QUARTERLY ECONOMIC OUTLOOK OF TURKEY – Q3 2010
Yeliz Aksu Keleş, Economist Economic and Sectoral Research Directorate email@example.com
Table of Contents OVERVIEW..................................................................................................................................................... 2 1.
DEVELOPMENTS IN GLOBAL ECONOMY ............................................................................................... 3
GROWTH AND PRODUCTION ................................................................................................................ 4 Production............................................................................................................................................. 6 Confidence Indices ................................................................................................................................ 7
EMPLOYMENT ....................................................................................................................................... 8
INFLATION ........................................................................................................................................... 10
BALANCE OF PAYMENTS ..................................................................................................................... 11 Foreign Trade ...................................................................................................................................... 12 Capital Inflow and Foreign Direct Investment .................................................................................... 14
PUBLIC FINANCE AND DEBT MANAGEMENT ...................................................................................... 16
BANKING SECTOR ................................................................................................................................ 17
FINANCIAL INDICATORS ...................................................................................................................... 19
Foreign Exchange Rates .............................................................................................................. 19
Interest Rates .............................................................................................................................. 20
Stock Market ............................................................................................................................... 21
MACROECONOMIC FORECASTS .......................................................................................................... 22
1|Quarterly Economic Outlook of Turkey-December 2010
OVERVIEW The global economic activity, having suffered the sharpest fall since the Great Depression, has shown a sluggish recovery since the first quarter of 2009. Significant divergence in economic performance among major country groups, growing uncertainties about the US economy and increased sovereign default risk of peripheral European economies added to the fragility of the economic recovery. Despite the weak and fluctuating trend in global economy, developments in 2010 indicated a sound economic recovery in Turkey, driven by strong consumer and business demand, thanks to the fiscal stimulus packages and monetary policy easing measures. The robust economic performance in the last consecutive four quarters up to the end of September 2010 has made Turkey the fastest recovering economy among the European and the OECD countries and also one of the fastest growing economies in the world. Industrial production index, as well as consumer and real sector confidence indices have exhibited a rapid recovery. Measures taken to accelerate economic growth also had favorable effects on the dynamics of the labor market. Compared to other countries, Turkey realized a faster decrease in its unemployment rate in the post-crisis period. On the inflation front, there was a downward trend in 2010 despite the upward pressure at the beginning of the year, driven mainly by indirect tax increase and volatile unprocessed food prices. Capital inflows to emerging countries soared in 2010 due to the increase in global risk appetite. Turkey, with its strong economic growth, prudent public finance management, sound financial system and relatively high nominal interest rates favorably diverged among emerging economies. On the other hand, current account deficit and its financing were the most fragile issue of the Turkish economy, as deficit is mainly financed by short-term capital such as portfolio debt and banking sector borrowing. Despite the increase in its current account deficit to GDP ratio, low indebtness and decreased budget deficit figures increase Turkeyâ€™s endurance to possible turmoils. The recent period has been fruitful for financial markets as interest rates have declined, stock market has soared, and the Turkish lira has appreciated. These developments can mainly be attributed to sound economic growth and reduced country riskiness, thanks to abated political uncertainty with the completion of the referendum process and the announcement of new Medium-Term Program that guarantees fiscal discipline. In contrast to its counterparts abroad, the Turkish banking sector is prudently scrutinized to maintain financial stability, which is essential for a healthy and sound growth. The ratios of assets, deposits and loans to GDP kept increasing, accompanied by the profitability of the banking sector. Unlike many other economies, risk sentiment of both local and global investors towards Turkish assets has improved in the post-crisis period. Remarkable resilience of the Turkish economy and financial system against the crisis and prudent macroeconomic policies enabled Turkey to decouple favorably from most of the developed and developing countries. The very recent economic performance of Turkey and followed prudent economic policies rendered an increase in the credit rating towards the investment grade in 2011 possible. 2|Quarterly Economic Outlook of Turkey-December 2010
1. DEVELOPMENTS IN GLOBAL ECONOMY With the commencement of the financial turmoil in the summer of 2007, the global economic activity suffered the sharpest fall since the Great Depression. The global economic growth experienced the trough in the first quarter of 2009, since then the global economy has shown a sluggish recovery from the recession. Recovery in the economic activity, although lost its momentum, continued to strengthen during the first half of 2010. On the advanced economies side, the United States and Japan experience a relatively moderate growth, while European economies falter. On the other frontier, many emerging economies are realizing strong growth. This fact can be attributed to the prudent economic and financial policies implemented during the period preceding the global crisis. Most of the developing countries kept a close eye on their financial systems, followed sound economic policies, strengthened their fiscal positions, reduced public debt and accumulated foreign reserves as they learnt their lessons from past crises. Most of the advanced countries applied accommodative monetary policies in order to support economic activity. These expansionary policies resulted in increased capital flows to developing countries, which in turn caused local currencies to appreciate. As a reaction to the loss in export competitiveness, monetary authorities of the emerging countries intervene in the currency markets to avert currency appreciation. These currency wars are the current form of beggar-thy neighbor policies applied during the Great Depression. Due to large fiscal stimulus packages, the crisis caused a massive damage in public budgets. The ratio of public debt to GDP is likely to reach triple digits in the US, as well as in several major economies in the Euro zone. Concerns on the sustainability of those budget deficits increased sovereign default risk of countries with problems in rolling over their short term liabilities, in particular for Eurozone peripheral countries. Given increased spreads, with respect to German bunds, in the European sovereign bond markets, slow-growth rates and large fiscal deficits may render austerity measures of these peripheral countries null. Moreover, ongoing high levels of unemployment in advanced economies exacerbate the gloomy growth outlook. The weakening growth outlook, in turn, feeds concerns about deflation in those countries. In sum, the recent financial turmoil, the significant divergence in economic performance among major country groups, particularly in European economies, and growing uncertainties about the US economy have added to the fragility of the economic recovery, raising concerns about increased downside risks to the global economic outlook. Unresolved difficulties in labor, housing and credit markets across advanced economies and the uncertainties regarding the impact of austerity measures indicate that the downside risks concerning the pace of global growth are likely to persist for some time. Although expectations are not as gloomy as the ones in the end of 2008, nobody knows how long the fragility will last or whether another dip is on the cards.
3|Quarterly Economic Outlook of Turkey-December 2010
2. GROWTH AND PRODUCTION The Turkish economy, having experienced an uninterrupted economic growth for 27 consecutive quarters prior to the global financial crisis, started to shrink in the last quarter of 2008 and contracted for four quarters. Thanks to the fiscal stimulus packages and monetary policy easing measures, the Gross Domestic Product started to rise again in the fourth quarter of 2009. On the back of the strong domestic demand, GDP increased by 11.8 %, 10.2 % and 5.5 % respectively, during the first three quarters of 2010. GDP & Growth Rates (year-on-year)
Source: Turkish Statistical Institute (TurkStat)
Looking into GDP in production terms, it is observed that all sectors, except financial services and agriculture, made negative contributions to growth in 2009. The economic contraction started in the last quarter of 2008 was reversed in the last quarter of 2009. The surge in the industry and services sectors led to 6% growth in GDP in the fourth quarter of 2009. The rapid growth trend, particularly in the industrial sector and domestic demand, has continued in 2010. The robust economic performance in the four consecutive quarters up to the end of September 2010 has made Turkey the fastest recovering economy among the European and the OECD countries, and also one of the fastest growing economies in the world. Economic recovery in the first three quarters of 2010, with 8.9 % GDP growth, has been fuelled by the industry and services sectors, which made a 3.6 % and 3.5 % contribution to the overall growth respectively. Financial intermediation services displayed a completely different trend from that of general services sector. While the services sector continuously contracted beginning from the outbreak of the global financial turmoil till the last quarter of 2009, financial intermediation services grew continuously during the crisis period on the contrary to its foreign counterparts, thanks to previous prudent reforms made in the financial sector. In 2010, all sectors, excluding agriculture, grew and made a positive contribution to the GDP growth.
4|Quarterly Economic Outlook of Turkey-December 2010
Rate of Production Itemsâ€™ Contribution to GDP
Source: TurkStat and Investment Support and Promotion Agency of Turkey (ISPAT)
When the composition of growth is analyzed in terms of expenditure, it is observed that the fall in private investment and consumption expenditures played an important role in the economic contraction observed throughout 2009. The private sector responded to the crisis by slashing investment expenditures significantly due to the uncertainty in economic conjuncture, the decline in foreign direct investments (FDI) and the difficulty in finding long-term financing resources. Consumption Itemsâ€™ Contribution to GDP
Source: TurkStat and ISPAT
As imports contracted faster than exports throughout 2009, net exports mitigated the scale of contraction by making a positive contribution to the growth. Nevertheless, parallel to the economic recovery from the last quarter of 2009, imports grew faster than exports, thus causing a negative contribution to the growth. 5|Quarterly Economic Outlook of Turkey-December 2010
Recovery in domestic demand accompanied by the rise in total consumption, which started in the last quarter of 2009, enabled the Turkish economy to grow again. Then private investment have surged and pushed the economy to grow starting from the first quarter of 2010. As production responds to the increased domestic demand, stocks have made a positive contribution to the economic growth since the fourth quarter of 2009. Nevertheless, stocks made a negative contribution due to the disappearance of low base effect in the third quarter of 2010. Analyzing seasonally and calendar adjusted GDP, it is seen that economic recovery started actually in the second quarter of 2009 with an outstanding 4.7 % quarter-on-quarter growth. Since then, seasonally adjusted growth rates remained in the positive territory for the sixth consecutive quarter, gaining momentum in the second quarter of 2010, signaling a strong and sustainable growth in the near future. Seasonally & Calendar Adjusted GDP â€“ billion TRY
Change from the Previous Quarter %
Consequently, developments in the third quarter of 2010 indicated a strong recovery in Turkeyâ€™s domestic demand, despite the weak and fluctuating trend in global economy.
Production The Industrial production index as well as the capacity utilization rate of manufacturing industry (CUR) are the leading indicators showing economic activity. Starting from the last quarter of 2008, the severe contraction in both domestic and external demand caused a stark decline in the industrial production index. This decline came to an end by February 2009, since then industrial production has exhibited a rapid recovery. As of October 2010, industrial production increased by 9.8 % year-on-year and reached the level of 129. Seasonally adjusted growth values also designate a real and sustainable growth, aside from low base effects.
6|Quarterly Economic Outlook of Turkey-December 2010
The manufacturing industry index, which dominates total industry index, is the most important indicator to observe the recovery in industry. With its October 2010 level of 120.2, seasonal and calendar adjusted manufacturing industry index is also approaching its peak level of 121 recorded in March 2008. Seasonal and Calendar Adjusted Production Indices (2005=100) & CUR of Manufacturing Industry (%)
Source: TurkStat and Central Bank of the Republic of Turkey (CBRT)
Intense machinery and equipment investments made in the pre-crisis period and the severe fall in total demand, together, left capacity idle during and after the crisis. As a natural consequence, the capacity utilization rate of the manufacturing industry decreased to its lowest level of 58.7 % in March 2009. Following this drastic fall, CUR started to increase and reached 75.9 % in November 2010; however it did not reach the pre-crisis levels due to aforementioned ample capacity. The production index of motor vehicles, one of the leading sectors of the manufacturing industry, reached its bottom level of 52.1 in January 2009. In the economic recovery period, the manufacture of motor vehicles made one of the biggest contributions to the manufacturing industry growth by reaching 140.7 in October 2010. However it did not reach its April 2008 peak level of 173.5 yet. According to the data by the Automotive Manufacturers Association, total automotive production reached 982,761 units in the first eleven months of 2010, demonstrating 27% growth compared to the same period of 2009. In the same period, passenger car production grew 18% and reached 546,748 units.
Confidence Indices Strong domestic demand can also be seen in the real sector and consumer confidence indices figures. The real sector confidence index is assumed to be a leading indicator of the economic activity since it reflects the opinions of the senior managers of the major private sector firms about the recent, past and future developments. The index shows the expansion and contraction periods of the economic activity. The real sector confidence index, which attained its lowest level at the end of 2008, passed the 7|Quarterly Economic Outlook of Turkey-December 2010
threshold value of 100 at the beginning of 2010, pointing to an expectation for a lasting improvement in the economic activity. On the other hand, consumer behaviour and expectations regarding demand side are evaluated by the consumer confidence index. The increase in the consumer confidence index stems from the improvements in consumers' assessments concerning their purchasing power in the next and present period, general economic situation and job opportunities in the next period. Confidence Indices
Source: TurkStat and CBRT
The consumer sector confidence index, which came down to the lowest level (68.9) in November 2008, started to rise again and reached 91 in November 2010, which has been the peak value for the last 34 months. The rise can mainly be attributed to the consumersâ€™ expectations concerning about their purchasing power in the present and next period, general economic situation within next 3 months and buying time condition of durable goods in the present period.
3. EMPLOYMENT Inevitably the economic crisis hit the Turkish labor market, where reduced demand for labor resulted in job losses in Turkey like most of the other developed and developing countries. However, measures to accelerate economic growth made positive effect on the dynamics of the labor market. Since May 2009, people who joined the labor force have started to be employed, resulting in an upward trend in seasonally adjusted employment figures and thus a downward trend in unemployment.
8|Quarterly Economic Outlook of Turkey-December 2010
Number of Persons Employed (â€˜000)
Unemployment Rate (%)
The seasonally adjusted unemployment rate decreased from its highest level of 14.8 % in April 2009 to 11.8 % in September 2010. Even though the number of unemployed is decreasing every month, one of the lowest levels of 10% in April 2008 cannot be reached at the moment. Analyzing unemployment is very crucial to understand the depth of the economic crisis and recovery since the unemployment rate is an important indicator, both in social and economic terms. In comparison with other countries, Turkey has managed to mark a faster decrease in unemployment rate during the post-crisis period, which is a solid proof of the fast recovery of Turkish internal demand and success of new investments in creating employment. As of September 2010, labor force increased to 26 million, together with increasing employed people and decreasing seasonally adjusted unemployed people figures. Labour Force Status (as of September 2010) Summary Table Sep. Sep. 2009 2010 Non-institutional population (000) 70 707 71 508 Population 15 years old and over (000) 51 862 52 718 Labour force (000) 25 416 25 907 Employed (000) 22 020 22 973 Unemployed (000) 3 396 2 934 Labour force participation rate (%) 49,0 49,1 Employment rate (%) 42,5 43,6 Unemployment rate (%) 13,4 11,3 Non-agricultural unemployment rate (%) 16,9 14,3 (1) Youth unemployment rate (%) 24,3 21,2 Not in the labour force (000) 26 446 26 810
Employment by Economic Activity (%)
(1) Population within 15-24 age group Note: Please note that the total numbers are rounded.
Source: TurkStat 9|Quarterly Economic Outlook of Turkey-December 2010
4. INFLATION With the global financial crisis, global inflation decreased marginally due to excess capacity and high unemployment, with a few exceptions among the emerging economies. The recovery of commodity prices raised the level of consumer prices during 2010. However, deflation rather than high inflation is the more possible risk, in particular for advanced economies. At the same time, rapid growth in emerging markets creates new inflationary pressures. In Turkey, aggregate demand conditions continued to support disinflation due to weak external demand, although domestic demand was relatively stronger compared to 2009. Annual consumer prices increased by 0.76 percentage points in the first eleven months of 2010 compared to the end of 2009 and reached 7.29 % in November. The rise was mainly driven by the tax increase in fuel, alcoholic beverages and tobacco products introduced in January, the increase in unprocessed food prices and the low base effect due to tax cuts in 2009. Consumer Price Index - Annual Rate of Change %
During the years 2009 and 2010, the dynamics of inflation were mainly determined by unprocessed food prices. During the first half of 2009, weak domestic demand, tax cuts and falling commodity prices pushed inflation down. Inflation started to rise in the last quarter of 2009, as the rate of change in unprocessed food prices displayed historically high increase. During the second quarter of 2010, again, unprocessed food prices had a significant impact on consumer prices, but in a reverse manner. This time, the fall in fruit and vegetable prices, resulted from the increase in supply, and the fall in meat prices, resulted from the increase in the import possibilities, pushed inflation down. In the third quarter of 2010, consumer prices surged with the sharp increases in unprocessed food prices again. This increase was largely due to higher fresh fruit and vegetable prices. Another factor that additionally boosted unprocessed food prices was the ongoing increase in meat prices. Currently, consumer prices, to a large extent, reflect the increase in fruit, vegetable and meat prices. In October 2010, consumer prices have increased by 1.83 %, bringing annual inflation down to 8.62 %. The 10 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
rise in inflation can be attributed to the sharp increases in unprocessed food prices resulted from soaring prices of vegetables, in particular record-high tomato prices. In November 2010, consumer prices were up 0.03 %, while annual inflation was down to 7.29 %. The fall in unprocessed food prices was the primary driver of this decline. Unprocessed food prices declined due to fall in vegetable prices, with tomato prices seeing a major correction. In addition, falling prices of chicken and red meat contributed to the decline in the annual unprocessed food inflation. In November 2010, annual PPI inflation decreased to 8.17 %. Agricultural prices dropped significantly with the fall in fruit and vegetable prices that brought consumer prices down as well. On the other hand, livestock prices and prices of manufacturing inputs such as wheat, sunflower and cotton continued to increase. Producer Price Index - Annual Rate of Change %
5. BALANCE OF PAYMENTS With the global financial turmoil, the current account deficit displayed a rapid downward trend due to weak investment and consumption demand, and decreasing energy prices. At the end of 2009, current account deficit ratio to GDP decreased to 2.3 %, which is the lowest level recorded since 2002. Current Account Deficit
Source: CBRT 11 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
With the surging economic activity starting from the last quarter of 2009, the current account deficit has widened again and reached USD 36 billion as of October 2010, and 6 % of GDP in the first three quarters of 2010. This deterioration can be attributed to the increase in imports demand, underpinned by the recovery in domestic demand. Meanwhile, the recovery in exports was relatively limited due to the weak external demand conditions and this pushes the foreign trade deficit up. When the price impact of energy items, the primary source of current account deficit, is excluded, current account balance of Turkey for 2009 is in surplus (+0.5 % of GDP); meaning that Turkeyâ€™s dependency on external energy resources plays the most important role in its current account deficit. (Million USD)
1. Current Account Balance 2. Financial Account Balance Net Errors and Omissions Source: CBRT
-41,946 36,305 5,641
-14,283 9,739 4,544
2009 Jan-Oct -9,199 5,169 4,030
2010 Jan-Oct -35,723 34,427 1,296
2010/ 2009 % 288% 566% -68%
Foreign Trade With the economic growth, leaded by domestic demand, and recovery in industrial production, the need for the import of intermediate goods and energy surged, boosting the volume of imports in 2010. On the other hand, weak external demand and appreciation of Turkish currency repressed total exports. Consequently, the ratio of export to import decreased to 62.7 % in October 2010 compared to 72.5 % at the end of 2009. Foreign Trade
The foreign trade deficit increased to USD 55 billion in the first ten months of 2010, up by 83 % compared with the same period of the previous year.
12 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
Main import items, including a large volume of imported raw materials and intermediary goods, significantly increased. Foreign trade by top five chapters (USD ‘000) 2009 Total imports Mineral fuels, minerals oils and products of their distillation Boilers, machinery and mechanical appliances, and parts thereof Vehicles other than railway or tramway rolling-stock, and parts thereof Iron and steel Electrical machinery and equipment, and parts thereof Other chapters
113 291 410 24 131 495 13 787 315 7 003 360 9 191 124 9 778 385 49 399 732
January-October Change 2010 (%) 147 821 140 30.5 30 640 232 27.0 16 733 365 21.4 10 059 566 43.6 13 123 238 42.8 11 782 200 20.5 65 482 539 32.6
Share in 2010 100% 21% 11% 7% 9% 8% 44%
Total exports Vehicles other than railway or tramway rolling-stock, and parts thereof Iron and steel Boilers, machinery and mechanical appliances, and parts thereof Electrical machinery and equipment, and parts thereof Knitted and crocheted goods and articles thereof Other chapters
83 185 010 9 842 289 6 475 434 6 643 670 5 231 903 5 659 256 49 332 458
92 708 852 11 442 967 7 160 833 7 613 246 5 999 138 6 363 885 54 128 782
Change (%) 11.4 16.3 10.6 14.6 14.7 12.5 9.7
Share in 2010 100% 12% 8% 8% 6% 7% 58%
Source: TurkStat Foreign Trade by Top 5 Countries as of October 2010 (value- mio.USD & share) Exports by Countries Imports by Countries
Exporters have continued to improve non-price competitiveness and to diversify into new markets. The share of the fast growing Asian and the Middle-Eastern economies in Turkey’s total exports has increased significantly. The EU countries, the main trade partner of Turkey, acquired a share of 46.3 % in Turkey’s total exports (slightly above 45.7 % in October 2009) and 38.8 % in total imports (slightly below 13 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
40.1 % in October 2009) in the first ten months of 2010. Turkish export markets are more diversified than import markets since top ten countries have a more dominant share in imports (58%) when compared with exports (48%).
Capital Inflow and Foreign Direct Investment Current account deficit has been financed through mainly by short-term capital, such as portfolio debt and banking sector borrowing during 2010. Due to the increase in global risk appetite, strong economic growth in Turkey, discipline in public finance, sound financial system and relatively high interest rates, capital inflows have soared. Therefore, liabilities in the capital account, including the public and private sector borrowing and equity purchases in the stock exchange market, increased substantially. Therefore weight of foreign direct investments in capital inflow decreased. The financial account recorded a net capital inflow of USD 34.427 million in January-October 2010, in comparison to net inflow of USD 5.169 million observed in the same period of 2009. (USD million) Financial Account Direct Investment Portfolio Investment Other Investments Reserve Assets
Jan-Oct 2009 5,169
Jan-Oct 2010 34,427
6,192 727 -2,392 642
4,592 15,438 23,800 -9,403
-26% 2024% -1095% -1565%
Direct investment showed a net inflow of USD 4.6 billion in January-October 2010 by decreasing 26 % over the same period of 2009. While residentsâ€™ net direct investment abroad increased, foreign direct investment in Turkey decreased and reached to USD 5.9 billion in January-October 2010. As a result, Turkeyâ€™s reliance on short-term capital inflows to meet its external financing needs increased. (USD million) Direct Investment Abroad In Turkey Equity Capital Other Capital (Net) Real Estate (Net)
-973 7,165 5,114 587 1,464
-1,292 5,884 3,714 171 1,999
32.8% -17.9% -27.4% -70.9% 36.5%
Regarding the sub-items of foreign direct investment; net real estate purchases of nonresidents in Turkey increased by 37 % to USD 2 billion, while other capital item reflecting net loans received from parent companies abroad decreased to USD 171 million in January-October 2010 period by contracting 71 %. Foreign direct investment from Greece increased by 596 % and reached USD 355 million as of October 2010. Hence its share in total FDI increased from 1 % to 10 %, making Greece the third investor country. 14 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
Foreign direct investment on financial intermediation sector grew by 92 % and reached USD 1 billion as of October 2010. Hence its share in total FDI increased from 11 % to 28 %, making financial intermediation the most attracting sector. FDI by Top 5 Countries and Sectors as of October 2010 By Countries
*Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods **Real Estate, Renting and Business Services
Portfolio Investment Capital flows in the form of portfolio investments, which exhibited a net outflow in the second half of 2008 due to the global turmoil, increased again in 2009 and attained a historically high level of USD 15 billion as of October 2010. (USD million) Portfolio Investment Assets Liabilities Equity Securities Debt Securities General Government Banks
-2,125 2,852 2,047 805 805 0
-2,449 17,887 3,523 14,364 13,364 1,000
15.2% 527% 72.1% 1684% 1560% NA
Other Investments Other investment account, which is composed of trade credits, loans and foreign exchange deposit accounts, recorded a net inflow of USD 23.800 million in January-October 2010, whereas a net outflow of USD 2.392 million was registered in the same period of 2009. The liabilities of other investments recorded an increase of USD 16 billion in January-October 2010, in contrast to a decrease of USD 10.189 million posted in the same period of 2009.
15 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
(USD million) Other Investments Assets Liabilities Trade Credits Loans General Government Banks Other Sectors Currency and Deposits Monetary Authority Banks Other Liabilities
7,797 -10,189 -1,586 -14,309 864 -6,512 -8,661 3,738 -839 4,577 1,968
7,685 16,115 576 3,488 1,319 7,641 -5,472 11,551 -425 11,976 500
-1.4% -258% -136% -124% 53% -217% -37% 209% -49% 162% -75%
Reserve Assets Official reserves, a sub-item under reserve assets, recorded an increase of USD 9.403 million in JanuaryOctober 2010, in contrast to USD 642 million decrease posted in the same period of 2009.
6. PUBLIC FINANCE AND DEBT MANAGEMENT Due to large fiscal stimulus packages in the US and several major economies in the Eurozone, the global financial crisis caused a massive damage in public budgets. Concerns on the sustainability of those budget deficits increased sovereign default risk of countries, in particular for the Eurozone. Despite the salient increase in the current account deficit to GDP ratio, overall indebtness figures are quite robust in Turkey. As of the second quarter of 2010, public sector gross debt stock to GDP ratio exhibited a 210 bp decrease and realized a level of 43 % where the Maastricht Criterion requires minimum level of 60 %. Public Sector Gross Debt Stock* (% of GDP)
Central Government Budget Deficit (% of GDP)
*EU Defined General Government Nominal Debt Stock **Annualized
Source: Undersecretariat of the Treasury 16 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
Recovery in economic activity, increase in tax revenues, decrease in interest expenses and increased control on public expenditures created balanced public finance outcomes. Increasing volume of imports led to higher tax revenues from imports, consumption tax revenues also increased due to the surge in the consumption of petroleum and other goods, which are subject to the special consumption tax, and the fall in interest rates led to a reduction in interest expenses item. In the last quarter of 2010, primary balance amounted to TRY 23 billion, whereas this figure was merely TRY 0.44 billion as of end of 2009. The budget deficit decreased to TRY 23.5 billion in the first eleven months of 2010, down from TRY 46.4 billion in the same period of the previous year. As a result, tight fiscal stance in the first three quarters of 2010 resulted with a central government budget deficit of 2.6 % of GDP, down from 5.5 % in 2009. Sound and sustainable economic growth, favorable budget performance and sharp decrease in real interest rates paved the way for healthy public debt figures. Growth rate of debt stock of central government has lost ground in 2010, slowing down from 16% in 2009 to 4%. This came in an era of global frenzy of fiscal expansion. 75.7 % of the central government debt stock consists of domestic debt. As it is well known, an increase in the overall maturity and share of fixed rate instruments imply a favorable condition against adverse interest rate movements. On the other hand, a reduction in the share of fx-denominated debt increases resistance to exchange rate fluctuations. Maturity, interest rate and currency mismatch of domestic debt are meliorated by endeavor of the Treasury in increasing shares of long-term, TRY denominated and fixed rate borrowing instruments. This policy comes to fruition and shows its impact in the overall maturity of the domestic debt. Maturity of domestic debt surged to 41 months as of October 2010 from a level of 35 months in 2009. Diminishing budget deficit and ameliorating debt stock figures render reductions in public borrowing costs possible. Unlike many other economies, risk sentiment of both local and global investors towards Turkish assets has improved in the post-crisis period. Remarkable resilience of the Turkish economy and financial system against the crisis and prudent macroeconomic policies enabled Turkey to differentiate favorably from most of the developed and developing countries. This fact is also apparent in recent credit rating upgrades by credit-rating agencies and CDS premiums which are lower than those of most Eurozone countries.
7. BANKING SECTOR The Turkish banking sector consists of deposit banks, development and investment banks, and participation banks. As of October 2010, of the 49 banks in the Turkish banking sector, 32 are deposit banks, 13 are development and investment banks and 4 are participation banks, pointing to the prevalence of deposit banking in the Turkish banking sector. As of October 2010, the banking sector employment and number of branches have continued to increase, compared to the figures of 2009, although number of banks remained unchanged in the same period. 17 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
The total asset size of the banking sector reached TRY 932 billion as of October 2010, marking a year-onyear growth rate of 17 %. As of October 2010, main financial indicators point out soundness of the sector as a whole. Deposits, with a 62 % share in total liabilities, continued to remain the largest source of funding for the banking sector. Other two substantial resources are the loans received from banks abroad and the funds raised through repo transactions. The ratios of assets, deposits and loans to GDP, which reveal the financial depth and intermediation level of the banking sector, kept increasing as of September 2010. In the same period, the total asset size to GDP ratio did not change and remained 87 %. This ratio is higher than that of Poland and Romania, but lower than that of the EU countries, revealing the growth potential of the sector. Banking Figures
Source: Banking Regulation and Supervision Agency (BRSA)
The ratios of deposits and loans to GDP exhibited a seamless growth for four consecutive years, whereas ratio of loans to deposits preserved a flat trend except the year 2009. In 2009, Turkish banks experienced a narrowing in foreign borrowing due to shaky balance sheets of their foreign counterparts during the crisis. After several years of solid growth, bank lending slowed sharply in the economic contraction period, reflecting tighter credit conditions and weaker demand. With economic growth and recovery period, domestic lending surged again driven by low interest rates. Thus the ratio of loans to deposits increased as well and reached 83 % indicating that banks started to perform their main role of intermediation. The profitability of the banking sector continued to increase even in the economic contraction period of 2009 and in the first three quarters of 2010 as well. In 2009, net profits increased by 50.4%, reaching TRY 20.2 billion, as the spread between deposit rates and lending rates widened and loan provisions declined in line with the falling demand. Profit growth is likely to be much weaker in 2010, reflecting narrower interest rate margins. As of October 2010, annual net profits amounted to TRY 21.5 billion. 18 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
The ratio of non-performing loans (NPL) to total loans was around 5.3 % at the end of 2009 and decreased to 4.2 % in October 2010. This situation indicates that in terms of credit risk the banking sector is in better condition compared to end of 2009. However, the ratio of NPL to total loans did not attain its pre-crisis levels of 3-3.5 %. Ratio of Non-Performing Loans (Gross) to Total Cash Loans (%)
Even though the capital adequacy ratio of the banking sector, which was 20.6 % in 2009, decreased to 19.6 % in October 2010, the ratio is still well above than what is prevailing in most European countries and the required minimum level of 8 % for Turkey. In contrast to its counterparts abroad, the Turkish banking sector is prudently scrutinized to maintain financial stability, which is essential for a healthy and sound growth. In this regard, Central Bank of Turkey increased its required reserve ratio and terminated the interest rate applied to required reserves in Turkish Liras in order to prevent economy from destructive effects of excess liquidity and rapidly increasing credit volume.
8. FINANCIAL INDICATORS The recent period has been fruitful for financial markets as interest rates have declined, stock market has soared, and the Turkish lira has appreciated. These developments can mainly be attributed to sound economic growth and reduced country riskiness thanks to abated political uncertainty with the completion of the referendum process and the announcement of the new Medium-Term Program that guarantees fiscal discipline.
a. Foreign Exchange Rates In many advanced countries, accommodative monetary policies were applied in order to support economic activity. These expansionary policies resulted in increased capital flows to developing countries and these in turn led local currencies to appreciate. In this regard, with increased capital inflows to the Turkish financial markets, nominal value of TRY compared to USD has increased since June 2010. While TRY appreciated by 15 % and fell below 1.40 against the USD between June and November, it remained almost stable against Euro in the same period. Additionally, based on CBRT data, TRY appreciated also in real terms by 7.4 % against emerging market currencies, it rose by 1.8 % against advanced economiesâ€™ currencies during the same period. 19 | Q u a r t e r l y E c o n o m i c O u t l o o k o f T u r k e y - D e c e m b e r 2 0 1 0
Foreign Exchange Rates
At the end of November, the Korean tension and increased sovereign default risk of countries in the Eurozone pushed the TRY/USD value up to 1.5 accompanied by a decrease in EUR/USD parity.
b. Interest Rates As a result of the decline in risk premiums and falling inflation, and accompanying globally low interest rates, interest rates in the Turkish market has experienced a downtrend since November 2008. Domestic Debt Securities Secondary Market Compounded Rates and CBRT Policy Rates (%)
The Central Bank of the Republic of Turkey has slashed overnight rates steadily since July 2008 and the interest rates followed declining CBRT O/N rates. In this regard, borrowing rates dropped from 16.75 % to 1.50 %, while lending from 20.25 % to 9 %. CBRT uses one week repo rate, which was set as 7 %, as its policy rate since May 20, 2010. However the policy rate was reduced from 7 % to 6.5 % on December 16, 2010.
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c. Stock Market With the accommodative monetary policies of advanced economies, emerging markets attracted more capital inflows in the form of portfolio investments. In addition to the global conjuncture, the Turkish economy has entered a strong recovery period and credit agencies have started to increase Turkeyâ€™s credit ratings. These developments were welcomed by the markets and the stock market in Turkey received high capital inflows. Accordingly, the ISE-100 index saw a record level in October 2010, reaching the level of 71,007. ISE 100 Index
Prudent macroeconomic policies, which resulted in remarkable resilience of the Turkish economy and financial system during the recent subprime crisis, enabled Turkey to differentiate favorably from most of the developed countries in the Eurozone. CDS (credit default swap) premium of Turkey has consistently outperformed most of the Eurozone countries since the outbreak of sovereign debt crisis. CDS Rates (basis point)
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9. MACROECONOMIC FORECASTS In October 2010, the government announced the Medium-Term Program (MTP), which covers the period from 2011 to 2013. According to MTP, GDP is estimated to grow by 6.8 % in 2010. However, the very recent economic performance of Turkey created an optimistic environment for international organizations to regard Turkey as the fastest growing economy in Europe. The MTP estimate for 2010 GDP growth is a very conservative estimate as compared to the forecasts of many international institutions, including IMF and OECD, which are higher than this estimate. 2010 Real GDP Growth Rate Estimates for Turkey (%) OECD 8.2 IMF 7.8 European Commission 7,5 MTP 6.8 Sources: OECD Economic Outlook No: 88, November 2010; IMF World Economic Outlook, October 2010; Medium Term Program by of the State Planning Organization (SPO-), October 2010; European Economic Forecast Autumn 2010.
According to OECD, Turkey is expected to be the fastest growing economy among OECD members in 2010, with a real GDP growth rate of 8.2 %. 2010 Growth Estimates (%) in OECD Countries
Source: OECD Economic Outlook No: 88
According to IMF, Turkey is expected to be the fastest growing economy in Europe in 2010, with a real GDP growth rate of 7.8 %. With this estimate, Turkey is also the only economy in Europe that grows with a GDP growth rate higher than 5 %.
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2010 Growth Estimates (%) by IMF
Source: IMF World Economic Outlook, October 2010.
According to MTP, GDP is estimated to grow by 4.5 %, 5 % and 5.5 % in 2011, 2012 and 2013, respectively. The improvement in the unemployment rate is anticipated to take place gradually. Moreover, the contribution of aggregate demand conditions to disinflation is expected to continue during the program period and inflation is estimated to realize around 5 % since 2011. According to the program, budget deficit/GDP ratio forecast for 2010 was revised to 4 %. Besides, current account deficit forecast for 2010 was revised upwards significantly. Current account deficit/GDP ratio was also revised over 5% for the forthcoming period. Seleceted Forecast and Targets in the Medium-Term Economic Program 2010 2011 2012 2013 Growth (%) 6.8 4.5 5.0 5.5 Unemployment Rate (%) 12.2 12.0 11.7 11.4 Current Account Deficit (USD billion) -39.3 -42.2 47.9 53.1 (% GDP) -5.4 -5.4 -5.3 -5.2 CPI (%) 7.5 5.3 5.0 4.9 Budget Balance* (TRY billion) -44.2 -33.5 -32.3 -24.4 (% GDP) -4.0 -2.8 -2.4 -1.6 Primary Surplus* -7.4 0.4 5.4 12.3 (% GDP) -0.7 0.0 0.4 0.8 Privatization Revenues (TRY billion) 3.9 13.7 12.7 10.3 Nominal Debt Stock** (% GDP) 42.3 40.6 38.8 36.8 *Central Government Budget **EU defined General Government Nominal Debt Stock Source: Medium-Term Program by Undersecretariat of State Planning Organization, October 2010
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Disclaimer This Document is one of a series assembled by the Republic of Turkey Prime Ministry Investment Support and Promotion Agency (ISPAT) for the information purposes relating to the economic outlook of Turkey. This Document does not purport to be all-inclusive nor to contain all the information that a prospective investor may require in deciding whether or not to invest. No representation or warranty, express or implied, is or will be made in relation to the accuracy or completeness of this Document and no responsibility or liability is or will be accepted by ISPAT. The information contained herein was prepared based on publicly available information sources at the time that this Document was prepared. In particular, no representation or warranty is given as to the achievement or reasonableness of future projections, targets and estimates, if any. Any recipient or prospective investor should not rely upon this Document in making any decision, investment or otherwise. ISPAT does not accept any liability in relation to the distribution or possession of this Document in and from any jurisdiction and ISPAT shall not be liable for any violation by the recipient of any such registration requirements or other legal restrictions.
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Published on Apr 23, 2012
December 2010 Yeliz Aksu Keleş, Economist Economic and Sectoral Research Directorate firstname.lastname@example.org