20 Jul 2017
Emerging Europe Emerging Markets Research
Turkey Trip Notes: local sentiment has recovered due to strong growth and stable lira
On July 18-19, we visited Ankara and Istanbul and met with government and CBRT officials, independent political and economic analysts, local market participants and representatives from the business community. The meetıngs confırmed our constructive view of the Turkish economy especially over the short-term. Thanks to stronger growth prospects and lower political noise, local sentiment has improved significantly over the last few months. Although concerns over the long term political and economic prospects remain and although there is no clear road map for the much-needed structural reforms, local investors are more positive for the short run. The risk of early elections has diminished and the risk of market negative surprises has dropped. Below are some of the key findings from the trip.
Political noise has subsided since the April referendum on constitutional amendments. Early elections remain as the main risk but there was nearly a total consensus that the elections would take place in November 2019, as scheduled. According to the political analysts and politicians, given the low support (51.5%) to the constitutional amendment package, it would be quite risky for President Erdogan to push for early elections as Erdogan would need 50% to get elected in the presidential election. The risk of early elections would increase only in the (unlikely) case of a sustained increase in the popular support for the AKP. The CHP�s so-called Justice March is regarded as a successful campaign but this is unlikely to be a big game changer as the opposition still remains fragmented.
Thanks to the efficacy of the government�s stimulus packages and to robust external demand, growth has been stronger than expected. The credit guarantee scheme is coming to an end and will most likely not be extended. Similarly, the tax cuts on consumer durables will expire in September. So, growth will likely lose momentum in the second half of the year. However, given the strong performance in 1H, full year growth ıs expected to be in the 4-5% range or even higher. There are serious question marks over the sustainability of this performance. Encouragingly, the need for structural reforms is acknowledged both by the government and the Presidential Palace. However, efforts towards this end could be observed only after the 2019 elections.
High inflation remains a problem while the CBRT is on a credibility build-up phase and is unlikely to start easing any time soon. Although supply side factors such as FX pass through and high food prıces stand out as the key factors behind the elevated inflation in recent months, such high inflation has led to worsening in inflation expectations and has led to stronger inflation inertia. Local investors expect inflation to fall modestly to 9.5% by the end of this year and to 7-8% range next year.
On a positive tone, the CBRT sounds quite cautious. According to the Bank, excluding the impact of the methodological changes (which affect categories with strong seasonality like clothing), the weakening in price pressures has been quite modest. Hence, caution is warranted and the CBRT sounds determined to keep the monetary policy tight to restore the credibility of the Bank and the inflation target. As the credit guarantee scheme comes to an end and the loan growth subsides, monetary policy will get tighter and this should help the disinflation process. Local investors agree with our call that the CBRT will refrain from easing the liquidity at least until December.
The fiscal stimulus packages introduced by the government and increased government spending has led to a sharp widening in fiscal deficit in recent months. However, the government sounds determined to keep the deficit under control. Authorities hope that with the expiry of the stimulus packages the expected pick up in tax collection (that should follow strong economic activity) will lead to a recovery in fiscal performance in 2H. Government authorities vow to keep the central government deficit in the 1.9-2.1% of GDP range by the end of the year. Given the favorable debt dynamics, such a deficit is surely not alarming. However, it still causes some flow problems. The rise in domestic roll over ratio of the Treasury pushes up the interest rates.
Efforts towards extending export markets (to Asia and Africa) and especially strong EU demand have led to stronger exports. The recovery in tourism after the lifting of the Russian ban on travel to Turkey has also helped. Hence, despite stronger domestic demand, the current account deficit is likely to stabilize at 4-4.5% of GDP. The real focus is on the short FX position of the corporate sector. Although the short posıtıon was as wide as USD196 billion as of March, this figure does not capture the natural and financial hedges. According to local experts, the real figure is likely to be half of this. The CBRT is doing a study to see the real scale of the problem and the government could take some measures to restraın the risk afterwards. However, it will take 1-2 years for this study to be completed and hence an imminent government decision on FX loans looks unlikely. Corporates have become more risk averse after last year�s lira weakness and they are already in the process of reducing their FX positions.
The banking system is in good shape especially because the credit guarantee scheme has led to an improvement in the asset quality. Stronger economic activity has also helped. However, the guarantee scheme also led to a tightening in lira liquidity as the TRY loan/deposit ratio increased to 140%. This, in turn, led to higher deposit rates and hence lower net interest margins. Banks hope that with the end of the scheme, deposit rates should come down. In fact, deposit rates have already dropped by 50-80bp since end-June.
Yarkin Cebeci
JPMorgan Chase Bank N.A, London Branch
Originally Posted by elma
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