abc Turkey Looking for the underlying trends in trade performance Global Research Flashnote The impact of gold on trade and growth

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1 Flashnote Global Research Macroeconomics The impact of gold on trade and growth went from being a large gold exporter in 212 to a large importer in 213 A closer look at the data shows that when gold trade is excluded, total export growth has picked up pace so far in 213. Exports to the MENA region are slowing, however consumes imported gold, while domestic production is small. So the gold impact on headline GDP growth is negligible Looking for the underlying trends in trade performance Sharp swings in gold trade have made it difficult to see the underlying picture in s trade performance recently. Historically, has been a large importer of gold: between 21 and 212 it imported, on average, 181 tonnes of gold per year, but domestic production has been limited, rising from around 1 tonne in 21 to an estimated 3 tonnes in 212 (Chart 1). 2 October 213 Melis Metiner Economist, HSBC Yatırım Menkul Değerler A.Ş melismetiner@hsbc.com.tr View HSBC Global Research at: Issuer of report: HSBC Yatirim Menkul Degerler A.S. Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it In 212, however, became a large net exporter of gold. Financial turmoil in Iran created real demand for the safe haven asset, and exported USD6.bn of the metal to the country, nearly half of its total gold exports for that year. This year, the trend has been reversed. has stopped its precious metals trade with Iran as a result of expanded economic sanctions. Consequently, gold exports in the first eight months of the year were only USD2.8bn, down from USD13.3bn in 212 as a whole. Meanwhile, Turkish households, which had drawn down on their gold holdings in 212, are now restocking, pushing gold imports to an all-time high. In the January-August period, gold imports reached USD13.6bn, significantly higher than in the previous years (Charts 2 and 3). What is the impact of gold trade on s overall trade balance and on its trade with the MENA (Middle East and North Africa) region? In 212, s trade deficit came in at USD84.1bn, or 1.7% of GDP, with the USD.7bn gold surplus shaving.7pp off the total deficit. In the first eight months of 213, s 12-month rolling trade deficit reached USD94.6bn, or 11.% of estimated GDP. Excluding gold, the deficit would have been 1.2% of GDP (Chart 4).

2 2 October 213 This year, export growth has been fairly lacklustre, despite the sharp lira depreciation since late May. After rising by 13.% in 212, exports were down by.% y-o-y in the first eight months of 213. But excluding gold trade, export growth has picked up the pace a little, from 4.3% to 6.6% y-o-y (Chart ). In 212, Turkish exports to the MENA region rose by 49.8% in annual terms, but this performance was artificially boosted by sizeable gold exports. Excluding the gold trade entirely, Turkish exports to MENA were up by 19.% in 212 and by 4.7% in the first eight months of this year (Chart 6). On the imports side, total imports rose by 6.3% y-o-y in the January-August period, after falling in annual terms last year. Excluding gold, however, imports are up by only 1.7% this year, from -2.4% in 212. The gold effect on consumption The total stock of gold in is sizeable we estimate it is close to USD129bn or 2,187 tonnes as of the end of last year (Chart 2). This is for cultural and economic reasons. Culturally, gold has always been a common way to save in and is frequently given as a gift in coin form. Economically, s inflationary past has made gold a good store of value. As Chart 7 shows, single-digit inflation in is a relatively new phenomenon. As recently as ten years ago, it was not uncommon for Turkish residents to look to preserve their wealth by buying gold, hard currencies or durable goods. This tendency, along with the recent increase in gold imports, raises an interesting question. Have gold purchases by residents provided a boost to household spending figures in the first two quarters of the year? There is no official data available on consumer spending on gold alone, but in national accounts, gold and jewellery purchases fall under the category of miscellaneous goods and services. As Chart 8 shows, growth in this category significantly outpaced growth in total household spending in Q1 and Q2. In the first half of the year, household consumption rose by 4.2% in annual terms, versus an increase of 17.% in the miscellaneous goods and services category. We do not know for certain whether gold purchases specifically are the primary driver behind the increase in this category. However, it is interesting to note that the sharp rise here comes on the back of a sizeable drop in the gold stock during 212 (of roughly 67 tonnes) and a rapid increase in gold imports in early 213. So will growth slow once households have replenished their gold stock that was drawn down during 212? At the end of 212, s gold stock stood at 2,187 tonnes. 1 We estimate that as of August 213, the stock had increased to 2,392 tonnes. In other words, residents have already replenished their gold holdings (Table 1). But this should have no impact on headline GDP growth for the remainder of the year because households are purchasing imported gold. If they decide to slow or stop their purchases, household consumption would go down, but so would imports, and the cumulative impact on headline GDP growth would be zero. If were a large producer of gold for domestic consumption, the picture would be different: lower gold demand would push down headline GDP growth. In s case however, domestic gold production is expected to reach 36 tonnes this year, according to an estimate from the Ministry of Energy and Natural Resources, which is less than USD2.bn at current prices. 1 To estimate the gold stock, we use CBRT data and methodology. We assume the gold stock in 1984 was zero, primarily because of data limitations. For each year, the gold stock increases by the sum of imports and domestic production volume, while gold exports are subtracted from the running total. For details, please see the CBRT research note: Türkiye'de Altın: Cari İşlemler Dengesi ve Büyüme Üzerine Etkisi by Zelal Aktaş, Altan Aldan, Faruk Aydın, İhsan Bozok, İbrahim Burak Kanlı. 23 October 212. Available at in Turkish. 2

3 2 October 213 Chart 1. Gold imports versus gold production Chart 2. Total stock of gold in tonnes 3 tonnes 3 tonnes 3, , , , , Imports Domestic production Stock in tonnes (LHS) Stock in dollars (RHS), Gold Miners Association, CBRT, Bloomberg, HSBC estimates Chart 3. Gold trade has been volatile recently YtD Gold balance Exports Imports Chart 4 making it difficult to read the underlying trade performance YtD Trade balance Balance excluding gold Chart. Excluding gold, export growth actually gained pace in 213 % Yr % Yr Jan-Aug 213 Total exports Non-gold exports Chart 6 But exports to MENA slowed sharply % Yr % Yr Jan-Aug 213 Exports to MENA Non-gold exports to MENA

4 2 October 213 Chart 7. has struggled with high inflation % Yr Headline CPI % Yr Chart 8. Gold purchases could be boosting household spending in 213 % Yr % Yr Resident household consumption Misc. goods and services (includes gold) Table 1. Change in s gold stock in (tonnes) Gold stock at the end of 212 2,187.1 (+) imports * 23. (+) domestic production ** 24. (-) exports 4. Estimated gold stock as of August 213 2,392.1 * Volume of gold imports is published by the Precious Metals and Diamond Market of Istanbul Stock Exchange. Volume of gold exports is HSBC estimate derived from Turkstat trade data ** The Ministry of Energy and Natural Resources expects domestic gold production for 213 to reach 36 tonnes. January-August production figure of 24 tonnes is HSBC estimate. Source: CBRT, Turkstat, Turkish Gold Miners Association, Istanbul Stock Exchange, HSBC estimates 4

5 2 October 213 Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Melis Metiner Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at Additional disclosures 1 This report is dated as at 2 October All market data included in this report are dated as at close 24 October 213, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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