Q3 2016: Growth Turned Negative

First, The Revision

Turkey’s official statistics office released major revisions to its national accounts data as the data was rebased such that the components are weighted to compile a real GDP statistics by chain-linking with 2009 as the base year. The office also introduced changes to the GDP calculation method are some items are now included within investment expenditures. Turkey’s macroeconomic variables seems to be healthier now as nominal GDP jumped about 10% solely based on revisions, taking CAD-to-GDP ratio down to 4% from the previous 4.5%. Meanwhile, fixed investments now account for roughly 30% of the economy (which was under 20% before revision).

On components basis investment expenditures seem to benefit most from the revision.

Then First Contraction Seen Since 2009

Turkey posted the first y/y decline in real GDP since the global financial crisis as expected. We noted that our prospect was for a 0.8% negative reading which, however, appears to be exceeded as the economy shrank by 1.8%. On a separate note, we saw government expenditures growing by 24% in real terms, adding almost 3.6 percentage points to growth, which means the growth would be remarkably weak if it weren’t the government supporting the economic activity. The economy took a huge hit in July when a failed coup attempt occurred in the country. That said, September data also suggest a gloomy outlook. Additionally, sectoral breakdown analysis suggests that all industries posted contractions with the exclusion of construction.

Finally, Q4 Outlook

Early sings demonstrate that the economy has started to recover from the slump in Q3 but it may even dodge a technical recession. Industrial production averaged -0.4% in 3-month period ending October (+0.5% in seasonally adjusted terms). That said, the elevated growth rates via the revision will bring a base effect that would make harden it further for Turkey to post a positive figure for Q4. We believe that FY 2016 growth is very likely to remain below 2.5%.

Turkey: Outlook Revised to Stable at S&P

Standard & Poor’s revised its outlook Turkey to stable from negative and affirmed its BB+ FC and BBB- LC sovereign credit ratings after the close of the market on Friday. The action was a positive surprising as it came amid concerns around Turkey’s political outlook taken to a higher level with the ouster of PM Ahmet Davutoglu. The credit rating agency downgraded sovereigns such as Poland, citing risks related to institutional stability.

The change at the top of the government should not be a game changer for Turkish politics in the short-term since Davutoglu had mostly felt into line with President Erdogan during his tenure. Still, this would keep Turkey’s governance mechanism open to dispute and harm Turkey’s accession process to the European Union while negotiations over visa-free pass going on which was supposed to mark a milestone in the history of country. Also, one would expect that steps toward a constitutional reform are to be taken faster than expected.

Turning back to the upside revision of S&P, the action has been primarily driven by a change in S&P’s assessment for Turkey’s debt burden as the credit rating agency believes that risks to the roll-over of its external debt have moderated. Having said that, the economic performance of the country has proven to be resilient by posting a higher-than-expected GDP growth of 4% despite to a number of challenges including, the busy electoral calendar in 2015, the end of the peace process with the PKK, heightened regional instability, and weak investor sentiment toward emerging markets.

Interestingly, S&P does not see eventual constitutional reform leading significant policy changes such as intensification of intervention in the independence of Turkish central or nationalization of private sector banks. Since, we don’t even have any draft that frames a new constitution, it is hard to predict the implications for the economy. But for instance, in case of a completed transition towards a presidential system, most certainly only the President will be in charge of assigning the Central Bank Governor. This the most controversial point made in the S&P’s Turkey release.

Putting it in a nutshell, below is the comparison of the estimates of the credit rating agency in November 2015 and May 2016 which, in our view, is useful to understand the underlying dynamics of S&P’s rating process.

Turkey - S&P EstimatesThe next report will be released on November 4, 2016.