 2,50 20 Communication 2,00 1,50 Furniture 15 1,00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Clothing 10 Housing Hotel Source: CBRT, TURKSTAT, BBVA Research Turkey Others Education Processed Food 5 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 Mar 2018 July 2018 *Bubble size corresponds to the weight of each item in FX pass-thru to Core D CPI