Turkey: Recent Developments and Future Prospects ISBANK Economic Research Division November 2018
Macroeconomic Outlook
Strong Economic Growth Cycle GDP of 851 bn USD (2017), 10.6k USD (2017) per capita Average GDP growth rate of 5.5% between 2005-2017 17 th largest economy in the world & 6 th largest economy amongst the EU countries More than 9 mn job creation since 2005 Prudent fiscal policy since 2002 3
500 548 7,304 7,906 677 647 9,656 8,980 777 772 10,931 10,560 832 11,205 871 862 863 851 11,588 11,019 10,883 10,597 12,480 12,112 950 935 Gross Domestic Product Turkey s GDP came in at 851 billion USD in 2017. GDP (billion USD) Per capita GDP (USD) 2005 2007 2009 2011 2013 2015 2017 2005 2007 2009 2011 2013 2015 2017 4 Source: Datastream, Turkstat
-4.7 0.9 3.2 5.0 4.8 5.2 6.1 6.2 7.1 7.4 8.5 8.5 11.1 Economic Growth Growth was largely driven by private consumption and investments in Q2. Real GDP Growth* (%) Contributions to Growth** (2009=100 chain linked volume index % points) 12 10 8 6 4 2 0 2006 2008 2010 2012 2014 2016 2018 (*) Latest figure as of 2018 H1 (**) Latest figure as of 2018 Q2 5-2 -4 Stock Change Net Exports Investment Consumption -6 GDP 2014 2015 2016 2017 2018 Source: Datastream, Turkstat
Leading Indicators The slowdown in economic activity 25 Calendar Adjusted Industrial Production (yoy, % change) 120 Confidence Indices Real sector confidence index Economic confidence index Consumer confidence index 20 110 15 100 10 90 80 5 70 0 60-5 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 50 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 6 Source: Turkstat, Datastream
Labor Market More than 9 million new jobs were created since 2005. 45 45 44 9.7 8.9 9.2 Labor Market Indicators* (%) Unemployment Labor Participation Rate 45 12.0 11.9 47 47 47 10.0 8.5 49 49 8.8 9.1 51 52 52 53 54 10.3 10.2 12.0 9.9 11.2 20 20 20 20 21 23 Employment* (millions) 23 24 25 26 27 27 29 29 2005 2007 2009 2011 2013 2015 2017 2005 2007 2009 2011 2013 2015 2017 (*) Seasonally adjusted figures. Latest figure as of August 2018. 7 Source: Turkstat, Datastream
Fiscal Discipline Fiscal discipline has been the main pillar of economic policy. Budget Deficit (% GDP) General Government Debt Stock (% GDP) Maastricht criterion: 3% Maastricht criterion: 60% 1.9 1.9 1.5 1.0 1.1 1.0 1.1 32.6 31.3 28.6 27.5 28.1 28.2 31.1 2012 2013 2014 2015 2016 2017 2018F* (*) New Economic Program forecasts 8 2012 2013 2014 2015 2016 2017 2018F* Source: Turkstat, Ministry of Treasury and Finance
73 86 107 102 114 132 135 144 143 152 152 158 157 162 Exports Export volume reached all-time highs. Exports* (billion USD) Exports* (% of total) 2005 2007 2009 2011 2013 2015 2017 (*) 12-month cumulative figures as of September 2018 9 Motor vehicles Boilers and machineries Iron and steel Knitted and crocheted goods Electrical machinery and equipment Precious stones Articles of iron and steel Non knitted and crocheted goods Plastic and articles Edible fruits and nuts 15.8 9.4 6.3 5.5 5.3 4.4 3.8 3.8 3.6 2.6 Source: Turkstat, Datastream
Exports Turkey has been successful in diversifying export markets. 2005 Top 10 Export Markets % of total 2018* % of total Exports* (% of total) 1. Germany 12.9 1. Germany 9.8 56.5 2. UK 8.1 2. UK 6.5 3. Italy 7.6 3. Italy 5.7 EU 49.9 4. US 6.7 4. USA 5.0 5. France 5.2 5. Iraq 4.8 6. Spain 4.1 6. Spain 4.5 Near and Middle East 7. Iraq 3.7 7. France 4.4 18.0 8. Netherlands 3.4 8. Netherlands 2.8 9. Russia 3.2 10.Romania 2.4 The share of first 10 57.3 9. Israel 2.3 10.Romania 2.3 The share of first 10 48.2 13.9 2005 2007 2009 2011 2013 2015 2017 (*) 12-month cumulative figures as of September 2018 10 Source: Datastream, Turkstat
117 140 141 170 186 202 207 199 241 237 252 242 234 239 Imports Import volume became 239 billion USD. Imports* (billion USD) Imports* (% of total) Minerals and Fuels 17.3 Boilers and machineries 11.5 Electrical machinery and equipment 8.3 Iron and steel 8.2 Motor Vehicles 7.2 Precious Stones 6.3 Plastic and articles 5.7 2005 2007 2009 2011 2013 2015 2017 Organic chemicals Optical products Pharmaceutical products 2.5 2.1 1.9 (*) 12-month cumulative figures as of September 2018 Source: Datastream,Turkstat 11
Imports 28% of imports are from China, Russia and Germany. 2005 Top 10 Import Markets % of total 2018* % of total Composition of Imports (%) 1. Germany 2. Russia 3. Italy 11.7 11.1 6.5 1. China 2. Russia 3. Germany 9.6 9.3 9.1 2005 12.0 17.4 2018* 10.9 13.5 4. China 5.9 4. USA 5.2 5. France 5.0 5. Italy 4.6 6. USA 4.6 6. France 3.5 7. UK 4.0 7. UK 3.4 70.1 75.6 8. Switzerland 9. Spain 3.5 3.0 8. India 9. Iran 3.3 3.1 Capital Goods 10.South Korea 3.0 10.South Korea 3.0 Intermediate Goods The share of first 10 58.3 The share of first 10 54.0 Consumption Goods (*) 12-month cumulative figures as of September 2018 12 Source: Turkstat
Tourism Tourism sector has recovered considerably. Tourism Revenues* (USD bn) Russia The Number of Tourists (million persons) 5.7 28 30 27 Germany 4.2 19 17 19 23 23 23 25 25 19 22 25 Iran Georgia Bulgaria 1.6 2.8 3.0 2018* 2017 UK 1.4 2016 Ukraine 1.4 2005 2007 2009 2011 2013 2015 2017 Iraq Netherlands Azerbaijan 1.0 0.8 1.1 Number of Tourists 2015: 36.2 mn 2016: 25.4 mn 2017: 32.4 mn 2018*: 38.2 mn (*) 12-month cumulative figures as of September 2018 13 Source: CBRT, Ministry of Culture and Tourism
Savings & Investments Saving-investment gap of Turkey Investments and Savings (% of GDP) 27.0 31.3 28.3 29.8 29.0 28.3 28.3 31.0 30.5 28.5 29.0 29.3 Saving Gap 23.0 21.4 21.3 22.5 22.8 23.2 24.4 24.8 24.5 25.4 25.9 25.3 26.3 26.8 New Economic Program Forecasts Savings 8.8 1.7 5.7 5.5 6.6 4.6 3.6 3.8 5.6 4.6 3.2 2.7 2.5 Investments 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 14 Source: Turkstat, New Economic Program (2019-2021)
Current Account Balance Current account deficit started to decline. Current Account Deficit (% of GDP) 100 Financing of CAD (12-month cumulative, billion USD) 8.9 80 60 September 46.1 4.2 5.7 5.5 5.1 5.8 5.5 6.7 4.7 3.7 3.8 5.6 40 20 0 1.8 2005 2007 2009 2011 2013 2015 2017-20 -40 Foreign Direct and Long Term Investments* Portfolio and Short Term Investments** -60 Current Account Deficit 2011 2012 2013 2014 2015 2016 2017 2018 (*) Long term capital movements are sum of banking and real sectors long term net credit and bonds issued by banks and the Treasury (**) Short-term capital movements are sum of banking and real sectors' short term net credits and deposits in banks. Source: Turkstat, CBRT 15
Capital Flows Volatile capital inflows... 30 25 20 15 10 5 0-5 -10 Portfolio Inflows (12-month cumulative, billion USD) Debt Securities Equity Securities 25 20 15 10 5 Foreign Direct Investment Inflows (12- month cumulative, billion USD) -15 Jan.16 Jul.16 Jan.17 Jul.17 Jan.18 Jul.18 0 Jan.16 Jul.16 Jan.17 Jul.17 Jan.18 Jul.18 16 Source: CBRT
Monetary Policy Central Bank has implemented tight liquidity policy. Annual CPI Inflation* (%) Interest Rates (%) 28 25.24 30 Interest Rate Corridor One Week Repo Rate 24 26 CBRT Weighted Average Cost of Funding 20 22 Late Liquidity Window 16 18 12 14 8 10 4 2012 2013 2014 2015 2016 2017 2018 (*) Latest figure as of October 2018 6 Jan.18 Mar.18 May.18 Jul.18 Sep.18 Nov.18 Source: CBRT, Turkstat, Datastream 17
Nominal depreciation in local currency Financial Markets Emerging market currencies have fluctuated so far this year. USD vs Local Currencies (Dec. 31, 2016 = 100) Equity Indices (Dec. 31, 2016 = 100) 200 Turkey Brazil 160 Turkey Brazil 180 Russia Russia 160 Indonesia South Africa 140 Indonesia South Africa 140 120 120 100 100 80 Jan.17 Aug.17 Mar.18 Oct.18 80 Jan.17 Aug.17 Mar.18 Oct.18 Latest figure as of November 16, 2018 18 Source: Datastream
Financial Markets Risk premiums of emerging markets 29 26 23 20 5Y Government Bond Yields (%) Turkey Brazil Russia Indonesia South Africa 650 550 450 Turkey Brazil Russia Indonesia South Africa 5Y CDS Spreads (bps) 17 350 14 250 11 8 150 5 Jan.17 Aug.17 Mar.18 Oct.18 50 Jan.17 Aug.17 Mar.18 Oct.18 Latest figure as of November 21, 2018 19 Source: Datastream
Banking Sector Dynamics
Banking Sector Dynamics Increased intermediation activity by financing the growth of Turkish economy Diversification of funding sources by increasing access to international markets Shifting focus from growth to asset quality and stable funding structure Strengthened asset quality confirmed by low NPL ratios High capital adequacy ratio Strong growth potential 21
Basic Indicators Increase in foreign bank presence Public Foreign Domestic Private Number of Banks* Share in Total Assets (%) 48 50 Public 38 37 25 28 Foreign 3 28 15 13 Domestic Private 58 8 9 35 2004 September 2018 2004 September 2018 (*) Excluding the banks under the administration of the SDIF 22 Source: BRSA
6,521 7,256 8,071 138,169 150,462 9,250 9,526 10,000 167,212 10,440 10,981 182,100 183,614 11,903 12,125 12,185 11,664 11,508 11,523 190,586 194,617 200,745 213,431 216,063 216,722 210,112 207,532 207,870 Basic Indicators Branch network and banking sector employment Number of Domestic Branches Number of Domestic Staff 2005 2007 2009 2011 2013 2015 2017 2005 2007 2009 2011 2013 2015 2017 Latest figure as of September 2018 23 Source: BRSA
Basic Indicators Strong growth performance in the banking sector 57 Nominal GDP Growth (%) 50 40 Loan Growth (%) 34 30 29 30 32 16 19 20 21 17 23 20 17 17 7 19 16 12 13 15 13 13 14 12 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Assets (bn USD) Loans (bn USD) Deposits (bn USD) Equity (bn USD) X3.1 705 X5.9 434 X2.5 358 X2.0 68 228 74 143 34 2004 September 2018 2004 September 2018 2004 September 2018 2004 September 2018 24 Source: BRSA, Turkstat
Balance Sheet Items Increasing financial intermediation role of banks Asset Composition (%) Liability Composition (%) 12 11 Other Assets 11 18 Other Liabilities 15 16 12 Cash+Banks Securities 15 0 11 10 5 Shareholder's Equity Securities Issued 40 Loans 16 Banks Deposits 61 62 51 32 2004 September 2018 2004 September 2018 25 Source: BRSA
Deposits Deposits have been the main funding source of the banking sector. Deposit Volume (annual % change) Share of TL Deposits in Total (%) 30 25 20 15 10 5 0-5 -10 TL Deposits FX Deposits in USD Terms -15 Total Deposits (exchange rate adjusted) 2013 2014 2015 2016 2017 2018 68 64 60 56 52 48 44 2013 2014 2015 2016 2017 2018 49.8 Latest figure as of November 9, 2018 26 Source: BRSA
Loans Loan growth has lost momentum since the last quarter of 2017. Loan Volume (annual % change) Share of TL Loans in Total (%) 30 75 25 20 15 71 67 10 5 TL Loans 0 FX Loans in USD Terms Total Loans (exchange rate adjusted) -5 2013 2014 2015 2016 2017 2018 63 59 55 2013 2014 2015 2016 2017 2018 59.9 Latest figure as of November 9, 2018 27 Source: BRSA
2.7 2.9 2.7 2.8 3.1 3.0 3.2 3.2 3.5 3.7 3.7 3.7 4.7 5.3 Non-Performing Loans NPL ratio has remained at low level. Non-performing Loan Ratio* (%) 2005 2007 2009 2011 2013 2015 2017 Greece S. Cyprus Portugal Italy Slovenia Ireland Bulgaria Hungary Romania Poland Spain Austria EU Average Malta France Turkey Belgium Latvia Denmark Germany Netherlands UK Norway Finland Luxembourg Sweden 19.5 15.3 14.4 13.6 12.5 11.5 10.1 6.1 5.7 5.3 5.1 4.4 3.7 3.2 3.2 3.2 3.1 2.5 2.5 1.9 1.9 1.6 1.1 1.0 NPL Ratio (%, 2016) 45.9 44.8 (*) Latest figure as of September 2018 28 Source: BRSA, EBA
Loans by Sectors Manufacturing industry has the highest share in total loans. Loans by Sectors (% share, September 2018) Manufacturing industry 18.4 Wholesale trade 12.5 Construction 8.5 Electricity, Gas and Water Resources 7.2 Transportation, Storage and Communication 5.2 Agriculture Retail trade Research, Consulting, Advertising etc. Textile and textile products Main Metal Industry Tourism 3.7 3.6 3.5 3.3 3.2 3.1 29 Source: BRSA
Non-Performing Loans by Sectors Non-performing loans ratio by sectors NPL Ratio (%, September 2018) Tourism 4.2 Retail trade Wholesale trade 3.8 3.7 Agriculture Construction 3.1 3.0 Electricity, Gas and Water Resources Manufacturing industry Textile and textile products Main Metal Industry 2.7 2.5 2.4 2.3 Transportation, Storage and Communication Research, Consulting, Advertising etc. 1.4 1.6 30 Source: BRSA
Net FX Position of NFCs Short-term FX risks have been managed carefully by the non-financial sector. 10.3 10.1 Net FX Position of the Non-Financial Sector (bn USD) 2009 2010 2011 2012 2013 2014 2015 2016 2017 August 2018-3.8-0.8-3.5 1.1 5.2 1.3 7.2 3.2-77 -99-114 -136 Long Term Net FX Position -67-89 -168-180 -195-207 -221-219 Short Term Net FX Position -118-137 -171-179 -190-206 -214-215 Net FX Position 31 Source: CBRT
FX Assets & Liabilities of NFCs Majority of FX loans of non-financial companies were raised from domestic banks. 15 82 50 FX Liabilities of NFCs (bn USD) 41 41 28 30 33 28 81 86 94 105 109 22 20 82 18 82 78 76 155 172 174 178 183 181 82 102 122 Import Payables External Loans Domestic Loans 2009 2010 2011 2012 2013 2014 2015 2016 2017 August 2018 FX Assets of NFCs (bn USD) 13 9 13 11 16 11 16 12 17 22 18 19 13 12 12 12 21 23 15 17 Direct Investment Abroad Export Receivables 57 62 55 61 64 67 69 68 78 76 Deposits 2009 2010 2011 2012 2013 2014 2015 2016 2017 August 2018 32 Source: CBRT
Public - Private Partnership Projects A total of 197 PPI projects, worth of 130.4 billion USD, have been completed / under construction since 2006. Annual Infrastructure Investment Amounts and Sectoral Distribution of Projects Contracted since 2006 (bn USD) Sectoral Distribution of Total Infrastructure Investment Amount (2006-15, bn USD) 33 Source: CBRT
Short Term External Debt Stock Turkey s external financing needs in the coming 12 months September 2018 (*) (bn USD) Share (%) Central Bank 5.5 3.1 General Government 4.6 2.6 Banks 94.3 53.7 Credits 47.6 27.1 FX Deposits 19.0 10.8 Bank Accounts 16.8 9.6 Branches and Affiliates Abroad 14.2 8.1 TRY Deposits 10.9 6.2 Branches and Affiliates Abroad 4.0 2.3 Other Sectors 71.3 40.6 Trade Credits 45.6 26.0 Other Credits 25.7 14.6 Public 0.1 0.0 Private 25.6 14.6 Total 175.7 100.0 111 119 12-Month Long-Term Debt Roll Over Ratio (%) Banking Sector Non-banking Sector 332 198 101 188 126 148 144 111 108 101 94 141 2012 2013 2014 2015 2016 2017 September 2018 (*) External debt maturing within 1 year or less regardless of the original maturity. 34 Source: CBRT
Breakdown of FX Loans In line with strict regulations, FX liabilities belong mostly to large-scale corporates that generate or have potential to generate FX revenues. Firm Size Breakdown of Domestic FX Corporate Loans (% share) Breakdown of Corporate FX Loans by Amounts (% share, # of companies) Large (Rha) Medium Small Micro Not: Loans extended abroad and used via the intermediacy of domestic banks are included. Source: CBRT 35
Non-Deposit Sources Banks have diversified their funding sources. 60 Net FX Position* (billion USD) External Borrowings of the Banks** (outstanding amount, billion USD) Eurobonds Syndication Loans Securitization Loans 40 Double Investment Grade (May 2013- Sep.2016) 27.5 20 0 17.7 13.7-20 -40-60 Net On Balance Off Balance 2012 2013 2014 2015 2016 2017 2018 2005 2007 2009 2011 2013 2015 2017 (*) Latest figure as of November 9, 2018 (**) Latest figure as of September 2018 36 Source: BRSA
Capital Adequacy Ratio Turkish banks continued to be very well capitalized. 23.7 21.9 18.9 18.0 20.6 Target Rate of 12% Legal Limit of 8% Capital Adequacy Ratio* (%) 19.0 16.6 17.9 15.3 16.3 15.6 15.6 2005 2008 2011 2014 2017 (*) Latest figure as of September 2018 16.9 18.1 37 Netherlands Ireland Latvia Croatia Bulgaria Slovenia Slovakia Germany EU Average Belgium Czech Rep. Malta France Austria Greece Hungary Poland S. Cyprus Turkey Spain Italy Portugal Capital Adequacy Ratio (%, 2016) 11.0 22.7 21.1 20.8 20.4 20.3 19.6 19.2 18.7 18.5 18.4 18.3 17.7 17.7 17.6 17.1 16.3 16.1 15.9 15.6 14.6 13.7 Source: BRSA, EBA
Alternative Banking Channels A promising innovative future for mobile banking in Turkey Internet Banking (number of active customers, thousand persons) Mobile Banking (number of active customers, thousand persons) X1.7 12,548 34,226 7,227 X148.6 230 2011 Q1 2018 Q2 2011 Q1 2018 Q2 38 Source: The Banks Association of Turkey
Profitability Net interest margin is 4%. NIM* Cost / Income Ratio 5.4% 4.3% 3.5% 4.1% 3.7% 3.5% 3.5% 3.6% 3.8% 4.0%** 36% 41% 44% 41% 43% 45% 46% 40% 38% 33%*** 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (*) Net interest income / average total assets (**) 12-month cumulative as of September 2018 (***) As of September 2018 39 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: BRSA
Profitability Profitable banking sector... ROAA ROAE 2.6% 2.5% 23% 20% 1.7% 1.8% 1.6% 1.3% 1.2% 1.5% 1.6% 1.6% 15% 16% 14% 12% 11% 14% 16% 16% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q3 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q3 40 Source: BRSA
Stock Exchange Performance Turkish equity market came under pressure in 2018. Stock Exchange Performance (thousands) 130 260 120 110 BIST-100 Index Banking Sector Index (right axis) 240 220 100 200 90 180 80 160 70 140 60 120 50 100 40 80 30 2013 2014 2015 2016 2017 2018 60 Latest figure as of November 16, 2018 41 Source: Datastream
60 63 66 74 83 87 87 87 96 98 101 105 105 Banking Sector Comparison Despite the fast growth in the sector, penetration ratios are still low. Banking Sector s Assets in Turkey (% GDP) Banking Sector s Comparison with Euro Area (2017) (%, 2015) Assets/GDP 105 272 Loans/GDP 68 164 Housing Loans/GDP 6 38 EA-19 Deposits/GDP 55 157 Turkey 2005 2007 2009 2011 2013 2015 2017 42 Source: BRSA, Turkstat, ECB, Eurostat
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