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Turkey Desknote Summary: EM Strategy - 09 November 2017

Core Content

This desknote provides an analysis of Turkey's economic performance and outlook for the year 2017 and beyond, focusing on industrial production, GDP growth, inflation, and current account deficit. It is produced by Turk Ekonomi Bank A.S. and authored by H. Erkin Isik, CFA, as part of the Emerging Markets (EM) Strategy team.

Main Economic Indicators

• Industrial Production Index (unadjusted):

  • Posted a strong 13.4% y/y growth in September 2017.
  • 3Q growth reached 13.7% y/y.
  • The seasonally adjusted index increased by 1.9% q/q, similar to the 2.0% q/q growth in Q2.

• GDP Growth Forecast:

  • Revised 2017 GDP growth forecast up by 1 percentage point to 6.5%.
  • Expect a slower growth of 4.0% in 2018, assuming no further government stimulus.

• Inflation Forecast:

  • Revised end-year CPI inflation forecast to 11.2% y/y, up from 9.8%.
  • The increase is attributed to the recent depreciation of the Turkish Lira (TRY), which added about 1.5 percentage points to inflation.
  • CBRT also revised its forecast by 1.1 percentage points to 9.8% y/y.
  • End-2018 inflation forecast remains 8.8%, which is still significantly higher than the CBRT's 7.0% y/y forecast.

• Current Account Deficit:

  • Revised 2017 current account deficit forecast up by 0.6 percentage points to 5.2% of GDP.
  • Revised the forecast up by USD 5 billion to USD 44 billion.
  • The increase is attributed to both base effects (Q3 2016 contraction due to the failed coup attempt) and stronger economic growth.
  • Core deficit (excluding gold and energy) is also rising, with 27% y/y increase in imports of intermediate goods in the first 9 months of 2017.

Key Concerns

• Inflationary Pressures:

  • Strong demand and currency depreciation are contributing to rising inflation.
  • The inflation rate is expected to remain high, with the risk of persistently elevated levels.

• External Imbalances:

  • The current account deficit is widening, indicating increased external vulnerabilities.
  • The rise in deficit is not solely due to base effects, but also reflects stronger domestic growth.

• Growth Sustainability:

  • While growth momentum remains strong, signs of slowdown in PMI and financial turbulence suggest a potential reduction in growth rates in Q4 and beyond.
  • The slowdown in loan growth may further contribute to the deceleration in economic activity.

Summary of Key Factors

• Base Effect:

  • The Q3 2016 contraction due to the failed coup attempt is a key reason for the high annual growth in Q3 2017.

• Seasonal Adjustments:

  • The seasonally adjusted index indicates sustained growth, though slower momentum is expected in the coming quarters.

• PMI and Financial Conditions:

  • A slowdown in PMI signals potential reduction in quarterly growth.
  • Financial turbulence and slow loan growth are expected to pressure future growth.

EM Strategy Contacts

Legal Notice

• This document is non-independent research and is intended for marketing purposes.
• It is not investment research and may be subject to conflicts of interest due to the strategy team's interaction with sales and trading.
• No liability is accepted for any direct or consequential loss arising from reliance on the document.
• The document is confidential and not for distribution without prior written consent.
• It does not constitute a prospectus or public offering in any jurisdiction.
• Simulated performance data is included for illustrative purposes only and does not guarantee future results.
• No advice is given regarding investment, tax, or legal matters.
• Indicative prices are based on internal models and may differ from actual market prices.

Important Disclosures

• Options and ETFs:

  • Options are complex instruments with high risk.
  • ETFs have tracking error, currency, and geopolitical risks.
  • BNP Paribas may have conflicts of interest due to its role as advisor, manager, underwriter, or market maker in the securities discussed.

• Restricted Securities:

  • Some securities may not be registered under US Securities Laws and are restricted under Rule 144A or Regulation S.
  • Only Qualified Institutional Buyers (QIBs) or non-US persons may be eligible to purchase such instruments.

Jurisdictional Information

• The document is produced by a BNP Paribas group company and is intended for intended recipients only.
• It is subject to supervision and regulation by various financial authorities in the EU, France, Germany, Belgium, Ireland, Italy, Netherlands, Portugal, Spain, and Switzerland.
• In Switzerland, the document is for Qualified Investors as defined by CISA and CISO.

Conclusion

Turkey's economy is experiencing strong growth, driven by base effects and seasonal adjustments, but this is coming at a cost in terms of inflation and external imbalances. The GDP growth is expected to slow down in 2018, while inflation is projected to remain elevated. The current account deficit is also increasing, indicating rising external vulnerabilities. The strategy team is monitoring these trends closely and is revising forecasts accordingly.