Turkey needs a re-coupling of growth drivers - After an impressive growth performance in 2010, thanks mainly to a robust recovery in domestic demand, it is clear that Turkey needs to rebalance its growth drivers in the face of mounting risks threatening the sustainability of this outperformance. Our C/A deficit, the speed limit of the economy, has widened rapidly, while the recent trend in oil and other commodity prices has definitely not been of any help in terms of stemming this rise. Luckily, the government and the CBT seem cognisant of the situation and have taken certain measures to restrain the pace of the recovery in loans and eventually domestic demand over the coming period, while hoping that the role to be played by the banking system in the monetary transmission mechanism would be supportive. Moreover, in order to quantify and commit these targets, the CBT has assumed a limited monetary tightening to bring loan growth down to 20-25% in 2011, which supports its YE11 CPI forecast (5.9%), as stipulated in its Jan’11 Inflation Report.
Government keen to restrain loan growth - Deputy PM Babacan also cautioned further measures were to follow in case of no slowdown in credit growth within 1Q11, as he stated that additional measures should be expected if loan growth persisted at 35-40% annually within January-March. He reiterated that a loan growth rate of 20-25% would be reasonable and in line with the government’s GDP growth target of 4.5-5.0% for 2011. He further noted that some bank-specific measures could also be applied, if necessary. Such a strong degree of commitment to limit loan growth renders this indicator even more critical than usual. Hence, it is essential for economists and analysts to gauge whether there is a slowdown in loan growth or not.
Are inferences of “no slowdown in loan growth” well-founded? Unfortunately, there are different sources (BRSA, CBT) and definitions (bank-only, consolidated) for loan figures and market players do not know exactly on which parameters the CBT or other authorities are basing their assessments, in the absence of an official announcement. Experts inferring that there is “no slowdown in loan growth” are usually predicating this conclusion on the BRSA’s weekly figures on an annual basis, but without making the necessary adjustments. Indeed, as of Feb 11, on a year-on-year basis, total loans outstanding were up 36%, while consumer loans were higher by 40%, showing no signs of a deceleration. However, first of all, a direct comparison with the year ago could be misleading due to the weak base. Secondly, the exchange rate effect on FX loans should be neutralised by using fixed FX rates against the TRL and a fixed currency (60% US$-40% €) composition. Last but not least, short term changes are more descriptive in terms of detecting trend changes. We have tried to refrain from those mistakes and used the BRSA’s loan figures from its daily bulletin, which come with less of a lag. We took the last 22 business days’ average of total loans (fixed FX rates and fixed FX composition) to represent the monthly outlook and compared it with the same period’s average of a year ago. The annual increase in our indicator is still high at 33.7% as of February 17, but it signifies a slight deceleration in the trend towards 33.6% as of mid-February, after having peaked at 33.8% within January. The CBT also acknowledged this, noting that there was a slight deceleration in the pace of credit growth at the beginning of 2011 in the summary of the MPC meeting notes. It also pointed to a slowdown in consumer loans, given sluggish auto loans, in another paragraph of the report.
There are other signs pointing to a deceleration in economic activity, which make our observation of a slowdown in the pace of credit growth more meaningful. First of all, seasonally-adjusted imports fell by 6.4% m/m in December. Moreover, VAT on imports item in the central government budget signified some deceleration in the pace of import growth in January. VAT on imports dropped by 5% yoy in TRL terms, corresponding to a 10% yoy decline in US$ terms. According to our calculations, this implies an import level of around US$14bn for Jan’11, reducing the annual growth of imports down to 15-20% from 37% in Dec’10. In that case, the trade deficit and hence the C/A deficit would continue to widen in annualised terms, but at a decelerating pace. Second, two of the most important leading indicators of economic activity showed some weakness in February. Capacity utilisation rate (CUR) fell further to 73.0%, while the Business Confidence Index of the CBT retreated after the impressive improvement of a month ago. CUR declined to 73.0% in Feb’11, the lowest level registered since Aug’10. Feb’11 CUR reading fell short of both the expectations and the average CUR (75.6%) of 4Q10. However, the seasonally-adjusted CUR of 76.1% indicated a more limited deterioration than what the headline figures suggested. Business Confidence Index slipped to 111.0 in Feb’11 from 113.6 in Jan’11, on the back of the fall in total orders in the last three months and that in export orders for the next three months. Yet, the current level is still much higher than the critical threshold of 100 -- which separates the expansion and contraction periods in the economy -- thereby attesting to the ongoing economic growth. While being a negative surprise for growth outlook, it was definitely another source of relief for recent overheating concerns. CUR turned out much weaker than expected, driven by lower CUR in consumption and capital goods. Despite its being still relatively stronger on a seasonally-adjusted basis, weak CUR supports the CBT’s stance on the existence of a negative output gap (around 1% of GDP) in the economy. Business confidence index implies that the growth momentum is also losing some steam, probably reflecting the measures taken by the Central Bank and other authorities.
On the consumer side, available leading indicators of domestic demand (domestic car sales and white goods sales) were strong in January. However, more forward-looking indicators such as consumer confidence have somewhat weakened, due to a deterioration in expectations. Recognising the above-mentioned developments, the CBT also acknowledged early signs of a slowdown that are discernible through various channels. The CBT sees an improvement in the current account deficit in December in seasonally-adjusted terms, as well as a slight deceleration in the pace of credit growth at the beginning of 2011. The monetary authority also indicates that monetary tightening would restrain demand side pressures on inflation, by citing that domestic orders have moderated during the first quarter compared to the previous quarter, according to leading indicators (business confidence sub index).
For the time being, the final supporting factor is the favourable performance of the central government budget in January. The budget posted a TRL4.81bn primary surplus in Jan’11, compared to a TRL2.97bn primary surplus in Jan’10, up 62% yoy. Similarly, a TRL1bn budget surplus was recorded in Jan’11, versus TRL3.1bn deficit in the same month last year. Budget revenues rose by 20.4% yoy, thanks to solid performances in both tax and non-tax revenues. On the other hand, budget expenditures declined by 0.7% yoy, thanks to lower interest expenses in Jan’11. Otherwise, non-interest expenditures rose by 12.9% yoy, at a slightly slower pace than the tax revenues. It was really a good start to 2011 in terms of fiscal discipline ahead of the parliamentary election scheduled for June’11. 12-month rolling budget figures imply that the primary balance improved slightly to 1% of the GDP from 0.8% of the GDP, while the budget deficit declined from 3.6% of the GDP to 3.2% of the GDP. Excluding one-off factors such as privatisation revenues, the primary balance also shows about 0.1pp improvement as a percentage of the GDP.
All in all, these signals bode well for the success of the CBT’s recent strategy. However, we agree with the CBT that the available data are not long enough to make a healthy assessment, as the effects of the measures would be observed more significantly with some lag.
Therefore, we think the CBT is seemingly trying to buy time before making any adjustments to the policy mix. However, the CBT also sees early signs of a slowdown and expects a further deceleration in economic activity. This should suggest that the CBT would be in no hurry to further increase the reserve requirement ratios (RRRs) or would be even more likely to hold them at current levels for a longer period, in case the impact of the measures became more visible. We maintain our expectation of a 100bp policy rate hike in 4Q and a 150bp RRR hike (weighted average) in the first half of the year. However, if the “slowdown” scenario pans out, this would lessen the chances of further RRR hikes and render the policy rate decision dependent more on inflation outlook than before.
On the other hand, we see a slight downside risk (*) to our GDP growth forecast of 6%for 2011, to which the current weakness in leading indicators would pose a threat should it evolve into a trend. We also see a limited upside risk to our CPI forecast of 6.2% for 2011, as oil prices are hovering about US$10-15 above our assumption. Our back of the envelope calculations suggest that the direct impact of every US$5 increase in average oil prices would be a 0.2pp rise in annual inflation. It would also mean a US$4.8-7.2bn (**) addition to our C/A deficit forecast of US$57.0bn, if the recent elevated oil price levels are sustained.
(*) In 2011, we assume seasonally-adjusted m/m changes in industrial production (IP) as 0.3% on average after a likely retreat of 2-3% m/m in January due to the sharp improvement in December. We think our assumption is very conservative, since average m/m changes were 0.8% and 1.4% in 2009 and 2010, respectively. Based on our calculations, even with this moderate improvement in industrial production, GDP growth could easily reach or even slightly exceed 6% in 2011.
(**) Oil and derivatives imports (US$21bn) constitute 54.5% of total energy imports (US$38.5bn) in 2010. Natural gas and solid fuels comprise the remainder. For simplicity, we assumed similar price increases in those segments. Oil and derivatives imports rise by around US$1.3bn in every US$10 increase in average oil prices
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