Turkish Labor Market: The Lean Times

Turkish statistics office released December 2016 jobs report which suggested that the unemployment rate at 12.7% hit a 7-year high as well as a seasonally adjusted figure at 12%. More importantly, the number of unemployed people stood at 3.87 million which was the higher figure ever recorded in that regard.

When the agriculture sector excluded, the adjusted unemployment rate also climbed considerably to 14.3% which was a result of the weaker economic activity and deteriorating expectations. Last year also marked a lean period for the youth of the nation as the youth unemployment rate revealed that almost one fourth of young people were without a job.

There are some important points to gleam from the latest jobs reports in many aspects to make an inference about the worsening economy.

First, we feel the need to put some emphasis on women participation in labor market as we consider it as one of the most challenging issued ahead of Turkish economy. The contribution of Turkey’s female workforce to the economy remained low given the participation rate of 32% which is among the lowest among the OECD countries. That said, the unemployment rate for the women with higher education jumped remarkably to 19.1% from 15.3% y/y in 2016. This, in our view, proves that women jobs are under bigger threat with economic conditions getting severe. The other key finding is that this is locking some important part of the country’s potential as women are prevented from adding value economically, culturally, and socially.

Second, when the non-agricultural jobs broken down into industries, we observe that the share of industry jobs dropped to 24.2% in 2016 from 25.2% in 2015 which already had been on a declining trend since 2005 when it provided 29% of the total non-agricultural jobs. At this stage, we refer to our previous research where we analyze the sectoral breakdown of the jobs and their contribution to the output generation (see Service Jobs: Structural Headwind?). Provided that the possibility of a sea-change here is low, we expect the economy to perform below its historical standards.

Thirdly, and finally, we believe that the current conditions in the labor market would potentially lead a major deterioration in asset quality of the banks. Consumers being destitute of regular income does not bode well particularly in Turkey given the heavy concentration on retail lending of the financial institutions. NPL ratios had already been on the upward trend until late last year and started to show some signs of improvement. However, to our thinking, we may see the impact of the weaker labor market on loan payment as of Q2 2017.

August Job Report: Confirming Weakness

The unemployment rate in Turkey rose by 1.2 percentage points y/y to 11.3% while the non-farm unemployment rate climbed to 13.7%. This August job report marked another step in deceleration pace of the economy.

turkey-nfp-and-growthPartly due to the purge following the coup attempt and struggling tourism sector, Turkey lost 614K non-agriculture job in the three-month period ended in August of which 356K came from services. In seasonally adjusted terms, total decrease was 219K (-162K from manufacturing, -113K from construction, and interesting +55K services). The report build a supportive case for a slowdown in the economy to the hilt during the 3Q.

turkey-unemployment-and-asset-qualityThe rising unemployment is likely to influence asset quality in the bank through its pressure on retail loans and credit cards. Traditionally, an unemployment rate above 12% is alarming and potentially would lead a major deterioration. Since the official figures still remain below that threshold, we can comfortably say it is groundless to be pessimistic for the time being, however, we recommend investors to keep an eye on upcoming job reports.

Turkey: Debt on the Radar Again

In a widely expected and almost inevitable move, Moody’s downgraded Turkey’s sovereign rating by one notch to Ba1 (junk level) on Friday, quoting the increase in the risks related the country’s external funding requirements and the weakening in previously supportive credit fundamentals, particularly growth and institutional strength as the driver of the decision. Turkey is now only rated at IG only by Fitch, who already lowered the outlook on its rating to negative last month.

Rating downgrade marked the end of three years of EMBIG IG conclusion of Turkey which represented 7.4% of the EMBIGD IG. We will see more forced selling by the pension funds at the remainder of this year, however, based on experience, losing IG is not capable of being a market driver in the long-run, and still, global policy remains highly accommodative, keeping an adjustment a long way off. On the other hand, we do not believe that Turkey would regain its IG anytime soon. We are also of opinion that we are in the initial phase of a downgrade cycle in emerging economies as we expect to see cuts in South Africa, Philippines.

Not surprisingly, the decision will bring Turkey’s debt on the radar, again, which, in fact, has been the weak link of the economy. Turkey’s debt has been rising rapidly and now stands at more than 120% of GDP. In particular, the corporate sector is really concerning where debt has risen by $315 billion since 2007, or by more than 40 ppts of GDP. The corporate sector is where concerns lie as public sector debt is not the issue. The government managed to de-lever through this period while non-financial firms levered up rapid in the post-financial crisis period and borrowed heavily in hard currency, creating a large short-FX position. Also, when compared to the CEEMEA peers, Turkey cannot be considered as an under-levered economy.

Turning into banks, fortunately, Turkish lenders calculate risk-weighted assets in accordance with the ratings that Fitch provide who still rates Turkey at IG. But, another rating downgrade is also very likely there, which eventually increase risk weighted assets leading higher capital burden. Turkish banks will also face higher cost of external funding at around 40-60 bps which would also hit profitability systemwide.

But we’d like to put some emphasis on Turkish banks’ FX-denominated asset-liability management. According to the data released by the official regulator, Turkish banks have a net FX position deficit of $11.5 billion which is closed by derivatives. Compared to the deficit of $45 billion recorded in late 2014, the recent figure seems manageable. Thus, a FX mismatch for banks seems quite unlikely unless…


Still one big question remains as to how bank allocated their FX assets. The chart below shows that the share of loans increased from 58% to 73% in six years following the financial crisis, also demonstrates the funding source of Turkish corporates where the real concerns lies related to FX liabilities.


So the sentence left unfinished would end with worries about the asset quality. Turkish bank entered a period of deleveraging but NPL generation has still been strong, more than doubling the loan growth.

On the macroeconomic front, more specifically on the implications for CBRT’s monetary policy, we still continuation of rate cuts of 25 bps both on upper and lower parameters of the interest rate corridor which would end up with a symmetrical rate base (7%-7.5%-8%). This, we believe, should be the end of normalization process and easing cycle. In order to keep growth high, CBRT will use other tools such as RRR cuts. Also, some fiscal easing may be in place to support the economic activity.