DenizBank Economic Update3 Economy (II) DenizBank Economic Update November 2018 0 31 %...
Transcript of DenizBank Economic Update3 Economy (II) DenizBank Economic Update November 2018 0 31 %...
1
DenizBank Economic Update
November 2018
Economy
Financial Markets
Banking Sector
Economic Research and Strategy
Saruhan Özel, Ph.D.
Ezgi Gülbaş
Deniz Bayram
2
Economy (I)
DenizBank Economic Update
November 2018 In
fla
tio
n
Gro
wth
Inflation climbs to 25.2% as the deterioration in pricing dynamics continue...
● Consumer prices rose by 2.7% MoM in October. While highest contribution to monthly inflation came from seasonal price increases in clothing (12.7% MoM) and rising food prices (3.2% MoM), price hikes in ex-change rate sensitive core goods such as transportation and household equipment) were still significant.
● October imprint took annual inflation to 25.2% from 24.5%, its highest level since 2003. Upward trend in core inflation (24.3%) and price hikes spreading across all categories indicate significant deterioration in pricing behavior. Moreover annual PPI inflation remained elevated at 45%, suggesting cost-push pressures will persist. As lagged impact of FX depreciation continue, we expect headline inflation to remain above 20% in 1H19, before high base effect kicks in. Our 2018 and 2019 year-end inflation expectations are at 25% and 16%, respectively.
● Following the 625 bps hike in in September meeting, Central Bank (CB) kept the policy rate constant at 24% in October. Yet CB keeps the hawkish tone and the tightening bias, reiterating that the tight monetary stance will be maintained until gloomy inflation outlook displays significant improvement. Recent apprecia-tion of 9% in TL since the last meeting and contraction in economic activity provides a case for CB against further rate hikes. However, given the elevated levels of inflation expectations, we expect CB to avoid any premature rate cuts and keep the policy rate at least at current levels until the end of 1H19.
Slowdown in economic activity deepens in 4Q18...
●Following the strong economic growth (6.2% YoY) in first half of 2018, leading indicators demonstrate a significant downturn in economic activity starting from 3Q18. Industrial production (IP) was up 0.5% in 3Q18 compared to 7.3% in 1H18, signalling economic activity remained roughly flat in 3Q18.
●Moreover, preliminary indicators suggest contraction in economic activity in 4Q18. Manufacturing PMI de-creased to 44.3 in October from 46 in 3Q18 and capacity utilization decreased to %73.7 in November from 77%, indicating IP growth turned to negative territory in 4Q18. Moreover, consumption good imports de-creased by 40% in October and auto (-68%) and white goods sales (-29%) nosedived, reflecting the sharp contraction in domestic demand. This is also evident in 1% nominal decrease in consumption tax revenues.
● As contraction in bank loans accelerated (-10.1%, see page 5), we expect a more severe slowdown in economic activity in 4Q18. As growth turns to negative in 4Q18, we expect 2018 full-year growth rate to decrease to 1-1.5%.
-1%
1%
3%
5%
7%
9%
11%
-4%-2%0%2%4%6%8%
10%12%14%16%18%20%
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
3Q
13
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
3Q
16
1Q
17
3Q
17
1Q
18
3Q
18
GDP and Industial Production (YoY Change, NSA)
Industrial Production
GDP (Right Axis)
42
44
46
48
50
52
54
56
58
72%
74%
76%
78%
80%
2013 2014 2015 2016 2017 2018
Manufacturing Industry Leading Indicators (Seasonally Adjusted)
Capacity Utilization Rate
PMI
25.2%
24.3%
2%4%6%8%
10%12%14%16%18%20%22%24%26%28%
Headline CPI
Core CPI
Headline and Core Inflation
24.0
19.9
6
8
10
12
14
16
18
20
22
24
26
28
30
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
Weekly Repo Rate
Average Funding Rate
O/N Lending Rate
O/N Borrowing Rate
LLW Lending Rate
BenchmarkBond Yield
Policy Rates (%)
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Economy (II)
DenizBank Economic Update
November 2018
Ex
tern
al S
ec
tor
Improvement in external balances gains momentum...
● Slowdown in economic activity led to a rapid improvement in external balances in 3Q18. In August and September, current account recorded all-time high monthly surpluses (Aug:$1.9 bn, Sep:$1.8 bn), and 12-month trailing current account deficit (CAD) decreased further to late 2017 levels of $46.1 bn (5.8% of GDP) from a peak of $58.3 bn in May.
● Due to sharp slowdown in domestic demand and strong export performance, core annual CAD (exc. ener-gy and gold) turned into a surplus ($2.6 bn) for the second time since May 2015. Net gold imports decreased significantly, although still high at $10.3 bn on 12-month basis. On the other hand, energy deficit continued to worsen ($10.4 bn annually) due to higher energy prices (Brent oil $75/bbl in Sep 18 vs. 61$/bbl in Sep 17), though at a slower pace. As oil prices retreated sharply below $60/bbl in November, prolonged deterio-ration in energy deficit may also come to an end in last two months of 2018.
● Quality of CAD financing worsened as reserve drawdowns ($24.6 bn annually) together with net errors and omissions ($21.2 bn) have been the main source of financing, and capital outflows continued.
● Significant decrease in trade deficit (imports down by 23%) points to another record high current account surplus in October. As contraction in domestic demand continues, we expect CAD (% of GDP) to decrease to 4.4% by the end of 2018.
Budget deficit continues to widen as tax revenues weaken...
● In the first 10 months of 2018, central government budget deficit rose by 78% to TL 62 bn from TL 35 bn in the same period of 2017, bringing 12 months trailing budget deficit to TL 75 bn (1.9% of 2018). Budget expenditures increased by 23% due TL 24 bn benefit handed out to pensioners , increase in the capital spending and rising interest expenses in first ten months of 2018. On the other hand, increase in tax reve-nues were limited (18%). Due to weaker domestic demand and new regulation curtailing special consump-tion tax on oil, indirect taxes increased 12% in January-October, compared to 15% inflation in same period. Non-tax revenues (up 87%) partly compensated the slowdown in tax revenues.
● Significant slowdown in tax revenues pose risk on government’s 1.9% budget deficit and 0.1% primary surplus target in 2018, which requires slowdown in expenditure in last two months of 2018. Government commits to fiscal discipline in 2019 according to the recently announced budget plan targeting a 1.8% (%of GDP) deficit and a primary surplus of 0.8%.
Pu
bli
c S
ec
tor
-17
-53
-40
-18
-29
-19-23 -24
-30
-47
-62
-72
-1.8%
-5.3%
-3.5%
-1.3%
-1.9%
-1.0%-1.1%-1.0%-1.1%-1.5%
-1.6%
-1.9%
-6%
-5%
-4%
-3%
-2%
-1%
0%
-80
-70
-60
-50
-40
-30
-20
-10
0
Budget Balance (TL Bn)% of GDP
*January-October 2018
33
0 8
24
19
31
2730
21
9
35
3.3%
0.0%0.7%
1.8%
1.2%
1.7%1.3%1.3%
0.8%
0.3%0.1%
0.1%
0%
1%
2%
3%
4%
0
10
20
30
40 Primary Budget Balance (TL Bn)% of GDP
*January-October 2018
-40-12
-45
-75
-49-65
-44-32 -33
-47 -46
-5.2%
-1.9%
-5.9%
-9.0%
-5.6%-6.8%
-4.7%-3.7%-3.8%
-5.6%-5.8%
-15%
-13%
-11%
-9%
-7%
-5%
-3%
-1%
1%
-110
-90
-70
-50
-30
-10
Current Account Balance (Bn $)
CA Balance CA Balance (% of GDP)
-46.1
2.6
-35.7
-80
-60
-40
-20
0
20
2010 2011 2012 2013 2014 2015 2016 2017 2018
Current Account Balance
Current Account Balance (ex. gold)
Current Account Balance (ex. energy and gold)
Current Account Balance (Bn $ , 12M Trailing)(Bn $)
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Financial Markets
DenizBank Economic Update
November 2018
De
bt
Ma
rke
t
Turkey’s 2-year benchmark bond yield decreased below 20% in November (-450 bps) to July 2018 level, from a peak of 28% in August (2017: 13.4%)
Cu
rre
nc
y M
ark
et
Sto
ck
Ma
rke
t
TL appreciated by 27% since the sharp drop in August (8% in November), recovering most of its losses. Yet, YtD depreciation in TL is still high at 28% while EM peers depreciated by 9% on aver-age.
MSCI Turkey index was up MoM by 5.6% (in TL terms) in November, in line with EM peers. On YtD basis, MSCI Turkey index was down by 18%.
Data retrieved from Bloomberg as of 14:00 (GMT + 3), 30.11.2018
24.0
19.9
6
8
10
12
14
16
18
20
22
24
26
28
30
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
Weekly Repo Rate
Average Funding Rate
O/N Lending Rate
O/N Borrowing Rate
LLW Lending Rate
BenchmarkBond Yield
Policy Rates (%)
-0.4%
1.1%
13.3%
2.2%
-2% 0% 2% 4% 6% 8% 10% 12% 14%
Turkey
Poland
Russia
Brazil
CDS
210
167
67
388
EM CDS Spreads Monthly Change (%, 5 Year)
7.6%
8.1%
-1.5%
1.8%
0.3%
1.7%
0.9%
0.5%
-3.4%
-4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
ZAR
TRY
RUB
PLN
MXN
KRW
HUF
CZK
BRL
Monthly Change Against $ (Positive Values= appreciating against $)
60
80
100
120
140
160
180
2014 2015 2016 2017 2018
Stock Market Performance (Jan-14=100)
MSCI Turkey Index
MSCI EM Index 5.6%
2.1%
1.0%
13.6%
0% 2% 4% 6% 8% 10% 12% 14%
EM Banks
US Banks
EU Banks
TR Banks
Monthly Performance of Banking Shares (%)
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Banking Sector (I)
DenizBank Economic Update
Ca
pit
al
Turkish banking sector has a strong capital base. Capital Adequacy Ratio is at 18.2% as of Octo-ber 2018.
Fu
nd
ing
Deposits went up YoY by 19% (3.1% net-of-currency) to TL 2.1 trillion as of November 18. The share of deposits in funding is stable at 54%.
Le
nd
ing
Contraction in loans (13 week average net-of-currency) accelerated to an annualized rate of 10.1% in November.
November 2018
-10.1%-20%
-10%
0%
10%
20%
30%
40%
50%
2011 2012 2013 2014 2015 2016 2017 2018
Loan Growth Rate(13W MA, Annualized, Net of Currency)
Macro Prudential
Measures
Credit Guarantee Facility
140
150
160
170
180
190
200
210
220
500
600
700
800
900
1000
1100
2013 2014 2015 2016 2017 2018
Deposits
TL deposits (TL bn)
FX deposits ($ bn, right axis)
17
0
16
5
15
2 16
1
14
7
14
4
14
3
13
6 14
4
14
0
5060708090
100110120130140150160170180
Liquidity Coverage Ratio
Regulatory Minimum75
8877
10291
10090 85
95
74
20.6%19.0%
16.6%17.9%
15.3%16.3%
15.6%15.6%16.9%18.2%
14.0%13.3%13.2%14.1%14.5%
0%
5%
10%
15%
20%
25%
0
20
40
60
80
100
120
2009 2010 2011 2012 2013 2014 2015 2016 2017 Oct 18
Owners' Equity CAR Core Capital RatioCapital and CAR ($ bn, %)
32% 29% 23% 20% 17% 15% 14% 13% 12% 12%
47% 52% 56% 58% 60% 62% 63% 64% 64% 61%
21% 19% 21% 22% 23% 23% 23% 24% 23% 27%
Other Loans Gov. Bonds
Breakdown of Total Assets
69% 67% 65% 62% 61% 60% 59% 58% 56% 54%
10% 12% 14%14% 17% 18% 19% 20%
19% 21%
13% 13% 12% 13% 11% 12% 11% 11%11% 10%
7% 7% 9% 10% 10% 11% 11% 11% 14% 15%
2009 2010 2011 2012 2013 2014 2015 2016 2017 Oct-18
Other Capital Wholesale Deposit
6
Banking Sector (II)
DenizBank Economic Update
Lo
an
to
De
po
sit
Ra
tio
s
Loan to deposit ratio (LDR) and TL LDR decreased to 117% and 139%, respectively.
Lo
an
Qu
ali
ty
Headline NPL ratio for the banking sector rose moderately to 3.5%.
P &
L
As of October 2018, 12 months cumulative profit increased YoY by 15% to TL 54 bn. RoE of the sector decreased slightly to 14.2%.
November 2018
20
30
40
50
60
70
80
90
100
110Protested Bills and Unpaid Cheques(# Thousands)
Protested Bills (3 Months m.a)
Unpaid Cheques (3 Months m.a)
33%
43%
51% 62%
71%
79%
80%
76%
84% 97
%
102%
108%
115%
118%
118%
123%
117%
0%
20%
40%
60%
80%
100%
120%
140%Loan to Deposit Ratio (%)
33% 46
% 60% 71
% 87%
93%
90%
84%
87% 10
5%
112% 12
4%
131%
141%
134% 14
8%
139%
0%
20%
40%
60%
80%
100%
120%
140%
160% TL Loan to Deposit Ratio (%)
13.420.2 22.1 19.8 23.5 24.7 24.6 26.1
37.5
49.153.8
-10%
50%
10%
-10%
19%5%0% 6%
44%
31%
15%
0
10
20
30
40
50
60
-20%
0%
20%
40%
60% 12 Months Cumulative Profit
Net Profit (Bn TL)
18.0
20.6 19.016.6 17.9
15.3 16.3 15.6 15.6 16.9 18.2
16.5
20.5
18.0
14.2 14.413.1
11.4 10.513.3
14.9 14.2
0
5
10
15
20
25
0
5
10
15
20
25 CAR (%) ROE
3.5%
2.8%
5.9%5.5%
2.5%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2013 2014 2015 2016 2017 2018
Headline Consumer LoansCredit Cards SMECorporate-Commercial