turkey economic outlook 4q18 - bbva research
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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
BBVA Research – Turkey Economic Outlook 4Q18 _/ 4
01 Global Economy:
Still Global Positive Outlook,
although risks are intensifying
BBVA Research – Turkey Economic Outlook 4Q18 / 5
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
BBVA Research – Turkey Economic Outlook 4Q18 / 6
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
BBVA Research – Turkey Economic Outlook 4Q18 / 7
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)
Source: BBVA Research
BBVA Research – Turkey Economic Outlook 4Q18 / 8
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
Source: BBVA Research
-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
BBVA Research – Turkey Economic Outlook 4Q18 / 9
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)
Source: BBVA Research
-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
BBVA Research – Turkey Economic Outlook 4Q18 / 10
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
BBVA Research – Turkey Economic Outlook 4Q18 / 11
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).
Source: BBVA Research
Approved trust / financial channel
Approved commercial channel
BBVA Research – Turkey Economic Outlook 4Q18 / 12
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.
Source: BBVA Research
-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
BBVA Research – Turkey Economic Outlook 4Q18 / 13
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
Source: BBVA Research
Up
Unchanged
Down
World
3.7 3.6
2018 2019
BBVA Research – Turkey Economic Outlook 4Q18 / 14
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)
Source: BBVA Research
EE.UU.
EZ
CHINA
Pro
bab
ilit
y in
th
e s
ho
rt t
erm
Severity
BBVA Research – Turkey Economic Outlook 4Q18 _/ 15
02 Turkey: Right policy steps restore
confidence in Turkish financial assets.
The rebalancing is underway
BBVA Research – Turkey Economic Outlook 4Q18 / 16
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
BBVA Research – Turkey Economic Outlook 4Q18 / 17
Source: BBVA Research
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
BBVA Research – Turkey Economic Outlook 4Q18 / 18
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
BBVA Research – Turkey Economic Outlook 4Q18 / 19
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%
BBVA Research – Turkey Economic Outlook 4Q18 / 20
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
BBVA Research – Turkey Economic Outlook 4Q18 / 21
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
BBVA Research – Turkey Economic Outlook 4Q18 / 22
*Bubble size corresponds to the weight of each item pass-thru in CPI.
Source: CBRT, TURKSTAT, BBVA Research Turkey
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)
Source: CBRT, TURKSTAT, BBVA Research Turkey
BBVA Research – Turkey Economic Outlook 4Q18 / 23
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
BBVA Research – Turkey Economic Outlook 4Q18 / 24
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
BBVA Research – Turkey Economic Outlook 4Q18 / 25
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
BBVA Research – Turkey Economic Outlook 4Q18 / 26
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
BBVA Research – Turkey Economic Outlook 4Q18 / 27
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
BBVA Research – Turkey Economic Outlook 4Q18 _/ 28
Turkey Baseline Scenario
03
BBVA Research – Turkey Economic Outlook 4Q18 / 29
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
BBVA Research – Turkey Economic Outlook 4Q18 / 30
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
Source: BBVA Research Turkey
BBVA Research – Turkey Economic Outlook 4Q18 / 31
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
Source: BBVA Research Turkey
BBVA Research – Turkey Economic Outlook 4Q18 / 32
(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
Source: BBVA Research Turkey
BBVA Research – Turkey Economic Outlook 4Q18 / 33
This report has been produced by the Turkey, China and Big Data Unit Chief Economist for Turkey, China and Big Data Unit
Álvaro Ortiz
alvaro.ortiz@bbva.com
Seda Güler Mert
sedagul@bbva.com
+90 212 318 10 64
Adem İleri
ademil@bbva.com
+90 212 318 10 63
Yiğit Engin
yigite@bbva.com
+90 212 318 10 60
Serkan Kocabas
serkankoc@bbva.com
+90 212 318 10 57
Ali Batuhan Barlas
alibarl@bbva.com
+90 212 318 10 67
Deniz Ergun
denizerg@bbva.com
+90 212 318 10 59
Pelin Ayrancı
pelinayr@bbva.com
+90 212 318 10 58
With the collaboration of Global Economic Situations Miguel Jiménez
mjimenezg@bbva.com
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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BBVA Research – Turkey Economic Outlook 4Q18 / 34
October 2018
Turkey Economic
Outlook 4Q18
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