CBT likely to stay its hand, for now... We do not anticipate a change in stance by the CBT -- as with the consensus expectation -- at the forthcoming final MPC meeting of the year, as the monetary authority sounds rather satisfied with the outcome of the new monetary framework since its date of inception, October 21; i.e. higher loan rates, lower loan growth, and a stable TRL. However, the reflections on macro framework are yet to be evidenced, with GDP growth -- especially domestic demand -- still vibrant, as suggested by 3Q figures; C/A deficit on the rise; and inflation double the year’s target. Although it looks like a typical time-inconsistency problem, the ex-post performance of previous attempts in restraining the “animal spirits” of the consumer understandably makes most investors lend little credence to a soft landing scenario. On the flip side, recent data should normally have assuaged hard-landing fears and made analysts more upbeat, due to strong growth momentum, whose effects will be observed going forward as well. Unfortunately, this is not the case either for the time being, given mounting EU-related concerns.
CBT’s Inflation Report due in Jan’12: Any inklings of a policy shift? The Eurozone conundrum is the predominant source of difficulty we face in setting our 2012 base case for global economic outlook, with the related uncertainty placing our main assumptions for the domestic economy at risk as well. At any rate, who could carry on with initial assumptions when underlying dynamics shift so rapidly in the global economic landscape? Lack of visibility also increases the need for flexible monetary frameworks for all central banks. That is why we judged the interest rate corridor policy to be an innovative response to prevailing global uncertainties and an instrument addressing the monetary authority’s need to gain time for improved visibility. We also see this experiment as a test drive to determine the equilibrium interest rate at which money demand is equal to money supply. We think that as long as the average cost of funding of CBT facilities (1-week repo, primary dealers facility and O/N Lending) remains significantly above the policy rate, the odds for the policy rate (5.75%) getting closer to the CBT’s blended rate (currently above 8%) would be higher than the reverse case. Based on latest available data, the average ISE O/N repo rate and average blended rate since the inception of the interest rate corridor policy stand at 10.6% and 6.9%, respectively. These figures point to 125-225bp scope for rate hikes when needed, which are likely to be front-loaded under these circumstances. However, the impact on loan rates would be similar and would not place any additional cost on top of that already generated by the interest rate corridor policy. The only difference is that tightening via the policy rate tends to be more permanent.
The main purpose of the interest rate corridor has also changed in time. At the beginning, it was aimed at fending off extreme depreciation of the TRL spurred by global factors. Recently, the trend in loan growth is driving the fine tuning by the CBT. We perceive this as a prudent move, since otherwise it would be extremely difficult to defend certain parity levels amid spikes in risk aversion. The corridor policy should thus continue to help alleviate currency volatility, as stressed by the CBT in recent presentations.
All in all, we continue to think the CBT will need to review this policy after a few months’ implementation, if the global outlook becomes less ambiguous -- for better or worse -- and possibly take a clearer stance on the policy rate (or policy mix) path in the first Inflation Report of 2012 due to be published by end-January, the earliest.
Economy on a slower growth track, based on recent data... Having made our aforementioned assessments on monetary policy, we also find it worthwhile to briefly discuss the current macroeconomic outlook and our base scenario for 2012. In line with the evaluations provided in our earlier reports, and supported both by data releases as of 3Q11 and leading indicators for 4Q11, a rather gradual slowdown remains underway in the Turkish economy, lending support neither to overheating nor to hard landing concerns. A major change appears under way as of the first month of 4Q11 in terms of private consumption and private investments, which had remained strong in the first nine months of 2011, despite all the tightening measures adopted by the Central Bank. Consumption goods and investment goods imports, which had grown by 32% and 48% yoy, respectively, in the first nine months of the year, posted a limited contraction in October. Leading indicators like automobile sales suggest there might be more to come. Similarly, the Consumption Index published by CNBC-e, which might be construed as Turkey’s retail index, has decelerated to 1% growth in November, down from 14% as of the first nine months of the year.
We expect such an outlook, also supported by the high interest rate environment prompted by monetary tightening, to reduce the final quarter’s growth to at least half the 8% observed in the preceding two quarters. While it appears that the re-balancing act anticipated in foreign demand has already started in 3Q11 (volume growth of exports has exceeded imports), foreign trade index readings as of October suggest that this still remains under way. Moreover, the rise in exports on a US$ basis remains quite significant, despite Eurozone related risks and the slowdown under way for quite some time. Although the month of December will see export growth touch its trough year-to-date mostly on the back of last year’s high base, final quarter exports growth is forecast at 10%. While a rather clear slowdown is evident here, the ratio of exports to GDP at 15%, trailing both private consumption (70%) and private investments (20%), underscores the continued relative significance of “final domestic demand” for the Turkish economy, and the fact that Turkey may emerge relatively unscathed from this turbulence, provided that household confidence is sustained and expectations are well managed. Moreover, it should be kept in mind that the share of exports to the EU in total exports, currently slightly below 47%, have been on a declining path in recent years, while their ratio to GDP of 7% is markedly below the EMEA average of 18%. On the other hand, in the event that the EU economy plunges into a deep recession -- unlike the consensus expectation of a limited growth -- the ensuing effects on the Turkish economy would be not only through trade but also through financial channels, i.e. banking relations. This effect might become evident through a diminution in short and long term credit flows to the banking and the non-financial private sector, which are also crucial for the financing of the current account deficit.
Considering the causality between the current account deficit and growth, the implication for the Turkish economy would be the related sectors and hence the overall economy sliding to a lower growth path. The magnitude of the decline in growth would hinge on the roll-over ratio of loans due in 2012. During the global crisis, roll-over ratios for long term loans had declined to 78% for the banking sector and to 71% for the other sectors. It might be feasible to assume these as the lower limits in the event of a credit crunch. Nevertheless, it is worth underlining that as of the end of October, reported roll-over ratios are far above the aforementioned ratios.
A hard landing -- rather than a balance of payments crisis -- seen as the worst case scenario -- Based on our calculations, Turkey’s aggregate foreign debt redemptions (public + CBT + banks + private sector) due in 2012 are around US$135bn. Of this amount, about US$65bn will be repaid by the banks and US$59bn by other sectors. Out of the debt repayments by the banks, a US$32bn portion pertains to loans, and the remainder to FX- and TRL-denominated bank deposits. However, about US$16bn of the bank deposits will be repaid to domestic banks’ branches and affiliates abroad. In other words, they are not an external liability in essence, and are easy to roll over. It was also disclosed by the CBT at the Financial Stability Report that about US$18bn of the redemptions by the banks would be related to syndications/securitisations. It is a commonly agreed upon fact that such loans are an outcome of long-standing relations and a full renewal would not be difficult, if sought by the borrowing bank. As far as the corporate sector is concerned, of the US$59bn total repayment, a US$27bn portion is related to trade credits, i.e. liabilities arising from L/C of imports and pre-financing of exports. These are also liabilities based on developed trade relationships, hence probably not difficult to roll-over either. Of the US$32bn loans ostensibly borrowed from abroad, a c.US$10bn portion pertains to domestic banks’ branches and affiliates abroad; hence, no roll-over difficulty is envisaged. Considering all these factors, an overall US$200bn foreign finance requirement -- including a US$63bn C/A deficit based on our estimates -- for 2012, which looks astounding at first glance, becomes more manageable. Even in the event of rather low roll-over ratios, the implication would be a hard landing, rather than a balance of payments crisis, in our view.
Maintaining our 2.5% growth estimate for the Turkish economy in 2012 -- In conclusion, EU related risks, i.e. recession and deleveraging, remain to be the foremost risk factors facing Turkey’s growth prospects, despite all the mitigating factors cited above. On the other hand, recent data on exports and foreign finance do not reveal any notable worsening in Turkey’s case attributable to the EU. Should the aforementioned risks fail to materialise, the recent strong growth momentum in the Turkish economy might lead it to sustain a relatively impressive growth rate in 2012 -- such as the 4% targeted in the Medium-term Economic Programme (OVP) -- as well. However, given the prevailing environment of uncertainty, with a cautious approach, we continue to consider 2.5% as a plausible growth rate for the Turkish economy in 2012, in a scenario whereby risks partly become reality. On the other hand, in the event of a marked deterioration in trade, finance, and expectations, the three channels via which external shocks may be transmitted to the domestic economy, stagnation or even a mild recession might well be the case.
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