Turkish Economy - Tacirler · Consumer loans Avg. total loan growth (2013-17) (13wMA growth,...

Turkish Economy2019 Economic Outlook

January 2019

Ozlem Bayraktar Goksen

Chief Economist

Tel: +90 212 355 2637

[email protected]

Source:Turkstat, CBT, ISO/Markit, Tacirler Investment

2Economic Outlook - 2019

PMI continues to imply contraction in Manufacturing IP Manufacturing Industry's demand for input has been declining

Economic Growth (Production) Tendency surveys provide strong proof of sharply decelerating economic activity

IP Diffusion Index signals that the weakness is spreading amongst sectors Export orders partly offset weaker domestic side

28 January 2019

-3%

-2%

-1%

0%

1%

2%

3%

40

45

50

55

60

Jul-

14

Oct

-14

Feb

-15

May

-15

Sep

-15

Dec

-15

Ap

r-1

6

Jul-

16

No

v-1

6

Mar

-17

Jun

-17

Oct

-17

Jan

-18

May

-18

Au

g-1

8

Dec

-18

PMI (3MMA)

Manufacturing IP (3MMA, m/m chg, rhs)

PMI has been oscillating way below 50

threshold since April 2018, indicating

contraction in the manufacturing

industry. In addition, the current levels

are the lowest recorded since 2009.-%15

-%10

-%5

%0

%5

%10

%15

%20

%25

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

May-1

4

Sep

-14

Feb

-15

Jun

-15

No

v-1

5

Mar-

16

Au

g-1

6

Jan

-17

May-1

7

Oct

-17

Mar-

18

Jul-

18

Dec-

18

Energy &Gold excl. Intermediary goods imports (chg, y/y)

Industrial Production (unadjusted, annual chg, rhs)

Energy and gold excluded intermediary goods have been

the main input for the industry, which is on a sharp

deceleration since 2Q18

35%

40%

45%

50%

55%

60%

Jan

-15

Mar-

15

May-1

5

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar-

16

May-1

6

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar-

17

May-1

7

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar-

18

May-1

8

Jul-

18

Sep

-18

No

v-1

8

We calculated the diffusion index as the percentage of the number of sub-sectors, which

recorded m/m decreases. There are 24 sub-sectors under the manufacturing industry.

-20%

0%

20%

40%

60%

80%

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Feb

-14

May-1

4

Au

g-1

4

No

v-1

4

Mar-

15

Jun

-15

Sep

-15

Dec-

15

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

May-1

7

Au

g-1

7

No

v-1

7

Feb

-18

Jun

-18

Sep

-18

Dec-

18

Domestic market orders Export orders

* Orders data shows the difference between the percentage of “positive "responses and percentage of “negative

"responses for domestic and export orders performance in the last three months.

IP Diffusion Index (6MMA)

Source:Turkstat, CBT, Tacirler Investment


An important indicator on investments pursues its downtrend Lower CUR is another confirmation of a weak investment tendency

Economic Growth (Investment) We expect negative contribution from the investment growth in 2019

The composite indicator* indicated deepening contraction The contraction in investments has just started

28 January 2019

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Dec-

11

Jun

-12

Dec-

12

Jun

-13

Dec-

13

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Au

g-1

6

Feb

-17

Au

g-1

7

Feb

-18

Sep

-18

Construction investments Machinery&equipment investments(4QMA, y/y, chg)

-20%

-10%

0%

10%

20%

30%

40%

50%

Mar-

11

Sep

-11

Ap

r-12

Oct

-12

May-1

3

Dec-

13

Jul-

14

Jan

-15

Au

g-1

5

Mar-

16

Sep

-16

Ap

r-17

Oct

-17

May-1

8

Dec-

18

RSCI-investment exp. GDP_Investment exp.

70

72

74

76

78

80

82

Jan

-11

Au

g-1

1

Mar-

12

Oct

-12

Jun

-13

Jan

-14

Au

g-1

4

Ap

r-15

No

v-1

5

Jun

-16

Feb

-17

Sep

-17

Ap

r-18

Dec-

18

CUR (export-oriented sectors)

CUR

-15%

-10%

-5%

0%

5%

10%

15%

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

The composite indicator for investments

Investment growth

Composite Indicator: capital goods

production, imports, LCV sales, housing sales,

commercial loans, and loan rates, CUR

Oct-Nov. only

Source:Turkstat, CBT, BRSA, Tacirler Investment


The loan growth seems to bottom out The credit impulse implies contraction in private sector consumption in 4Q18

Economic Growth (Consumption) Loan growth will be the key determinant of private sector activity

Consumer Confidence Index stands at record low levels The composite indicator signals a contraction in 4Q18 private consumption

28 January 2019

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1 4 7

10

13

16

19

22

25

28

31

34

37

40

43

46

49

52

Total loans

Commercial loans

Consumer loans

Avg. total loan growth (2013-17)

(13wMA growth, annualized, FX adjusted)

The trend loan growth seems hitting the bottom. The

extent of the expected revival from now on will be

influential on the growth trend especially in 2H19. -2%

-1%

0%

1%

2%

3%

4%

5%

6%

-10%

-6%

-2%

2%

6%

10%

14%

18%

22%

Mar-

11

Dec-

11

Sep

-12

Jul-

13

Ap

r-14

Jan

-15

No

v-1

5

Au

g-1

6

May-1

7

Mar-

18

Dec-

18

Private Consumption y/y Growth

Credit Impulse* (rhs)

* net change in consumer lending as % of GDP -- the correlation between

consumption and credit impulse implies four-to-six month lag.

20

40

60

80

100

120

Mar-

12

Jul-

12

No

v-1

2

Ap

r-13

Au

g-1

3

Dec-

13

May-1

4

Sep

-14

Jan

-15

Jun

-15

Oct

-15

Feb

-16

Jul-

16

No

v-1

6

Mar-

17

Au

g-1

7

Dec-

17

Ap

r-18

Sep

-18

Jan

-19

General economic situation expectations (12-mo forward looking)

Appropriate time for buying durable goods (present)

(3MMA)

-5%

0%

5%

10%

15%

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

Private Consumption Growth

The composite indicator for consumption

Composite Indicator: Non-durable goods turnover, durable goodsimport quantity index, passanger car sales, retail sales volume Oct-Nov. only

Source:Turkstat, CBT, Tacirler Investment


We maintain our 2019 GDP growth estimate at 1.5% The main catalysts for the growth will be «net exports» performance in 2019

Economic GrowthWe maintain our 2019 GDP growth estimate at 1.5% down from 2.8% in 2018

Tighter financial conditions to weigh on growth dynamics Economic growth is mostly dependent on capital flows

28 January 2019

-2%

-1%

0%

1%

2%

3%

4%

Private Consumption Public Consumption Investment Net exports

2017 2018F 2019F

7,8%

3,7%

4,9%

7,4%

2,8%

1,5%

0%

2%

4%

6%

8%

10%

2002-06 2007-11 2012-16 2017 2018 2019

CAGR Growth

(2002-17 average growth)

4

9

14

19

24

29

0

10

20

30

40

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

Ap

r-17

Jul-

17

Oct

-17

Jan

-18

Ap

r-18

Jul-

18

Oct

-18

Jan

-19

TL commercial loan rates

TL consumer loan rates

WACF (rhs)

(%, 13wMA)

0%

2%

4%

6%

8%

10%

-15%

-10%

-5%

0%

5%

10%

15%

Mar

-07

No

v-0

7

Jul-

08

Mar

-09

No

v-0

9

Au

g-1

0

Ap

r-1

1

Dec

-11

Au

g-1

2

May

-13

Jan

-14

Sep

-14

May

-15

Feb

-16

Oct

-16

Jun

-17

Feb

-18

No

v-1

8

GDP growthFinancial Account / GDP

Tighter global liquidity conditions undermined the extent

of the capital flows and thus reduce the growth pace. For

2019, relatively better outlook could be awaited.

Source:Turkstat, CBT,Tacirler Investment


The worsening in unemployment rate continues As the capacity utilization falls, the unemployment starts to follow it

Employment Weak growth resulted in deterioration in unemployment rate

Changes in employment sector take place with a lag Expectations for # of unemployed indicates palpable deterioration

28 January 2019

6

8

10

12

14-15

-10

-5

0

5

10

15

Mar-

05

Ap

r-06

May-0

7

Jun

-08

Au

g-0

9

Sep

-10

Oct

-11

No

v-1

2

Jan

-14

Feb

-15

Mar-

16

May-1

7

Jun

-18

Jul-

19

GDP growth (y/y, %)

Unemployment rate (%, rhs) Tacirler Investment

estimates

5.000

5.200

5.400

5.600

5.800

6.000

17100,

18100,

19100,

20100,

21100,

22100,

23100,

24100,

Jan

-11

Au

g-1

1

Mar-

12

Oct

-12

May-1

3

Dec-

13

Au

g-1

4

Mar-

15

Oct

-15

May-1

6

Dec-

16

Jul-

17

Mar-

18

Oct

-18

Non-agriculture

Agriculture (rhs)

Employment (seasonally adjusted, 000)8%

9%

10%

11%

12%

13%

14%

15%55%

60%

65%

70%

75%

80%

85%

Jan

-07

Ap

r-08

Au

g-0

9

Dec-

10

Ap

r-12

Au

g-1

3

Dec-

14

Ap

r-16

Au

g-1

7

Dec-

18

Capacity Utilization Rate

Unemployment Rate (rhs, reverse)

8%

10%

12%

14%

16%

18%

Jan

-07

Jan

-08

Feb

-09

Mar-

10

Ap

r-11

May-1

2

Jun

-13

Jun

-14

Jul-

15

Au

g-1

6

Sep

-17

Oct

-18

Unemployment Rate

Non-farm Unemployment Rate

(Seasonally adjusted)

60

65

70

75

80

85

90

95

100

Mar-

12

Dec-

12

Sep

-13

Jun

-14

Mar-

15

Dec-

15

Sep

-16

Jun

-17

Ap

r-18

Jan

-19

(6-month MA)

Source:TURKSTAT,CBT, Bloomberg, Tacirler Investment


Annual inflation will remain elevated until end-2Q19 Our 2019 CPI rise estimate stands at 16.3%

Inflation Diffusion Index reveals a broad based inflationary pressureFX pass-through carries annual inflation to its highest in recent years

Price Dynamics (I)Annual inflation will remain elevated until end-2Q19

28 January 2019

• Pass through coming from weak economic activity has

already taken its place on inflation figures.

• Elimination of the negative FX pass through impact in the

coming months together with the more stable outlook in

TL will also help inflation to moderate.

• Supportive oil price environment and stable TRY will keep

the energy prices restrained.

• Food prices will continue to be the main drag albeit at a

lower degree compared to 2018. The structural problems

will keep the volatility in unprocessed food segment high.

The processed food side, which is more elastic to the weak

economic activity, might act more favorable to CPI.

• Two episodes of different base impacts will be the case in

2019. 1H19 will be under the pressure of unfavorable base

impact, but the favorable base will help cutting the annual

inflation by 300-500bps during 2H19.

The recent SCT rise on tobacco products

will be influential on the course of the

inflation throughout 2019. Yet it is still

unknown to what extent the adjustment

would be reflected into end-prices. (Our

house estimate incorporates tobacco

price hikes to fully reflect tax adjustments

in 2Q19).

However, starting from 3Q, we expect to

see a sharp improvement in CPI before it

rises to some extent again. Weak

economic activity, stable TL and

supportive energy prices are main causes for the improvement in CPI.

0,5

0,6

0,7

0,8

0,9

1,0

Jan

-04

Oct

-04

Jul-

05

May-0

6

Feb

-07

Dec-

07

Sep

-08

Jul-

09

Ap

r-10

Feb

-11

No

v-1

1

Sep

-12

Jun

-13

Ap

r-14

Jan

-15

Oct

-15

Au

g-1

6

May-1

7

Mar-

18

Dec-

18

2%

6%

10%

14%

18%

22%

26%

-20%

0%

20%

40%

60%

80%

100%

Jan

-06

Dec-

06

Dec-

07

Dec-

08

Dec-

09

Dec-

10

Dec-

11

Dec-

12

Dec-

13

Dec-

14

Dec-

15

Dec-

16

Dec-

17

Dec-

18

Basket / TL (annual, %)

Core-C (annual, 3m lag, rhs)

70

130

190

250

310

370

430

Jan

-10

No

v-1

0

Oct

-11

Au

g-1

2

Jul-

13

Jun

-14

Ap

r-15

Mar-

16

Feb

-17

Dec-

17

No

v-1

8

Import price Index (USD-based)

Import price Index (TL-based)

9%

13%

17%

21%

25%

29%

Jan

-18

Mar-

18

May-1

8

Jul-

18

Sep

-18

No

v-1

8

Jan

-19

Mar-

19

May-1

9

Jul-

19

Sep

-19

No

v-1

9

CPI

Core-C

Tacirler

estimates

0

4

8

12

16

20

24

CPI Core-I Food Energy AB&T * Gold

2017

2018

2019

(pps)

* AB&T: Alcholic Beverages and Tobacco

Source:TURKSTAT,CBT, Tacirler Investment


We expect food inflation to retreat in 2019 albeit remaining high at 17% We expect the energy prices to be supportive throughout 2019

The services inflation is likely to remain high due to stickiness in prices

Price Dynamics (II)Our 2019 CPI rise estimate stands at 16.3%

28 January 2019

Further improvement should be awaited in core goods inflation

-10%

0%

10%

20%

30%

40%

Jan

-05

No

v-0

5

Sep

-06

Au

g-0

7

Jun

-08

May-0

9

Mar-

10

Feb

-11

Dec-

11

No

v-1

2

Sep

-13

Jul-

14

Jun

-15

Ap

r-16

Mar-

17

Jan

-18

Dec-

18

Unprocessed food (lhs)

Processed food

(annual change)

We expect the food inflation to ease

towards 17% in 2019 down from 20.3% in

2018. We believe most of the improvement

would stem from the processed food side,

which will be under pressure of weaker

domestic demand. However, strong tourism

sector will continue to weigh on the food

inflation, which poses an upward risk on our

estimate. On the unprocessed food prices, we

expect the high volatility to continue. Note

that our 2019 food inflation estimate stands

conservative compared to the CBT’s estimate

at 13%.

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Feb

-15

May-1

5

Au

g-1

5

Dec-

15

Mar-

16

Jun

-16

Oct

-16

Jan

-17

Ap

r-17

Au

g-1

7

No

v-1

7

Feb

-18

Jun

-18

Sep

-18

Dec-

18

Energy prices

(annual change)

The currency shock together with rising

global oil prices fed the energy inflation

significantly, while y/y rise in energy prices

had skyrocketed to 29.5% as of September.

But starting from October, global oil prices

have witnessed a sharp decline. Moreover,

TL appreciated 21% in real terms during the

same period. Our base scenario incorporates

lower average oil prices and stable TL

throughout 2019. Under these

circumstances, we expect energy inflation

to be at around 12% this year.

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Feb

-15

May-1

5

Au

g-1

5

Dec-

15

Mar-

16

Jun

-16

Sep

-16

Jan

-17

Ap

r-17

Jul-

17

No

v-1

7

Feb

-18

May-1

8

Au

g-1

8

Dec-

18

Services prices

(annual change)

Pricing behavior and inertia are very critical

for the course of the services sector inflation.

The FX pass-through has a limited direct impact

on the services side, given that services lack the

pressure from international competitiveness and

thus is rather closed in nature. Inertia finds its

way by backward indexation, given that the

services sector is labor-intensive and the wage

contracts are critical on general pricing levels.

The pricing behavior has deteriorated notably

which can be detected by the course of the

services sector prices.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan

-14

Ap

r-14

Au

g-1

4

No

v-1

4

Mar-

15

Jun

-15

Sep

-15

Jan

-16

Ap

r-16

Au

g-1

6

No

v-1

6

Mar-

17

Jun

-17

Oct

-17

Jan

-18

May-1

8

Au

g-1

8

Dec-

18

Core goods prices

(annual change)

Key determinants of core goods prices are

the course of TL and economic activity. These

two components ignited a sharp increase in core

goods prices starting from the beginning of

2017. However, the weak economic activity in

1H19 and rather stable TL will stage material

improvement from very high levels in 2018. The

VAT ad SCT cuts on several sectors also played

an important role in the very recent

improvement. However, the resumption of taxes

in 2Q19 would add to core goods prices.

Source:Ministry of Finance, TURKSTAT, Tacirler Investment


Central government budget deficit to GDP hovers around 2% of GDP Weakness in consumption will weigh on the revenue generation in 2019

Rise in interest expenditures is limiting the maneuver capabilityPublic balance is expected to improve to 1.6% in 2019 from 2.7%

Fiscal Dynamics (I)Coherent fiscal policy is crucial in a combination of weak activity & high inflation

28 January 2019

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Central Government Budget Balance Other Public

-3%

-2%

-1%

0%

1%

2%

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Primary Balance / GDP

Budget Balance / GDP

55%

56%

57%

58%

59%

60%

61%

62%

63%

-8%

-3%

2%

7%

12%

17%

22%

Dec-

07

Au

g-0

8

Ap

r-09

Jan

-10

Sep

-10

Jun

-11

Feb

-12

No

v-1

2

Jul-

13

Ap

r-14

Dec-

14

Sep

-15

May-1

6

Feb

-17

Oct

-17

Jul-

18

Mar-

19

Dec-

19

Private consumption growth (y/y, 12MMA)

Consumption taxes in total tax revenues (12MMA, rhs)

The dotted line shows our

quarterly growth forecasts

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019F

Interest expenditures

Non-interest expenditures(y/y change)

-2%

-1%

0%

1%

2%

3%

Jan

-12

Jul-

12

Feb

-13

Sep

-13

Ap

r-14

No

v-1

4

Jun

-15

Jan

-16

Au

g-1

6

Mar-

17

Oct

-17

May-1

8

Dec-

18

PS _ Treasury and Finance Ministry definition

PS _ IMF definition

Primary balance / GDP

The IMF- defined primary balance

calculation for 2018 eliminates the

revenue generation from zone

amnesty and the paid military

service schemes.

*According to the New Economic Program


Fiscal Dynamics (spending)Rising interest spending limits the maneuver capacity of the budget

Source:Treasury and Finance Ministry, Tacirler Investment

28 January 2019

In real terms, the central government budget revenues are expected to remain unchanged

according to the government’s targets. Recall that the government announced fiscal measures for

2019 including TL60bn of cost-cutting measures and TL16bn of additional revenue generation

As per the non-interest expenditures, the expected real change is negative at 4.1% mainly on the

back of the cut projected at the capital expenditures to the tune of above TL30bn which

corresponds to 47% real decrease. In addition, the capital transfers are also expected to fall by a

significant 49% in real terms. The government has underlined before that there will be TL31bn of

saving from the investments spending, Another cost-cutting item was in regards to «goods and

services» spending, which will be reduced by TL4.1bn implying 19% real drop.

The three major spending items that will exhibit real increases will be «personnel», «social security

premiums» and the «current transfers». The prevailing incentives for the employment for 2019 will keep

the non-interest expenditures side busy. There were bonus payments to the pensioners last year ahead of

the two religious holidays in 2018 and back then it was announced that these bonus payments were to

prevail in the coming years. If no amendment is to take place on that front, this will also add further

pressure on the personnel expenditures this year.

The highest increase among the spending items is seen on the interest expenditures as a result of

significantly elevated cost of borrowing. Accordingly, the interest expenditures are expected to

portray 36.5% of a real increase in 2019. Higher interest expenditures obviously limit the maneuver

capacity of the budget.

2018 2019

Nominal

chg.

Real

chg. *

Central Government Budget Expenditures 830.4 961.0 15.7% -0.5%

Non-interest expenditures 756.5 843.7 11.5% -4.1%

Personnel expenditures 200.9 247.3 23.1% 5.9%

Social Security Premiums 34.4 43.4 26.2% 8.5%

Goods and Services 71.7 67.6 -5.8% -19.0%

Current transfers 323.1 391.3 21.1% 4.1%

Capital expenditures 88.0 54.4 -38.1% -46.8%

Capital transfers 16.7 10.0 -40.0% -48.4%

Liability 21.7 21.7 0.4% -13.7%

Reserve Appropriations 0.0 7.9 - -

Interest Expenditures 74.0 117.3 58.6% 36.4%

(as % of GDP)

Central Government Budget Expenditures 23.4% 23.0% - -

Non-interest expenditures 21.3% 20.2% - -

Personnel expenditures 5.7% 5.9% - -

Social Security Premiums 1.0% 1.0% - -

Goods and Services 2.0% 1.6% - -

Current transfers 9.1% 9.4% - -

Capital expenditures 2.5% 1.3% - -

Capital transfers 0.5% 0.2% - -

Liability 0.6% 0.5% - -

Reserve Appropriations 0.0% 0.2% - -

Interest Expenditures 2.1% 2.8% - -

* Our house estimate for annual CPI at 16.3% was incorporated for real change calculation.

* Our house estimates for nominal GDP is at TL3.6trl for 2018 and TL4.2trl for 2019.


In real terms, the central government budget spending are expected to remain unchanged

according to the government’s targets. Recall that the government announced fiscal measures for

2019 including TL60bn of cost-cutting measures and TL16bn of additional revenue generation

As per the non-interest expenditures, the expected real change is negative at 4.1% mainly on the

back of the cut projected at the capital expenditures to the tune of above TL30bn which

corresponds to 47% real decrease. In addition, the capital transfers are also expected to fall by a

significant 49% in real terms. The government has underlined before that there will be TL31bn of

saving from the investments spending, Another cost-cutting item was in regards to «goods and

services» spending, which will be reduced by TL4.1bn implying 19% real drop.

The three major spending items that will exhibit real increases will be «personnel», «social security

premiums» and the «current transfers». The prevailing incentives for the employment for 2019 will keep

the non-interest expenditures side busy. There were bonus payments to the pensioners last year ahead of

the two religious holidays in 2018 and back then it was announced that these bonus payments were to

prevail in the coming years. If no amendment is to take place on that front, this will also add further

pressure on the personnel expenditures this year.


Fiscal Dynamics (revenues)Weak economic activity and lack of one-off items will weigh on revenue performance

Source:Treasury and Finance Ministry, Tacirler Investment

28 January 2019

Corporate tax: Weak economic activity and higher FX rates diminished turnover and thus the

tax base of the corporate sector, which results in lower tax revenues generation expectation for

2019.

Income tax: The only meaningful revenue rise expectations has found a place in income tax,

which is expected to post a real increase of 6.3%. Amid weak activity environment, we believe

that such an increase would imply the fight with the unregistered economy will gain pace that

would add to the revenue generation.

Consumption taxes: The share of indirect taxes in total stands significantly high at 65%. Given that the

economic landscape is very influential on the performance of the indirect taxes, 2019 would not pose a

prospective year in terms of tax revenue generation. Domestic VAT and SCT taxes consist 50% of the

indirect tax revenues generation. And in 2019, in real terms, a weak performance is expected by the

government despite higher than consensus GDP growth estimate. In the New Economic Program, the

government has announced that there will be a tax adjustment with an updated intensified product list.

Despite this fact, the revenues performance is projected to be weak. Last but not least, although the

contraction in imports due to weaker economic activity is expected to continue in 2019, 16.7% of a real

increase in VAT on imports can be attributable to higher Basket/TL parity.

Lack of one-off revenue generation: The budget has been benefiting largely from the one-off

revenues generation such as restructuring scheme of taxes and other state receivables, zone

amnesty as well as paid military service program. Throughout 2018, the revenue generation from

these items amounted to TL50bn (c.a.6.5% of budget revenues) Given that Treasury and Finance

Minister Albayrak made it clear that there will be no further restructuring scheme for taxes, social

security or any other kind of debts in the coming period, temporary sources to feed the budget

revenues will not be the case this time.

2018 2019

Nominal

chg.

Real

chg. *

Central Government Budget Revenues 757.8 880.0 16.1% -0.2%

Tax Revenues 631.0 756.5 19.9% 3.1%

Income Tax 139.0 171.9 23.7% 6.3%

Corporate Tax 78.7 74.2 -5.7% -18.9%

VAT on Imports 122.1 165.8 35.8% 16.7%

Special Consumption Tax 133.9 162.6 21.4% 4.4%

Domestic VAT 56.4 70.7 25.5% 7.9%

Motor Vehicle Tax 12.8 16.0 24.6% 7.1%

Fees 21.7 27.7 27.9% 10.0%

Stamp tax 17.0 20.8 22.6% 5.5%

Banking Insuarance Transaction Tax 18.2 19.0 4.5% -10.2%

Others 31.3 27.8 -11.3% -23.7%

Non-tax revenues 126.8 123.5 -2.6% -16.3%

Central Government Budget Revenues 21.3% 21.0% - -

Tax Revenues 17.8% 18.1% - -

Income Tax 3.9% 4.1% - -

Corporate Tax 2.2% 1.8%

VAT on Imports 3.4% 4.0% - -

Special Consumption Tax 3.8% 3.9% - -

Corporate Tax 1.6% 1.7% - -

Domestic VAT 0.4% 0.4% - -

Fees 0.6% 0.7% - -

Stamp tax 0.5% 0.5% - -

Banking Insuarance Transaction Tax 0.5% 0.5% - -

Others 0.9% 0.7%

Non-tax revenues 3.6% 3.0% - -

* Our house estimate for annual CPI at 16.3% was incorporated for real change calculation.

* Our house estimates for nominal GDP is at TL3.6trl for 2018 and TL4.2trl for 2019.

(as % of GDP)


Source:CBT, Treasury, Tacirler Investment


Treasury's Domestic Debt Service (TL bn)

Debt Service (Domestic)Treasury has been giving signals of a different borrowing strategy since November

28 January 2019

36

18

2521

35

21

32 34

44

3337

50

0

10

20

30

40

50

60

1Q 2Q 3Q 4Q

2017 2018 2019

• The Treasury has been giving signals of a different domestic

borrowing strategy since November. If the cash accounts are strong,

the Treasury cancels some of the auctions previously scheduled or tap

the markets at much lower amounts than projected. In addition,

diversification of the instruments is prioritized as FX-based debt

instruments make the agenda currently. The Treasury very recently

held EUR-denominated bonds and lease certificates .

• Moreover the borrowing schedule of the Treasury released in January

showed that rather than fixed coupon bonds, the floating and CPI-

linker bonds are preferred. In addition, 10y fixed coupon bond does

not find place in 1Q19 strategy.

• The Treasury’s cash accounts as of mid-January is quite strong thanks

to the earlier than expected profit transfer from the CBT as well as two

Eurobond issuances. The profit transfer from the CBT was quite

massive to the tune of TL37bn, which strengthened the cash accounts

to TL64.4nm in January 18. Since then it has eased to TL47bn.

• Treasury’s domestic debt services amount will increase by TL41bn in

2019. In the first quarter of 2019, the debt services will be higher at

around TL10bn compared to the same period of last year and 50% of

will be held in February. The highest domestic debt service of the year

is slated for the last quarter to the tune of TL50bn.

• The highest monthly domestic debt redemptions throughout the year

are slated for February and December to the tune of TL23bn and

TL25bn respectively. According to the very recently released 1Q19

borrowing strategy, the Treasury plans to borrow TL35bn from the

markets in 1Q19 in order to meet its market redemption of TL34.5bn

implying a market rollover ratio close to 100%.

0

4

8

12

16

20

24

28

Jan

-19

Feb

-19

Mar-

19

Ap

r-19

May-1

9

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec-

19

(TL bn)

Treasury’s Monthly Domestic Debt Serv. Treasury's cash account at CBT

10

20

30

40

50

60

70Ja

n-1

8

Feb

-18

Mar-

18

Ap

r-18

May-1

8

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

Dec-

18

Jan

-19

(USD bn)

Source:CBT, Treasury, Tacirler Investment


External Debt Payments (private sector, USD bn)

Debt Service (External)The highest external debt repayments are slated for 2Q19

28 January 2019

• There is a higher amount of external debt payment to the tune of

USD20.9bn in 2Q19. 93% of this external debt payments in 2Q19

belongs to the private sector. The banking sector’s payments will be

USD14.8bn of the total USD19.5bn of private sector debt.

0,4 0,4

3,8

0,4 0,5 0,4 0,3 0,8 0,7 0,4

1,9

5,5

3,8

4,4

6,2

8,2

5,6 5,43,8

3,2

7,03,0

0

2

4

6

8

10

Jan

-19

Feb

-19

Mar-

19

Ap

r-19

May-1

9

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Public Private monthly average

• The total external debt payment of public and private sector during

1Q19 will be USD18.3bn, of which USD4.5bn belong to the public.

• The Treasury projects to tap the international markets to the tune of

USD8bn this year. Last year, the foreign borrowing projection was at

USD6.5bn though the Treasury borrowed USD7.7bn through the

Eurobond issuance, while the excess part was used in order to

reduce the domestic borrowing need. We believe the amount of

external borrowing might also change this year, depending on the

cost and availability of financing in international markets as well as

conditions in domestic borrowing markets.

3,82,5 3,0

5,1

6,8

3,3 3,4

1,4 1,9

5,8

2,1

1,7

1,31,4

1,1

1,4

2,2 2,0

2,4 1,3

1,2

0,9

0

2

4

6

8

10

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Financials Non-financials

External Debt Payments (public + private, USD bn)

• So far, the Treasury borrowed USD3.4bn from the international

markets via double Eurobond auctions. Accordingly, first USD-

denominated bond (maturing 2029) raised USD2bn, which was

followed by EUR-denominated bond issuance (maturing at 2025) to

the tune of EUR1.25bn. We believe that another issuance

throughout 1Q19 could be the case if the global financial markets

provides a favorable outlook.

Source: CBT, World Bank, TURKSTAT, IMF, Tacirler Investment


We expect exports to rise 6% y/y this year with some downside risks We expect CAD to narrow to USD16.7bn (2.3% of GDP) in 2019

External Demand The current account deficit will continue to improve throughout 2019

Almost 25% of CAD ease since May stemmed from gold trade normalization The consumption goods imports volume index depicted the sharpest decline

28 January 2019

1,5%

1,7%

1,9%

2,1%

2,3%

2,5%

2,7%

2,9%

3,1%

-5%

0%

5%

10%

15%

20%

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Export volume index

Export-weighted global growth index (rhs)

The export weighted global growth index depicts a

supportive export outlook for Turkey. Yet, the

tumbling global growth paves the way for downward

revisions and hence, weighs on Turkey’s export. -8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

2013

2014

2015

2016

2017

2018

2019

CAD -- Tacirler forecast

The main assumptions that back our CAD

estimate are as follows:

• Weaker economic activity will continue to

weigh on imports, which we expect it to

remain almost unchanged in 2019.

• Tourism sector performance will be

stronger, while we incorporate 20%

increase for gross tourism revenues (Please

see Box 2 on page 21 for further details).

• Energy import bill would remain relatively

low thanks to lower global oil prices (Please

see Box 1 on page 20 for further details).

• Normalization in gold trade will also cap

further pressure on imports.

60

80

100

120

140

160

180

Jan

-13

Ap

r-13

Jul-

13

No

v-1

3

Feb

-14

May-1

4

Sep

-14

Dec-

14

Mar-

15

Jul-

15

Oct

-15

Jan

-16

May-1

6

Au

g-1

6

No

v-1

6

Mar-

17

Jun

-17

Oct

-17

Jan

-18

Ap

r-18

Au

g-1

8

No

v-1

8

Imports Capital goods

Intermediate goods Consumption goods

(imports volume index, WDSA, 3MMA)

50

70

90

110

130

150

170

190

75

85

95

105

115

125

135

2004

2006

2008

2010

2012

2014

2016

2018

REER (CPI based, 12MMA)

Exports (0.4xUSD + 0.6xEUR,annual, rhs)

0%

1%

2%

3%

4%

5%

-20

-15

-10

-5

0

5

10

Jan

-11

Jul-

11

Feb

-12

Sep

-12

Mar

-13

Oct

-13

May

-14

Dec

-14

Jun

-15

Jan

-16

Au

g-1

6

Mar

-17

Sep

-17

Ap

r-1

8

No

v-1

8Net Gold Trade (USD bn, lhs)

Gold imports / Total imports

(annual)

Source: CBT, World Bank, Moody’s, IMF, Tacirler Investment


Corporate sector LT external debt ratio in annual terms is close to 100% The amount of capital flows has been weakening since 2018

External FinancingAnnual «external financing need» remains high at 23% of GDP

The «quality financing» remained below its already low LT average Annual «external financing need» remains high at 23% of GDP

0%

1%

2%

3%

4%

5%

6%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Turkey

World

Turkey _LT average

World _LT average

(Net FDI annual /

GDP)

28 January 2019

0%

100%

200%

300%

400%

500%

600%

700%

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2017

2018

Financial Sector

Non-financial Sector

-45

-25

-5

15

35

55

75

95

Oct

-10

May-1

1

Oct

-11

May-1

2

Oct

-12

May-1

3

No

v-1

3

May-1

4

No

v-1

4

May-1

5

No

v-1

5

May-1

6

No

v-1

6

May-1

7

No

v-1

7

May-1

8

No

v-1

8

FDI + LT borrowing

Portfolio Investment + ST Borrowing

CAD

(annual, USD bn)

17%

19%

21%

23%

25%

27%

29%

150%

170%

190%

210%

230%

250%

270%

Jul-

11

Jan

-12

Jul-

12

Dec-

12

Jun

-13

Dec-

13

Jun

-14

Dec-

14

Jun

-15

Dec-

15

Jun

-16

No

v-1

6

May-1

7

No

v-1

7

May-1

8

No

v-1

8

External Financing Need / Gross FX Reserves

External Financing Need / GDP (rhs)

Source: IMF, Bloomberg, Tacirler Investment

16Turkey Investor Presentation

The growth dynamics will draw an unfavourable picture but …

Comparison Analysis (2019/18)Weak growth dynamics signals rebalancing of major vulnerabilities in 2019

… the adjustment in CAD will continue at full speed

… inflation will improve significantly albeit remaining at high levels

The weak growth conditions will keep the budget deficit slightly higher

28 January 2019

-4

-3

-2

-1

0

1

2

Bra

zil

Arg

en

tin

a

Co

lom

bia

S. A

fric

a

Mexi

co

Sau

di A

rab

ia

Ph

ilip

pin

es

Ind

ia

Ru

ssia

Peru

Ind

on

esi

a

Mala

ysi

a

Ch

ina

Ch

ile

Th

ailan

d

Hu

ng

ary

Po

lan

d

Tu

rkey

Growth improvement

Growth deterioration(pps change y/y)

IMF estimates_WEO

The IMF projects GDP

growth to ease to 0.4% in

2019 from 3.5% in 2018.

-6

-4

-2

0

2

4

Tu

rkey

Mexi

co

Ph

ilip

pin

es

Sau

di A

rab

ia

Arg

en

tin

a

Th

ailan

d

Co

lom

bia

Ch

ina

Ind

ia

Ind

on

esi

a

S. A

fric

a

Hu

ng

ary

Bra

zil

Ch

ile

Peru

Po

lan

d

Mala

ysi

a

Ru

ssia

Inflation deterioration

Inflation improvement(pps change y/y)

IMF estimates_WEO

-2

-1

0

1

2

Tu

rkey

Ind

ia

Arg

en

tin

a

Sau

di A

rab

ia

Co

lom

bia

Mexi

co

Ph

ilip

pin

es

Ind

on

esi

a

Ch

ina

Ch

ile

Hu

ng

ary

Bra

zil

S. A

fric

a

Peru

Po

lan

d

Mala

ysi

a

Th

ailan

d

Ru

ssia

CA deterioration

CA improvement

(pps change y/y)

IMF estimates_WEO

-2

0

2

4

Arg

en

tin

a

Sau

di A

rab

ia

Bra

zil

Co

lom

bia

Hu

ng

ary

Ch

ile

Peru

Th

ailan

d

Mala

ysi

a

Ind

on

esi

a

S. A

fric

a

Ind

ia

Ru

ssia

Ph

ilip

pin

es

Mexi

co

Ch

ina

Tu

rkey

Po

lan

d

Budget deterioration

Budget improvement

Bloomberg consensus estimates

(pps change y/y)

Source:Rating Agencies, Bloomberg, Tacirler Investment


Turkey’s sovereign ratings scale

Sovereign RatingTurkey has experienced sharp rating downgrades in the past two years

Turkey’s 5y CDS remained high at above 300 bps levels

28 January 2019

-4

-3

-2

-1

0

1

2

S&P (B+/stable) Moody's (Ba3 / negative) Fitch (BB / negative)

Foreign Currency _LT Local Currency_LT

neutral

grade

(notches)

EM Sovereign Rating Scale

The closest sovereign rating review date will be on February 15 by S&P

Fitch 3-May 1-Nov

S&P 15-Feb 2-Aug -

2019 Review Calendar of Rating Agencies for Turkey's Sovereign Rating

For Moody's the Sovereign Release Calendar includes sovereign issuers that are covered by a Lead

Analyst based in the EU , as required by EU regulation and, in order to provide greater market clarity,

it also includes EU sovereign issuers that are covered by Lead Analysts based outside of the EU. As

Turkey is not part of the EU and the Lead Analyst is not based in the EU, it is not on the calendar.

0

100

200

300

400

500

600

700

800

900

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec-

17

Jan

-18

Feb

-18

Mar-

18

Ap

r-18

May-1

8

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec-

18

Jan

-19

Argentina

Turkey

Brazil

South Africa

Average of All Names

*Argentina, Turkey, Brazil, South Africa, Mexico, Russia, Indonesia, Malaysia, Philippines, Thailand, Bulgaria, Croatia, Czech, Egypt,

Estonia, Greece, Hungary , India, Poland, Romania, Ukraine.

(bps)

Moody's S&P Fitch

Ba1 Russia, Morocco, Guatemala, Namibia BB+ Croatia BB+ South Africa, Croatia

Ba2 Croatia, Brazil, BB South Africa BB Turkey, Guatemala, Vietnam

Ba3 Bangladesh, Bolivia, Vietnam, Turkey BB-Vietnam, Bangladesh,

Guatemala, Brazil, BoliviaBB- Brazil, Bolivia, Greece

B1 Suriname B+ Kenya, Greece, Turkey B+ Kenya, Nigeria

B2 Cambodia, Argentina, Nigeria, Kenya B Ecuador, Nigeria, Belarus, Egypt, Argentina B Egypt, Argentina, Belarus

B3 Egypt, Pakistan, Greece, Belarus B- Pakistan, Ukraine B- Ukraine,

Caa1 CCC+ CCC

Caa2 Ukraine CCC CC

Caa3 Venezuela CCC- C

Ca CC D

C C

D

Spe

cula

tive

Gra

de

Source:CBT, Bloomberg, BRSA, Tacirler Investment


We expect one-week repo rate (policy rate) to ease 19% from 24% this year Current monetary stance supports the carry advantage of TRY

Foreign investors reduced their local bond positions significantly in 2018 Bond yields trade stronger compared to our fair value calculations

Monetary Policy & YieldsWe expect monetary policy easing cycle to kick off as of June

28 January 2019

-4%

-2%

0%

2%

4%

6%

8%

10%

Oct-

11

Feb-1

2

Jun

-12

Oct-

12

Jan

-13

Ma

y-1

3

Se

p-1

3

Jan

-14

Ma

y-1

4

Au

g-1

4

Dec-1

4

Ap

r-15

Au

g-1

5

Nov-1

5

Ma

r-16

Jul-1

6

Nov-1

6

Ma

r-17

Jun

-17

Oct-

17

Fe

b-1

8

Jun

-18

Se

p-1

8

Jan

-19

spot-fair value difference

(+1s)

(+2s)

(-1s)

(-2s)

(5y bond yield)

-4%

-2%

0%

2%

4%

6%

8%

Ro

man

ia

Hu

nga

ry

Cze

ch r

ep

.

Po

lan

d

Thai

lan

d

Pee

r Ec

on

om

ies

Sou

th A

fric

a

Ind

ia

Bra

zil

Mal

aysi

a

Mex

ico

Ru

ssia

Turk

ey

* ex-post (2018YE)

Real Policy Rate_ ex-post*

5%

10%

15%

20%

25%

14%

16%

18%

20%

22%

24%

26%

28%

30%

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Foreigners' share in bond market

10y yields (rhs)

-4%

-2%

0%

2%

4%

6%

8%

Hu

nga

ry

Ro

man

ia

Cze

ch r

ep

.

Po

lan

d

Pee

r Ec

on

om

ies

Thai

lan

d

Sou

th A

fric

a

Ind

ia

Ru

ssia

Bra

zil

Mal

aysi

a

Mex

ico

Turk

ey

* ex-ante: end-2Q19

Real Policy Rate_ ex-ante*

0%

5%

10%

15%

20%

25%

30%

Jan

-15

May-

15

Oct

-15

Mar-

16

Au

g-1

6

Jan

-17

Jun

-17

No

v-1

7

Ap

r-18

Sep

-18

Feb

-19

Jul-

19

Dec-

19

Policy Rate*

CPI (annual)

*policy rate refers to the weighted average

funding rate in 2001-Jun18 period

We expect easing cycle to kick

off as of June

Source:CBT, BIS, Bloomberg, Tacirler Investment


We incorporate a flat Real Effective Exchange Rate (REER) for end-2019 A slight recovery in foreign portfolio flows would help FX liquidity in 2019

The residents FX deposits have decreased by USD6bn in 2018 … TRY appreciated to some extent in line with the recovery in carry positions

Local CurrencyStill weak but rather stable

28 January 2019

60

70

80

90

100

110

120

130

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

REER (CPI) average +1s

+2s -1s -2s

(CPI-based REER)

50

60

70

80

90

100

110

Jan

-14

May-1

4

Au

g-1

4

Dec-

14

Mar-

15

Jul-

15

Oct

-15

Feb

-16

May-1

6

Sep

-16

Dec-

16

Mar-

17

Jul-

17

Oct

-17

Feb

-18

May-1

8

Sep

-18

Dec-

18

Turkey Brazil

South Africa Russia

India

BIS_REER -- 2010=100

-8.000

-6.000

-4.000

-2.000

0

2.000

4.000

6.000

8.000

10.000

Jan

-14

Jun

-14

Dec-

14

May-1

5

No

v-1

5

Ap

r-16

Oct

-16

Mar-

17

Au

g-1

7

Feb

-18

Jul-

18

Jan

-19

equity

bond

Net Foreign portfolio flows

(12-m cumulative, equity + bond

(excl. repo transc.) )

14%

16%

18%

20%

22%

24%

26%

-3.000

-2.000

-1.000

0

1.000

2.000

3.000

Jan

-14

Jul-

14

Feb

-15

Sep

-15

Mar-

16

Oct

-16

May-1

7

No

v-1

7

Jun

-18

Jan

-19

Net bond flow(lhs)

Share in overall

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

-20

-15

-10

-5

0

5

10

15

Au

g-1

6

Sep

-16

No

v-1

6

Dec-

16

Jan

-17

Mar-

17

Ap

r-17

Jun

-17

Jul-

17

Au

g-1

7

Oct

-17

No

v-1

7

Dec-

17

Feb

-18

Mar-

18

May-1

8

Jun

-18

Jul-

18

Sep

-18

Oct

-18

No

v-1

8

Jan

-19

Banks' off balance sheet

FX position (4w cum, lhs, USD bn)

USD/TL (4wMA, rhs)

120

130

140

150

160

170

Jan

-14

Ap

r-14

Au

g-1

4

Dec-

14

Ap

r-15

Jul-

15

No

v-1

5

Mar-

16

Jul-

16

Oct

-16

Feb

-17

Jun

-17

Oct

-17

Jan

-18

May-1

8

Sep

-18

Jan

-19

(We eliminate the EUR/USD parity effect)

… but starting from September the individuals

raised their long FX position by ca.USD8bn

until year-end, while corporates remained

mostly muted.

Residents FX Deposits (USD bn, w/o interbank)

40

50

60

70

80

90

100

Jan

-14

Ap

r-14

Au

g-1

4

Dec-

14

Ap

r-15

Jul-

15

No

v-1

5

Mar-

16

Jul-

16

Oct

-16

Feb

-17

Jun

-17

Oct

-17

Jan

-18

May-1

8

Sep

-18

Jan

-19

Individuals

Corporates

(We eliminate the EUR/USD parity effect)

Source: CBT, EAI, Bloomberg, Tacirler Investment


Lower global oil prices will also support the improvement in CAD Energy prices might support efforts of disinflation in 2019

Significant downward revisions take place in 2019 Brent forecasts Various scenarios on impact of Brent oil price changes on CAD and inflation

Box 1: Oil prices Oil prices might provide a supportive landscape for macro aggregates

28 January 2019

6160

64

68

72

76

Jan

-18

Feb

-18

Mar-

18

Ap

r-18

May-1

8

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec-

18

EIA Crude Oil forecasts for 2019

(USD per barrel)

Energy Information Agency (EAI) forecast taken from

December Short-term Outlook report. 2019 Brent

forecast at 61 USD/per barrel shows USD11 decline

compared to the previous month’s forecast.

40

50

60

70

80

90

100

110

120-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

Jan

-09

No

v-0

9

Oct

-10

Au

g-1

1

Jul-

12

Jun

-13

Ap

r-14

Mar-

15

Feb

-16

Dec-

16

No

v-1

7

Oct

-18

CAD

CAD excl. gold & energy

Brent Oil (US$/bbl,12MA, rhs)

(in reverse order)Turkey’s energy imports in 2018 have

totaled to USD43bn up from USD37bn a

year ago, in parallel to the rising oil prices.

Energy imports played a very influential

role on Current Account Deficit, given its

15-20% share in total import bill. 75% of

the energy demand is met via imported oil

and natural gas. Reducing the energy

dependency necessitates a comprehensive

reform program and hence a long time. In

this respect, we believe that the cyclical

factors will remain dominant in regards to

the course of the energy bill, while we

assume an energy imports bill at around

USD37-38bn this year down from

USD43bn.

The energy sector has an important weight

at around 12-13% in overall inflation basket.

The global oil prices and course of TL are

the main components of the energy

inflation. 2018 was a hard year in terms of

containing the energy inflation which has

peaked 30% in annual terms. Oil prices have

climbed until November, while TRY has seen

rising pressure starting from March. While

pass-through to domestic prices is fast, only

one-third of the change has been reflected

on pump prices because of the high level of

fuel taxation. The pressure of energy prices

on inflation eased following the steep

decline in oil prices since November and the

recovery of TL since September.

-20%

-10%

0%

10%

20%

30%

40%

50%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jan

-14

Jul-

14

Feb

-15

Au

g-1

5

Mar-

16

Oct

-16

Ap

r-17

No

v-1

7

Jun

-18

Dec-

18

Energy inflation y/y

(Brent oil price y/y chg + USD/TL y/y chg)/3

Inflation CAD / GDP Inflation CAD / GDP

75 1.05 0.84 17.4 -3.1

70 0.70 0.57 17.0 -2.9

65 0.35 0.29 16.7 -2.6

60 - - 16.3 -2.3

55 -0.35 -0.29 16.0 -2.0

50 -0.70 -0.57 15.6 -1.7

45 -1.05 -0.87 15.3 -1.4

Brent oil price(US$ per barrell)

Macro implications

Contribution (as percentage points)

Levels(%)

Macro implications

Contribution (as percentage points)

Levels(%)

Source: TÜİK, CBT, Bloomberg, Tacirler Investment


Number of foreign arrivals rose by 28% and 23% respectively in 2017 & 2018 We expect the revenue per visitor to improve towards its average this year

Tourism revenues covers almost 50% of the trade deficit by end-2018 Improving tourism sector pose pressure on food and catering inflation

Box 2: Tourism sector forecastsWe expect the improvement in tourism sector to help external balance in 2019

28 January 2019

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan

-09

Au

g-0

9

Mar-

10

Sep

-10

Ap

r-11

No

v-1

1

Jun

-12

Jan

-13

Au

g-1

3

Mar-

14

Oct

-14

May-1

5

Dec-

15

Jul-

16

Feb

-17

Sep

-17

Ap

r-18

No

v-1

8

Germany

UK

Russia500

550

600

650

700

750

800

850

Dec-

13

Mar-

14

Jun

-14

Sep

-14

Dec-

14

Mar-

15

Jun

-15

Sep

-15

Dec-

15

Mar-

16

Jun

-16

Sep

-16

Dec-

16

Mar-

17

Jun

-17

Sep

-17

Dec-

17

Mar-

18

Jun

-18

Sep

-18

(2014-17 ave.: USD736)

Despite the significant recovery experienced in tourism

sector throughout 2018, the revenue per visitor has

recovered only starting from 3Q18. We expect further

improvement in revenue per visitor in 2019.

Tourism revenue per visitor (USD, annual average)

The average revenue per capita

from foreign tourist arrivals was at

around USD630 in 2018.

0

5

10

15

20

25

30

35

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018F

2019F

Gross tourism revenues (USD bn)

Europe

42%

Asia

22%

CIS

29%

Others

7%

*as of November 2018, 12MMA

20%

30%

40%

50%

60%

70%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Gross tourism revenues / Foreign Trade deficit Gross tourism revenues covers

almost 40% of the foreign trade

deficit as of November. We

expect it to increase towards

60% in 2019.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0%

5%

10%

15%

20%

25%

Feb

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jun

-11

Dec-

11

Jun

-12

Dec-

12

Jun

-13

Dec-

13

Jun

-14

Dec-

14

Jun

-15

Dec-

15

Jun

-16

No

v-1

6

May-1

7

No

v-1

7

May-1

8

No

v-1

8

Restaurants & Hotels inflation

Food inflation

Gross tourism revenues (rhs)

(y/y change)

Source:CBT, Treasury, Bloomberg, TURKSTAT, Tacirler Investment


Macro ForecastsTurkey at a glance

28 January 2019

2012 2013 2014 2015 2016 2017 2018 2019F

Real GDP Growth 4.8% 8.5% 5.2% 6.1% 3.2% 7.4% 2.8% 1.5%

Nominal GDP (US$ bn) 875.7 951.8 934.5 859.4 863.4 851.5 745.0 720.0

GDP per capita (US$) 11,698 12,445 12,085 10,996 10,935 10,602 9,846 9,752

CPI (end-of-period) 6.2% 7.4% 8.2% 8.8% 8.5% 11.9% 20.3% 16.3%

CPI (average) 8.9% 7.5% 8.9% 7.7% 7.8% 11.1% 16.3% 18.0%

CAD (US$ bn) -48.5 -64.7 -46.5 -32.2 -33.0 -47.4 -27.7 -16.7

CAD / GDP -5.5% -6.8% -5.0% -3.8% -3.8% -5.6% -3.7% -2.3%

Budget Balance / GDP -1.9 -1.0 -1.1 -1.0 -1.2 -2.0 -2.0 -2.3

Primary Balance / GDP 1.2 1.7 1.3 1.3 0.8 -0.1 0.0 0.3

USD / TL (end-of-period) 1.79 2.14 2.32 2.91 3.54 3.81 5.30 6.09

EUR / TL (end-of-period) 2.36 2.94 2.82 3.18 3.70 4.55 6.10 7.31

Basket / TL (end-of-period) 2.07 2.54 2.57 3.05 3.62 4.18 5.70 6.70

USD / TL (average) 1.79 1.90 2.19 2.72 3.02 3.65 4.84 5.70

EUR / TL (average) 2.31 2.53 2.91 3.02 3.34 4.12 5.62 6.78

Basket / TL (average) 2.05 2.21 2.55 2.87 3.18 3.88 5.23 6.24

CBT's weighted average cost of funding (simple, eop) 5.5% 4.5% 8.3% 7.5% 8.0% 8.5% 24.0% 19.0%

2y bond yield (end-of-period) 5.9% 9.4% 8.1% 10.8% 10.6% 11.0% 22.9% 18.5%

10y bond yield (end-of-period) 6.7% 8.1% 9.4% 10.8% 11.4% 11.5% 17.7% 17.0%

23Turkey Investor Presentation

Copyright © Tacirler Investment, 2019. All rights reserved

This document was produced by Tacirler Yatırım Menkul Değerler A.Ş. (“Tacirler Investment”), solely for information purposes and for the use of the recipient. It is

not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient.

This document does not constitute an offer of, or an invitation by or on behalf of Tacirler Investment to any person to buy or sell any security. The information

contained herein has been obtained from published information and other sources which Tacirler Investment considers to be reliable. Tacirler Investment does not

accept any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other

subjective judgments contained herein are made as of the date of this document.

Recipients of this document are urged to base their investment decisions upon their own appropriate investigations that they deem necessary and they should

make their own independent decisions as to whether an investment or instrument is proper or appropriate based on their own individual judgment and their risk-

tolerance. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the

investor and Tacirler Investment accepts no liability for any such loss or consequence. Not all investment strategies are appropriate at all times, and past

performance is not necessarily a guide to future performance.

Tacirler Investment may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or their

derivative securities thereon either on their own account or on behalf of their clients.

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Disclaimer

28 January 2019

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