Creating Opportunities

Turkey Economic

Outlook

November 2018

Challenging times ahead needing policy determination

Rebalancing is underway and will

accelerate from now onwards

The level and the duration of

adjustment is still uncertain but will

accelerate soon on the tightening

credit conditions

01

Turkish financial assets stabilize

after reaching lows in summer

A firmer policy response and easing

relations with US facilitate the

stabilization of Turkish Lira and risk

premium

02

Inflation will transitorily

increase in 1Q19

The exchange rate pass-thru and

likely reversal of recent

campaigns will keep inflation

high in the short term. It should

start to stabilize afterwards

03

Monetary policy stays on hold

but will remain tight

Higher inflation should prevent the

CBRT from easing in the short

term. Movements could be more

aggressive in the 2nd half of 2019

04

Fiscal consolidation in a realistic

New Economic Program

Fiscal policy is already tightening

and the targets of 2018 will likely be

met. The real challenge will become

the next year

05

Restructuring options already

under discussions

The Government has started the

evaluation period to implement a

restructuring process to cope with

corporate-bank problems

06

Source: CBRT, BBVA Research Turkey

The Turkish Lira and Turkish financial assets continue to improve on a

more benign EM outlook, policy changes and geopolitical ease…

Turkish Lira vs USD(level)

-02%

-01%

-01%

00%

01%

01%

02%

02%

Ma

y-1

6

Jul-

16

Se

p-1

6

Nov-1

6

Jan

-17

Ma

r-1

7

Ma

y-1

7

Jul-

17

Se

p-1

7

Nov-1

7

Jan

-18

Ma

r-1

8

Ma

y-1

8

Jul-

18

Se

p-1

8

Nov-1

8

TURKEY EM Average

EM Currencies volatility(% daily change moving average 1M moving Avg. One Standard deviation range)

TK differentiationEM Amplification

FED stance

tightens

Doubts on

CBRT

Failed

Coup

Doubts

on

CBRT

3,7

4,1

4,5

4,9

5,3

5,7

6,1

6,5

6,9

Jan-1

8

Jan-1

8

Feb

-18

Ma

r-1

8

Ma

r-1

8

Apr-

18

Ma

y-1

8

Ma

y-1

8

Jun-1

8

Jul-1

8

Jul-1

8

Aug-1

8

Sep-1

8

Sep-1

8

Oct-

18

No

v-1

8

Turkey: Activity Indicators(%YoY, mov. Avg. 3m)

Source: CBRT, TURKSTAT, BBVA-Research Turkey

The financial adjustment is now under control… Now it is time for the

real economic adjustment… we still expect 3% GDP growth in 2018

Turkey: GDP Monthly Indicator*(%YoY mov. Avg. 3m)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

GDP Growth

BBVA-GB GDP Growth (Monthly)

GDP growth nowcast

August: 2.2% (100% of inf.)

September: 2.2% (96% of inf.)

October: -0.6% (47% of inf.)M ean Mar Apr May Jun Jul Aug Sep Oct

Industrial Production 7.8 9.9 7.3 6.4 5.0 6.0 -0.2 0.5

Non-metal Mineral Production 7.8 16.7 10.3 6.0 3.1 2.8 -4.8 -4.0

Electricity Production 4.9 3.0 2.4 1.9 0.9 0.9 -0.4 0.2 -1.2

Auto Sales 6.9 2.2 -0.4 -5.8 -20.0 -29.6 -42.1 -51.5 -66.5

Tourist Arriv als 5.5 34.9 31.2 29.4 28.3 21.0 17.7 14.0

Number of Employ ed 3.9 4.4 3.7 3.0 2.5 2.1 1.9

Number of Unemploy ed 1.6 -13.5 -10.9 -7.1 -2.3 0.6 4.1

Auto Imports 8.6 -1.0 -3.2 -7.4 -21.2 -35.3 -50.9 -59.3 -69.9

Auto Exports 9.2 -3.1 9.6 18.7 37.3 24.3 9.5 5.3 4.8

Retail Sales 6.4 8.9 7.7 6.7 5.8 4.4 1.5

Manuf acturing PMI 51.4 49.6 51.7 49.5 48.4 49.6 46.4 42.7 44.30.00

Total Loans growth 13-week 19.0 13.1 15.9 17.0 14.5 10.2 1.8 -3.9 -9.1

Real Sector Conf idence 106.5 111.9 111.2 109.9 104.6 102.7 96.4 89.6 87.6

MICA Forecast 2.2% -0.6%

GDP YoY 5.2%

BoomContraction Slow-down Growth

2018

*We produced our GDP montly Indicator by using our retail sales forecast for September and October

+7.3%

-2.0%

+2.0%

+5.2%

Turkey: Private Consumption*(%YoY, mov. Avg. 3m)

Source: CBRT, TURKSTAT, BBVA-Research Turkey

A sharp slowdown in domestic demand is partially buffered by a

strong reversal of external demand…

Turkey: Total Investment(%YoY, mov. Avg. 3m)

Turkey: Net Exports(% Contribution to GDP Growth)

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Oct-

14

Jan

-15

Ap

r-15

Jul-1

5

Oct-

15

Jan

-16

Ap

r-16

Jul-1

6

Oct-

16

Jan

-17

Ap

r-17

Jul-1

7

Oct-

17

Jan

-18

Ap

r-18

Jul-1

8

Oct-

18

Cie

nto

s

Inv. Growth

BBVA-GB Inv. Growth (Monthly)

Inv. Growth Nowcast

Aug: 1.1% (100% of inf.)

Sep: -1.7% (100% of inf.)

Oct: -2.6% (50% of inf.)

-6%

-4%

-2%

0%

2%

4%

6%

Se

p-1

4

Dec-1

4

Ma

r-15

Jun

-15

Se

p-1

5

Dec-1

5

Ma

r-16

Jun

-16

Se

p-1

6

Dec-1

6

Ma

r-17

Jun

-17

Se

p-1

7

Dec-1

7

Ma

r-18

Jun

-18

Se

p-1

8

Cie

nto

s

Net Exp. Contribution

BBVA-GB Net Exp Contribution (Monthly)

Net Exp. Contribution Nowcast

July: 2.2%

August: 3.2%

September: 5.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Oct-

14

Jan

-15

Ap

r-15

Jul-1

5

Oct-

15

Jan

-16

Ap

r-16

Jul-1

6

Oct-

16

Jan

-17

Ap

r-17

Jul-1

7

Oct-

17

Jan

-18

Ap

r-18

Jul-1

8

Oct-

18

Cie

nto

s

Cons. Growth

BBVA-GB Cons Growth (Monthly)

Cons. Growth nowcast

Aug: 2.1% (100% of inf.)

Sep: -0.8% (83% of inf.)

Oct: -5.5% (33% of inf.)

Employment trend is not immune and in some sectors the

adjustment is becoming sizeable… (i.e. those boosted by the CGF)

Unemployment rate(SA, %)

Turkey: Employment growth by Sector( 3MA, YoY)

8,5%

9,0%

9,5%

10,0%

10,5%

11,0%

11,5%

12,0%

12,5%

Aug-1

3

De

c-1

3

Apr-

14

Aug-1

4

De

c-1

4

Apr-

15

Aug-1

5

De

c-1

5

Apr-

16

Aug-1

6

De

c-1

6

Apr-

17

Aug-1

7

De

c-1

7

Apr-

18

Aug-1

8

-7%

-4%

-1%

2%

5%

8%

11%

Aug-1

4

Fe

b-1

5

Aug-1

5

Feb

-16

Aug-1

6

Feb

-17

Aug-1

7

Feb

-18

Aug-1

8

Industry Construction Service

Source: CBRT, TURKSTAT, BBVA Research Turkey

The domestic demand adjustment is related to the sudden stop in the

loans evolution… the credit contraction is now more broad-based

Credit Growth (FX adj) YoY, Quarterly Annual Rate

Source: CBRT, TURKSTAT, BBVA Research Turkey

Credit Growth (FX adj) 13-week, Quarterly Annual trend

-13%

-19%

-8%

-13%13w ann.

6% yoy

-20%

-10%

0%

10%

20%

30%

40%

Feb

-17

Ma

y-1

7

Aug-1

7

No

v-1

7

Feb

-18

Ma

y-1

8

Aug-1

8

No

v-1

8

-20%

-10%

0%

10%

20%

30%

40%

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

Jan-1

8

Ma

r-1

8

Ma

y-1

8

Jul-1

8

Sep-1

8

No

v-1

8

Credit 13-week GrowthTrend Public Banks

Private Banks

Source: CBRT, TURKSTAT, BBVA Research Turkey

…with some differences in the consumer segments…

Credit Growth: Commercial vs Consumers13-week, Annualized trend

Source: CBRT, TURKSTAT, BBVA Research Turkey

Credit Growth (FX adj): Consumer 13-week, Annualized trend

-35%

-25%

-15%

-5%

5%

15%

25%

35%

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

Jan-1

8

Ma

r-1

8

Ma

y-1

8

Jul-1

8

Sep-1

8

No

v-1

8

Mortgage Credits Auto Credits General Purpose Loans

-14%

-31.7%

-13.5%

-13.4%

-15%

-5%

5%

15%

25%

35%

45%

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

Jan-1

8

Ma

r-1

8

Ma

y-1

8

Jul-1

8

Sep-1

8

No

v-1

8

Consumer Credits Commercial Credits

Source: CBRT, Turkstat and BBVA Research Turkey

Credit is linked to the external imbalance (overconsumption or low

savings”) and is leading to a reversal of the current acount deficit…

Current Account Financing12M sum, % GDP

-5.5

-2%

0%

2%

4%

6%

8%

10%

De

c-1

0M

ar-

11

Jun-1

1S

ep-1

1D

ec-1

1M

ar-

12

Jun-1

2S

ep-1

2D

ec-1

2M

ar-

13

Jun-1

3S

ep-1

3D

ec-1

3M

ar-

14

Jun-1

4S

ep-1

4D

ec-1

4M

ar-

15

Jun-1

5S

ep-1

5D

ec-1

5M

ar-

16

Jun-1

6S

ep-1

6D

ec-1

6M

ar-

17

Jun-1

7S

ep-1

7D

ec-1

7M

ar-

18

Jun-1

8S

ep-1

8

Net FDI Net Other InvestmentNet Portfolio Flows ReservesNet Error and Omissions

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

De

c-0

8

Jun-0

9

De

c-0

9

Jun-1

0

De

c-1

0

Jun-1

1

De

c-1

1

Jun-1

2

De

c-1

2

Jun-1

3

De

c-1

3

Jun-1

4

De

c-1

4

Jun-1

5

De

c-1

5

Jun-1

6

De

c-1

6

Jun-1

7

De

c-1

7

Jun-1

8

De

c-1

8

Jun-1

9

De

c-1

9

FX Adj Credit Growth(yoy, inverted and forwarded 4M)-Left

Current Account Deficit/GDP

BBVA CAD/GDP Projections

Turkey: Current Account and Credit Growth (% GDP and Credit YoY inverted and forwarded 4 months)

Source: CBRT, TURKSTAT, BBVA Research Turkey

Inflation could decelerate in the short term due to tax reductions

(1pp) and lagged effects of discount campaigns… but there will be a

transitory reversal in 1Q-19 on base effects

Turkey: CPI and Core InflationYoY

Turkey: CBRT Inflation ProjectionsOctober Inflation Report

October CPI Realization

BBVA Research Forecasts

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

De

c-1

4

Apr-

15

Aug-1

5

De

c-1

5

Apr-

16

Aug-1

6

De

c-1

6

Apr-

17

Aug-1

7

De

c-1

7

Apr-

18

Aug-1

8

De

c-1

8

CPI Core

23.5%

1,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

5,00

5,50

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Turkey: Exchange Rate vs USD

Source: CBRT, TURKSTAT, BBVA Research Turkey

Upside risks from “far from homogeneous” pass-thru impact and

duration on inflation… it will start to die out after the elections

*Bubble size corresponds to the weight of each item in FX

pass-thru to Core D CPI

Turkey: FX Pass-thru on Core D CPI Items*

Housing

Furniture

Health

Entertainment

Transportation

Processed Food

Communication

Clothing

Education

Hotel

Others

Energy

0

5

10

15

20

25

30

35

40

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Cu

mu

lati

ve F

X P

ass

-Th

rou

gh

(%

)

Months taken to complete FX pass-thru

July

2018

Dec 2018

Mar

2018

CBRT Interest Rates(Annual Level, %)

Source: CBRT and BBVA Research Turkey

Monetary Policy: The CBRT stayed on hold in October and given the

recent exchange rate appreciation and the oil price evolution it will stay

on hold until inflation expectations start to revert

7

9

10

12

13

15

16

18

19

21

22

24

25

27

De

c-1

5

Feb

-16

Apr-

16

Jun-1

6

Aug-1

6

Oct-

16

De

c-1

6

Feb

-17

Apr-

17

Jun-1

7

Aug-1

7

Oct-

17

De

c-1

7

Feb

-18

Apr-

18

Jun-1

8

Aug-1

8

Oct-

18

CBRT One-Week Repo CBRT LLW CBRT Funding Cost

Inflation Expectations(YoY)

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

5%

7%

9%

11%

13%

15%

17%

No

v-1

3

Feb

-14

Ma

y-1

4

Aug-1

4

No

v-1

4

Feb

-15

Ma

y-1

5

Aug-1

5

No

v-1

5

Feb

-16

Ma

y-1

6

Aug-1

6

No

v-1

6

Feb

-17

Ma

y-1

7

Aug-1

7

No

v-1

7

Feb

-18

Ma

y-1

8

Aug-1

8

No

v-1

8

12-month ahead 24-month ahead

The fiscal plan is coherent but also challenging…

-2,5%

-2,0%

-1,5%

-1,0%

-0,5%

0,0%

0,5%

1,0%

1,5%

2,0%

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

9

De

c-2

0

De

c-2

1

Budget Balance Primary Balance

CG Budget Balance and NEP Forecasts% of GDP

Government New Forecasts

BBVA Forecasts

Lower adjustment in

Nominal Balance on

High Interest Payments

Sustainable PB

2017 2018 (e) 2019 (f) 2020 (f) 2021 (f)

GDP Growth(%) 7.4 3.8 2.3 3.5 5.0

Domestic Demand 7.3 2.4 0.8 3.3 4.8

External Demand 0.1 1.4 1.5 0.2 0.2

Unemployment Rate(%) 10.9 11.3 12.1 11.9 10.8

USD/TRY(Year Avg) 3.6 4.9 5.6 6.0 6.2

Inflation Rate(eoy %) 11.9 20.8 15.9 9.8 6.0

Central Gov. BudgetBalance (% GDP) -1.5 -1.9 -1.8 -1.9 -1.7

Central Gov. PrimaryBalance (% GDP) 0.3 0.1 0.8 1.0 1.3

Current AccountBalance (% GDP) -5.6 -4.7 -3.3 -2.7 -2.6

EU Defined Gov.Debt (% GDP) 28.3 31.1 28.5 28.2 27.2

As includes huge fiscal consolidation efforts in 2019 which the

government will have to accelerate…

Turkey: Central Government Balance% of GDP)

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Fiscal Easing

Fiscal Tightening

*The 2019 savings amount 60bnTL (1.3% of GDP) coming from:

- postponing investment (0.7% of GDP),

- reducing incentives (0.3% of GDP),

- cutting social security (0.2% of GDP)

- reducing current expenditures (0.1%).

- higher interest expenditures (2.2% and 2.8% of GDP in 2018 and 2019).

On the revenue side, the Government extra revenues (0.4% of GDP) in 2019

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

20

12

20

13

20

14

20

15

20

16

20

17

Jan-1

8F

eb

-18

Ma

r-1

8A

pr-

18

Ma

y-1

8Jun-1

8Jul-1

8A

ug-1

8S

ep-1

8O

ct-

18

No

v-1

8D

ec-1

8Jan-1

9F

eb

-19

Ma

r-1

9A

pr-

19

Ma

y-1

9Jun-1

9Jul-1

9A

ug-1

9S

ep-1

9O

ct-

19

No

v-1

9D

ec-1

9

Turkey: Fiscal Effort Tracker*( 12m Cumulative change in cyclically adjusted balance, % GDP)

*2018 figures correspond to 12-month sum

Structural Fiscal Effort Planned

Structural Fiscal Effort Implemented

Loca

l E

lection

s

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Central Government Budget Balance

Cyclically adjusted balanceWith support of

some one-offs

Geopolitics have provided some tailwinds…

Turkey: Foreign Relationships Index(negative change in cyclically adjusted balance, % of GDP)

Reverend Brunson was finally

released after the reduction of the

penalty. A critical step in the right

direction.

The removal of Magnitsky act was

good news and a manageable

Halkbank penalty could be

delivered

But still important issues to restore

“trust” between US and Turkey

particularly AS-400 , YPG and Iran

The Saudi Arabia Consulate Affairs

ease negotiations

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

Jan-1

8

Feb

-18

Ma

r-1

8

Apr-

18

Ma

y-1

8

Jun-1

8

Jul-1

8

Aug-1

8

Sep-1

8

Oct-

18

No

v-1

8

USA EU

Sa

feN

eu

tra

lH

igh

Extr

em

e

GDP Forecast(YoY)

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

De

c-1

4

Ma

r-1

5

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

De

c-1

6

Ma

r-1

7

Jun-1

7

Sep-1

7

De

c-1

7

Ma

r-1

8

Jun-1

8

Sep-1

8

De

c-1

8

Ma

r-1

9

Jun-1

9

Sep-1

9

De

c-1

9

Our GDP forecast remains “balanced” in the short term. Some

downside inflation risks, supported by exchange rate and oil prices

Source: Xxxxxxxxxxxxxxxxxx

Inflation Forecast(3m YoY)

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

32%

34%

De

c-1

6

Feb

-17

Apr-

17

Jun-1

7

Aug-1

7

Oct-

17

De

c-1

7

Feb

-18

Apr-

18

Jun-1

8

Aug-1

8

Oct-

18

De

c-1

8

Feb

-19

Apr-

19

Jun-1

9

Aug-1

9

Oct-

19

De

c-1

9

Monetary policy should remain tight until inflation expectations will be under control. There are some risks on the upside as there is some uncertainty on

the exchange rate pass-thru to final prices

The incoming economic adjustment, a non supportive global environment and a new

political cycle lead us to maintain a prudent exchange rate forecast

Monetary Policy Forecasts% CBRT Funding Cost

Exchange Rate ForecastsUSDTRY Level

Monetary policy should remain “tight” until inflation expectations

are curbed, with some downside risks in the second half of 2019.

Exchange rate positive reaction poses clear appreciation risks

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Aug-1

7

De

c-1

7

Ap

r-1

8

Au

g-1

8

De

c-1

8

Ap

r-1

9

Aug-1

9

De

c-1

9

2,6

3

3,4

3,8

4,2

4,6

5

5,4

5,8

6,2

6,6

7

7,4

7,8

8,2

De

c-1

5

Ap

r-1

6

Au

g-1

6

De

c-1

6

Ap

r-1

7

Au

g-1

7

Dec-1

7

Ap

r-1

8

Au

g-1

8

De

c-1

8

Ap

r-1

9

Au

g-1

9

De

c-1

9

Turkey: Base Case Scenario

BaseLine Scenario 2017 2018 2019 2020 2021 2022 2023

GDP (yoy) 7.4 3.0 1.0 2.5 4.5 4.5 4.5

Unemployment Rate (% avg) 10.9 11.3 13.5 12.8 11.5 10.5 10.0

Domestic Demand 7.3 1.8 -1.1 2.1 4.8 4.6 4.5

External Demand (pp) 0.1 1.2 2.1 0.3 -0.2 0.0 0.0

Inflation (eoy) 11.9 23.5 17.0 12.0 9.0 8.0 7.0

Inflation (avg) 11.1 16.7 22.5 13.2 10.7 8.4 7.4

Policy Rate (% eoy) 12.75 24.00 21.50 15.00 12.00 11.00 10.50

TRY/USD (eoy) 3.77 6.20 6.40 6.55 6.75 7.00 7.00

TRY/USD (avg) 3.65 4.96 6.31 6.48 6.66 6.89 7.00

Central Government Balance/GDP -1.5 -2.1 -2.2 -2.0 -1.7 -1.6 -1.5

Current Account Balance / GDP -5.5 -5.1 -2.7 -2.6 -3.4 -3.6 -3.8

Loans Growth (FX adjusted) 24.0 5.4 3.3 10.0 14.3 14.6 14.6

Creating Opportunities

Turkey Economic

Outlook

November 2018