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%.

September Industrial Production: Stating GDP Contraction

September industrial production index was down -4.2% y/y well below the market consensus of 2.5% y/y, driving the 3-month moving average to the negative territory for the first time since the global financial crisis. Following the results analysts downgraded their 2016 GDP growth estimate to the 2.3%-2.5% from the recent 3%-3.5% as an output contraction is very likely in 3Q 2016. The Ramadan holiday negatively affected the data, however, we also saw a decline in seasonally and working-day adjusted data (-2.5% y/y, -1.5% 3MMA).

turkey-real-gdp-growth-v-industrial-production-indexAll of the main production groups have contracted in 3Q 2016. It goes with saying, manufacturing sub-index has a strong relationship with industry’s output showed a decline which account for one third of the economy. There is an off-chance that faster than expected output growth in agriculture would minimize the contraction.

turkey-manufacturing-output-growth-v-manufacturing-indexDomestic demand should also be expected to be weak.

turkey-real-domestic-consumption-v-consumer-related-industrial-productionWe expect Turkey’s real GDP to contract by %0.8 in 3Q. For 4Q 2016, some pre-indicators including loan growth, PMI, auto sales point to a strengthening but we are in early days yet.

Sluggish Credit Growth: A Cause for Concern?

The evolution of Turkey’s banking system in early 2000s was a lesson to be learned for any emerging countries, even for the developed ones. Following the 1994 crisis, Turkish financial system had come to settle in a fuzzy equilibrium with a large nominal stock of carried by a handful of banks in a lucrative “carry trade”, and a large number of lemon banks involved in tunneling bank deposits to shareholders through connected lending. Unsurprisingly, the industry had to face another crisis at the beginning of the new millennium with sizable impacts on the economy. After that, some important reforms took effect across the industry including BRSA’s (Turkey’s Banking Watchdog) main objective changing from supervision to restructuring and rehabilitation. Thanks to those reforms, things started to take shape in the financial system as well as in the economy. Banks survived through the crisis got healthier and flooded with foreign capital. With stronger financial structures and capital injections, banks in Turkey were more able to support the economy through their effect of easing overall credit conditions.

Given the eased lending environment, the total amount of credit issued by Turkish has been consistently rising. On monthly basis we have observed only three drops since 2005 excluding the financial crisis period between July 2008 and July 2009. First drop of -0.2% was in Jul 2006. After rising consecutively for 23 months, total credit saw its first monthly drop in July 2008 as the global crisis started to hit many economies across the world. Following the crisis period that is full of ups and downs in the credit market, Turkey experienced only two monthly drops in the total amount of issued credit in 63 months, in January 2012 and October 2014. Since 2005, the average monthly change has been 2.1%. Despite the tightening efforts by policymakers in order to cool down the economy, Turkish credit markets seemingly has growing since the end of 2010.

The Long-Term Trend for Monthly Changes in the Total Amount of Credit Issued by Turkish Banks

Turkey has performed the greatest expansion of its history amid the lending boom. Both domestic and foreign lenders have contributed to the transformation that made the country a $800 billion economy. As pervasive fears around the external financing rise due to monetary policy tightening in developed economies in the horizon, credit issued by the domestic institutions become more important to the economy. As discussed above, the average loan growth has been 2.1% since 2005. The next chart shows how the household consumption and the private investment perform during above and below average loan growth periods.

Credit Growth and Private Consumption and Investment in Turkey

One thing is certain that tumbling loan creation brings recession nearer. The slowdown in non-government components of GDP nicely correlates with the lending growth. The most recent drop in the total amount of lent cash might signal that demonstrates a dramatic change in the well-greased Turkish economic machine.