turkey economic outlook 4q18 - bbva research

BBVA Research – Turkey Economic Outlook 4Q18 / 1

October 2018

Turkey Economic

Outlook 4Q18

Key messages

The global expansion remains at a steady pace, but more

moderated and less synchronized. Risks now cumulate on

protectionism, normalization of the Fed, tensions in emerging

countries, greater uncertainty in Europe

Turkey’s firm policy response to the financial shocks helped to restore

confidence in financial assets. The economic adjustment is now underway

Recent financial shocks and necessary tightening policies to restore confidence will result in

a faster rebalancing of the economy. We expect GDP growth to decelerate to 3% in 2018

and 1% in 2019

The sharp depreciation of the exchange rate during the summer triggered excessive

inflation pressures. We estimate the year-end inflation to remain high and start to moderate

from 2Q19 onwards

Both monetary and fiscal policies included in the New Economic Program (NEP) are now

more adequate to restore confidence and rebalance the economy

The current account deficit will correct much faster than initially expected

BBVA Research – Turkey Economic Outlook 4Q18 _/ 3

Contents

01

02

Global Economy: Still Global Positive Outlook,

although risks are intensifying

Turkey: Right policy steps restore confidence in

Turkish financial assets. The rebalancing is underway

03 Turkey: Baseline Scenario


01 Global Economy:

Still Global Positive Outlook,

although risks are intensifying


Positive global inertia continues, although risks

are intensifying

The global expansion remains at a

steady pace, but more moderated

and less synchronized

The strength of the US economy

contrasts with moderation in China

and Europe

Divergent monetary policy between

the US and Europe from 2019

The Fed ends the cycle of

increases, while the ECB initiates

the increases and prepares the

withdrawal of liquidity

Greater financial tensions in

emerging markets

With evident differentiation between

countries, the most financially

vulnerable face sudden adjustments

of their economies

Global risks intensify

Protectionism and the normalization of the

Fed are joined by the increase in tensions

in emerging countries, and the greater

uncertainty in Europe

Intensification of the commercial war

between the US and China

Impact still limited, but could increase

if new measures are taken. At the

moment, the conflict between the US

and other areas decrease


Moderation of global growth

World GDP growth (Forecasts based on BBVA-GAIN, % QoQ)

Source: BBVA Research

Slight moderation of global growth

towards rates slightly below 1%

QoQ in 2H18

Activity remains strong, but have

lost momentum, since protectionism

growth weighs on confidence, trade

and investment

Beyond volatility, world trade

has improved and stabilized after

the slowdown at the beginning

of the year

CI 20% CI 40% CI 60%

Point Estimates Period average

0.4

0.6

0.8

1

1.2

De

c-1

3

Jun-1

4

De

c-1

4

Jun-1

5

De

c-1

5

Jun-1

6

De

c-1

6

Jun-1

7

De

c-1

7

Jun-1

8

De

c-1

8


Monetary policy continues to normalize and will

diverge between the Fed and the ECB from 2019

End of QE (December 2018)

Total reinvestment at least

until December 2020

Repayment of TLTROs from

June 2020

Continues the reduction of

the balance (450mM dollars

in 2018)

More rate hikes in 2019,

but the cycle ends

(natural interest rate)

Anchored expectations of

low rates for a prolonged

period. No increases are

expected until

September 2019

Balance Interest rates

0.75

1.5 2.25

0.25

3.25 3

2016 2017 2018 2019 2020

0% 0% 0%

0.25%

0.75%

2016 2017 2018 2019 2020

Forecast (eop) Refi rate (eop)



Financial tensions rebound in emerging markets,

but less synchronized than in previous episodes

BBVA index of financial stress in emerging markets (Standardized index)

The emerging markets are being

subjected to greater stress which

results in a depreciation of their

currencies and an increase in

their risk premium

There is heterogeneity: tensions have

concentrated especially on the most

vulnerable economies. We are

not facing a systemic crisis

The adoption of economic policy

measures (monetary and fiscal)

are allowing some stabilization

Turkey

Brazil

Argentina


-2

-1

0

1

2

3

4

5

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

De

c-1

6

De

c-1

7


The outflows of emerging economies are still persistent,

but we are far from a typical episode of sudden-stop

Portfolio flows to emerging economies (% of total assets, monthly data)

Accumulation of flows in the last 5 quarters (% of accumulated since January 2017)


-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Ma

r-1

3

Se

p-1

3

Ma

r-1

4

Se

p-1

4

Ma

r-1

5

Se

p-1

5

Ma

r-1

6

Se

p-1

6

Ma

r-1

7

Se

p-1

7

Ma

r-1

8

Se

p-1

8

Ma

r-1

9

US

elections Tapper

tantrum China

Current

episode 16.7%

-2.1%

14.6%

-5%

0%

5%

10%

15%

20%

From January 2017to March 2018

From April toSeptember 2018

Net sinceJanuary 2017


Trade loses momentum after the strength of 2017,

but will continue to support global growth

Global export of goods (% QoQ, constant prices)

So far, the trade war has had

a limited impact. Export flows

may be ahead of the possibility

of a worse scenario

Increases the volatility of trade

flows as a result of uncertainty…

... due to commercial tensions,

the political situation and

the depreciation of the currencies

of emerging economies

Source: BBVA Research based on CPB World Trade Monitor

0%

1%

2%

3%

4%

5%

6%

7%

8%

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

1Q

16

3Q

16

1Q

17

3Q

17

1Q

18

3Q

18

BBVA-Goods Exports CPB-Goods Exports


USA and China have announced higher tariffs,

but with an estimated effect on limited global GDP

Effect on GDP growth of US tariff increases

and the response of other countries (2018-20, pp)

The impact on growth of

the measures approved so far

through the commercial channel

could be limited, but the indirect

effects could be considerable,

especially for China and

emerging economies

The signature of the USMCA

reduces the uncertainty with Mexico

and Canada

In Europe, the increase of tariffs

on cars is currently frozen, although

it will be negotiated again

from November

Tariffs 25% All imports from China

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

World China US Europe

Approved tariff increase: USA (25% steel, 10% aluminum, 25% Chinese imports worth 50,000 million dollars and 10% worth 200,000 million);

China (25% to US imports worth 50,000 million dollars and 10% to 60,000 million).


Approved trust / financial channel

Approved commercial channel


The risk of an increase in US tariffs to the European automotive

sector continues, with a limited and different effect per country

Effect on GDP growth of US tariff increases to

the European automotive sector (2018-20, pp) An increase of the tariff to

the European automotive sector up

to 20% (current 2.5%) could subtract

between one and two tenths

of the growth of Germany and

the northern European countries

Greater impact in Korea and Japan,

but also in the US

There is uncertainty about the effect

of the hardening the amount of

inputs produced in North America

(75%) in the USMCA by European

car companies, but the impact

should be smaller

Simulation: increase of tariffs to 20% to the European automotive sector, Japan

and Korea in addition to the measures approved so far.


-0.18

-0.16

-0.14

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

Ge

rma

ny

Hung

ary

Slo

vakia

Cze

ch R

epub

lic

Austr

ia

Slo

ven

ia

Sw

ede

n

Ita

ly

Pola

nd

Rom

ania

Neth

erlan

ds

Ire

land

Spa

in

Fra

nce

Port

uga

l

Gre

ece

Final demand Inputs


US

2.8 2.8

2018 2019

Mexico

1.9 2.0

2018 2019

Eurozone

2.0 1.7

2018 2019

LATAM

0.9 1.8

2018 2019

Turkey

3.0 1.0

2018 2019

China

6.5 6.0

2018 2019

The downward revision of growth in emerging economies

explains the expected moderation of global growth in 2019


Up

Unchanged

Down

World

3.7 3.6

2018 2019


Global risks: Protectionism and the exit of the Fed remain

the most relevant, but political uncertainty in Europe increases

CHINA

Protectionism: upward (new tariffs and reprisals) with an

impact on domestic policies (financial stability, reforms)

High indebtedness: more content in the short-term, but higher

in the medium term (private debt continues to rise)

USA

Fed exit: rises of higher than expected rates

• Differential impact on emerging markets

Protectionism: upward and concentrated in China

Economic recession: low probability, but rising

Signs of financial instability in some assets

EUROZONE

Political uncertainty: upwards, led by tensions in Italy and Brexit

Protectionism: more restrained with focus on the automotive sector

ECB’s exit: downward

Tensions in emerging economies can amplify

the impacts of the aforementioned global risks

(effects of "second round" on global growth)


EE.UU.

EZ

CHINA

Pro

bab

ilit

y in

th

e s

ho

rt t

erm

Severity


02 Turkey: Right policy steps restore

confidence in Turkish financial assets.

The rebalancing is underway


Challenging times ahead to be tackled

with policy determination

Turkish financial assets stabilize after

firm economic policies

The change in economic policy

direction and the ease of geopolitical

tension with the US triggered the

stabilization and recovery of Turkish

financial assets

The rebalancing of the economy is

already underway

A fast domestic demand adjustment is

being compensated with the reversal

of external demand. The current

account deficit will correct rapidly

Inflation will remain the key concern

in the short term and should reduce

gradually next year

Inflation will stay high in the short

term as the exchange rate pass-thru

is still well alive. A gradual

disinflation path will start in 2019

Foreign affairs with the US

improved, eliminating some

uncertainty in the Market

The ease of tensions with the US

after the Reverend Brunson release

might facilitate agreements on other

issues. This could help to eliminate

uncertainty in the market

Monetary policy needs to be tighter

Monetary policy should be

maintained tight to fight inflation and

re-anchor inflation expectations.

Monetary policy credibility will

continue to be key for the coming

months

New Economic Program (NEP)

suggests an aggresive fiscal

consolidation plan in the short term

The Government has presented a

more realistic plan including a sizeable

fiscal adjustment in 2019. The policy

mix is now more adequate to fight

inflation



Turkish Lira vs USD (Level)

(*) A positive value indicates a depreciation of the local currency.

Source: Bloomberg

3.7

4.1

4.5

4.9

5.3

5.7

6.1

6.5

6.9

Feb

-18

Ma

r-1

8

Ma

r-1

8

Apr-

18

Ma

y-1

8

Ma

y-1

8

Jun-1

8

Jul-1

8

Jul-1

8

Aug-1

8

Sep-1

8

Sep-1

8

Oct-

18

EM Currencies volatility (% daily change moving average 1M moving Avg.

One Standard deviation range)

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Jun-1

6

Aug-1

6

Oct-

16

De

c-1

6

Feb

-17

Apr-

17

Jun-1

7

Aug-1

7

Oct-

17

De

c-1

7

Fe

b-1

8

Apr-

18

Jun-1

8

Aug-1

8

Oct-

18

TURKEY EM Average

TK differentiation EM Amplification

FED

stance

tightens

Doubts on

CBRT

Failed

Coup

Doubt

s on

CBRT

The change in policy direction and easing tensions with the US

supported the stabilization and improvement in Turkish markets


Turkey: Activity Indicators (%YoY, mov. Avg. 3m)

Source: CBRT, TURKSTAT, BBVA-Research Turkey

Turkey: GDP Monthly Indicator (%YoY mov. Avg. 3m)

-4%

-3%

-1%

1%

2%

4%

5%

7%

8%

10%

11%

13%

14%

Sep-1

4

De

c-1

4

Ma

r-1

5

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

De

c-1

6

Ma

r-1

7

Jun-1

7

Sep-1

7

De

c-1

7

Ma

r-1

8

Jun-1

8

Sep-1

8

GDP Growth

BBVA-GB GDP Growth (Monthly)

GDP growth nowcast August: 2.2% (90% of inf.)

September: 2.0% (40% of inf.)

M ean Feb Mar Apr May Jun Jul Aug Sep

Industrial Production 7.9 11.2 9.9 7.3 6.4 5.0 5.9 -0.3

Non-metal Mineral Production 7.9 24.6 16.7 10.3 6.0 3.1 2.8 -4.8

Electricity Production 5.0 3.4 3.0 2.4 1.9 0.9 0.9 -0.4 0.2

Auto Sales 7.0 -1.8 2.2 0.4 -4.1 -13.1 -24.0 -36.7 -51.2

Tourist Arriv als 5.5 33.4 34.9 31.2 29.4 28.3 21.0 17.7 14.0

Number of Employ ed 3.9 5.2 4.4 3.7 3.0 2.5 2.1

Number of Unemploy ed 1.6 -14.5 -13.5 -10.9 -7.1 -2.3 0.6

Auto Imports 9.3 -5.7 -1.0 -3.2 -7.4 -21.2 -35.3 -50.9 -59.3

Auto Exports 7.4 -4.7 -3.1 -1.5 -6.1 -9.8 -19.1 -29.1 -15.7

Retail Sales 6.6 8.9 8.9 7.7 6.7 5.8 4.6

Manuf acturing PMI 51.5 52.7 49.6 51.7 49.5 48.4 49.6 46.4 42.7###Total Loans growth 13-week 19.3 13.2 13.1 15.9 17.0 14.5 10.2 1.7 -2.2

Real Sector Conf idence 106.7 110.8 111.9 111.2 109.9 104.6 102.7 96.4 89.6

MICA Forecast 2.2% 2.0%

GDP YoY 5.2%

BoomContraction Slow-down Growth

2018

Economic activity rebalancing is already happening and will

accelerate in 4Q. This is in line with our growth forecast of 3% for

2018


The tightening of financial conditions and

the recent financial shocks weigh on domestic

demand, particularly on private consumption and

investment

The decline in imports, undervalued exchange rate

and robust tourism revenues are triggering

a sharp positive reversal of the external demand

A significant rebalancing of activity: A sharp adjustment in domestic

demand with a positive reversal of external demand

Source: CBRT, TURKSTAT, BBVA-Research Turkey

Turkey: Private Consumption (%YoY, mov. Avg. 3m)

Turkey: Total Investment (%YoY, mov. Avg. 3m)

Turkey: Net Exports (% Contribution to GDP Growth)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Se

p-1

4

Dec-1

4

Ma

r-15

Jun

-15

Se

p-1

5

Dec-1

5

Ma

r-16

Jun

-16

Se

p-1

6

Dec-1

6

Ma

r-17

Jun

-17

Se

p-1

7

Dec-1

7

Ma

r-18

Jun

-18

Se

p-1

8

Hu

nd

red

s

Cons. Growth

BBVA-GB Cons Growth (Monthly)

Cons. Growth nowcast

Aug: 1.9% (100% of inf.)

Sep: -2.0% (33% of inf.)

-8%

-4%

0%

4%

8%

12%

16%

20%

Se

p-1

4

Dec-1

4

Ma

r-15

Jun

-15

Se

p-1

5

Dec-1

5

Ma

r-16

Jun

-16

Se

p-1

6

Dec-1

6

Ma

r-17

Jun

-17

Se

p-1

7

Dec-1

7

Ma

r-18

Jun

-18

Se

p-1

8

Hu

nd

red

s

Inv. Growth

BBVA-GB Inv. Growth (Monthly)

Inv. Growth Nowcast

Aug: 0.8% (100% of inf.)

Sep: -4.7% (50% of inf.)

-6%

-4%

-2%

0%

2%

4%

Au

g-1

4

Nov-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

Nov-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

Nov-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

Nov-1

7

Fe

b-1

8

Ma

y-1

8

Au

g-1

8

Hu

nd

red

s

Net Exp. Contribution

BBVA-GB Net Exp Contribution (Monthly)

Net Exp. Contribution Nowcast

July: 2.3%

August: 3.6%


8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

Jul-1

3

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Turkey: Unemployment Rate (SA, %)

Turkey: Employment growth by Sector (3MA yoy)

-5%

-3%

0%

3%

5%

8%

10%

13%

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Industry Construction Service

The unemployment rate has started

to rise and will respond with a lag to

the business cycle conditions

Employment creation so far remains resilient in

Industry and Services, while it is already being

negatively affected in Construction

Employment is not immune and in some sectors the adjustment is

sizeable… (i.e. those boosted by the Credit Guarantee Fund)

Source: TURKSTAT, BBVA-Research Turkey


Annual inflation climbed to 24.5% in September on top of rapid exchange rate

pass-thru after sharp currency depreciation, climbing cost-push factors and high food

inflation despite favorable seasonality

A “voluntary” campaign of minimum 10% reduction on prices until the end of the year could help temporarily but may create additional inflationary pressures for 2019.

The sharp divergence in inflation expectations should be the main concern for the CBRT

Turkey: CPI and Core Inflation (YoY)

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

De

c-1

4

Apr-

15

Aug-1

5

De

c-1

5

Apr-

16

Aug-1

6

De

c-1

6

Apr-

17

Aug-1

7

De

c-1

7

Apr-

18

Aug-1

8

De

c-1

8

CPI Core

Turkey: Anti inflation Program

Source: CBRT, TURKSTAT, BBVA Research Turkey

Inflation will remain high in the short term with

the “Anti-Inflation” program providing some transitory relief

A “voluntary” campaign of minimum 10%

reduction on prices until the end of the year

There would be no increase in electricity

and natural gas prices until the end of 2018

The Government will accelerate and target

50% of value-added tax (VAT) returns by

the end of the year (0.9% of GDP)

We expect these measures to have some

transitory impact on inflation until the end

of the year


*Bubble size corresponds to the weight of each item pass-thru in CPI.


Turkey: FX Pass-thru on CPI Items* Exchange rate and Pass-Thru coefficient* (Avg 12 months)

The pass-thru coefficient is far from homogeneous in terms of

activity and duration. Exchange rate volatility matters…

Housing

Furniture

Health

Entertainment

Transportation

Processed Food

Communication

Clothing

Education

Hotel

Others

Energy

0

5

10

15

20

25

30

35

40

0 5 10 15

Cu

mu

lati

ve F

X P

ass

-Th

rou

gh

(%

)

Months taken to complete FX pass-thru

1.2

1.7

2.2

2.7

3.2

3.7

4.2

4.7

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

Sep-0

9

Ma

r-1

0

Sep-1

0

Ma

r-1

1

Sep-1

1

Ma

r-1

2

Sep-1

2

Ma

r-1

3

Sep-1

3

Ma

r-1

4

Sep-1

4

Ma

r-1

5

Sep-1

5

Ma

r-1

6

Sep-1

6

Ma

r-1

7

Sep-1

7

Ma

r-1

8

Sep-1

8

Cumulative Pass Thru on Core Prices

USD/TRY (12m MA, rhs)

*Core Prices refer to Core-D (CPI excluding unprocessed food , alcohol and tobacco)



The Central Bank (CBRT) surprised on the upside and

hiked its policy interest rate (one-week repo)

by 625bps to 24.0% in September

The recent stabilization in the currency and

voluntary discount campaigns could have provided

buffer for the CBRT not to react in October.

Monetary policy should remain alert as inflation

expectations are far from anchored

CBRT Interest Rates (Annual Level, %)

Source: CBRT and BBVA Research Turkey

7

9

10

12

13

15

16

18

19

21

22

24

25

27

De

c-1

5

Feb

-16

Apr-

16

Jun-1

6

Aug-1

6

Oct-

16

De

c-1

6

Feb

-17

Apr-

17

Jun-1

7

Aug-1

7

Oct-

17

De

c-1

7

Feb

-18

Apr-

18

Jun-1

8

Aug-1

8

Oct-

18

CBRT One-Week Repo CBRT LLW CBRT Funding Cost

Turkey: Inflation expectations (%)

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

12-month ahead 24-month ahead

The CBRT tightened its stance further to control inflation and

exchange rate pressures in September and stayed on hold in October.

It should be cautious as inflation expectations are far from anchored


CG Budget Balance and NEP Forecasts (% of GDP)

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

9

De

c-2

0

De

c-2

1

Budget Balance Primary Balance

Government New Forecasts

PB Out of

Sustainability Limit

(Real Gov Exp 2-3%

before reversing back to

long run growth rates)

PB going near

Sustainable Limit

(Real Gov Exp 7%)

BBVA Forecasts

PB Out of

Sustainability Limit

(Real Gov Exp 4%-6%)

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

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. 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

Turkey: New Economic Program (NEP)

Assumptions

The New Economic Program (NEP) macroeconomic

assumptions are more realistic

Source: Ministry of Treasury and Finance, BBVA Research Turkey


In cyclically adjusted terms, the Central

Government budget balance shows a significant

fiscal consolidation next year

-2.5

-2

-1.5

-1

-0.5

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Central Government Budget Balance

Cyclically adjusted balance

Turkey: Central Government Balances (% of GDP)

Turkey: Fiscal Impulse (Negative change in cyclically adjusted balance, % of GDP)

-1.5

-1

-0.5

0

0.5

1

1.5

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

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

On the revenue side, the Government extra revenues (0.4% of GDP) in 2019

The consolidation will be provided mainly

by savings in expenditures (near 1.3% of

GDP)

The NEP includes sizeable fiscal effort in 2019. It also envisages

a turning point to restore the fiscal prudence in the medium term

Source: Ministry of Treasury and Finance, BBVA Research Turkey


Current Account Balance (12M sum, % GDP)

Source: CBRT, Turkstat and BBVA Research Turkey

Current Account Financing (12M sum, % GDP)

6.2%

-2%

0%

2%

4%

6%

8%

10%

De

c-1

0M

ar-

11

Jun-1

1S

ep-1

1D

ec-1

1M

ar-

12

Jun-1

2S

ep-1

2D

ec-1

2M

ar-

13

Jun-1

3S

ep-1

3D

ec-1

3M

ar-

14

Jun-1

4S

ep-1

4D

ec-1

4M

ar-

15

Jun-1

5S

ep-1

5D

ec-1

5M

ar-

16

Jun-1

6S

ep-1

6D

ec-1

6M

ar-

17

Jun-1

7S

ep-1

7D

ec-1

7M

ar-

18

Jun-1

8A

ug-1

8

Net FDI Net Other Investment

Net Portfolio Flows Reserves

Net Error and Omissions

-6.2%

-5.1%

-2.7%

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

De

c-0

7

Jun-0

8

De

c-0

8

Jun-0

9

De

c-0

9

Jun-1

0

De

c-1

0

Jun-1

1

De

c-1

1

Jun-1

2

De

c-1

2

Jun-1

3

De

c-1

3

Jun-1

4

De

c-1

4

Jun-1

5

De

c-1

5

Jun-1

6

De

c-1

6

Jun-1

7

De

c-1

7

Jun-1

8

De

c-1

8

Jun-1

9

De

c-1

9

The current account deficit will adjust rapidly as domestic demand

contracts, and exports and tourism revenues remain robust


Turkey: Foreign Relationships Index (Sentiment level index using GDELT)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Jan-1

7

Feb

-17

Ma

r-1

7

Apr-

17

Ma

y-1

7

Jun-1

7

Jul-1

7

Aug-1

7

Sep-1

7

Oct-

17

No

v-1

7

De

c-1

7

Jan-1

8

Feb

-18

Ma

r-1

8

Apr-

18

Ma

y-1

8

Jun-1

8

Jul-1

8

Aug-1

8

Sep-1

8

Oct-

18

USA EU

Reverend Brunson was finally

released after the reduction of

the Penalty

This is a critical step as it should open

a way to reduce uncertainties about

additional sanctions and restore the

relation with the US

There are still pending issues with the

US: S-400, Syrian position and

potential sanctions against Iran

The collaboration of Turkish

authorities in Khashoggi’s killing could

help to restore foreign affairs links

with the West

The recent improvement in Turkey-US relations

should help to eliminate uncertainties

Sa

fe

Neu

tral

Hig

h

Ex

trem

e

Source: GDELT and BBVA Research Turkey


Turkey Baseline Scenario

03


GDP Forecast (YoY)

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

De

c-1

4

Ma

r-1

5

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

De

c-1

6

Ma

r-1

7

Jun-1

7

Sep-1

7

De

c-1

7

Ma

r-1

8

Jun-1

8

Sep-1

8

De

c-1

8

Ma

r-1

9

Jun-1

9

Sep-1

9

De

c-1

9

Recent financial shocks and necessary steps of monetary

and fiscal tightening to restore confidence will weigh on GDP

Economic activity has started

to rebalance and the adjustment will

become more obvious in the second

half of the year

This will be the reaction to the recent

financial shocks and the necessary

steps of monetary and fiscal policy

tightening to restore confidence in the

Turkish financial markets

We forecast that GDP growth will slow

down to 3% this year and will

decelerate further to 1% in 2019

Source: BBVA Research Turkey


We expect the exchange rate to remain at current levels

at the end of this year. Although the lira remains

undervalued, continuing high inflation and an

unsupportive global environment will limit the correction

Inflation Forecast (3m YoY)

Inflation will stabilize in the short term at very high levels.

The disinflation path will start in 2Q19

Inflation will temporarily stabilize

on the anti-inflation plan measures to

be effective until December

Inflation will increase transitorily at

the beginning of next year

on base effects and likely utility price

hikes

The effects of monetary policy with

wider negative output gap will become

evident from 2Q19 onwards

It is important to maintain a tight

policy mix to curb inflation

expectations as soon as possible

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

32%

34%

De

c-1

6

Feb

-17

Apr-

17

Jun-1

7

Aug-1

7

Oct-

17

De

c-1

7

Feb

-18

Apr-

18

Jun-1

8

Aug-1

8

Oct-

18

De

c-1

8

Fe

b-1

9

Apr-

19

Jun-1

9

Aug-1

9

Oct-

19

De

c-1

9



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. We maintain a prudent forecast for exchange rate

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

De

c-1

7

Ap

r-1

8

Au

g-1

8

De

c-1

8

Ap

r-1

9

Au

g-1

9

De

c-1

9

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

8.6

9

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

De

c-1

7

Ap

r-1

8

Au

g-1

8

De

c-1

8

Ap

r-1

9

Au

g-1

9

De

c-1

9



(f) Forecast. (e) Estimated.

2017 2018 (e) 2019 (f) 2020 (f)

GDP (%) 7.4 3.0 1.0 2.5

Private consumption (%) 6.1 3.5 0.4 1.9

Public consumption (%) 5.0 3.5 3.5 3.0

Investment in fixed capital (%) 7.8 -2.7 -6.6 2.4

Exports (%) 11.9 4.7 6.0 6.0

Imports (%) 10.3 -0.8 -3.2 5.0

Unemployment rate (average) 10.9 11.3 13.5 12.8

Inflation (end of period, YoY %) 11.9 23.5 17.0 12.0

CBRT funding rate (end of period, YoY %) 12.75 25.0 21.5 15.0

Exchange rate (USDTRY, end of period) 3.77 6.20 6.40 6.55

Current account balance (% of GDP) -5.5 -5.1 -2.7 -2.6

Central government budget balance (% of GDP) -1.5 -2.1 -2.2 -2.0

Turkey Baseline Scenario



This report has been produced by the Turkey, China and Big Data Unit Chief Economist for Turkey, China and Big Data Unit

Álvaro Ortiz

[email protected]

Seda Güler Mert

[email protected]

+90 212 318 10 64

Adem İleri

[email protected]

+90 212 318 10 63

Yiğit Engin

[email protected]

+90 212 318 10 60

Serkan Kocabas

[email protected]

+90 212 318 10 57

Ali Batuhan Barlas

[email protected]

+90 212 318 10 67

Deniz Ergun

[email protected]

+90 212 318 10 59

Pelin Ayrancı

[email protected]

+90 212 318 10 58

With the collaboration of Global Economic Situations Miguel Jiménez

[email protected]

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 -

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Rafael Doménech

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Miguel Jiménez

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Julián Cubero

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Turkey

Álvaro Ortiz

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October 2018

Turkey Economic

Outlook 4Q18

turkey economic outlook 4q18 - bbva research

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