Turkey Economic Outlook

1st Quarter 2018

BBVA Research
January 2018
 Turkey Economic Outlook – 1Q 2018

Key messages

1. The global demand continues to improve with better forecasts

for the US, China and the Eurozone, while the policy
normalization of global central banks is ongoing

2. The policy impulse and the resilience of the economy pushed

the Turkish economy to strong growth dynamics. We expect
GDP growth to reach 7% in 2017 and moderate towards 4.5%
this year

3. The labor market is finally benefiting from strong growth while

the degree of slack in the economy is dying out

4. Inflation will remain high during most of the year on inertia,

robust domestic demand and lagged effects of exchange rate
depreciation. It will moderate to 9% at the end of 2018

5. The Central Bank of Turkey (CBRT) will maintain the tight

stance waiting for clearer signs of disinflation and expectations
to ease. The fiscal policy will remain accommodative in 2018

6. Current account deficit should be monitored as it is already

above 5% of GDP and the pick up in investment and the new
oil prices scenario pose some upward risks
 Turkey Economic Outlook – 1Q 2018

GLOBAL
Global growth confirmed and
short-terms risks moderated
 Turkey Economic Outlook – 1Q 2018

Global growth consolidates & monetary policy normalization is ongoing

Projections for the U.S., China More positive perspectives for

01 and Eurozone improve
There is less uncertainty in the
02 emerging economies
Better global demand and higher
short run commodity prices

Greater caution in financial Central Banks continue progressing

03 markets
Expectations of less liquidity
04 towards normalization
Motifs to withdraw stimulus are
might reduce flows to emerging materializing in the midst of a
economies contained core inflation

Global risks
05 Less significant in the short run;
without changes in medium to
long run

4
 Turkey Economic Outlook – 1Q 2018

Robust and sustained global growth…

World GDP growth

(Forecasts based on BBVA-GAIN, % QoQ)

1.2
The global economy continues to grow,
supported by the recovery of the industrial sector
1.0
Confidence indicators continue to improve, and
anticipate the outlook will continue to be positive

0.8 Private consumption keeps sustaining growth in

advanced economies and gains momentum in
emerging economies
0.6

0.4
Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

CI 20% CI 40% CI 60%

Point Estimates Period average

Source: BBVA Research 5

 Turkey Economic Outlook – 1Q 2018

…with a broad-based revision

EURO ZONE
UNITED STATES

2018 2019 2018 2019

2.6 2.5 CHINA
2.2 1.8

2018 2019
MEXICO 6.3 6.0
2018 2019 2018 2019
2.0 2.2 4.5 4.3

WORLD
SOUTH AMERICA

2017 2018
2018 2019 3.8 3.8
1.6 2.6

TURKEY
Up

Unchanged

Down

Source: BBVA Research 6

 Turkey Economic Outlook – 1Q 2018

A weaker Phillips Curve but still something to monitor

OECD: Production gap and inflation

(% of potential GDP, % YoY)
Reduction in the economies’ output gap, but with
6 room to grow without strong inflationary
pressures
4 Less price reaction to the increase in activity, for
several reasons:
2
• Globalisation

0 • Increased flexibility in the labour market

• Low inflationary expectations

-2
• Reduced productivity growth
-4 The increase in the price of oil will push up
inflation in the short term, facilitating central
-6 banks to move towards normalisation in
2001
2002
2003
2004
2005
2006
2007
2008

2011
2012
2013
2014
2015
2016
2017
2018
2000

2009
2010

developed economies

Output gap Inflation

7
 Turkey Economic Outlook – 1Q 2018

A better outlook for emerging economies but also for oil prices

Price of oil
(Dollars per barrel,%)
The increase in oil prices reflects a greater
global demand, which would account for 60% of
65.9 such increase

61.5 21.8%
But this is also due to supply factors, linked to
geopolitical risks and the correction of
18% inventories

Positive and significant impact on emerging

economies that produce raw materials

However, we still expect prices to converge to

$60 per barrel in the medium term, due to
increased competition and structural changes in
64.1 the energy sector
-2.8%

4Q17 2018 2019

Variation over previous period Dollars per barrel

Source: BBVA Research 8

 Turkey Economic Outlook – 1Q 2018

Withdrawal of non-conventional monetary policy measures is ongoing

Pre-crisis Crisis Normalization

Tightening

Interest rate
rises
Partial
Hike in interest rates reinvestment
Reinvestment of
maturities

Reduction
of
purchasing
of bonds Fed
Easing

BoJ
ECB

9
 Turkey Economic Outlook – 1Q 2018

Monetary policy normalization: accelerated in the case of the Fed,

gradual in the case of the ECB

Tightening cycle and reduction of QE reduction, but extension

the balance in progress until September 2018
Estimated rise of 75pbs in 2018 to No rate hikes are expected
FED ECB
2.25% and reduction of the balance until 2019
by 500,000 million dollars

Focus: Focus: avoid sudden

gain room for manoeuvre acceleration of long-term rates

Elements of uncertainty:

• Politics: changes in • Macro : possible • Markets: Long-term rates

government ministries surprises in inflation and slope of the curve
(Fed, ECB) 10
 Turkey Economic Outlook – 1Q 2018

Cautiousness in financial markets, with gradual moderation in flows

to emerging economies
Appetite for risk indicator
1st Factor (global), analysis of capital flows EPFR

2
"Risk-on mood"
Acceleration in
1.5 the normalization
process
Pre-Trump
1

0.5

-0.5
Post-Trump
-1
"Risk-off mood"
-1.5

-2
Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

Source: BBVA Research, EPFR 11

 Turkey Economic Outlook – 1Q 2018

Turkish
Economy
Strong Growth and Inflation

12

The Turkish economy during the last quarter
Exchange rate depreciated on
01 Global & Geopolitical woes
High exchange rate volatility at
the end of the year
02 Strong growth and declining
unemployment
Labor market is finally benefiting
from strong growth
03 Inflation remain high on both
supply and demand factors
High inflation will recede but
remain at high levels
Turkey Economic Outlook – 1Q 2018
Tight Monetary Policy
04 The Central Bank tightened
monetary policy with words & deeds
05 Fiscal Policy loosened but lower
than expected
Strong nominal growth supported
revenues
06 The current account deficit should
be monitored
Again above the 5% mark on
investment recovery, oil prices and
gold imports
13
 Turkey Economic Outlook – 1Q 2018

The volatility of Turkish Lira increased on geopolitical factors while

global factors started to be more supportive
Lira Exchange Rate : Global & Local Turkish Lira vs USD
(contribution to % weekly change from different factors ) (TRL/USD)

0.04 4.05
FX Depreciation
0.03
3.95
0.02
3.85
0.01

0 3.75

-0.01
3.65
-0.02
FX Appreciation
3.55
-0.03

-0.04 3.45
Oct-17 Nov-17 Dec-17 Jan-18

Global Component % Local Component % 3.35

May-17
May-17
Apr-17
Feb-17
Mar-17
Mar-17

Jul-17
Jul-17

Oct-17
Oct-17
Aug-17
Sep-17

Nov-17
Dec-17
Dec-17
Jan-17
Jan-17

Jun-17

Jan-18
TL Weekly Change %

Geopolitical Events Stress and Reversals

14
 Turkey Economic Outlook – 1Q 2018

Economic growth skyrocketed in 3Q thanks to low base impact and

working day adjustments but remained promising in 4Q, consistent with
our 7% GDP growth forecast for 2017
Activity Indicators Turkey: GDP Monthly Indicator
(%YoY 3MA) (% YoY mov. avg. 3m)

14%

Hundreds
2017
13%
M ean May Jun Jul Aug Sep Oct Nov Dec
Industrial Production 3.9 4.2 2.2 7.7 7.7 13.8 8.6 9.6 11%
Non-metal Mineral 1.7 2.7 0.9 8.2 8.4 14.2 7.7 8.7
Electricity Production 4.5 6.6 4.5 8.4 8.5 12.2 9.5 9.7 6.5
10%
Auto Sales 3.5 -10.3 -9.7 2.4 7.1 14.6 7.3 -1.4
8%
Tourist Arriv als 2.1 26.5 36.5 45.5 45.3 38.2 31.0
Number of Employ ed 5.5 16.1 10.5 6.1 1.5 -0.8 -5.1 7%
Number of Unemploy ed 3.5 2.0 2.7 3.5 4.3 4.5 4.8
5%
Auto Imports 5.1 -13.9 -14.4 -6.7 -3.4 3.1 -0.9 -8.4
Auto Exports 9.2 32.4 24.0 23.2 9.8 5.9 33.3 28.9 4%
Financial Conditions 75.4 30.6 35.6 40.5 35.4 38.9 26.1 10.0 15.2
2%
13-week Credit Growth 17.8 37.2 29.2 20.1 17.6 14.5 14.5 12.0 13.4

Retail Sales 3.6 0.1 0.8 1.8 2.0 1.5 1.3 1.9 1%
Real Sector Conf idence 106.1 104.8 108.8 107.7 110.2 111.2 112.2 109.8 109.2
-1% BBVA-GB GDP Growth (Monthly)
MICA Forecast 11.8% 9.1% 6.7% GDP Growth October : 11.8% (100% of inf.)
GDP Y oY 5.4% 11.1% -3% November : 9.1% (90% of inf.)
GDP growth nowcast
Co ntractio n Slo w-do wn Gro wth Boom
-4% Mar-14 December : 6.7% (26% of inf.)

Mar-15

Mar-16

Mar-17
Sep-13
Dec-13

Sep-14
Dec-14

Sep-15
Dec-15

Sep-16
Dec-16

Sep-17
Dec-17
Jun-14

Jun-15

Jun-16

Jun-17
Source: BBVA Research Nowcasting Model 15
 Turkey Economic Outlook – 1Q 2018

The Credit Guarantee Fund (CGF) has proved to be an efficient

counter-cyclical tool, but not a “free lunch”
The Effects of a “Credit Supply Shock” to the
Economy*
(Shock of CGF, 5 times standard deviation in loans shock. Variables
in 3-Month Moving Average)
The CGF had a positive contribution to growth
between 1.0-1.5pp in 2017 with a somewhat
delayed impact on inflation once the domestic
demand side of the economy reacted

There is some uncertainty about the magnitude

of the negative/positive base effect in 2018
depending on the allocation of remaining funds,
the roll-over of last year´s program or the
existence of new programs

The economic outlook will also matter.

Household and Corporate demand and Banks’
willingness to supply also depend on the
macroeconomic conditions surrounding the
program

* See the detailed analysis in the following link

Source: BBVA Research 16
 Turkey Economic Outlook – 1Q 2018

Strong domestic demand has finally benefited the labor market while
the amount of slack has now disappeared
Unemployment Rate Output Gap Models and Core inflation
(SA, %) ( Ouput gap % of GDP (left) and Core Inflation B YoY ,right)

24% 5 14
12%
4
12
3

2 10
21%
11%
1
8
0
6
-1
10% 18%
-2 4
-3
2
-4
9% 15%
-5 0
Feb-15
Feb-14

Feb-16

Feb-17
Oct-13

Oct-14

Oct-15

Oct-16

Oct-17
Jun-14

Jun-15

Jun-16

Jun-17

2012

2013

2014

2015

2016

2017
Unemployment Rate Median 6 Models* 1 stdev range BBVA MPM Model Output Gap
Youth people unemployment rate-rhs Core Inflation (RHS) Central Bank of Turkey November IR Output Gap

* Output gap one standard deviation range includes: Linear Model, Capacity
Utilization, Hodrick-Prescott Filter (1600), Credit Neutral (Borio et al), Multivariate
Filter Model , Open Economy NK Model.
Source: Turkstat and BBVA Research Source: BBVA Research & CBRT Inflation Report 17
 Turkey Economic Outlook – 1Q 2018

Favorable base effects on food will help inflation fall sharply in the
short term but it will navigate on high levels due to still high domestic
demand, inertia and lagged effects of exchange rate depreciation
CPI Inflation & Its Components Inflation Expectations
(YoY) (YoY)

17% 0.095

14% 0.09

11% 0.085

8% 0.08

5% 0.075

2% 0.07

-1% 0.065

-4% 0.06

Mar-14

Mar-15

Mar-16

Mar-17
Dec-13

Sep-14
Dec-14

Sep-15
Dec-15

Sep-16
Dec-16

Sep-17
Dec-17
Jun-14

Jun-15

Jun-16

Jun-17
Mar-14

Mar-15

Mar-16

Mar-17
Dec-13

Jun-14
Sep-14
Dec-14

Jun-15
Sep-15
Dec-15

Jun-16
Sep-16
Dec-16

Jun-17
Sep-17
Dec-17

Core Food Energy CPI 12-month ahead 24-month ahead

Source: Turkstat and BBVA Research 18

 Turkey Economic Outlook – 1Q 2018

The CBRT tightened monetary policy by 75 bps at the end of 2017 with
additional «verbal tightening» during the last meetings
CBRT Interest Rates CBRT Monetary Policy Statement Sentiment
(Annual Level, %) (Standardized, estimated through Big Data LDA Techniques from
Minutes & Statements)

14% 4
Hundreds

Tight Monetary Policy Sentiment

13%
3
12%
2
11%

10% 1

9%
0
8%
-1
7%

6% -2

5%
-3
May-16
May-15

May-17
Jan-15

Sep-15

Jan-16

Sep-16

Jan-17

Sep-17

Jan-18

Loose Monetary Policy Sentiment

-4

Jul-10
Jul-06

Jul-07

Jul-08

Jul-09

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17
Jan-10

Jan-18
Jan-06

Jan-07

Jan-08

Jan-09

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
CBRT One-Week Repo CBRT Cost of Funding
CBRT LLW

Source: CBRT and BBVA Research 19

 Turkey Economic Outlook – 1Q 2018

Strong nominal growth boosted revenues supporting a better than

expected Central Government deficit of 1.5% of GDP in 2017
Budget and Primary Balance
(% GDP, *4Q GDP data is a forecast)

0.02
We expect some deterioration in fiscal balance
0.015
on the back of lower nominal revenues and
0.01 some upward pressures on expenditures
0.005
Better than expected budget deficit in 2017
0 opens the door for more fiscal consolidation
-0.005
However, we think that the Government will
-0.01 stick to the programmed Medium Term Plan
given some pressures on some expenditure
-0.015
items (i.e defence and security)
-0.02

-0.025
Dec.12

Dec.13

Dec.14

Dec.15

Dec.16

Dec.17

Dec.18

Dec.19

Dec.20

Budget Balance Primary Balance

Government MTP Forecasts BBVA Research Forecasts

Source:Turkstat, Ministry of Finance 20

 Turkey Economic Outlook – 1Q 2018

The security climate has improved markedly allowing tourism arrivals

and revenues to recover
Turkey: Conflict Index Number of Tourists and Tourism Revenues
(Conflict News op Total News in News Media) (3MA, YoY)

45%
Intense

30%

15%
High

0%
Low

-15%

-30%
Safe

-45%

May-13

May-14

May-15

May-16

May-17
Feb-13

Feb-14

Feb-15

Feb-16

Feb-17
Nov-12

Aug-13
Nov-13

Aug-14
Nov-14

Aug-15
Nov-15

Aug-16
Nov-16

Aug-17
Nov-17
Jul-16
Mar-16

May-16
Apr-16

Mar-17

May-17
Apr-17

Jul-17
Feb-16

Oct-16

Feb-17

Oct-17
Aug-16
Sep-16

Nov-16
Dec-16

Aug-17
Sep-17

Nov-17
Dec-17
Jan-16

Jun-16

Jan-17

Jun-17

Foreign Tourist Arrivals Tourism Revenue

Source: BBVA Research,, GDELT, Turkstat 21

 Turkey Economic Outlook – 1Q 2018

Strong domestic demand, higher energy prices and gold imports led
current account deficit to rise above 5% of GDP again
Current Account Balance Current Account Financing
(12M sum, bn USD) (12M sum, % GDP)
14%
30.0
12%
10.0
10%

-10.0 8%

-30.0 6%

4%
-50.0

2%
-70.0
0%

-90.0
-2%
Nov-06

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17
Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17
CAB CAB Exc. Energy & Gold
Net Portfolio Flows Net FDI Net Other Investment CAD

Source: CBRT, Turkstat and BBVA Research 22

 Turkey Economic Outlook – 1Q 2018

Turkey
Outlook
The Base Scenario and
The Balance of Risks

23
 Turkey Economic Outlook – 1Q 2018

Strong growth set to moderate but with balanced risks

GDP Forecasts
(YoY)
12%
Economic growth will moderate as last year´s
11% stimuli fade away. We expect GDP to grow
9% 4.5% in 2018 after the extraordinary growth
8%
rate of 2017 at 7.0%

6% A positive outlook of the global economy, a

5% sustained recovery of non-residential private
investment and a new round of policy stimulus
3%
pose risks on the upside
2%

0% A more aggressive than expected Global

Monetary Policy normalization and Geopolitical
-2%
risks pose risks on the downside
-3%
Aug.15

Aug.16

Aug.17

Aug.18

Aug.19
Dec.14

Dec.15

Dec.16

Dec.17

Dec.18

Dec.19
Apr.15

Apr.16

Apr.17

Apr.18

Apr.19

Source: Turkstat & Garanti MPM Model 24

 Turkey Economic Outlook – 1Q 2018

Inflation will remain high but the worst is over in our base case scenario

Inflation Forecasts
(3MA YoY baseline scenario)

16% Inflation will start to moderate soon (1Q) but

15% will remain near 10% until 4Q before ending
14%
the year at 9.0%
13%
12%
Risks are balanced. Exchange rate
11%
depreciation lower than expected and
10%
9% structural measures to reduce food price
8% volatility may result in positive surprises
7%
6% Higher oil prices, strong inertia and new
5% exchange rate shocks from global &
4% CBRT target
geopolitical factors may pose upside risks
3%
2%
1%
0%
Mar-17
Mar-16

Mar-18

Mar-19
Dec-15

Dec-16

Dec-17

Dec-18

Dec-19
Jun-16
Sep-16

Jun-17
Sep-17

Jun-18
Sep-18

Jun-19
Sep-19

Source: Turkstat & Garanti MPM Model 25

 Turkey Economic Outlook – 1Q 2018

The CBRT will maintain the current policy unless a new shock arises.
Exchange rate will depreciate more moderately.
Monetary Policy Rate Forecasts Exchange Rate Forecasts
(% Average Funfing Cost) (USDTRY Level baseline scenario)

16% 5.2
5
14% 4.8
12% 4.6
4.4
10% 4.2
4
8%
3.8
6% 3.6
3.4
4% 3.2
3
2%
2.8
0% 2.6
Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19
Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19
Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

Aug-19

Mar-17
Mar-16

Mar-18

Mar-19
Dec-15

Dec-16

Dec-17

Dec-18

Dec-19
Jun-16
Sep-16

Jun-17
Sep-17

Jun-18
Sep-18

Jun-19
Sep-19
Elements of uncertainty:

• Global: Normalization of • Macro : Domestic demand • Risk Premia:

Monetary Policies (Fed, ECB) pressures and inflation risks Geopolitical risks
26
 Turkey Economic Outlook – 1Q 2018

Baseline forecasts

2016 2017e 2018f 2019f 2020f 2021f 2022f 2023f

GDP Growth (%) 3.2% 7.0% 4.5% 4.3% 4.5% 4.5% 4.5% 4.5%

Private consumption (%) 3.7% 6.2% 4.0% 3.6% 4.3% 4.1% 4.1% 4.3%

Public consumption (%) 9.5% 2.2% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5%

Gross fixed investment (%) 2.2% 7.9% 3.0% 4.6% 5.1% 5.7% 5.6% 5.5%

Exports (%) -1.9% 11.8% 8.4% 6.5% 6.0% 5.6% 5.6% 5.5%

Imports (%) 3.7% 6.1% 5.2% 5.6% 6.5% 6.5% 6.5% 6.5%

Inflation (end of period. YoY %) 8.5% 11.9%* 9.0% 8.0% 7.5% 7.0% 6.7% 6.0%

Exchange Rate vs US dollar (end of period) 3.52 3.77* 4.15 4.45 4.65 4.84 5.04 5.25

Exchange Rate vs US dollar (average) 3.02 3.65* 4.01 4.31 4.56 4.75 4.95 5.16

Official Interest Rate (end of period) 8.3% 12.8%* 12.8% 10.0% 8.3% 7.5% 7.5% 7.5%

Official Interest Rate (average) 8.4% 11.5%* 12.8% 11.6% 8.6% 7.8% 7.5% 7.5%

Current Account Balance (% of GDP) -3.8% -5.5% -5.6% -5.6% -5.4% -5.4% -5.4% -5.5%

Central Government Budget Balance (% of GDP) -1.1% -1.5% -2.2% -2.2% -2.1% -1.8% -1.6% -1.4%

EU Defined Public Debt (% of GDP) 28.3% 29.3% 30.9% 31.6% 31.7% 31.4% 31.1% 31.0%

F= forecast. (*) realization. 27

 Turkey Economic Outlook – 1Q 2018

This report has been produced by the Turkey, China and Geopolitics Unit
Chief Economist for Turkey, China and Geopolitics Unit
Álvaro Ortiz
alvaro.ortiz@bbva.com
Seda Güler Mert Adem İleri Yiğit Engin Serkan Kocabas
sedagul@garanti.com.tr ademil@garanti.com.tr yigite@garanti.com.tr serkankoc@garanti.com.tr
+90 212 318 10 64 +90 212 318 10 63 +90 212 318 10 60 +90 212 318 10 57

Ali Batuhan Barlas Deniz Ergun

alibarl@garanti.com.tr denizerg@garanti.com.tr
+90 212 318 10 67 +90 212 318 10 59

With the collaboration of

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Miguel Jiménez
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Jorge Sicilia Serrano
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Turkey Economic Outlook
1st Quarter 2018

BBVA Research
January 2018