DenizBank Economic Update

Transcription

1 Economic Research and Strategy Saruhan Özel, Ph.D. Ercan Ergüzel Berke Gümüş Doğukan Ulusoy Economy Financial Markets Banking Sector Focus Rising Current Account Deficit Raises Eyebrows A Variety of Precautionary Measures Taken Measures Began To Work... 1

2 External Sector Growth Economy (I) 25% 15% 5% -5% -15% Industrial Production Growth Month on Month Annualized 11.3% 7.94% Leading Growth Indicators Industrial Production (SA) Capacity Utilization (SA) 85% 8 75% 7 65% 6-25% Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 55% Industrial production (IP) is losing its momentum. Although, it went up by 7.9% YoY in May, the seasonally and working day adjusted (SWA) IP reading dropped by.3% MoM, fourth consecutive drop in a row since January 211. Capacity utilization rate (CUR), the leading indicator for the production growth in Turkey, is depicting a similar picture for June and July. Seasonally adjusted CUR has decelerated to 73.2% in June 211, compared unfavorably with January 211 CUR of 77%. The slowdown in the leading production indicators are diminishing overheating concerns in domestic economy, in our opinion. Accordingly, The Central Bank of Turkey (CBRT) was more confident in its latest minutes that the unconventional measures taken are being effective and is expecting the results to get more obvious in the coming months. (Bn $) 2 Non-Energy CAD CAD Non-energy Balance -5-6 Energy Balance Current Account Balance (Bn. $) (%) % % -22-2% % -2.3% % -4% -4.6% -5% -4 CA Bal. CA % of GDP -5.8% -5.6% -6% % -7% May-11* Current account deficit (CAD) was $7.8 bn in May, much higher than $2.9 bn of deficit a year ago and was almost in line with the consensus estimate, carrying 12M trailing deficit to $68.2 bn, corresponding to ~8.5% of GDP. On the financing side, the main channels of inflows were portfolio investment, corporate and bank borrowing as expected in the first five months of 211. They, amounting to TL34 bn, financed a whopping 9 of the CAD. FDI has jumped to $4.4 bn from $1.7 bn of 21, but still financing a mere 11% of the CAD. The net errors/omissions, which is unexplained inflows, topped $4.4 bn, carrying year to date figure to $7.5 bn. Additionally, the CBRT has accelerated reserve accumulation by a strong 19% in the first five months of 211 compared to same period in 21. The CBRT has stated in its latest minutes that owing to the measures taken so far, the CAD will start to improve in the final quarter of the year. We agree that it will start to decelerate at least in the last quarter, but not necessarily because of the measures taken by the CBRT (RRR hikes from 6% to 14%) and the BRSA (raising general provisioning for retail loans). The low base effect will also start to disappear starting from November

3 Public Sector Inflation Economy (II) Annual Inflation PPI 12% CPI 4% -4% % 6.24% Headline and Core Inflation 12% 1 8% 6% 4% 2% Headline CPI 6.24% 5.27% Core CPI Thanks to the monthly drop of 1.4% in June inflation, annual CPI inflation has eased to 6.2% in May from 7.2% previous month. The drop in the June inflation stemmed mainly from the correction of the jump in fresh fruit prices in the previous month. On the flip side, the core inflation indices are rising for the last eight months in a row, reaching 5.2% in June-211 from 2.5% in October-21. Moreover, TL has lost 13% against a basket USD Dollar and Euro (%5, %5) since the beginning of this year and 5% in the last two months. Accordingly, the CBRT has stated that it will be ready to take further action if the TL weaken further from these levels, since there will be pass-through from the currency to the inflation. Yet, apart from weakening TL, the CBRT has a dovish outlook for inflation. Expectations are also in line with the CBRT s projections. 12M forward inflation expectations are still under control and hovering slightly below 7% Budget Balance (12M Trailing) % % -1.6% % % -5.2% -5.5% -14-2% -4% -6% 3 1 Rev. vs. Non Int. Exp. Increase (12M Rolling) Non-Interest Expenditures -3-4 $ bn % GDP -8.8% Jun-11-8% -1 Revenues -1 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 The central government budget recorded TL3.1 bn surplus in June. Thus, the year-to-date surplus has risen to TL2.9 bn from the deficit of TL15 bn last year. The stellar performance was due to 45% surge in tax revenues. The collections from debt restructuring scheme was instrumental in rising tax revenues. Similarly, primary balance (excluding interest payments) has increased to TL25 bn from TL12 bn in 21. While total tax revenues went up by 45% in June compared to same month a year ago, the VAT levied on imports increased by only 35%, signaling that imports would signal some deceleration in June. As per the Medium Term Programme, the 211 budget deficit target is TL34 bn. It appears achievable by far given the first half year s budget figures. 3

4 Stock Market Currency Market Depreciate Appreciate Debt Market Financial Markets EM CDS Spreads and Ratings (5 Year; Fitch, LT FX) 9 6 TR, BB+ Hun, BBB- Rus, BBB Bra, BBB Benchmark Bond Yield (%) Benchmark Bond Yield (Compounded) 3 Dec-8 Dec-9 Dec % Policy Rate (Compounded) 5 O/N Equivalent: 6.25% Oct-8 Jun-9 Mar-1 Dec-1 The benchmark bond yield is gradually rising, mainly due to global risk-off mode. But, the government s stellar budget performance is putting an upper cap at around 9% level EM Currencies (Dec 28=1) Dec-8 Aug-9 Apr-1 Dec-1 TRY HUF CZK BRL KRW ZAR % Change Against $ (Positive Values= appreciating against $) BRL MXN CZK PLN HUF Aylık Değ (%) 5 Günlük Değ (%) ZAR KRW.3 3. TRY JPY GBP. 2.1 EURO The TL is underperforming other EM currencies, mainly on the back of the CAD rising concerns. But, the most recent comments from the government and the CBRT, supporting the stronger TL, have eased the concerns Stock Market Performance (Sep 28=1) MSCI Turkey Index Bank's Equity Prices (Jan 28 = 1) EM Banks US Banks EU Banks TR Banks 1 MSCI EM Index Sep-8 Apr-9 Nov-9 May-1 Dec-1 Jun-11 Jan-8 Oct-8 Jun-9 Feb-1 Oct-1 Jul-11 Since the end of last year the ISE has underperformed emerging peers. 4

5 Lending Funding Capital Banking Sector (I) % Sector's Capital Strength ($ bn) 22% Owners' Equity Free Capital 21% CAR 19% 18% 19% 18% 25% 15% Capital Adequacy Ratio by Bank Groups Private Banks' CAR State Banks' CAR Foreign Banks' CAR Q % 3 21% 19% 17% 1 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Sector s capital adequacy ratio is more than two times the Basel requirement. Also, the gap between the banking groups has diminished, as state banks engage in more lending decelerating their capital adequacy ratio (CAR) to the sector average. Banking Sector's Liability Structure Other Capital Repo Wholesale Fudning Deposit 1 9% 8% 7% 7% 9% 8% 7% 7% 8% 12% 14% 15% 13% 12% 13% 12% 13% 13% 12% 3% 5% 3% 4% 5% 5% 6% 7% 6% 9% % 13% 14% 12% 13% 1 12% 13% Total Deposits (TL bn) % 62% 62% 62% 62% 61% 62% 62% 61% 58% May Jan-8 Jan-9 Jan-1 Jan-11 While total deposits are rising, it s share in liabilities went down by 3 pps in 211. There is switch from deposits to repo funding. Banking Sector's Asset Structure Other Retail Corporate Gov.Bonds 45% Loan and Deposit, Annual Increase (%) 36% 3% 31% 27% 26% 24% 23% 23% 21% 19% 21% 5% 9% 12% 14% 16% 16% 16% 17% 21% 24% 27% 3 33% 34% 31% 35% 18% 36% 35% 25% 15% Loans Deposits 4 43% 4 35% 32% 28% 26% 32% 29% 25% 5% May-11-5% Feb-8 Feb-9 Feb-1 Feb-11 Given stable funding, loan books continue to grow steadily. But, the recent regulatory changes have started to take their toll on loan interest rates, which should curb some portion of the loan demand in the next months. 5

6 P & L Loan Quality Loan Breakdown Banking Sector (II) Loan Breakdown (27=1) SME Corporate 2 Retail C. Card Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec Retail Loans (Dec 27=1) Mortgage Car General Purpose Credit Card 6 Feb-8 Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Retail loans, especially the general purpose loans, are expected to slow down a bit following the BRSA s recent regulations. 6% 5% NPL Ratio 5.7% (TL Mn. ) 1,3 1,1 9 NPL Provisions (Monthly) 21 Average: TL451 mn 29 Average: TL824 mn Avr: TL35 mn 7 4% 3.4% 3% Feb-8 Sep-8 Apr-9 Dec-9 Jul-1 Feb-11 3,1% Jun-7 Jun-8 Jun-9 Jun-1 32 The NPL ratio fell significantly and provision expenses decelerated to pre-crisis levels. Accordingly, NPL provisions are falling, which is supporting the profitability in 211. (TL Mn. ) 3, 2,6 2,2 1,8 1,4 1, Net Income (Monthly) 21 Average: TL1.8 bn 29 Average: TL1.7 bn Avr: TL1.2 bn 1.5 (TL Mn. ) 4, 3,2 2,4 Net Interest Income (Monthly) 21 Average: TL3.2 bn 29 Average: TL3.5 bn Avr: TL2.5 bn Jun-7 Jun-8 Jun-9 Jun-1 1,6 Jun-7 Jun-8 Jun-9 Jun-1 On the back of strong base effect and new regulations, the sector s net profit went down by 18% in the first five months compared to same period a year ago. 6

7 Focus Rising Current Account Deficit Raises Eyebrows... After contracting 4.7% in 29, Turkish economy grew by a strong 8.9% in 21, and on top of that 11% in the first quarter of 211. Although the strong come back in GDP growth was not a concern regarding the internal balance, i.e. inflation, it raised eyebrows on the external balance front. The swift recovery in growth resulted also in widening the current account deficit back to the pre-crisis level (normalization). After plunging to $14 bn or 2.3% of GDP in 29 as a result of recession, it shot back up to $49 bn or 6.6% of GDP in 21. The increase has continued into 211 as economic growth remained high during the period. It may climb further into the range of 8.5 to 9% of GDP by the end of 211. (Bn. $) (%) % % Current Account Balance % -4.6% -5% CA Bal. CA % of GDP -5.8% -5.6% -6% % -7% May-11* % -2% -3% -4% Since current account deficit is technically the difference between investment spending and savings in the economy, it is the mirror image of foreign capital inflows. Indeed, there was a strong foreign capital inflow into the economy in the five years to 21 averaging $41 bn or 6.3% of GDP a year. This strong foreign appetite allowed the current account deficit to rise by financing economic growth. The fact that Turkey imports raw materials and intermediate goods to produce and grow has added an extra boost to current account deficit. Only 13% of Turkey s imports are consumption goods. The recent spike in energy and other commodity prices inflated the import bill and adversely affected the CAD. Excluding net energy imports, Turkey s CAD ratio (% GDP) was only 1.8% of GDP (vs. 6.6% for total) in Foreign Capital Inflows Into Turkey ($ bn) Total Cap. Inflows FDI May-211 The Authorities Have Already Taken a Variety of Precautionary Measures It would have likely ceased to increase as fast once the recovery gives way gradually to a more stable growth. Nonetheless, some external developments took place towards the end of 21 especially in the crisis stricken developed economies that forced the authorities to switch to a precautionary stance against a continuation of the fast increase in the current account deficit. Most importantly, the FED and the BOJ resorted to quantitative easing by liquefying private T-bond portfolios to support their sluggish growth. The BOE announced plans (but later postponed) and the ECB bought sovereign bonds for a different reason. For all these central banks, balance sheets began to grow again implying monetary expansion. Moreover, given the economy s remarkable resilience during the crisis and swift recovery in the aftermath, all three rating agencies increased Turkey s rating, Moody s to Ba2, S&P to BB and Fitch to BB+, the latter one notch below investment grade driving up the appetite for Turkish assets. As these external developments were seen likely to accelerate the already strong capital inflows into the economy (mainly through banking system as it is typically the case), strengthening the currency and boosting the current account deficit wider, the authorities found it appropriate to take precautionary measures against them towards the end of 21. The objective was to keep the economic growth sustainable, i.e. not allowing an excessive growth in current account deficit through excessive foreign inflows boosting bank lending. 7

8 INFLATION Focus On the monetary policy side, the central bank switched from inflexible inflationary targeting to a framework with the dual policy objectives of low inflation and financial stability. While the former remained still the primary objective that will be controlled by policy interest rates, financial stability would be maintained by restraining bank lending (to the range of 2-25% a year) by adjusting reserve requirements. If for example, the Bank considers inflation outlook is in line with its target while financial stability needs more attention, it would not increase the policy rates but the reserve requirements. Increasing the latter could also restrain bank lending but would invite short term speculative inflows as well that would appreciate the currency and weaken export growth. New Policy Framework of the CBRT Policy Response Policy Interest Rate Unconventional Tools Policy Response Policy Interest Rate Target Policy Response Policy Interest Rate Unconventional Tools Current Policy Response Policy Interest Rate Following the rationale and its belief that bank lending should slow to 2-25% range in annual Unconventional Tools Unconventional Tools terms from the current 3+, the central bank first pulled down its O/N borrowing rate dramatically from 5.75% to 1.5 at once while lowering the policy rate (weekly repo) by 75 bps to FINANCIAL STABILITY (Loan Growth) 6.25%. This was to decrease the TL s yield attractiveness by as much as inflation outlook permits. At the same time, the bank jacked up the reserve requirements from an average of 6% at the end of 28 to 14% in 211 for deposits denominated in TL and from 11% to 12% for those in FX (paying no interest on them). This drained about TL45 bn from the banking system which was then reinstated to the system through the Bank s weekly repo funding operations at 6.25%. Banks would either absorb the difference or reflect to their loans in terms of higher interest rates which would discourage borrowers in return. Hence the expected restraint of the system. Once bank lending slowed to within that range the policy would have reached the target. In using these prudential measures, the central bank intends to incentivize longer maturities for deposit owners by raising reserve requirements much higher in long-end of the curve. It is very important because the TL has become a low real interest rate recently to be preferred as a borrowing currency but the maturity profile is still limited to around 1 month. Project finance on the other hand requires long-term funding. Longer-term deposits will improve match-funding in the banking system and increase its capacity in prudent lending. On the fiscal side, the authorities also followed a more disciplined spending than the expected despite going into general elections in June 211. Fiscal revenues rose by 21% in the first half of the year (including a surcharge on consumer loans in tandem with the central bank s prudential measures) vs. only 5% increase in total spending and 11% rise in non-interest expenditures. As a result, budget surplus quickly rose to $3 bn in the first half of 211, compared favorably with TL34 deficit target for the whole year. The authorities used the proceeds to pay down debt at a roll-over ratio of 88% decreasing the net domestic public debt to about 28% of GDP at Q Other authorities such the bank regulator BRSA also controls bank lending through macro prudential measures such as mortgage financing up to 75% of the house value, much higher capital adequacy than the Basel standards and higher provisioning for lending above a certain limit while the central bank also imposes caps on borrowing for certain consumer loan types such as overdrafts and credit loan balances from a regulatory perspective. Yet the annual loan growth pace was still above 3, so the BRSA has stepped in and took additional measures, specifically aiming at curbing retail loan growth. General provisioning for retail loans were hiked by 3 bps for banks. Additionally risk weighting were increased general purpose loans. 8

9 Focus Precautionary Measures Began To Work... All macro prudential measures and policy moves would (and should) be effective with a lag because hitting the breaks very hard could create other problems. Recently both the economy and the bank lending started to show signs of decelerating their growth rates. 8 6 Retail Loans Annualized Increase (4W MA) First, the banking began to decrease its fast pace of lending growth. Total loan growth has stabilized recently at slightly above 3 following the monetary policy and macro prudential measures. Given that the measures came after the banks completed their budgets and targets for 211 at the end of 21, it should be expected to conform to the 2-25% lending limit imposed by the authorities with a long lag. This would be true especially for the big banks with huge networks. Moreover, competition is vicious in the sector and smaller banks especially would still be in need of increasing their market share trying to turn these limits to their advantage (knowing that the authorities would be keen on too big to fail rather than focusing on the relatively unimportant small ones). Therefore, it would not be surprising to see bank specific limits on the way if the recent stabilization in lending does not slow further into range of 2-25% by the year-end. The deceleration in retail loans was also visible especially following the BRSA s latest regulations detailed in previous page. The competition also made the banks reluctant to increase lending rates and instead absorb at least part of the regulatory costs for quite sometime after the macroprudential measures were put into effect. They have started to raise lending rates only recently as the system s profitability was down by 18% in the first five months of the year compared to same period a year ago. Also industrial production began to show signs of slowing. It slowed consistently every month to 11. annual pace in June 211 from 13.6% in January. Similarly, capacity utilization was down to 73.2% in July from as high as 77% in January, falling every month of the year. Stripped of the seasonality and calendar effects also confirm the slowdown in 211 showing back to back declines since January. The slowdown in industrial production and bank lending will take their toll in GDP growth, which is likely to start slowing starting from second quarter. As could be seen on the next graph, based on second quarter industrial production outturn, the GDP growth would ease around 7% in second quarter from double digit growth in the previous quarter. 4 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Average Loan Rate (%) Start of the rise in Reserve Req. Rates 95 Jan-7 Jan-8 Jan-9 Jan-1 Jan Leading Growth Indicators Industrial Production (SA) Capacity Utilization (SA) GDP Manufacturing vs. Industrial Production GDP Manufacturing Industrial Production GDP Growth 1Q6 1Q7 1Q8 1Q9 1Q1 1Q % 8 75% 7 65% 6 55% 7.8% 9

10 Focus More importantly the recent slowdown in economic activity will help Turkey s imports to lose its strong growth pace. As shown in the next graph, import growth follow the industrial production trend with a couple of months lag. Additionally, global financial and economic conditions this time will also accelerate this trend. TL has depreciated by a strong 19% against a basket of currencies (%5 $ and %5 ) year to date. As it was the case in 28 global crisis, thanks to the rising risk aversion in addition to the depreciating TL, the blue line in the next graph would rebound from its highest levels in the next months. Let us remind that the CA deficit to GDP ratio has dropped to a mere 2.3% at the end of 29 from 6.2% just before the crisis Industrial Production and Export Growth Industrial Production (SA) Import YoY (%) 95 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan In conclusion, the measures the authorities have used in attempting to check financial stability through restraining bank lending appear to bring about results. That they have shown their impact with a long lag is not unexpected. 1