EFTA01097470.pdf

Deutsche Bank O Turkiye: Off the saddle path October 2015 a2c-itrz,:ftr PeArfb-rwt, Obilav M. OztOrk, Chief TOrkiye Economist +44 20 7545 8774 EFTA01097470  Deutsche Bank El Tiirkiye's sliding-door moment Macro outlook [MO]: on a soft patch Global threats [GT] vs. cushions [GC] = no [traditional] EM crisis China's difficult economic transition Excess leverage in some parts of EM Evaporating capital inflows... ... versus stronger fundamentals [GC] in many EM economies Which EM economies appear more vulnerable? Domestic challenges [DC] Turkish politics: from one hung parliament to another? In search of structural reforms Deutsche Bank Deutsche Bank Research EFTA01097471  Deutsche Bank MO-1. Growth remained sub-par yet still defiant in H1 2015... 10 8 6 4 2 0 -2 -4 -6 12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 —Net exports Change in stocks Investments Public consumption Private consumption —Headline real GDP (YoY%) Source: Haver Analyecs. TurkStat. and Deutsche Bank Deutsche Bank Deutsche Bank Research EFTA01097472  Deutsche Bank MO-2. ...while latest high-frequency indicators point to a soft landing... 70 YoY%, 3mma <100 = pessimism 85 60 50 80 40 75 30 20 \ 70 10 0 65 -10 —Vehicle sales —White goods sales -20 House sales 60 -30 Core imports —Consumer confidence (rhs) -40 55 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Source: Haver Analybcs. TurkStat. CBT. and Deutsche Bank Deutsche Bank Deutsche Bank Research 4 EFTA01097473  Deutsche Bank El MO-3. ...as also signalled by the ongoing slowdown in loan growth and capital inflows 70 WoW%, 13ma, annualized 120 USDbn 60 100 50 80 40 30 60 20 40 10 20 0 Total credit growth (FX adjusted, Ihs) 0 -10 - —Consumer credit growth (Ihs) -20 Commercial credit growth (FX adjusted, Ihs) - -20 —Gross financing flows (12m rolling, t-6, rhs) -30 -40 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Haver Analyhcs. CBT, TurkStat. and Deutsche Sank Deutsche Bank Deutsche Bank Research EFTA01097474  Deutsche Bank El MO-4. Current account deficit is likely to improve in H2 2015 not due to the positive ToT shock yet on the back of slower growth 40 USDbn, 12m rolling 2010=100 110 20 DB Forecasts 105 0 100 -20 95 -40 90 -60 -80 85 Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16 —Current account (C/A) —C/A w/o energy and gold Terms of trade (RHS) Source: Haver Anabrace. CST. TurkStat. and Deutsche Sank Deutsche Bank Deutsche Bank Research EFTA01097475  Deutsche Bank El MO-5. Despite dented commodity prices, inflation is set to remain above 7% in the coming period due to re-kindled FX pass-through 14% YoY% USD/TRY 3.6 DB Forecasts 3.4 12% Headline CPI 3.2 3.0 10% DB Forecasts 2.8 2.6 8% - 2.4 2.2 6% 2.0 DB uncertainty 4% Incertainty band 1.8 1.6 2% 1 .4 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Some: Haver Analyucs. CBT. TurkStai. and Deutsche Bank Deutsche Bank Deutsche Bank Research EFTA01097476  Deutsche Bank MO-6. Residents are long in FX and used to balance out movements in TRY, yet not any more since the Fed taper tantrum 170 USDbn Basket/TRY 3.4 160 3.2 —Resident FX deposits 150 3.0 Basket/TRY (rhs) 140 2.8 130 - 2.6 120 - 2.4 110 2.2 100 2.0 90 1.8 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Source: Haver Analytics. CST, and Deutsche Bank Deutsche Bank Deutsche Bank Research EFTA01097477  Deutsche Bank MO-7. CBT has committed to following the footsteps of the FED as part of its framework simplification... 14% - DB Forecasts 13% - Rate corridor 12% - Effective funding rate 9O/O - 8O/O 7O/O - One-week repo 6% - rate 5O/O Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Source: Haver Aralybcs. CBT. and Deutsche Bank Deutsche Bank Deutsche Bank Research 9 EFTA01097478  Deutsche Bank MO-8. ...while alternative rate paths are possible depending on which volatility regime dominates ahead DB Forecasts 2.0 High volatility & late High volatility & and partial - 2.2 simplification at simplification one-shot - 2.4 •••• USD/TRY 2.6 (rhs) Low volatility gradual simpflication 2.8 [DB basecase] 3.0 • ------- • 9O/O One-week repo *..•• •s. 3.2 rate (Ihs) ---h e 3.4 8O/O - • ******* '•..... . ......... •'' . •----- 3.6 7O/O - 3.8 6% 4.0 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Source: Haver Analyhcs. CBT. and Deutsche Bank Deutsche Bank Deutsche Bank Research 10 EFTA01097479  Deutsche Bank MO-9. CBT's FX reserves are shrinking. 150 USDbn 125 - 100 - 75 50 25 0 0 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 r - Gold: ROM/CBT/Other [USD18.3bn] Other FX Deposits [USD2.4bn] Banks' FX Deposits: ROM/RRs [USD68.6bn] CBT: Net usable FX reserves - with public FX deposits [USD28.9bn] - --CBT: Net usable FX reserves - in purest form [USD26.1bn] — — -CBT: Gross FX reserves [USD99.6bn] Note: As of end•September. CBTs net usable FX reserves are calculated by subtracting 'Banks' FX deposits' (either in the form of ROM or FX recpired reserves) and 'Other FX deposits from the CBTs gross FX reserves. The dotted line [CBTs net usable FX reserves • in purest from (i.e. Erectly available for FX sales)) is achieved by further subtract:1g 'Public FX deposits' (i.e. held by the Treasury and other state entities). Figures in parenthesis refer to latest readings. Cars official mid-rate for USOTRYis used for conversion purposes. Source: Haver Analytics. CBT. and Deutsche Bank Deutsche Bank Deutsche Bank Research It EFTA01097480  Deutsche Bank MO-10. ...due to ongoing sales to BOTAS and markets and there is no quick fix 3 USDbn USDbn 9 2 6 1 3 0 0 -1 -2 -3 -4 -5 -6 Jun 13 Nov 13 Apr 14 Sep 14 Feb 15 Jul 15 Contribution by X credits (lhs) FX sales to BOTAS (lhs) FX sales to market (auction & intervention, Ihs) —Cumulative impact of FX sales and X credits since May '13 —Cumulative change in CBT's net usable FX reserves since May '13 Source: Haver Analybcs. CST. and Dolled. Bank Deutsche Bank Deutsche Bank Research EFTA01097481  Deutsche Bank MO-11. Fiscal balances remain under control, yet for how long? mFiscal balance: Outturn 4 `)/O of GDP 42 Primary balance: Outturn % of GDP Fiscal balance: Target 3 — Primary balance: Target —Cent Govt Debt (RHS) 2 40 38 -2 - 36 -3 - -4 34 11 12 13 14 15F 16F Source: Haver Analyfics. Ministry of Finance. and Deutsche Bank Deutsche Bank Deutsche Bank Research 13 EFTA01097482  Deutsche Bank GT-1. The potential impact of a hard landing in China Cumulative loss in output over a five year period (%) 0 2 4 6 8 10 12 14 16 ARG CHN RUS SGP MAL THA SAR IDN HKG POL -or BRZ TUR 7.3 JAP ~i CHL PHL Simulation of an investment IND led slowdown that takes GER growth in China to 3% by ITA 2017 compared with a more ZAF gradual deceleration to 6.4% MEX by 2019 FRA KOR UK AUS US CAN Source:: Guavin and RetilLard. 2015 (Banque de France worlung papar no. 562) Deutsche Bank Deutsche Bank Research 14 EFTA01097483  Deutsche Bank El GT-2a. Cheap funding has resulted in large rise in debt in some cases Change in debt since 2007 (percent GDP) -10 0 10 20 30 40 50 60 70 80 90 China Malaysia Thailand Turkey ........ Brazil Poland Russia Mexico Hungary Indonesia • Households South Africa Nonfinancial companies India Government Source. IMF end Deutsche Bank Deutsche Bank Deutsche Bank Research EFTA01097484  Deutsche Bank GT-2b. Borrowing has been funded in FX in some cases 45 - Foreign currency debt of non-financial firms and households (% GDP) 40 - 35 - 1 ■ 2007 ■ 2014 r -- 30 - 25 - 1 20 - 15 - 10 - 5 - 0 Argentina Colombia India Brazil Indonesia South Russia Turkey Poland Chile Africa Source: IMF and Deutsche Bank Deutsche Bank Deutsche Bank Research EFTA01097485  Deutsche Bank CI GT-2c. While sovereigns have mostly avoided ramping up their dollar borrowing, foreign ownership of local currency debt has risen. 70 % of total government debt 60 Foreign-held local currency • FX 50 r 40 I 1 1 30 20 10 0 07 2014 2007 2014 2007 2014 2007 2014 I 200;1201 2007T2014 200;[2014 200712014 2007-12014 200712014 Thailand Brazil Colombia Indonesia Turkey South Romania Hungary Mexico Poland Africa Source: IMF and Deutsche Bank Deutsche Bank Deutsche Bank Research 17 EFTA01097486  Deutsche Bank El GT-3a. Capital flows to EM: down but not out 400 Net foreign purchases of EM assets (12m sum, USD bns) 350 300 • Debt • Equity 250 200 150 100 50 I 0 I 0 I I 2011 2011 2012 2013 2014 2015 Soums: IF end Deu,sche Ezni, Deutshe Bank Deutsche Bank Research 18 EFTA01097487  Deutsche Bank GT-3b. Capital outflows have been about 70-80% of the magnitude observed during the 2013 taper tantrum Days before and after reversal t-30 t+30 t+60 t+90 t+120 t+150 t+180 10 0 Current -10 Taper tantrum -20 -30 -40 Global financial -50 crisis -60 Cumulative portfolio flows to EM (USD bns) ** " Sam* of seven Err countries Source: OF and Deutsche Bank Deutsche Bank Deutsche Bank Research EFTA01097488  Deutsche Bank El GC-1. Foreign reserves are substantial in EM 18 EM reserves (months imports) 16 14 12 10 8 6 4 2 0 80 85 90 95 00 05 10 15 Sour.. Hawer AnaWs and Oeutscne Bank Deutsche Bank 00.00 Bank R0500,0 20 EFTA01097489  Deutsche Bank El GC-2. Government debt levels in EM well below DM 120 Government debt (% GDP) Forecast 100 80 Advanced 60 40 - Emerging 20 - 0 95 00 05 10 15 20 Source: Haver Analytics end Deutsche Bank Deutsche Bank Deutsche Bank Research 21 EFTA01097490  Deutsche Bank Finding the weakest EM: who has enough reserve cover? Foreign reserves (% external financing needs) PHL 1,384 PER 611 KOR 580 RUS 540 CHN 507 THA 394 TWN 365 ISR 325 More vulnerable BRZ 266 EGY 222 IND 191 HUN 190 IDN 177 COL 167 MEX 153 CZE 132 POL 116 CHL 112 MAL 99 ROM 89 VEN 85 ZAR 71 ARG 67 TUR 61 UKR 22 0 200 400 1000 1600 Source: Haver Anatees. World Bank Ouarterly Externe] Debt Stabstics. National Central Banks. Deutsche Bank Research Deutsche Bank Deutsche Bank Research EFTA01097491  Deutsche Bank 0 Finding the weakest EM: FX is already cheap but further adjustment may have to required to restore external balance 10 Fair value according to DB BEER model (%) 5 0 -5 - -10 - -15 - Undervalued -20 - -25 - -30 -35 COP RUB BRL CLP MYR ZAR TRY MXN POL RON IDR HUF INR TWD CZK ILS KRW THB PHL CNY Source: Deutsche Bank Research Deutsche Bank Deutsche Bank Research EFTA01097492  Deutsche Bank Finding the weakest EM: macro adjustment in major EM economies has been limited since the Fed taper tantrum India has adjusted Brazil has not... ...and nor has Turkiye Growth Growth Growth 1.0 Fiscal 1.0 Fiscal 1.0 Fiscal , Inflation Inflation balance balance / Inflation balance Public Credit Public Credit Public Credit debt growth debt growth debt growth FX Private FX Private FX Private valuation debt valuation debt valuation debt Reserve Real Reserve / ‘. Real Reserve cover rates cover rates cover N rateReals Current Current Current account account account —Current — Pre taper tantrum —Current — Pre taper tantrum —Current —Pre taper tantrum The chart show vulnerability scores for ten indicators from 0 (least vulnerable) to 1 (most vulnerable) such that a move towards the centre of the web represents a reduction in vulnerability Source: Haver Malytics and Deutsche Bank Deutsche Bank Deutsche Bank Research 24 EFTA01097493  Deutsche Bank El DC-la. AKP lost her overall majority in the June 2015 elections for the first time since 2002 400 # of MPs 367: Constitutional 350 majority (outright) 330: Constitutiona <=. 11M•11•01MIE majority (via referendum) 300 - 276: Absolute majority 1 0 250 - 258 200 -u-AKP CHP -N-MHP -E-HDP* Others** 150 - 132 100 - 80 50 - 0 2002 2007 2011 2015 Note: (1HOP .s been established in 2012. Hence. figures for 2007 a. 2011 represent former pro.Kurdish ',a.m. i.e. DTP and BDP. In 2002, HEDAP entered as a single party, but remained at 6.2.. (—I Others' inc.. smaller political parties and independent candidates. Source: YSK. TurkStat. and Deutsche Bank Deutsche Bank Deutsche Bank Research 25 EFTA01097494  Deutsche Bank DC-lb. Latest opinion polls still point to another hung parliament... 50 MHP `)/O of the national vote 18 16.5 15.8 15.4 15.3 15.3 • 16 45 AKP • • • 13.0 42.2 42.9 42.4 . .......... .......... 11.6 * 40 12 40.7 ••"" .....**** *** *********• *************** 12.5 HDP [rhs] 12.3 10 35 - 10% election 8 Others [rhs] threshold 30 4.8 6 26.7 26.4 26.9 • • • .1/ 26.2 ,A. 4 . ****** ************* ••-. * 25 - 3.5 3.5 t 3.4 25.1 3.2 2 CHP 20 0 June '15 elections Jun [2] Jul [2] Aug [7] Sep [8] Note: Results for June '15 elections refer to only domestic votes. Figures in parenthesis denotes number of pollsters available in respective month. The sample size is based on top-I0 pollsters (measured as accuracy in June 'IS elections) Much consistently release results. Source: MAK. Kends. Gezid. ORC. SONAR. Metropoll. Andy.AR. A&G. Denge. GENAR. and Deutsche Bank Deutsche Bank Deutsche Bank Research