Emerging

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EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
Turkey  
Large-scale manoeuvres  
With the approach of municipal elections on 31 March, which will be another key test for the government, major manoeuvres have  
been launched on both the macroeconomic and geopolitical fronts to stimulate activity and advance a foreign policy agenda  
(
notably in Syria) at the expense of diplomatic tensions with the US. The financial strain has soothed since the currency crisis in  
August 2018, but cyclical conditions have deteriorated. We seem to be heading for a recession scenario lasting several quarters,  
with the financial weakness of many non-financial corporates being a main concern. The rapid narrowing in the current account  
deficit and the disinflationary process initiated in recent months attest to the scope of the macroeconomic currently underway.  
A tumultuous relationship with the United States  
1
- Forecasts  
The year 2018 was marked by the chaotic relations between Ankara  
and Washington: the US lawsuit against Halkbank, the Turkish  
state-owned bank, for circumventing the Iran embargo, the US  
refusal to extradite Fethullah Gülen, and the diplomatic crisis over  
Pasteur Brunson, which triggered US sanctions in August (he was  
finally liberated on 12 October).  
2017 2018e 2019e 2020e  
Real GDP growth (%)  
7.4  
2.9  
2.0  
3.3  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
Public debt / GDP (%)  
11.1  
-1.5  
16.3  
-2.0  
17.1  
-2.2  
11.4  
-2.2  
28.3  
-5.6  
31.1  
-3.6  
30.0  
-3.3  
29.2  
-3.7  
Current account balance / GDP (%)  
External debt / GDP (%)  
Historical allies as part of NATO, it is in the geopolitical interest of  
both countries to cooperate in the Syrian conflict. Yet there are still  
major divergences, not only on the Kurd question, but also on Iran  
53.3  
82.6  
57.4  
72.0  
55.6  
72.0  
56.6  
75.0  
Forex reserves (USD bn)  
(
one of Turkey’s main oil supplier) and Saudi Arabia (historical  
Forex reserves, in months of imports  
Exchange rate USDTRY (year end)  
4.0  
3.8  
3.5  
5.3  
3.4  
5.8  
3.2  
6.5  
partner of the US). For Turkey, the mid-December announcement  
that the US planned to withdraw from Syria was seen as a godsend,  
prompting it to announce a military intervention as part of its  
strategy of securing its southern border with the creation of a buffer  
zone and a sanctuary for accommodating millions of Syrian  
refugees. Reaffirmation that its ultimate goal is to eliminate the  
Kurdish forces in Syria once again strained relations with the US,  
leading Donald Trump to threat to “devastate the Turkish economy”  
before new negotiations were launched to find an agreement.  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Foreign portfolio investments and FX rate  
Net flows of foreign portfolio investment in local currency (USD bn, 3m)  
Nominal foreign exchange rate USDTRY (rhs)  
1
0
8
6
4
2
0
2
4
7
6
5
4
3
2
1
…which makes the financial stabilisation fragile  
The aggravation of macroeconomic imbalances, which was fed by  
pro-cyclical economic policies through the fall, and Turkey’s external  
financial vulnerability have reinforced the country’s exposure to  
geopolitical factors. Since August’s forex crisis, economic conditions  
have deteriorated markedly, including a cyclical downturn and  
soaring inflation (see below). Municipal elections at the end of  
March will serve as another test for the government, whose  
popularity has eroded since June’s legislative and presidential  
elections. On 15 January the Parliament voted to grant president  
Erdogan full powers to take all necessary measures in case the  
country’s financial stability was threatened.  
-
-
-6  
2013  
2014  
2015  
2016  
2017  
2018  
Source: CBRT, BNP Paribas  
yields have declined sharply since September to 18% in mid-  
January. The yield curve has inverted since the 3-month interbank  
rate has held close to the key policy rate (7-day repo) at 24% since  
September.  
Financial turmoil has eased since mid-September, following a  
massive interest rate hike by the Turkish central bank (CBRT) and  
Pasteur Brunson’s liberation. After a precipitous 42% decline  
against a euro-dollar basket between January and August, half of  
which occurred in the month of August alone, the Turkish lira (TRY)  
rebounded in September-October and ended the year 2018 down  
Net outflows of non-resident portfolio investment in local currency  
finally amounted to only USD 1.9 bn in 2018 (-USD 1 bn from the  
bond market and USD 0.9 bn from the equity market). Net flows  
became positive again between mid-September and the end of  
November (+USD 0.7 bn). Since December, however, non-resident  
investors have pulled out of the local bond market again  
2
7% (year-on-year and average annual rate). The 5-year CDS  
premium on sovereign bonds in foreign currencies dropped from  
80 bp in early September to 350 bp in mid-January. After soaring  
by 1400 bp between January and August to 27.3%, 2-year bond  
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EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
(
-USD 0.8 bn). They now hold only 15% of domestic public debt (vs.  
3- Real GDP growth  
more than 20% through 2014).  
q/q % change, wdsa  
y/y % change  
Recent portfolio movements are due in part to the Turkish  
Treasury’s strategy to limit calls on the market and to favour debt in  
foreign currencies. Given the sharp increase in the cost of financing  
in the local market, it is effectively soliciting the international markets  
more, with a Eurobond issue at a rate of 7.7% in January. In the first  
12  
8
4
11 months of 2018, central government external debt increased by  
0
TRY 5.7 bn (about USD 1 bn), whereas the annual programme calls  
for debt reduction of TRY 1.6 bn. By resorting less to the domestic  
market, however, domestic debt narrowed to TRY 40.6 bn in  
November, compared to TRY 62.7 bn initially programmed for the  
year.  
-
4
-8  
12  
16  
-
-
Since September, Turkish banks have managed to turnover about  
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
9
0% of their external financing in the form of syndicated loans, and  
Source: Turkstat  
the secondary market has picked up again. As the squeeze on  
liquidity has eased, the banks have been able to rebuild foreign  
currency deposits, notably via the Reserve Options Mechanism  
Macroeconomic imbalances are narrowing. Between January and  
November 2018, the current account deficit shrank to USD 26.2 bn,  
down USD 13.5 bn from the 2017 figure, thanks to the compression  
of imports (accentuated by falling oil prices) and the strong  
performance of export and tourism revenues. Inflation seems to  
have peaked in October at 25.2% y/y, and the CPI closed the year  
at 20.3%. Less subject to political pressures, the central bank is  
unlikely to loosen financing conditions until it has clear confirmation  
of disinflation.  
(
ROM) with the central bank (CBRT). Foreign deposits had declined  
by USD 26 bn between March and September. The current account  
has swung into a surplus since August and financial flows have  
rebounded (including massive unidentified currency inflows in 2018,  
which were reported as “errors and omissions”), both of which  
contributed somewhat to the rebuilding of gross foreign exchange  
reserves (+USD 7.2 bn between October and mid-January), which  
had declined by USD 40 bn since 2013. FX reserves cover about  
4
0% of the external debt maturing in 2019 (USD 173 bn for short-  
 Economic support, corporates weakened  
term debt and medium and long-term debt to be rolled over) while  
The increase in the public deficit was relatively mild in 2018, and the  
primary balance remained very slightly positive. The probable  
decline in fiscal revenues and non-recurring revenues, as well as  
the announced stimulus measures (26% increase in the minimum  
wage, expected wage increases for public-sector employees, and  
electricity bill rebates for low-income households) should strain  
public finances in 2019. Other measures could also prove to be an  
indirect or future liability for the state via public guarantees and  
contingent liabilities, like the loan guarantee fund that was very  
active in 2017, and new programmes to bolster real estate and  
consumer lending via the state-owned banks Ziraat and Halkbank.  
so-called “free” reserves (i.e. excluding ROM) cover only 15%.  
An abrupt macroeconomic adjustment  
A recession scenario lasting several quarters seems to be taking  
shape under the impact of the Turkish lira’s sharp depreciation,  
soaring inflation and interest rates, the contraction of bank lending  
and the dire financial straits of numerous companies, notably in the  
construction sector, which has been the main growth engine in  
recent years. Corporate and household confidence indexes have  
rebounded slightly since October but are holding at very low levels.  
The other monthly and leading indicators are still depressed for  
Q4 2018 and early 2019.  
Faced with a surge in requests for debt restructuring by non-  
financial companies (officially 846 Konkordato bankruptcy protection  
procedures were initiated in December 2018) in order to prevent  
bankruptcies, the banking regulator has asked the commercial  
banks to honour all of these requests.  
In Q3 2018, real GDP contracted 1.1% q/q using data adjusted for  
seasonal variations and the number of business days. Real GDP  
rose only 1.6% y/y, compared to 11.5% in the year-earlier period (a  
record high since Q3 2011) and 5.3% in Q2. Consumption rose  
1.1% y/y in Q3, after 6.4% in Q2. Investment was down 3.8%. Job  
creations stagnated and the seasonally-adjusted unemployment  
rate rose from 9.9% in January to 11.5% in October. Net foreign  
trade made a strongly positive contribution to GDP growth thanks to  
the dynamic pace of exports (+13.6% y/y in volume) and the drop  
off in imports (-16.7% y/y in volume). Value added in the  
construction sector plunged by 5.3% y/y, and industrial production  
was down by 6.5% y/y in November (down since August). Only  
services continued to progress (+4.5% y/y in Q3),  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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