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Economic Research
Athens, July 4, 2006
Trip Notes: Turkey
Key notes from our recent trip to Ankara and Istanbul: June 26-28
Outlook
During the past week we traveled to Ankara and Istanbul
Ratings
Short Term: negative/neutral
Medium term: neutral/positive
Long Term: neutral/positive
S&P: BBMoody’s: Ba3
Fitch: BB-
where we met with officials from the Central Bank, the
Ministry of Finance and the Privatization Administration as
well
as
market
participants
to
discuss
recent
developments in politics and the economy and prospects
going forward.
Key points:

Economy now in a better shape to cope
with external shocks than during past
incidents of turmoil

CBRT’s
latest
tightening
measures
temporarily
Disinflation
halted
but
medium-term
wave of risk aversion and global de-leveraging began
to unfold in early May. Overstretched valuations, a
to
the
disinflation
process
and,
more
recently,
increased domestic political noise provided some of the
key catalysts of this underperformance. In the current
Economic slowdown but not recession
ahead

whole emerging markets universe since the latest
large and widening current account deficit, headwinds
structural forces remain in favour

sell-off, likely to lag in a recovery
Turkey has been one of the worst performers in the
successful in stabilizing lira, at least

Turkey underperformed other EMs in the recent
environment of increased aversion to risk, investor
selectivity and discrimination against markets featuring
weak fundamentals will remain of primary importance
for at least until global conditions stabilize. Turkey’s
Structural reforms on a fast track
short-term fundamentals have worsened as a result of
the crisis, thus we expect Turkish markets to remain
vulnerable in the short-term and to lag other major
Turkey: Macroindicators
GDP growth %
CPI eop (yoy %)
Budget balance (% GDP)
C/A balance (% GDP)
Total external debt (% GDP)
EMs in any broad-based recovery. On a medium-to2004
8.9
9.3
-7.1
-5.2
50.0
2005
7.4
7.7
-2.0
-6.4
45.0
2006 figures represent official forecasts as well as
our own projections
2006
5.0
8.5
-1.5
-6.2
43.0
longer term perspective, we remain positive on the
country’s outlook, given the significant progress that
was made in recent years in stabilizing the economy
and in pursuing a series of structural reforms that have
mended its past boost and burst tendencies. We also
expect the ongoing IMF deal to continue reducing the
scope for significant deviation from tight fiscal policy
and to ensure continued efforts towards economic
stabilization.
Analysts:
Gikas Hardouvelis,
Chief Economist and Director of Research
Platon Monokroussos
Head of Financial Markets Research
Strong growth in recent years, financed mainly
by short-term foreign capital
Over the past three years, Turkey enjoyed a virtuous
cycle of currency strength, easing inflation and falling
interest rates, which, in turn, boosted domestic credit
and fuelled a strong economic expansion. Average real
Important disclaimer at the end of this report
Economic Research
GDP growth exceeded 7.0%, remaining among the
foreign speculative capital rushed to exit the market
highest in the emerging world and almost twice as
‘‘at any cost’’ amid escalating global aversion to risk.
high as last decade’s average. This strong growth
The central bank’s initial lack of decisive action (in the
performance was not well balanced, however, as it
form
was mainly financed by short-term credits and
intervention),
portfolio inflows (the C/A deficit reaching 6.5% of
government’s
GDP), making it crucially susceptible to sudden
policy affairs, were interpreted by markets as a failure
reversals
to
in
investor
sentiment
and
foreigners’
willingness to provide financing.
of
further
display
rate
together
earlier
firm
hikes
with
and/or
memories
interferences
commitment
direct
to
with
the
of
FX
the
monetary
disinflation
program. Indeed, the subsequent sharp depreciation of
the lira exacerbated the market worries that the CBRT
The combination of relatively high domestic interest
was left ‘‘behind the curve’’ in its fight against
rates and a broadly strong home currency offered
inflation2.
one of the highest returns on short-term speculative
capital in the emerging world, causing significant
CBRT’s latest tightening measures successful in
capital inflows and an increase of CBRT’s foreign
stabilizing lira, at least temporarily
currency reserves, which almost doubled over the
In an extraordinary MPC meeting held on Sunday, June
past two years to approximately $58bn currently.
25, the CBRT hiked its key overnight borrowing rate by
FDI inflows, though increasing strongly in recent
225bp to 17.25%. It also announced its decision to
quarters1, have been providing a relatively small
initiate daily dollar selling auctions of a maximum
cover to the current account deficit, with most of the
volume of $500mn as well as lira purchase ‘‘depo’’
financing being achieved via foreign loans, inflows to
auctions of 1-wk and 2-wk maturities aiming to drain
the local bond and equity markets and reverse
excess liquidity from the market. Then, on June 28,
currency substitution by domestic residents. On this
the CBRT raised its key overnight lending rate by a
latter point, note that the net errors and omissions
further 200bp to 22.25%, while it left its overnight
item in the BoP statistics, which reflects unregistered
borrowing rate unchanged at 17.25%. The CB has so
capital flows such as shifts of informal foreign
far hiked its overnight borrowing and lending rates by
currency savings back to local currency deposits,
600bp and 400bp, respectively since the beginning of
reached particularly high levels in the past three
June.
years, though the recent lira decline must have led
to a temporary halt to this process.
The latest tightening steps, together with active FX
intervention by CBRT, have succeeded to stabilize the
Risk aversion, CBRT’s lack of decisive action
lira, albeit at much weaker levels than before the
behind lira’s recent depreciation
recent sell-off, and to restore the Bank’s inflation
The
awkward
reality
of
Turkey’s
increased
fighting
credibility,
at
least
temporarily.
Higher
dependency on foreign short-term capital inflows
domestic interest rates are expected to help contain
manifested itself via the recent dramatic plunge in
inflationary pressures by constraining private sector
the lira, which reached a climax shortly after the
credit and contributing to a cooling down in domestic
CBRT’s unchanged-rates decision on June 20. An
demand growth over the coming quarters. Moreover,
earlier surprise 175bp hike in the central bank’s
the CBRT’s recent
overnight borrowing rate and the abolition of a
attractiveness of lira-shorting strategies, while the
withholding tax on non-resident holding of local
current daily dollar selling/lira depo auctions are
rate hikes have reduced the
bonds had little success in stabilizing the market, as
Net FDI receipts reached $9.7bn in 2005 and,
including cash from deals cut last year, are expected
to reach between $13.5bn and $24.3bn in 2006,
depending on how much cash Saudi Oger Telecom
pays for Turk Telecom ahead of schedule. Turk
Telecom was privatized last year in a $6.55bn deal.
1
The Turkish currency hit 3 ½ yr lows above 1.77 to
the dollar on June 20th but it has recovered significant
ground since then, helped by the CBRT’s latest
package of tightening measures to halt its rapid
decline.
2
Trip Notes: Turkey, June 27, 2017, Page 2 of 6
Economic Research
facilitating the mopping up of excess liquidity, which
currency to inflation of ca 0.30ppts (affecting the CPI’s
has been a key factor behind the recent lira volatility.
tradables component), with the maximum impulse-
Since the CBRT initiated its new daily sterilization
response being felt within a three-month horizon.
operations on June 26, some TRY 5.4bn of excess lira
Lastly, note that under its inflation-targeting regime
liquidity were absorbed from the market, while a
the CB had forecast that inflation would end June
further 3bn liras were also withdrawn on account of
within two percentage points of 6.5%, before easing
tax payments by corporates. This reduction of TRY
towards 5% by the end of the year. Now, with its
liquidity overhang (which, according to one of our
expected failure to meet those IMF-agreed targets, it is
contacts, stood at more that TRY 15bn before the
likely
latest sterilizations) has certainly contributed to the
inflationary pressures subside.
to
continue
its
tight
policy
stance
until
lira recovery over the last few sessions, while the
broad-based US dollar weakening post the 29 June
Supply
FOMC also supported it. The TRY rate stood at ca
pressures
1.55 again the US dollar at the time of writing, up by
Our CBRT contacts attributed the recent upward move
ca 13% from its lows beyond 1.76 on June 20 but
in inflation to higher commodity prices, supply-side
still 16% down from its late-April levels. With the
disruptions
CBRT
appearing
determined
temporary
price
influences
that
pushed headline CPI upward in January-May without
affecting much the underlying inflation rate. In fact,
FX intervention were market volatility to increase, we
the
see the TRY maintaining its recent gains and even
unprocessed food, gold and alcoholic beverages came
strengthening
the
short-term
its
other
demand-side
new
in
apply
and
vs.
measures more aggressively and even conduct direct
further
to
constraints
in
CPI
index
excluding
the
volatile
energy,
the
in at 5.5% y/y in May, in line with the central bank’s
absence of any fresh major round of global risk
year-end target. We generally give credence to the
aversion.
above line of reasoning but we believe that demand
side
pressures,
especially
in
the
prices
of
non-
Upside inflation risks
tradables, have also contributed to the upward move
The lira’s depreciation since early May has certainly
in inflation since the beginning of this year. An
worsened Turkey’s near-term inflation outlook but
important
actually the country has begun experiencing rising
constraints’’ argument is the sharp rise in the food
inflation since early this year as a result of elevated
components (accounting 27.7% of the CPI basket),
commodity prices and demand-side pressures. After
which posted a 6.5% cumulative rise in the first 5
decelerating from around 73% y/y at the beginning
months of the year and came in at 10.4% y/y in May.
of 2002 to 7.1% y/y in June 2004, consumer price
This increase was mainly due to unprocessed food
inflation has been stuck in a narrow range before
prices (14.2% basket weight), which rose by an eye-
moving higher again in the last several months. The
catching 11.4% in January-May, reportedly as a result
rise in the year-on-year CPI to 10.1% in June from
of supply disruptions due to unusually bad whether
7.7% at the end of last year, though not necessarily
conditions earlier this year. Another development
signaling the end of the medium-term disinflation
which
trend, has prompted a gradual rise in inflation
commodity prices on Turkish inflation is the sharp rise
expectations, as depicted in the CBRT’s recent survey
in the CPI basket’s miscellaneous component by ca
data. According to CBRT’s estimates, the weak lira
11.5% in the first 5 months of this year, mainly as a
has inflated the May CPI rate by 65bps and its impact
result of higher prices of gold (1.4% basket weight).
is likely to be particularly acute in the July and
On the non-tradables side, rent prices remained a
August CPI figures. Most of our contacts expect
source of inflationary pressure since the beginning of
headline CPI rate to move above 12% y/y in the next
the year, leading to a rise of more than 11% in the CPI
two months, while the CB expects no sustained
basket’s housing component in May. However, tighter
resumption of disinflation before Q2 2007. These
financial conditions in the period ahead are likely to
development
also
shows
the
supporting
impact
of
the
‘‘supply-
international
projections assume a pass-through coefficient of
Trip Notes: Turkey, June 27, 2017, Page 3 of 6
Economic Research
calm somewhat the recent boom in the housing
Increased political noise likely to persist
market and lead to an ebbing of price pressures in
Two sources of political noise are likely to keep
this sector.
markets unsettled in the immediate future. The first is
the upcoming Presidential and Parliamentary elections.
Disinflation halted but medium-term structural
Presidential elections are scheduled for May 2007 and
forces remain in favor
national elections for October 2007.
Higher
commodity
prices
and
the
recent
lira
AKP
holds
an
absolute
majority
Mr. Erdogan’s
in
the
current
devaluation are likely to lead to higher year-on-year
parliament and can, therefore, easily nominate and
CPI rates over the next 6-9 months, making the
install its own presidential candidate, a prospect that
2007 inflation target of 4% +/-1% extremely difficult
creates substantial uneasiness and discomfort among
to attain. However, structural disinflation is likely to
the opposition. If early elections were held today, the
re-assert
extraordinary
AKP would likely risk to lose this majority and thus
inflationary effects fade. Important dis-inflationary
miss the opportunity to install its preferred candidate.
impulses in the period ahead are likely to be
Current polls indicate a small loss of support for AKP
provided by a still negative output gap, continued
relative to 2002, plus a high probability that three or
strong
more of the smaller political parties would manage to
itself
once
productivity
the
gains
recent
and
cooling
domestic
demand growth as a result of tighter monetary (as
pass
well as fiscal) conditions.
Parliament. All this has given a strong incentive to the
the
10%
threshold
required
for
entering
opposition to keep raising the issue of early elections
Fiscal policy to tighten further
and for the government to try to keep the issue away
Fiscal policy has been restrictive all along with
from public discussion.
primary surpluses in excess of 6.5% of GDP helping
to reduce the public debt from around 100% of GDP
The second major source of noise comes from the
in 2001 to ca 70% of GDP at year-end 2005. The
ongoing EU negotiations. The pro-EU mood (78% in
present rise in inflation automatically implies an even
favor) seems to have shifted substantially over the last
more
the
year, bringing that percentage down to close to 60%.
expenditure and the revenue side. Public expenditure
The negotiations have created a feeling among the
will decline in real terms because public sector
public that the EU keeps shifting the “goalposts”. Up to
nominal wages were recently set for a two-year
a certain extent, the latter may reflect a lack of full
period based on the CBRT’s target rates of inflation,
understanding among the public of the seriousness of
which were 5% for end-2006 and 4% for end-2007,
the
well below current market expectations for future
consensus building within the European Union and,
inflation. Moreover, in the ministerial meeting of
particularly, the diversity of views among leading
Friday, June 23, a decision was made to keep public
European politicians and technocrats about Turkey’s
expenditure at the previously set targets. While this
accession prospects and sociopolitical behavior. In
decision
pre-election
such an environment, something negative is bound to
pressures next year, it nevertheless makes current
hit the Turkish press and media almost daily, adding to
discretionary expenditure policy more restrictive.
the political noise and uncertainty.
restrictive
may
policy
not
stance
withstand
both
the
on
pre-conditions
for
accession,
the
culture
of
Budget revenues are also expected to increase, at
least in the short-run, as rising inflation will likely
Structural reforms on a fast track
result in higher than previously expected direct and
In line with the conditionalities of the recent IMF
indirect tax revenues.
programs, Turkey has moved very fast with the
Of course, over a longer
period of a year or so, budget revenues will also be
implementation of structural reforms.
affected negatively by a slowdown in economic
system is now well capitalized, with regulatory capital
activity, so the net result on the revenue side is likely
at
to be neutral.
Problematic bank loans are now at just 5% of total
24.2%
of
risk-weighted
assets
Its banking
at
end-2005.
loans, down from 40% in early 2002. Domestic banks’
Trip Notes: Turkey, June 27, 2017, Page 4 of 6
Economic Research
balance sheets are well hedged against foreign
depreciation of a similar magnitude in 1994 was also
exchange risks and their interest rate duration gaps
accompanied by a 5% slump in GDP growth. On a
are low. State-owned companies are being privatized
more positive note, the weakened currency helped
at a very fast pace. According the Privatization
eventually improve the country’s external position with
Administration, $20bn of privatization funds were
the current account balance switching from a deficit of
secured in 2005 alone, while year-to-date receipts
ca 5% of GDP to a surplus of 2.7% in 2001 and from -
have already surpassed a TRY 8bn initial target for
4% of GDP to a surplus of 3% of GDP in 1994. With
privatization revenues in 2006. More privatizations
most forecasters previously predicting the economy to
are in the pipeline: Three electricity distribution
continue
companies in the second half of 2006 and the
average GDP growth in excess of 7% over the past
remaining seventeen in 2007. Halkbank, the 6th
three
largest bank in Turkey is currently up for sale. Parts
considerable pain on the economy and derail Turkey’s
of the state tobacco company, Tekel, are also in line
recent stabilization efforts. It could also hammer
for privatization, 61% of Petchem, as well as three
investor psychology further, coming as an acute
seaports.
the
reminder
privatization agency told us “The aim is economic
behavior.
As
a
high
ranking
official
at
performing
years,
of
a
strongly
major
Turkey’s
in
2006,
recession
past
following
could
boost-burst
inflict
growth
efficiency, not just the extraction of funds for the
purpose of reducing the national debt”. Meanwhile
Slowdown but not recession ahead
the reform of the social security system was recently
As things stand at this point, and assuming no further
passed into law and is about to go through the last
significant deterioration in global investor sentiment
Presidential hurdles before becoming effective. The
towards risky assets, we believe that a protracted
new law, among other things, aims to rationalize the
economic recession in Turkey is unlikely. This view was
retirement age, which previously gave an incentive
endorsed by the CBRT, as well as our private sector
for people to retire early and then seek employment
contacts. The central bank now expects real GDP
for another 10 to 20 years, often in the underground
growth of ca 4.5% this year and 4.0% in 2007 but we
economy, thus depriving the system of vital funding.
believe that risks to the 2006 forecast are skewed to
The IMF appears to be happy with the pace of
the upside given strong growth in H1. Real gross
reforms so far, and has suggested to the government
domestic product expanded by a much stronger than
that, from now on, it should pay particular attention
expected rate of 6.4% in Q1 2006 despite weak
to the efficiency of the tax system and the serious
exports and adverse weather conditions and the
problem of bureaucratic red tape. One official also
economy has likely expanded at an even stronger rate
pointed to us the need for a major overhaul of the
in the second quarter on buoyant domestic demand.
judicial system to make it more efficient and to
improve the pace of resolution of cases.
Economy now in a better position to cope with
external shocks than during past turmoils
Recent lira crisis likely to inflict pain in the
Several recent developments make us confident that
economy
this time around the Turkish economy is in a better
The recent mass exodus of foreign capital and the
position to absorb the repercussions of a currency
consequent sharp increase in domestic interest rates
crisis than during past periods of major market
to stabilize the lira and fight rising inflation will
turmoil. First, the size of the recent lira correction (~
almost certainly lead to a slowdown in domestic
18% vs. the US dollar May-to-date) is considerably
demand, as has also occurred in past major episodes
smaller than in other past major adjustments, while
of currency crises. In 2001, when Turkey was forced
the most recent monetary policy tightening measures
to devalue by ca 45%, the massive depreciation of
appeared to have already stabilized the FX market and
the lira and the ensuing sharp rise in interest rates
reassured investors about the CBRT’s inflation-fighting
pushed the economy into recession, with real GDP
credentials. Second, the strong investment drive of
contracting by around 7.5% during that year. A lira
recent years has helped to expand the productive
Trip Notes: Turkey, June 27, 2017, Page 5 of 6
Economic Research
capacity of the economy, making it more resilient to
Currently, around half of total private sector debt is
external shocks. Third, the country’s fiscal position
foreign currency-denominated with the bulk of the
has improved considerably in recent years with the
problem concentrated in the corporate sector, which
government currently running a primary surplus in
continues to run a sizeable short-FX position. Note also
excess of 6.5% of GDP and an overall deficit of just
that most of the existing loans to the private sector are
1% of GDP. Fourth, the public sector is in a much
of variable rate, with the exception of consumer and
better
housing loans. The latter are fixed by law, have
shape
to
cope
with
the
recent
market
adjustments than in previous episodes preceding
relatively
currency
years),
and
still
represent a very small percentage of the total private
sector loan exposure. All in all, the recent lira
lengthening the average maturity of its debt over the
depreciation may cause some servicing problems to
last five years (total public debt-to-GDP ratio: 70%
domestic corporates, with negative repercussions for
now vs. ca 100% in early 2001; foreign debt as % of
banks but the impact is not likely to be as severe as
total debt: less than 30% vs. ca 40% in 2001).
during the 2001 crisis,
its
debt
implemented
(3-5
significant
in
having
maturities
considerably
reductions
crises,
low
ratios
and
given
the current
much
healthier state of the domestic banking system and the
Finally, the current IMF stand-by agreement provides
stronger state of the real economy.
adequate external financing to the government,
lessening the need to resort to external financing to
cover its borrowing needs. In contrast to the public
sector, the private sector currently appears more
susceptible to default risks as a result of higher
domestic rates and the recent lira depreciation and in
view of the significant increase in its short-term
foreign currency borrowing in recent years.
Research Team:
Platon Monokroussos, Head of Market
Research
Paraskevi Petropoulou,
Roubiniana Drakopoulou
Sales Team:
Fokion Karavias, Treasurer
Dimos Arhodidis, Danai Manoussaki
Kostas Karanastasis, Nikos Laios, Alexandra Vogiatzi, Alexandros Trourinakis, Makis
Savvidis.
EFG Eurobank Ergasias, 8 Othonos Str. GR 105 57, Athens, Tel:(30210) 3718 906, 3718 999, Fax:(30210) 3337 190, Reuters Page: EMBA
Internet Address: http://www.eurobank.gr
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Trip Notes: Turkey, June 27, 2017, Page 6 of 6