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Turkish Economy at 35.5 Slides…
Evaluation of 1H2014, Expectations for FY2014 & FY2015
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
1
» Investing in Turkey is like dating Don Juan…plenty of reasons for being attracted
(some irrational) but never a relief of confidence
» Alas, this will continue being the case in the period ahead
» If you are one of those who doesn't want to ‘lose the excitement in a
relationship’, then skip this report! For rather more ‘true love’ seekers (risk
conscious and realistic investors), the story I will tell will be addressing the risks
» In a nutshell I will tell you that: Conditions in the global economy will set to
change in the period ahead. But that is given for any given EM market. Thus
nothing we can change or control, but just have to live with. What will
differentiate a country in the period ahead will be its macro fundamentals and
political landscape. Turkey has low grades in both of the aforementioned fields,
with no short term structural improvement in the pipeline. But these
weaknesses are not the fruit of one day. So don’t blame FED, don’t blame
lobbies etc. Where we came is a part of the direction we took!
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
2
» Turkey sailed with sub potential growth in 2012 and 2013
» Despite a stronger than expected start to the year, growth in 2014 will be belowthe potential as well
» Growth in the previous 5 quarters owe a lot to inventory accumulation and heavypublic spending, pointing at unsustainable pillars
» Meanwhile, revitalized private consumption shows sign of taming with weakconsumer confidence
» Financial conditions eased recently but it will gradually tighten putting further capon consumption appetite
» Although not at alarming levels yet, number of people failing to pay their creditcard debt is on the rise, showing further risk on ‘leverage fuelled growth’
» Further inventory depletion is set to be on the cards while low capacity utilizationratio limits private investment appetite
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
3
» Regular machinery renewals due, might create some action on the privateinvestment but it will not be aiming at expanding the capacity
» Public spending has already been on the stage since late 2012. With generalelections to come within coming 12 months (early elections also possible) more tocome on the public spending front
» Yet due to the relatively limited share of public spending in GDP compared toprivate spending, boosting the public spending can create only a rather limitedand temporary impact on the GDP…
» …but, it definitely carries the risk of hurting the fiscal front and inflation…a storywe will hear more often in 2015
» Europe’s recovery is still a day dream, while some of its members are strugglingwith recession as well as signs of stagnation
» Never-coming European recovery is good news on one hand for saving further richliquidity stance…
» …but it is also bad news for Turkey which expects to compensate weak domesticdemand and weak export demand of Eastern neighbors' by the European demand
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
4
» Although there is some rebalancing in the economy, it will not be enough todeliver a permanent improvement on the current account front
» Needless to say, exports will not be enough to elevate Turkey’s growth back to itspotential levels
» Weaker aggregate demand conditions will limit the pricing power of theproducers’ in 2015
» Yet, TL volatility and higher administrated prices are set to hurt the price settingdynamics. CBRT will not hit the inflation target in neither 2014 nor 2015
» Meanwhile, premature rate cuts of the Bank threatens the stability of themonetary policy outlook
» Taking her lessons from Bernanke’s 2013 August actions, I expect Yellen to besilent before her actions. Tightening will be gradual including indirect means
» Within this framework, EM countries with artificially low rates will be forced tocompensate their mistakes with behind the curve sharp rate hikes. One relief:CBRT is experienced in being behind the curve, that is almost the standard!
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
5
» GROWTH DYNAMICS
» INDUSTRIAL PRODUCTION OUTLOOK
» LEADING INDICATORS
» FOREIGN TRADE DYNAMICS
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
6
» 2014 kicked off with a 4.3% of growth YoY in 1Q2014, which was clearly too highcompared to my initial projections
» Following a volatile pattern, growth outlook sets to decline in the period ahead
» Data in hand suggest that FY2014 GDP growth will be around 3.3% higher than
my initial base case of 2.8% but lower than my best case of 4% (See previousreport: Something Happened On the Way to Tapering, December 2013)
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
7
Source: TurkStat
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
1Q20
06
3Q20
06
1Q20
07
3Q20
07
1Q20
08
3Q20
08
1Q20
09
3Q20
09
1Q20
10
3Q20
10
1Q20
11
3Q20
11
1Q20
12
3Q20
12
1Q20
13
3Q20
13
1Q20
14
YoY GDP growth %, off calendar effect
• Turkey’s growth has not been a pre-planned one. Manufacturing growth has beenvolatile-weak while construction sector has been on the rise
• While the whole country looks like a construction yard, share of education in the
GDP fell compared to a decade ago, showing the ‘infertile investment taste’
• Current growth model creates temporary jobs for less educated part of theworkforce but stands very vulnerable to bubbles and financial shocks
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
8
Source: TurkStat
-5.5
-0.6
2.1
4.1
-8
-6
-4
-2
0
2
4
6
Agriculture Industry Construction Services
Change in the Share of the Sectors WithinEmployment, % Point, 2013-2004
Source: TurkStat
1.8%
1.9%
2.0%
2.1%
2.2%
2.3%
2.4%
2.5%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%19
98
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Share of Construction in GDP
Share of Education in GDP (r.a.)
• Despite sailing higher than my call in the first five months of the year, slow-downsignals in the manufacturing industry became more visible as of June
• Following the first quarter GDP growth of 4.3% YoY, data in hand suggest a GDP
growth of some 2.5% YoY in 2Q2014
• A slight recovery might come in 3Q2014 only to be followed by furtherdeterioration in 4Q2014
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
9
Source: TurkStat
-30-25-20-15-10
-505
10152025
2006
Q1
2006
Q3
2007
Q1
2007
Q3
2008
Q1
2008
Q3
2009
Q1
2009
Q3
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
Quarterly Manufacturing Growth, YoY %Change
Quarterly GDP Growth, YoY % Change
• After delivering positive contribution to GDP growth for 4 consecutive quarters,we saw a limited inventory depletion in 1Q2014
• Weak consumer confidence hints that, weaker demand to come shall be met viafurther inventory depletion rather than new production, which will cast its shadowover the growth in the short term
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
10
Source: TurkStatSource: TurkStat
-4
-2
0
2
4
6
8
10
2010
-I
2010
-II
201
0-III
2010
-IV
2011
-I
2011
-II
201
1-III
2011
-IV
2012
-I
2012
-II
201
2-III
2012
-IV
2013
-I
2013
-II
201
3-III
2013
-IV
2014
-I
Contribution of Inventory to GDP, % point
68
70
72
74
76
78
80
1 2 3 4 5 6 7 8 9 10 11 12
Consumer Confidence Index 2013 2014
months
• Share of the leverage within disposable income has been almost on steady rise
• Hence the inevitable consequence started to become more visible with morehouseholds are being unable to honour their liabilities
• Meanwhile, the inequality in wealth distribution continues to pressure theindebted portion of the population…
• …creating downside risk to Turkey’s unsustainable growth model that is based on‘consumption fuelled by leverage’
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
11
Source: The Banks Association of Turkey – Risk Center
Number of People Who Did Not Pay Its… (thousand)
165108 149
276
389
273263207 215
340
502
378
0100200300400500600700800900
100020
09
2010
2011
2012
2013
1H20
14
Consumer Loan DebtCredit Cards DebtConsumer Loans or Credit Cards Debt
Distribution of TL Deposits
Source: BRSA (as of 06/2014)
• Real Sector Confidence Index shows that private investment appetite will betamed in the coming 12 months as well…
• …casting its shadow over the contribution of private investment to GDP growth in2015
• Yet given the high inventory and weak consumer confidence, I guess no one issurprised (or not that many)
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
12
Source: CBRT, TurkStat
-50
-30
-10
10
30
50
70
-50
-40
-30
-20
-10
0
10
20
200
7Q
1
200
7Q
3
200
8Q
1
200
8Q
3
200
9Q
1
200
9Q
3
201
0Q
1
201
0Q
3
201
1Q
1
201
1Q
3
201
2Q
1
201
2Q
3
1Q
201
3
3Q
201
3
1Q
201
4
3Q
201
4
12M Ahead Investment Expenditures (RSCIIndex)Real Private Investment Growth (YoY, %,r.a.)
• Despite losing some steam,adjusted time series showsthat public spending is still onthe table
• Public consumption rose by4.4% QoQ (adjusted series) in1Q2014
• Meanwhile public investmentrose by 5.6% QoQ (adjustedseries) in 1Q2014 vs privateinvestment that fell by 2.8%QoQ (adj.)
• Can public demandcompensate the weakening ofprivate demand? Can NOT!
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
13
Source: TurkStat *Data adjusted for seasonality and calendar effect
Source: TurkStat *Data adjusted for seasonality and calendar effect
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
1Q20
10
2Q20
10
3Q20
10
4Q20
10
1Q20
11
2Q20
11
3Q20
11
4Q20
11
1Q20
12
2Q20
12
3Q20
12
4Q20
12
1Q20
13
2Q20
13
3Q20
13
4Q20
13
1Q20
14
Public Consumption, QoQ % Chng* (l.a.)
Household Spending, QoQ % Chng.*
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1Q20
10
2Q20
10
3Q20
10
4Q20
10
1Q20
11
2Q20
11
3Q20
11
4Q20
11
1Q20
12
2Q20
12
3Q20
12
4Q20
12
1Q20
13
2Q20
13
3Q20
13
4Q20
13
1Q20
14
Public Investment, QoQ % Chng.*
Private Investment, QoQ % Chng.*
• One shall remember that the share of public spending (consumption + investment)in GDP is limited at roughly 15-16%
• Said in another way, private spending adds the lion’s share to the GDP
• Due to its rather limited share in Turkey’s GDP pie, one shall conclude that raising
the public spending can NOT save the growth stand alone but it will for sure risk
the fiscal front as well as the inflation outlook
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
14
Source: TurkStat
0%
20%
40%
60%
80%
100%
120%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Share of Private Spending in GDP
Source: TurkStat
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2012
-I
2012
-II
2012
-III
2012
-IV
2013
-I
2013
-II
2013
-III
2013
-IV
2014
-I
PrivateInvestment
Public Investment
Contribution to GDP, % Point
• Net exports added 2.7 pp to the headline GDP growth in 1Q2014 vs 2.1 ppcontribution of private consumption of the households, pointing at rebalancing
• While weak consumer confidence points at a slow-down in the HH consumption,recovery in European growth is expected to serve as a buffer to compensate theweakness
• Yet, I shall warn you: Stronger European demand might ease the pain but it will
NOT be the panacea against sub-potential growth
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
15
Source: TurkStat, Author’s Own Calculations
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
201
0-I
201
0-I
I
201
0-I
II
201
0-I
V
201
1-I
201
1-I
I
201
1-I
II
201
1-I
V
201
2-I
201
2-I
I
201
2-I
II
201
2-I
V
201
3-I
201
3-I
I
201
3-I
II
201
3-I
V
201
4-I
Net Exports, % Point Contribution to GDP
Private Consumption, % Point Contribution to GDP
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
16
Source: TurkStat, Author’s Own Calculations
• Unexpected gold trade in the recent years distorted the trade picture of thecountry
• Focusing on the exports excluding gold – which is more meaningful for the GDPcontribution – one shall see that, share of Europe has been in fact more or lessstabilized
• Said in another way, when gold exports are excluded, the recent rise in Europe’sshare within Turkey’s total export pie stands rather limited…
• …thus, not big enough to compensate the growth loss that shall come from theexpected deterioration in private demand
1H2014 1H2013 YoY Diff.
Near & Middle East 21.4% 20.8% 0.7%
EU28 + Other Europe 53.8% 52.0% 1.8%
Near & Middle East 22.2% 24.0% -1.8%
EU28 + Other Europe 53.8% 49.6% 4.3%
Excluding the Export of Precious Metals
Including the Export of Precious Metals
% Share In Total Exports
• European recovery continues to be a day dream
• When we go rather detailed in the data, we see that our trading partners’ growthprojections are being revised downward (Germany contraction, Italy recession,France stagnation wow wow wow!)…
• …pointing at negative divergence and risking the upside potential of theirexpected contribution to Turkey’s export demand (ja, naturlich!)
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
17
Countries 1H2014 2013 2012 2014 2015Germany 1 1 1 0.2 0.1Iraq 2 2 2 n.a. n.a.UK 3 3 4 0.4 0.2Italy 4 5 7 -0.3 0.0France 5 6 8 -0.3 -0.1USA 6 7 9 -1.1 0.1Russia 7 4 10 -1.1 -1.3
Revision in IMF's Growth Call July vs April, % Point
Rank in Turkey's Export Markets
Source: TurkStat, IMF
• Private sector companies signal for falling competitiveness in countries bothwithin and outside EU
• Latest reading of the graph might have been heavily influenced by the recentpolitical tension with both Western and Eastern neighbors and might tame a bit.But since political tension is not set to decline in the ST, a recovery is not realistic
• Meanwhile low value added export goods of Turkey are open to increasingcompetitive pressure, being another factor to cast shadow over exports’contribution
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
18
Source: CBRT
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
04-1
205
-12
06-1
207
-12
08-1
209
-12
10-1
211
-12
12-1
201
-13
02-1
303
-13
04-1
305
-13
06-1
307
-13
08-1
309
-13
10-1
311
-13
12-1
301
-14
02-1
403
-14
04-1
405
-14
06-1
407
-14
Countries Within EU
Countries Outside EU
Competitive Power - Balance
Sour - 2015 Sweet and Sour - 2015
» Annual GDP growth: 2.7%
» Budget Deficit / GDP: 2.6%
» Primary Balance / GDP: 0.3%
» Story:
Private spending tames whilepublic spending stands positivebut under control. Ambiguity onthe political front continues butdoes not turn into a full-fledgedcrisis. Then the drive will beshaky but manageable.
» Annual GDP growth:1.5%
» Budget Deficit / GDP: 3.2%
» Primary Balance / GDP: -0.5%
» Story:
Domestic political tension risesdelivering instability, whileterror in southern neighbourscontinue. In that case Turkeycan not differentiate in FED’snormalization period and stepsahead as the weak chain of theEM
» Annual GDP growth: 4%
» Budget Deficit / GDP: 2.2%
» Primary Balance / GDP: 0.5%
» Story:
Harmony between Presidentialoffice and the ruling partysupport the stability attractingexternal savings to the countrydespite FED’s normalizationsteps
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
19
Sweet -2015
» BALANCE of PAYMENTS
» CURRENT ACCOUNT BALANCE
» REAL EFFECTIVE EXCHANGE RATE
20
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
• Rebalancing in 1Q2014 helped to improve the CAD outlook, with the deficitstepping back by USD 12.9 bn in 1H2014 compared to 1H2013
• Meanwhile, 1H2014 portfolio investment is also down by USD 15 bn YoY
• Hence the picture in hand shows lower CAD but also weaker financing
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
21
Source: CBRT
12,934
-14,943-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
Current Account Deficit Portfolio Investments (net) (selected items)
1H2014 - 1H2013, USD mn
• Private sector is the fat boy of Turkey’s balance of payments picture, while itsstrong roll-over ability serves as a limited relief
• Savings that fell short of the investment need of the country pushes externalborrowing almost as the mandatory way to finance private investment
• Yet, recent data in hand challenges the generally accepted rhetoric of ‘growthcreating leverage’ (see above graph on the right)
• So it is time to question the efficiency of borrowing-investment relationship andpossible course of private sector roll-over
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
22
Source: CBRT, BRSA, Undersecretariat of Treasury
-200000-150000-100000-50000
050000
100000150000200000250000
Hou
seho
lds
CB
RT
Ba
nks
Pu
blic
Se
ctor
Non
Ba
nkin
gP
riva
te S
ecto
r
May.14 May.13
0
100
200
300
400
500
600
700
800
900
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
1Q
201
4-
An
n.
Private Sector Investment, Current Prices, Reindexed
2002=100Private Sector FX Liabilities
Private Investment, Fixed Prices, Reindexed 2002=100
Source: CBRT, TurkStat
Short FX Position, USD mn
• Normalization steps in FED’s policy will tame the appetite of the global capital but one shall not expect to see a dry-up
• As global liquidity becomes more selective, domestic pull side factors will be more important for each country
• Turkey has a loaded risk agenda with external political tension, domestic political tension, possible early elections, low growth and high inflation
• Since we are not exactly the ‘best candidate’, portfolio inflows will ease and roll-over performance of the private sector and banking sector will moderate
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
23
Source: CBRT
0%
100%
200%
300%
400%
500%
600%
700%
01-0
4
06-0
4
11-0
4
04-0
5
09-0
5
02-0
6
07-0
6
12-0
6
05-0
7
10-0
7
03-0
8
08-0
8
01-0
9
06-0
9
11-0
9
04-1
0
09-1
0
02-1
1
07-1
1
12-1
1
05-1
2
10-1
2
03-1
3
08-1
3
01-1
4
06-1
4
LT Roll-Over Ratio for the Banks, Annualized
16% 18% 19% 20%
8%
19%
35%29%
84%
49%
37%
13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2010 2011 2012 2013 1H2013 1H2014
FDI
Net Portfolio Investment
Credits Excluding GovernmentShare in Financing
Source: CBRT
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
24
• Shape of the global liquidity will be the same for everyone and it is out of our control
• EM currenciess will all be affected but diverge according to their own macro health and political agenda.
• In this matter, I see risk of further pressure over TL in 2015 (weaker in averagethan year end)…
• …which means that CBRT will not sleep tight (more on that in the coming chapter)
Source: OECD
70
75
80
85
90
95
100
08.1
3
09.1
3
10.1
3
11.1
3
12.1
3
01.1
4
02.1
4
03.1
4
04.1
4
05.1
4
06.1
4
07.1
4
Turkey India Indonesia South Africa
Real Effective Exchange Rate Index: RelativeConsumer Price Indeces, 2010=100
-25,000
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
20,000
2006
2007
2008
2009
2010
2011
2012
2013
1H20
13
1H20
14
Total Reserve Change,USD mnBanks' FX Assets, Chng,USD mnOfficial Reserves, Chng,USD mn
Change in the Reserves, (-) is accumulation
Source: CBRT
» PRICE DYNAMICS
» MONETARY POLICY
» REACTION FUNCTION
25
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
• Let’s get it straight: CBRT is unsuccessful in inflation targeting and shows no sign ofimprovement
• The Bank clearly denies the bad inflation outlook, becoming more and more
professional in finding excuses but also less and less credible
• 2014 is not an exception either. CBRT blames the food prices for high inflation
although core indicator excl. food also sails high
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
26
Source: TurkStat
0
2
4
6
8
10
12
01.1
0
03.1
0
05.1
0
07.1
0
09.1
0
11.1
0
01.1
1
03.1
1
05.1
1
07.1
1
09.1
1
11.1
1
01.1
2
03.1
2
05.1
2
07.1
2
09.1
2
11.1
2
01.1
3
03.1
3
05.1
3
07.1
3
09.1
3
11.1
3
01.1
4
03.1
4
05.1
4
07.1
4
CPI, YoY % Chng.
I-Type Indicator (excl. Food), YoY % Chng.
• Rest of 2014 and 2015 will give a bumpy inflation ride
• I expect to see higher administrated prices after the general elections tocompensate the public spending, which will pressure the inflation
• Consumer inflation shall end up around 8.5-8.8% in 2014 and 7-7.5% in 2015
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
27
Source: CBRT, Author’s Own Calculations
-2.00
-1.00
0.00
1.00
07/1
4
08/1
4
09/1
4
10/1
4
11/1
4
12/1
4
01/1
5
02/1
5
03/1
5
04/1
5
05/1
5
06/1
5
07/1
5
Food Alc.Tob Sub-Segment ClothHousing Furnishings TransportComm. Recr. EducationHotels. Misc. Health
Base Year Effect on Consumer Prices, % Point
• CBRT is talented in building handsome sentences with fancy words whiledescribing its monetary policy
• Yet the reality is usually rather more simple and sometimes it bites!
• Pass through from the currency depreciation to inflation is still considerable…
• …hence despite initial attempts for denial, periods of currency depreciation endsup with rate hikes, almost without exception
• I expect currency to give hard times to CBRT in 2015 as well, making the Bank
regret for the rate cuts that are delivered between May-July this year
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
28
Source: CBRT
3
4
5
6
7
8
9
10
11
-5
0
5
10
15
20
25
01.1
1
03.1
1
05.1
1
07.1
1
09.1
1
11.1
1
01.1
2
03.1
2
05.1
2
07.1
2
09.1
2
11.1
2
01.1
3
03.1
3
05.1
3
07.1
3
09.1
3
11.1
3
01.1
4
03.1
4
05.1
4
07.1
4
Non Domestic PPI, YoY % Chng (l.a.)
Domestic PPI, YoY % Chng
One Week Repo Rate
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
4
5
6
7
8
9
10
11
12
1310
.11
12.1
1
02.1
2
04.1
2
06.1
2
08.1
2
10.1
2
12.1
2
02.1
3
04.1
3
06.1
3
08.1
3
10.1
3
12.1
3
02.1
4
04.1
4
06.1
4
08.1
4
Funding Cost (%,simple, l.a.)
Eq. Weighted Bask
Source: CBRT, TurkStat
• Previous experience shows that, CBRT’s premature rate cuts and insistence on lowrates ended up sharp compensations that come behind the curve
• A sober CBRT shall stop cutting the rates further within 2014
• Credibility shall be restored with realistic comments
• One shall be ready to see higher rates to come in 2015, standing double digit
• If CBRT refrains from such an action due to ‘social pressure’, the mistake willsooner or later had to be compensated with even higher hikes
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
29
Source: CBRT, Author’s Own Calculations
CUT HIKE
2002 - 2005 180 -
2006 - 2008 66 181
2009 - 09/2010 73 -
10/2010 - 10/2011 n.m. 188
11/2011 to date 67 183
Size of the Move, Average, Basis Points
7.5
8
8.5
9
9.5
10
10.5
11
11.5
1 2 3 4 5 6 7 8 9 10 11 12 13 14
14.08.2014 14.08.2013 27.01.2014
Yield Curve, months vs yields %
Source: BondHub
» MACRO PROJECTIONS FOR 2015
» SCENARIO WORK
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'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
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Growth Outlook Sour Sweet-Sour Sweet
GDP (TL bn) 1910 1931 1950
GDP ($ billion) 823 862 898
GDP Grow th (real, %, YoY) 1.5 2.7 4.0
Central Government Budget
Budget Balance (%of GDP) -3.20 -2.60 -2.20
Primary Balance (% of GDP) -0.50 0.30 0.50
International Trade
Current Account Balance (% of GDP) -5.4 -6.5 -7.5
Price Dynamics
CPI (%, YoY, end of period) 7.5 7.3 6.7
Foreign Exchange
$/TL Exchange Rate (year-end) 2.450 2.300 2.150
Projections for 2015
Source: Mind and Mood of Burcu ÜNÜVAR
» GLANCE AT THE POLITICAL LANDSCAPE
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'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
» Turkish politics have been suffering an unbalanced game played between a strongpolitical party in the office vs weak and fragmented opposition
» After Mr. Erdogan, who has been the Prime Minister for more than anuninterrupted decade, was elected as the next President, one of the biggestquestion marks is about his successor
» His successor will be taking AKP to the next general elections scheduled mid 2015
» AKP will not be facing a strong opposition from outside as the results of thePresidential election left a ticking bomb to the hands of two leading oppositionparties
» Main opposition party CHP is already created its internal storm on the back of theunsuccessful presidential election results
» Hence before the next general elections, the challenge to AKP does not come fromthe opposition but from its internal dynamics
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
33
» Where does to-be-veteran-President Abdullah Gül fit into this picture ? From hisearlier comments, we aknow that he thinks ‘he is too young to quit active politics’
» Meanwhile there will be many deputies within AKP who will not be able to run forthe Parliament again, due to a internal legislation of the AKP banning the office formore than 3 terms. Will Turkish politics be able to find them a new seat?
» While fresh blood circulation shall be welcomed, markets will definitely be missingMr Babacan (who can be replaced in September or in the next general electionseven if AKP wins) who has been seen as the guarantee of sober economy policiesin Turkey
» A populist candidate to replace Mr Babacan (populist means someone whobelieves that there is a global interest rate lobby who is after Turkey, or whobelieves that Master Yoda exists while in fact ‘there is no spoon’…yes it can goreally that surrealist) will hurt the investment appetite
» If that will be the case, one shall not be surprised to see rating agencies
downgrading Turkey right after the Cabinet revision
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
34
• AKP knows that with deterioration in the economy and higher number of peoplebeing dissatisfied, general elections had to be timed carefully
• Meanwhile having the ‘musical chairs’ – that is more candidates than number of
available posts- rings the bells for possible tension within the ruling party, whichhas been deemed as a source of stability by the investors
• Within this picture, Turkey might be facing earlier general elections around March
2015
'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR
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Source: PEW
Country Satisfaction - TURKEY
0%
20%
40%
60%
80%
100%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Dissatisfied Satisfied
Burcu ÜNÜVAR
Economist – Lecturer at Yasar University
Views expressed in this report are mine and do not reflect those of the institutions that I work with or have any work affiliation.
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'Turkish Economy: Evaluation of 1H2014, Expectations for FY2014 & FY2015' by Burcu ÜNÜVAR