DenizBank Economic Update

Transcription

1 Economy Financial Markets Banking Sector Focus Farewell to Unorthodox Policy Stance Economic Research and Strategy Saruhan Özel, Ph.D. Ercan Ergüzel Berke Gümüş Doğukan Ulusoy 1

2 External Sector Growth Economy (I) Leading Growth Indicators Industrial Production (SA) Capacity Utilization (SA) 85% 8 75% 7 65% Confidence Indices Optimism Threshold Consumer Sector Industrial Sector 95 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 55% 5 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 After the surprisingly strong July figure, the industrial production growth in Turkey went up by a humble 3.8% in August, compared to the same month a year ago. Yet, signaling a slowdown, since it is the lowest outturn since the end of 29. The slowdown in economic activity was also visible in seasonally and work day adjusted figures (SA), plummeting by 2.6% in August compared to the previous month. Barring machinery, the slowdown in production was visible across all major sectors. Confirming the economic slowdown, the industrial sector confidence index has dropped to 11.9 in October, the lowest figure since the end of last year. Consumer confidence index is flat around 93, any release below signaling a negative consumer sentiment. On the flip side, the capacity utilization rate (SA) went up to 75.1% in October, fourth consecutive rise in a row, showing that the strong slowdown in third quarter was a temporary one and the economy is landing softly. (Bn. $) (%) % % Current Account Balance % % CA Bal. -5.8% -5.6% -6% CA % of GDP % -7% Jan-Aug % -2% -3% -4% -5% (Bn $)Current Account Deficit (12M Trailing) 2 Non Energy Deficit -2 Energy Deficit Current Account Deficit Current account deficit (CAD) in July has risen to $4. bn in August from $3. bn deficit a year ago. The outturn was exactly the same with the consensus estimate, carrying 12M trailing deficit to $75.1 bn, corresponding to ~9.5% of GDP, in our calculations. On the bright side, the correction in the CAD appears to have started. In addition to the deceleration in commodity and energy prices, slowing domestic economic activity and weaker TL will be instrumental in this correction. In the Medium Term Programme (MTP) released this month, the government expects the CAD to reach 9.4% of GDP this year before falling to 8. next year, in fact a worse estimation when compared to the market s and IMF s expectations hovering around 7-7.5%. As per the government, the improvement in the CAD will gradually fall to 7% of the GDP by year 214. The discrepancy between Markets/IMF and the government expectation is emanating from diverging growth projections, such that the government envisages strong growth performance to continue in the coming years. In the MTP, the government also briefly describes several measures, which will help to curb the CAD, such as increasing energy efficiency. But most are long term solutions... 2

3 Public Sector Inflation Economy (II) CPI and CPI Expectation 12% CB Survey Expectations 12% 1 Headline and Core Inflation Headline CPI 8% 4% 6.15% 6.83% 8% 6% 6.96% 6.15% % Core CPI 2% Annual CPI inflation has fallen slightly to 6.15% in September from 6.65% a month before. On the other hand, the core CPI is rising faster recently having reached 6.96% in September from as low as 2.5% a year ago. Weaker TL on the cost side and strong domestic consumption on the demand side were instrumental for the rise in core indices and we are likely to see further pass-through from weaker TL to the CPI in the forthcoming period. On the bright side, it will be balanced by the fall in domestic demand to some extent. Accordingly, the CBRT revised its 211 inflation forecast higher. It raised its year-end projections to a midpoint of 8.3% (in the range of 7,8% to8.8%) from 6.9%.Due to the recent rise in administrative prices and tax hikes, it is possible that the yearend CPI may even reach to double digits. As of today, 12 months forward inflation expectation is benign and standing at 6.84%. But rising inflation may distort the expectations. Thus, the CBRT has announced a five-point action plan on 26 th of October. For details, please refer to Focus Section of this report. -2% -4% MTP Budget Balance to GDP Targets -1.8% -1.7% -1.5% -1.4% % -5.5% 5 3 MTP Government Debt to GDP Targets 46% 42% 37% 35% 32% -6% 28A 29A 21A 211E 212E 213E 214E 28A 29A 21A 211E 212E 213E 214E The central government budget yielded a deficit of TL1.9 bn in September. Thus, the year-to-date surplus has decelerated to TL.2 bn from the deficit of TL21 bn last year in the first three quarters. The stellar performance was mainly due to 22% surge in tax revenues since year to date. Additionally, interest expense was down 1 at the same period. The former was mainly on the back of strong domestic growth and the latter is mainly due to falling government bond yields. It is not very good news that VAT levied on imports went up by a whopping 56% in September compared to last year, while total tax revenues rose by a mere 19%, signaling that the slowdown in imports is not to some extend as hoped by the authorities. Confirming this outturn, the foreign trade balance was released a couple of weeks later, showing foreign trade deficit has risen by 55% in September, compared to a year ago. The recently released MTP show that the government is still aiming to pursue a disciplined budget performance for the next there years. Accordingly, the year-end budget deficit will be 1.7% and it will gradually decelerate to 1% until 214. On the back of this performance, the government debt to GDP ratio will decrease to 32% in 214 from.. Very low indebtedness levels compared to emerging peers, may enable Turkey s credit rating to be increased to investment grade soon. 3

4 Stock Market Currency Market Depreciate Appreciate Debt Market Financial Markets EM CDS Spreads and Ratings (5 Year; Fitch, LT FX) 9 TR, BB+ Hun, BBB- Rus, BBB Bra, BBB Benchmark Bond Yield (%) Benchmark Bond Yield (Compounded) 3 Dec-8 Dec-9 Dec % 1 Policy Rate (Compounded) O/N Equivalent: 5.92% 5 Oct-8 Jun-9 Mar-1 Dec-1 Aug-11 While Turkey s CDS spreads are falling, benchmark 2-year government bond yields are approaching towards 1, mainly on the back of the CBRT s new policy framework EM Currencies (Dec 28=) Dec-8 Aug-9 Apr-1 Dec-1 Jul-11 BRL MXN CZK PLN HUF ZAR 1.3 % Change Against $ (Positive Values= appreciating against $) Monthly Change(%) 11 KRW TRY JPY TRY HUF CZK BRL KRW ZAR GBP EURO Due to rising interest rates, the TL has strengthened almost 6% against the USD in the last one month Stock Market Performance (Sep 28=) MSCI Turkey Index Bank's Equity Prices (Jan 28 = ) EM Banks US Banks EU Banks TR Banks 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 Turkish banks are underperforming peer countries banks. Banks profitability is expected to be affected negatively from rising interest rates because of the duration mismatch between assets and liabilities. 4

5 Lending Funding Capital Banking Sector (I) % Sector's Capital Strength ($ bn) 22% Owners' Equity Free Capital 21% CAR 19% 19% 18% 17% 25% 15% 6 5 Capital Adequacy Ratio by Bank Groups Private Banks' CAR State Banks' CAR Foreign Banks' CAR Q % 3 16% 16% 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 Funding 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% Jun Feb-8 Feb-9 Feb-1 Feb-11 While total deposits are rising, its share in liabilities went down by 3 pps in 211. However, thanks to rising interest rates, deposit growth will accelerate in the remainder of the year. 36% 3% 31% 27% 26% 24% 23% 23% 21% 19% 21% 5% 9% 12% 14% 16% 16% 16% 17% 21% 24% 43% Banking Sector's Asset Structure Other Retail Corporate Gov.Bonds 27% 3 33% 34% 35% 32% 28% 26% 31% 35% 18% 36% 32% 29% 25% Jun-11 35% 3 25% 15% 1 5% Loan & Deposit Annual Increase (%) (Parity Effect Eliminated) Loans Deposit -5% Some portion of the rise in total loans is coming from the TL depreciation, such that while annual loan growth is topping 38%, it is in fact 29% when the $/TL parity effect is eliminated. 5

6 P & L Loan Quality Loan Breakdown Banking Sector (II) Loan Breakdown (27=) SME Corporate 22 Retail C. Card Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun Retail Loans (Dec 27=) Mortgage CAR General Purpose Credit Card 6 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Retail loans have recently started to slow down, especially on the back of BRSA s new regulations. 6% 5% NPL Ratio 5.8% (TL Mn. ) 1,3 1, 9 NPL Provisions (Monthly) 21 Average: TL451 mn 29 Average: TL824 mn Avr: TL35 mn 4% 3.2% 3% 2.8% 2% Feb-8 Sep-8 May-9 Dec-9 Jul-1 Mar-11 Oct Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 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, 6 Net Income (Monthly) 21 Average: TL1.8 bn 29 Average: TL1.7 bn Avr: TL1.2 bn 2 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11.8 (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 1,6 Jun-7 Jun-8 Jun-9 Jun-1 Jun Net income has fallen significantly in August, mainly due to the fall in net interest income on the back of negative performance of CPI linkers. 6

7 Focus Farewell to Unorthodox Policy Stance... The Central Bank of Turkey (CBRT) announced significant changes in its monetary policy this month. In the old scheme, the policy was to tighten the reserve requirement rates (RRRs) while easing the policy rate. The CBRT was tightening the RRRs because loan growth was too strong, creating imbalance between domestic and foreign demand conditions, which leads to a widening in the current account deficit (CAD). On the other hand, the CBRT was easing the policy rate (or at least keeping it constant around 6%), because inflation was under control. Additionally, thanks to low interest rates, interest expenses paid on government bonds have fallen sharply in the last years, or in other words public finance benefited substantially from the single digit borrowing costs. Moreover, keeping the interest rates low would discourage TL demand from short term speculative inflows, making it weaker and helping to curb the CAD. In this setting low interest rates and high RRRs-, the CBRT has almost managed a year. However, mainly on the back of the negative mood in global financial and economic conditions, financial markets have started questioning the strength of the TL given Turkey s rising CAD, and as a result it devalued by more than in between September 21 and July 211. In fact, a weaker TL was positive development from the CAD perspective, helping exporters to gain competitive advantage and slow down domestic demand for imports. Therefore, the CBRT did not seriously intervene in the market at all in the beginning. Even, some could say that the CBRT has supported the weaker TL in its rhetoric. But, at some point it started to be a real problem for inflation. Although the CPI is 6.15% in annual term as of today, fairly in line with the year-end target of 5.5%, the core inflation is rising 11 month in a row and currently 7.4%, signaling that the headline inflation will rise sharply in the coming months, mainly on the back of weaker TL, not because of excess demand...accordingly, the CBRT has increased its year end inflation forecast to 8.3%. Moreover, due to the tax and other administrative price hikes, some analysts expect the headline CPI to reach double digits in the next couple of months; this might severely distort inflation expectations. All in all, the CBRT had to do something to stop further weakness in the TL. Hence it sold more than $8 bn to the market since the beginning of August, however TL against the basket (5 $ and 5 ) has devalued by an additional 8% on top of previous depreciation Therefore, the CBRT announced a comprehensive action plan in an aim to reinforce the value of the TL: 1- Interest Rates: Previously, the policy rate of the CBRT was one week repo rate, standing at 5.75%. Based on banks liquidity requirement, the CBRT was funding them through one week repo. In the new policy framework, the new policy rate of the CBRT is in fact an interest rate corridor in between 5.75% and 12.5%. CBRT will decide whether to open weekly repo auctions or not and in case it doesn t, banks will be obliged to borrow from O/N lending rate which is 12.5% (or 12% for primary dealers) Following the announcement, the market interest rates have exceeded 1, which is in fact new effective policy rate in Turkey. 2- Reserve Requirement Rates: The CBRT decreased the RRR rates from 12.5% to 1.6% on weighted average. There are several reasons for this change, in our opinion: i- It was understood that the rise in RRR is not so effective in curbing loans. The RRRs were hiked from 6% to 14% in between November 21 and April 211, but we did not see strong deceleration in loan growth until the BRSA s new regulations (specifically targeting retail loans) were introduced. ii TL Reserve Requirement Rates (Deposit and Bonds %) Demand -1 Month 1-3 Month 3-6 Month 6-12 Month Over 1Y Up to 1Y 1-3 Year 3+ Year Nov 21 Dec 21 Jan 211 Mar 211 Apr 211 Oct 211 Such a huge rise in the RRRs has negatively affected the banks profitability, such that year to date net profit as of August 211 went down by 15% compared to the same period last year. As explained above, the rise in market interest rates will exacerbate the fall in profitability, since there is duration mismatch between assets and liabilities. 2 bps cut in the RRRs will compensate some portion of this negative effect. 7

8 Focus iii- The main reason why the CBRT previously increased the RRRs was to slow domestic demand. Since the CBRT has changed its unorthodox policy stance, and raised the policy rate as explained above, there is no need to use the RRRs aggressively. 3- Currency: The CBRT has explicitly stated that it will not tolerate excessive volatility and further devaluation in the TL. For this reason, as explained above, it changed its unorthodox stance and increased the policy rate strongly. It also stated that FX selling auctions will continue. But to do so, it needs strong reserves, but it decreased to $82 bn from $94 bn in the last two months. In other words, it was a bad signal from market s perspective. Therefore, the CBRT had to find creative ways to increase its reserves while selling them to defend the TL. Hence, the upper limit for FX reserves that may be held to meet Turkish lira reserve requirements is raised from to of lira liabil- 2.3 TL Against the Basket (5 $, 5 ) ities. Thus, the Bank s FX reserves are expected to increase by about $5 bn. This would also support the banks 2.2 profitability since the cost (and lending) of FX funding is 2.1 substantially lower than TL funding (and lending) 2 In summary, the most important problem for the CBRT was the rising current account deficit in year 211. However, due to weaker TL, inflation is expected to rise strongly in the next few months. Therefore, the CBRT has intervened with several policy tools, especially rising interest rates. So far, it seems to be working and the TL against the basket has strengthened by a strong %5 in the last two weeks Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 8