BBVA Research – Turkey Economic Outlook 4Q18 / 1

Turkey Economic
Outlook
4Q18

October 2018
Key messages

The global expansion remains at a steady pace, but more

moderated and less synchronized. Risks now cumulate on
protectionism, normalization of the Fed, tensions in emerging
countries, greater uncertainty in Europe

Turkey’s firm policy response to the financial shocks helped to restore

confidence in financial assets. The economic adjustment is now underway

Recent financial shocks and necessary tightening policies to restore confidence will result in
a faster rebalancing of the economy. We expect GDP growth to decelerate to 3% in 2018
and 1% in 2019

The sharp depreciation of the exchange rate during the summer triggered excessive
inflation pressures. We estimate the year-end inflation to remain high and start to moderate
from 2Q19 onwards

Both monetary and fiscal policies included in the New Economic Program (NEP) are now
more adequate to restore confidence and rebalance the economy

The current account deficit will correct much faster than initially expected
 BBVA Research – Turkey Economic Outlook 4Q18 _/ 3

Contents

01 Global Economy: Still Global Positive Outlook,

although risks are intensifying

02 Turkey: Right policy steps restore confidence in

Turkish financial assets. The rebalancing is underway

03 Turkey: Baseline Scenario

 BBVA Research – Turkey Economic Outlook 4Q18 _/ 4

01
Global Economy:
Still Global Positive Outlook,
although risks are intensifying
 BBVA Research – Turkey Economic Outlook 4Q18 / 5

Positive global inertia continues, although risks

are intensifying

The global expansion remains at a
steady pace, but more moderated
and less synchronized
The strength of the US economy
contrasts with moderation in China
and Europe
Divergent monetary policy between
the US and Europe from 2019
The Fed ends the cycle of
increases, while the ECB initiates
the increases and prepares the
withdrawal of liquidity
Greater financial tensions in
emerging markets
With evident differentiation between
countries, the most financially
vulnerable face sudden adjustments
of their economies

Intensification of the commercial war Global risks intensify

between the US and China
Impact still limited, but could increase
if new measures are taken. At the
moment, the conflict between the US
and other areas decrease
Protectionism and the normalization of the
Fed are joined by the increase in tensions
in emerging countries, and the greater
uncertainty in Europe
 BBVA Research – Turkey Economic Outlook 4Q18 / 6

Moderation of global growth

World GDP growth

(Forecasts based on BBVA-GAIN, % QoQ)
Slight moderation of global growth
1.2 towards rates slightly below 1%
QoQ in 2H18

1 Activity remains strong, but have

lost momentum, since protectionism
growth weighs on confidence, trade
and investment
0.8

Beyond volatility, world trade

has improved and stabilized after
0.6 the slowdown at the beginning
of the year

0.4
Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

CI 20% CI 40% CI 60%

Point Estimates Period average

Source: BBVA Research

 BBVA Research – Turkey Economic Outlook 4Q18 / 7

Monetary policy continues to normalize and will

diverge between the Fed and the ECB from 2019

Balance Interest rates

3.25
3
0.25
Continues the reduction of More rate hikes in 2019,
1.5 2.25
the balance (450mM dollars but the cycle ends
in 2018) (natural interest rate) 0.75

2016 2017 2018 2019 2020

0.75%

End of QE (December 2018) Anchored expectations of

low rates for a prolonged
Total reinvestment at least
period. No increases are 0.25%
until December 2020
expected until 0% 0% 0%

Repayment of TLTROs from September 2019 2016 2017 2018 2019 2020
June 2020
Forecast (eop) Refi rate (eop)

Source: BBVA Research

 BBVA Research – Turkey Economic Outlook 4Q18 / 8

Financial tensions rebound in emerging markets,

but less synchronized than in previous episodes

BBVA index of financial stress in emerging markets The emerging markets are being
(Standardized index) subjected to greater stress which
results in a depreciation of their
6
Argentina currencies and an increase in
their risk premium
5

There is heterogeneity: tensions have

4
concentrated especially on the most
vulnerable economies. We are
3 Turkey
not facing a systemic crisis
2
The adoption of economic policy
measures (monetary and fiscal)
1 Brazil are allowing some stabilization
0

-1

-2
Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Source: BBVA Research

 BBVA Research – Turkey Economic Outlook 4Q18 / 9

The outflows of emerging economies are still persistent,

but we are far from a typical episode of sudden-stop

Portfolio flows to emerging economies Accumulation of flows in the last 5 quarters

(% of total assets, monthly data) (% of accumulated since January 2017)

20%
Tapper US Current
tantrum China elections episode 16.7%
5%

4% 15% 14.6%

3%

2%
10%
1%

0%

-1% 5%

-2%

-3% 0%
-4%
-2.1%
-5%
Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18
Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

-5%
From January 2017 From April to Net since
to March 2018 September 2018 January 2017

Source: BBVA Research

 BBVA Research – Turkey Economic Outlook 4Q18 / 10

Trade loses momentum after the strength of 2017,

but will continue to support global growth

Global export of goods

(% QoQ, constant prices)
So far, the trade war has had
8%
a limited impact. Export flows
may be ahead of the possibility
7%
of a worse scenario
6%
Increases the volatility of trade
5% flows as a result of uncertainty…

4% ... due to commercial tensions,

the political situation and
3% the depreciation of the currencies
of emerging economies
2%

1%

0%
1Q16
1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

3Q16

1Q17

3Q17

1Q18

3Q18

BBVA-Goods Exports CPB-Goods Exports

Source: BBVA Research based on CPB World Trade Monitor

 BBVA Research – Turkey Economic Outlook 4Q18 / 11

USA and China have announced higher tariffs,

but with an estimated effect on limited global GDP

Effect on GDP growth of US tariff increases The impact on growth of

and the response of other countries the measures approved so far
(2018-20, pp) through the commercial channel
could be limited, but the indirect
0
effects could be considerable,
especially for China and
-0.2
emerging economies
-0.4
The signature of the USMCA
reduces the uncertainty with Mexico
-0.6
and Canada
-0.8 In Europe, the increase of tariffs
on cars is currently frozen, although
-1 it will be negotiated again
from November
-1.2
World China US Europe

Approved trust / financial channel

Approved commercial channel

Tariffs 25% All imports from China

Approved tariff increase: USA (25% steel, 10% aluminum, 25% Chinese imports worth 50,000 million dollars and 10% worth 200,000 million);
China (25% to US imports worth 50,000 million dollars and 10% to 60,000 million).
Source: BBVA Research
 BBVA Research – Turkey Economic Outlook 4Q18 / 12

The risk of an increase in US tariffs to the European automotive

sector continues, with a limited and different effect per country

Effect on GDP growth of US tariff increases to

the European automotive sector
(2018-20, pp) An increase of the tariff to
the European automotive sector up
0.00
to 20% (current 2.5%) could subtract
-0.02 between one and two tenths
-0.04 of the growth of Germany and
the northern European countries
-0.06

-0.08
Greater impact in Korea and Japan,
-0.10 but also in the US
-0.12
There is uncertainty about the effect
-0.14
of the hardening the amount of
-0.16 inputs produced in North America
-0.18 (75%) in the USMCA by European
Slovenia
Sweden

Portugal
Czech Republic

Spain
Hungary

Italy

France
Austria

Romania
Germany

Slovakia

Netherlands
Poland

Greece
Ireland

car companies, but the impact

should be smaller

Final demand Inputs

Simulation: increase of tariffs to 20% to the European automotive sector, Japan
and Korea in addition to the measures approved so far.
Source: BBVA Research
 BBVA Research – Turkey Economic Outlook 4Q18 / 13

The downward revision of growth in emerging economies

explains the expected moderation of global growth in 2019

US

2018 2019
Eurozone
2.8 2.8
2018 2019
China
2.0 1.7
2018 2019

Mexico 6.5 6.0

2018 2019

1.9 2.0

LATAM
Turkey World

2018 2019
2018 2019 2018 2019

0.9 1.8 Up
3.7 3.6
3.0 1.0
Unchanged

Source: BBVA Research Down

 BBVA Research – Turkey Economic Outlook 4Q18 / 14

Global risks: Protectionism and the exit of the Fed remain

the most relevant, but political uncertainty in Europe increases

CHINA
Protectionism: upward (new tariffs and reprisals) with an
impact on domestic policies (financial stability, reforms)
High indebtedness: more content in the short-term, but higher
in the medium term (private debt continues to rise)

USA
Fed exit: rises of higher than expected rates
EE.UU. CHINA • Differential impact on emerging markets
Protectionism: upward and concentrated in China
EZ Economic recession: low probability, but rising
Probability in the short term

Signs of financial instability in some assets

EUROZONE
Political uncertainty: upwards, led by tensions in Italy and Brexit
Protectionism: more restrained with focus on the automotive sector
ECB’s exit: downward

Severity
Tensions in emerging economies can amplify
the impacts of the aforementioned global risks
(effects of "second round" on global growth)
Source: BBVA Research
 BBVA Research – Turkey Economic Outlook 4Q18 _/ 15

02
Turkey: Right policy steps restore
confidence in Turkish financial assets.
The rebalancing is underway

Challenging times ahead to be tackled
with policy determination
Turkish financial assets stabilize after
firm economic policies
The change in economic policy
direction and the ease of geopolitical
tension with the US triggered the
stabilization and recovery of Turkish
financial assets
Monetary policy needs to be tighter
Monetary policy should be
maintained tight to fight inflation and
re-anchor inflation expectations.
Monetary policy credibility will
continue to be key for the coming
months
BBVA Research – Turkey Economic Outlook 4Q18 / 16
The rebalancing of the economy is
already underway
A fast domestic demand adjustment is
being compensated with the reversal
of external demand. The current
account deficit will correct rapidly
New Economic Program (NEP)
suggests an aggresive fiscal
consolidation plan in the short term
The Government has presented a
more realistic plan including a sizeable
fiscal adjustment in 2019. The policy
mix is now more adequate to fight
inflation
Inflation will remain the key concern
in the short term and should reduce
gradually next year
Inflation will stay high in the short
term as the exchange rate pass-thru
is still well alive. A gradual
disinflation path will start in 2019
Foreign affairs with the US
improved, eliminating some
uncertainty in the Market
The ease of tensions with the US
after the Reverend Brunson release
might facilitate agreements on other
issues. This could help to eliminate
uncertainty in the market
 BBVA Research – Turkey Economic Outlook 4Q18 / 17

The change in policy direction and easing tensions with the US

supported the stabilization and improvement in Turkish markets

Turkish Lira vs USD EM Currencies volatility

(Level) (% daily change moving average 1M moving Avg.
One Standard deviation range)
2.0%
6.9

6.5 1.5%
Doubt
s on
CBRT
6.1 1.0%
Failed
Doubts on FED
Coup
CBRT stance
tightens
5.7 0.5%

5.3
0.0%

4.9
-0.5%

4.5
-1.0%

4.1 EM Amplification TK differentiation

-1.5%

Feb-18
Oct-16

Oct-17

Oct-18
Feb-17
Apr-17

Apr-18
Aug-16

Dec-16

Aug-17

Dec-17

Aug-18
Jun-16

Jun-17

Jun-18
3.7
Mar-18

Mar-18

May-18

May-18
Apr-18

Jul-18

Jul-18
Feb-18

Oct-18
Aug-18

Sep-18

Sep-18
Jun-18

TURKEY EM Average

(*) A positive value indicates a depreciation of the local currency.

Source: BBVA Research Source: Bloomberg
 BBVA Research – Turkey Economic Outlook 4Q18 / 18

Economic activity rebalancing is already happening and will

accelerate in 4Q. This is in line with our growth forecast of 3% for
2018

Turkey: Activity Indicators Turkey: GDP Monthly Indicator

(%YoY, mov. Avg. 3m) (%YoY mov. Avg. 3m)

2018 14%
M ean Feb Mar Apr May Jun Jul Aug Sep
Industrial Production 7.9 11.2 9.9 7.3 6.4 5.0 5.9 -0.3
13%
Non-metal Mineral Production 7.9 24.6 16.7 10.3 6.0 3.1 2.8 -4.8
Electricity Production 5.0 3.4 3.0 2.4 1.9 0.9 0.9 -0.4 0.2 11%
Auto Sales 7.0 -1.8 2.2 0.4 -4.1 -13.1 -24.0 -36.7 -51.2

Tourist Arriv als 5.5 33.4 34.9 31.2 29.4 28.3 21.0 17.7 14.0
10%
Number of Employ ed 3.9 5.2 4.4 3.7 3.0 2.5 2.1
Number of Unemploy ed 1.6 -14.5 -13.5 -10.9 -7.1 -2.3 0.6 8%
Auto Imports 9.3 -5.7 -1.0 -3.2 -7.4 -21.2 -35.3 -50.9 -59.3
Auto Exports 7.4 -4.7 -3.1 -1.5 -6.1 -9.8 -19.1 -29.1 -15.7 7%
Retail Sales 6.6 8.9 8.9 7.7 6.7 5.8 4.6
5%
Manuf acturing PMI 51.5 52.7 49.6 51.7 49.5 48.4 49.6 46.4 42.7
###
Total Loans growth 13-week 19.3 13.2 13.1 15.9 17.0 14.5 10.2 1.7 -2.2 4%
Real Sector Conf idence 106.7 110.8 111.9 111.2 109.9 104.6 102.7 96.4 89.6

MICA Forecast 2.2% 2.0% 2%

GDP Y oY 5.2%
1%
Co ntractio n Slo w-do wn Gro wth Boom
-1% BBVA-GB GDP Growth (Monthly)
GDP Growth August: 2.2% (90% of inf.)
-3%
GDP growth nowcast September: 2.0% (40% of inf.)
-4%

Mar-15

Mar-16

Mar-17

Mar-18
Jun-17
Sep-14
Dec-14

Jun-15
Sep-15
Dec-15

Jun-16
Sep-16
Dec-16

Sep-17
Dec-17

Jun-18
Sep-18
Source: CBRT, TURKSTAT, BBVA-Research Turkey
 BBVA Research – Turkey Economic Outlook 4Q18 / 19

A significant rebalancing of activity: A sharp adjustment in domestic

demand with a positive reversal of external demand

Turkey: Private Consumption Turkey: Total Investment Turkey: Net Exports

(%YoY, mov. Avg. 3m) (%YoY, mov. Avg. 3m) (% Contribution to GDP Growth)

14% Aug: 1.9% (100% of inf.) 20% Aug: 0.8% (100% of inf.) July: 2.3%

Hundreds
Hundreds

Hundreds
Sep: -2.0% (33% of inf.) Sep: -4.7% (50% of inf.) August: 3.6%
4%
12%
16%

10%
12% 2%
8%

6% 8%
0%

4% 4%
-2%
2%
0%
0%
-4%
BBVA-GB Cons Growth (Monthly) BBVA-GB Inv. Growth (Monthly) BBVA-GB Net Exp Contribution (Monthly)
-4%
-2% Cons. Growth Inv. Growth Net Exp. Contribution

Cons. Growth nowcast Inv. Growth Nowcast Net Exp. Contribution Nowcast
-4% -8% -6%

Aug-14
Nov-14

Aug-15
Nov-15

Aug-16
Nov-16

Aug-17
Nov-17

Aug-18
Feb-15

Feb-16

Feb-17

Feb-18
May-15

May-16

May-17

May-18
Jun-15

Jun-16

Jun-17

Jun-18

Jun-15

Jun-16

Jun-17

Jun-18
Sep-14
Dec-14

Sep-15

Sep-16

Sep-18

Sep-14
Dec-14

Sep-15

Sep-17

Sep-18
Mar-15

Dec-15
Mar-16

Dec-16

Sep-17
Mar-17

Dec-17
Mar-18

Mar-15

Dec-15

Sep-16
Mar-16

Dec-16
Mar-17

Dec-17
Mar-18
Source: CBRT, TURKSTAT, BBVA-Research Turkey

The tightening of financial conditions and The decline in imports, undervalued exchange rate
the recent financial shocks weigh on domestic and robust tourism revenues are triggering
demand, particularly on private consumption and a sharp positive reversal of the external demand
investment
 BBVA Research – Turkey Economic Outlook 4Q18 / 20

Employment is not immune and in some sectors the adjustment is

sizeable… (i.e. those boosted by the Credit Guarantee Fund)

Turkey: Unemployment Rate Turkey: Employment growth by Sector

(SA, %) (3MA yoy)

12.5% 13%

12.0% 10%

11.5% 8%

11.0% 5%

10.5% 3%

10.0% 0%

9.5%
-3%
9.0%
-5%

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18
Jan-15

Jan-16

Jan-17

Jan-18
8.5%
Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Industry Construction Service

Source: TURKSTAT, BBVA-Research Turkey

The unemployment rate has started Employment creation so far remains resilient in
to rise and will respond with a lag to Industry and Services, while it is already being
the business cycle conditions negatively affected in Construction
 BBVA Research – Turkey Economic Outlook 4Q18 / 21

Inflation will remain high in the short term with

the “Anti-Inflation” program providing some transitory relief

Turkey: CPI and Core Inflation Turkey: Anti inflation Program

(YoY)
A “voluntary” campaign of minimum 10%
26%
reduction on prices until the end of the year
24%
22% There would be no increase in electricity
20% and natural gas prices until the end of 2018
18%
16% The Government will accelerate and target
14% 50% of value-added tax (VAT) returns by
12% the end of the year (0.9% of GDP)
10%
8% We expect these measures to have some
6%
transitory impact on inflation until the end
of the year
Apr-15

Apr-16

Apr-17

Apr-18
Dec-14

Dec-15

Dec-16

Dec-17

Dec-18
Aug-15

Aug-16

Aug-17

Aug-18

CPI Core
Source: CBRT, TURKSTAT, BBVA Research Turkey

Annual inflation climbed to 24.5% in A “voluntary” campaign of minimum 10% reduction

September on top of rapid exchange rate on prices until the end of the year could help temporarily
pass-thru after sharp currency depreciation, but may create additional inflationary pressures for 2019.
climbing cost-push factors and high food The sharp divergence in inflation expectations should
inflation despite favorable seasonality be the main concern for the CBRT
 BBVA Research – Turkey Economic Outlook 4Q18 / 22

The pass-thru coefficient is far from homogeneous in terms of

activity and duration. Exchange rate volatility matters…

Turkey: FX Pass-thru on CPI Items* Exchange rate and Pass-Thru coefficient*

(Avg 12 months)
40 21% 4.7

Transportation
20%
35 4.2
19%
Cumulative FX Pass-Through (%)

30
Energy 18% 3.7

Entertainment 17%
3.2
25
16%
Health
2.7
20 15%
Communication
Furniture 14% 2.2
15
13%
Clothing 1.7
10 Housing 12%
Hotel
11% 1.2
Others

Mar-16
Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-17

Mar-18
Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18
5 Education Processed Food

0
0 5 10 15 Cumulative Pass Thru on Core Prices

Months taken to complete FX pass-thru USD/TRY (12m MA, rhs)

*Bubble size corresponds to the weight of each item pass-thru in CPI. *Core Prices refer to Core-D (CPI excluding unprocessed food , alcohol and tobacco)
Source: CBRT, TURKSTAT, BBVA Research Turkey Source: CBRT, TURKSTAT, BBVA Research Turkey
 BBVA Research – Turkey Economic Outlook 4Q18 / 23

The CBRT tightened its stance further to control inflation and

exchange rate pressures in September and stayed on hold in October.
It should be cautious as inflation expectations are far from anchored
CBRT Interest Rates Turkey: Inflation expectations
(Annual Level, %) (%)

27 18%
25 17%
24 16%
22
15%
21
19 14%
18 13%
16 12%
15 11%
13 10%
12
9%
10
9 8%
7 7%
Feb-16
Apr-16

Feb-17
Apr-17

Feb-18
Apr-18
Oct-16

Oct-17

Oct-18
Dec-15

Dec-16

Dec-17
Aug-16
Jun-16

Jun-17
Aug-17

Jun-18
Aug-18

6%

Jul-17
Jul-14

Jul-15

Jul-16

Jul-18
Apr-15

Apr-16

Apr-17

Apr-18
Oct-14

Oct-15

Oct-16

Oct-17

Oct-18
Jan-15

Jan-16

Jan-17

Jan-18
CBRT One-Week Repo CBRT LLW CBRT Funding Cost 12-month ahead 24-month ahead
Source: CBRT and BBVA Research Turkey

The recent stabilization in the currency and

The Central Bank (CBRT) surprised on the upside and voluntary discount campaigns could have provided
hiked its policy interest rate (one-week repo) buffer for the CBRT not to react in October.
by 625bps to 24.0% in September Monetary policy should remain alert as inflation
expectations are far from anchored
 BBVA Research – Turkey Economic Outlook 4Q18 / 24

The New Economic Program (NEP) macroeconomic

assumptions are more realistic

CG Budget Balance and NEP Forecasts Turkey: New Economic Program (NEP)
(% of GDP) PB Out of Assumptions
Sustainability Limit
(Real Gov Exp 2-3%
2.0% PB going near
before reversing back to 2017 2018 (e) 2019 (f) 2020 (f) 2021 (f)
Sustainable Limit
long run growth rates)
1.5% (Real Gov Exp 7%) GDP Growth
7.4 3.8 2.3 3.5 5.0
(%)
1.0%
PB Out of Unemployment Rate
10.9 11.3 12.1 11.9 10.8
0.5% Sustainability Limit (%)
(Real Gov Exp 4%-6%)
0.0% USD/TRY
3.6 4.9 5.6 6.0 6.2
(Year Avg)
-0.5% Sustainable PB
Inflation Rate
Lower adjustment in 11.9 20.8 15.9 9.8 6.0
-1.0% (eoy %)
Nominal Balance on High
Interest Payments
Central Gov. Budget
-1.5% -1.5 -1.9 -1.8 -1.9 -1.7
Balance (% GDP)
-2.0%
Central Gov. Primary
0.3 0.1 0.8 1.0 1.3
Balance (% GDP)
-2.5%
Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Current Account
-5.6 -4.7 -3.3 -2.7 -2.6
Balance (% GDP)

EU Defined Gov.
Budget Balance Primary Balance 28.3 31.1 28.5 28.2 27.2
Debt (% GDP)
Government New Forecasts BBVA Forecasts

Source: Ministry of Treasury and Finance, BBVA Research Turkey

 BBVA Research – Turkey Economic Outlook 4Q18 / 25

The NEP includes sizeable fiscal effort in 2019. It also envisages

a turning point to restore the fiscal prudence in the medium term

Turkey: Central Government Balances Turkey: Fiscal Impulse

(% of GDP) (Negative change in cyclically adjusted balance, % of GDP)

-0.5 1.5
Fiscal Easing
1
-1
0.5

0
-1.5
-0.5
Fiscal Tightening
-1
-2
-1.5

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
-2.5
2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

* The 2019 savings amount 60bnTL (1.3% of GDP) coming from:

- postponing investment (0.7% of GDP),
- reducing incentives (0.3% of GDP),
Central Government Budget Balance - cutting social security (0.2% of GDP)
Cyclically adjusted balance - reducing current expenditures (0.1%).
- higher interest expenditures
On the revenue side, the Government extra revenues (0.4% of GDP) in 2019
Source: Ministry of Treasury and Finance, BBVA Research Turkey

In cyclically adjusted terms, the Central The consolidation will be provided mainly
Government budget balance shows a significant by savings in expenditures (near 1.3% of
fiscal consolidation next year GDP)
 BBVA Research – Turkey Economic Outlook 4Q18 / 26

The current account deficit will adjust rapidly as domestic demand

contracts, and exports and tourism revenues remain robust

Current Account Balance Current Account Financing

(12M sum, % GDP) (12M sum, % GDP)

10%
-1%

-2% 8%
6.2%
-3% 6%
-2.7%
-4%
4%
-5%
-5.1%
2%
-6%

-7% 0%
-6.2%
-8%
-2%

Mar-15
Mar-11

Mar-12

Mar-13

Mar-14

Mar-16

Mar-17

Mar-18
Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
Jun-11
Sep-11

Jun-12
Sep-12

Jun-13
Sep-13

Jun-14
Sep-14

Jun-15
Sep-15

Jun-16
Sep-16

Jun-17
Sep-17

Jun-18
Aug-18
-9%

-10%
Net FDI Net Other Investment
Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19
Jun-15
Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-16

Jun-17

Jun-18

Jun-19

Net Portfolio Flows Reserves

Net Error and Omissions

Source: CBRT, Turkstat and BBVA Research Turkey

 BBVA Research – Turkey Economic Outlook 4Q18 / 27

The recent improvement in Turkey-US relations

should help to eliminate uncertainties

Turkey: Foreign Relationships Index

(Sentiment level index using GDELT)
Reverend Brunson was finally
0.7 released after the reduction of
the Penalty
Extreme

0.6
This is a critical step as it should open
0.5 a way to reduce uncertainties about
additional sanctions and restore the
relation with the US
High

0.4

There are still pending issues with the

0.3
US: S-400, Syrian position and
Neutral

potential sanctions against Iran

0.2
The collaboration of Turkish
0.1 authorities in Khashoggi’s killing could
Safe

help to restore foreign affairs links

0 with the West
Jul-18
Mar-17

May-17
Apr-17

Jul-17

Mar-18

May-18
Apr-18
Feb-17

Oct-17

Feb-18

Oct-18
Aug-17
Sep-17

Nov-17
Dec-17

Aug-18
Sep-18
Jan-17

Jun-17

Jan-18

Jun-18

USA EU

Source: GDELT and BBVA Research Turkey

 BBVA Research – Turkey Economic Outlook 4Q18 _/ 28

03
Turkey Baseline Scenario
 BBVA Research – Turkey Economic Outlook 4Q18 / 29

Recent financial shocks and necessary steps of monetary

and fiscal tightening to restore confidence will weigh on GDP

GDP Forecast
(YoY)
Economic activity has started
17% to rebalance and the adjustment will
16%
become more obvious in the second
15%
14% half of the year
13%
12% This will be the reaction to the recent
11% financial shocks and the necessary
10% steps of monetary and fiscal policy
9%
8%
tightening to restore confidence in the
7% Turkish financial markets
6%
5% We forecast that GDP growth will slow
4% down to 3% this year and will
3%
2%
decelerate further to 1% in 2019
1%
0%
-1%
-2%
-3%
Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Dec-14

Sep-15
Dec-15

Sep-16
Dec-16

Sep-17
Dec-17

Sep-18
Dec-18

Sep-19
Dec-19
Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Source: BBVA Research Turkey

 BBVA Research – Turkey Economic Outlook 4Q18 / 30

Inflation will stabilize in the short term at very high levels.

The disinflation path will start in 2Q19

Inflation Forecast
(3m YoY)
Inflation will temporarily stabilize
on the anti-inflation plan measures to
34% be effective until December
32%
Inflation will increase transitorily at
30%
28%
the beginning of next year
26%
on base effects and likely utility price
24%
hikes
22%
The effects of monetary policy with
20%
wider negative output gap will become
18%
evident from 2Q19 onwards
16%
14% It is important to maintain a tight
12% policy mix to curb inflation
10% expectations as soon as possible
8%
6%
Feb-19
Feb-17
Apr-17

Feb-18
Apr-18

Apr-19
Oct-17

Oct-18

Oct-19
Dec-16

Dec-17

Dec-18

Dec-19
Jun-17
Aug-17

Jun-18
Aug-18

Jun-19
Aug-19

We expect the exchange rate to remain at current levels

at the end of this year. Although the lira remains
undervalued, continuing high inflation and an
Source: BBVA Research Turkey unsupportive global environment will limit the correction
 BBVA Research – Turkey Economic Outlook 4Q18 / 31

Monetary policy should remain “tight” until inflation expectations

are curbed. We maintain a prudent forecast for exchange rate

Monetary Policy Forecasts Exchange Rate Forecasts

% CBRT Funding Cost USDTRY Level

30% 9
28% 8.6
8.2
26% 7.8
24% 7.4
22% 7
6.6
20% 6.2
18% 5.8
16% 5.4
5
14% 4.6
12% 4.2
10% 3.8
3.4
8% 3
6% 2.6

Aug-16

Aug-17

Aug-18

Aug-19
Apr-16

Apr-17

Apr-18

Apr-19
Dec-15

Dec-16

Dec-17

Dec-18

Dec-19
Aug-16

Aug-17

Aug-18

Aug-19
Apr-16

Apr-17

Apr-18

Apr-19
Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Source: BBVA Research Turkey

Monetary policy should remain tight until inflation The incoming economic adjustment, a non
expectations will be under control. There are some supportive global environment and a new
risks on the upside as there is some uncertainty on the political cycle lead us to maintain a prudent
exchange rate pass-thru to final prices exchange rate forecast
 BBVA Research – Turkey Economic Outlook 4Q18 / 32

Turkey Baseline Scenario

2017 2018 (e) 2019 (f) 2020 (f)

GDP (%) 7.4 3.0 1.0 2.5

Private consumption (%) 6.1 3.5 0.4 1.9

Public consumption (%) 5.0 3.5 3.5 3.0

Investment in fixed capital (%) 7.8 -2.7 -6.6 2.4

Exports (%) 11.9 4.7 6.0 6.0

Imports (%) 10.3 -0.8 -3.2 5.0

Unemployment rate (average) 10.9 11.3 13.5 12.8

Inflation (end of period, YoY %) 11.9 23.5 17.0 12.0

CBRT funding rate (end of period, YoY %) 12.75 25.0 21.5 15.0

Exchange rate (USDTRY, end of period) 3.77 6.20 6.40 6.55

Current account balance (% of GDP) -5.5 -5.1 -2.7 -2.6

Central government budget balance (% of GDP) -1.5 -2.1 -2.2 -2.0

(f) Forecast. (e) Estimated.

Source: BBVA Research Turkey
 BBVA Research – Turkey Economic Outlook 4Q18 / 33

This report has been produced by the Turkey, China and Big Data Unit
Chief Economist for Turkey, China and Big Data Unit
Álvaro Ortiz
alvaro.ortiz@bbva.com
Seda Güler Mert Adem İleri Yiğit Engin Serkan Kocabas
sedagul@bbva.com ademil@bbva.com yigite@bbva.com serkankoc@bbva.com
+90 212 318 10 64 +90 212 318 10 63 +90 212 318 10 60 +90 212 318 10 57

Ali Batuhan Barlas Deniz Ergun Pelin Ayrancı

alibarl@bbva.com denizerg@bbva.com pelinayr@bbva.com
+90 212 318 10 67 +90 212 318 10 59 +90 212 318 10 58

With the collaboration of

Global Economic Situations
Miguel Jiménez
mjimenezg@bbva.com

BBVA Research
Jorge Sicilia Serrano

Macroeconomic Analysis Financial Systems and Regulation Spain and Portugal South America
Rafael Doménech Santiago Fernández de Lis Miguel Cardoso Juan Manuel Ruiz
r.domenech@bbva.com sfernandezdelis@bbva.com miguel.cardoso@bbva.com juan.ruiz@bbva.com
Digital Economy Digital Regulation and Trends United States Argentina
Alejandro Neut Álvaro Martín Nathaniel Karp Gloria Sorensen
robertoalejandro.neut@bbva.com alvaro.martin@bbva.com Nathaniel.karp@bbva.com gsorensen@bbva.com
Global Macroeconomic Scenarios Regulation Mexico Colombia
Miguel Jiménez Ana Rubio Carlos Serrano Juana Téllez
mjimenezg@bbva.com arubiog@bbva.com carlos.serranoh@bbva.com juana.tellez@bbva.com
Global Financial Markets Financial Systems Turkey, China and Big Data Peru
Sonsoles Castillo Olga Cerqueira Álvaro Ortiz Francisco Grippa
s.castillo@bbva.com olga.gouveia@bbva.com alvaro.ortiz@bbva.com fgrippa@bbva.com
Long-Term Global Modelling and Analysis Turkey Venezuela
Julián Cubero Álvaro Ortiz Julio Pineda
juan.cubero@bbva.com alvaro.ortiz@bbva.com juliocesar.pineda@bbva.com
Innovation and Processes Asia
Oscar de las Peñas Le Xia
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 BBVA Research – Turkey Economic Outlook 4Q18 / 34

Turkey Economic
Outlook
4Q18

October 2018