Turkish business confidence recovers slightly but remains in negative territory

Turkish business confidence recovers slightly but remains in negative territory
By Akin Nazli in Belgrade November 26, 2018

Turkey’s business sentiment index rose by 6% m/m to 92.8 in November but was still lower than the 96.4 level seen in August when the negative readings began amid the country’s currency turmoil, central bank data showed on November 26.

“Turkey's economy is out of the headlines, because the current account has swung to surplus so quickly, transforming the BoP [balance of payments]. But the underlying shock—a credit crunch—is still playing out. The negative flow in Lira-denominated lending is more severe in Q4 than Q3,” Robin Brooks of the International Institute of Finance (IIF) said on November 23 on Twitter, adding: “Based on data to Nov. 16, we estimate the negative credit impulse to GDP in Q4 at -2.6% y/y. Given that this is for only half of Q4, the true hit to the economy is likely more severe than in Q3, when the negative credit impulse was worse than in 2008/9.”

Meanwhile, the Turkish government’s efforts to encourage local lenders to “voluntarily” cut lending rates seem to be bearing fruit.

“Turkish banks' lending margins [lending rates – deposit rates] at 9-month low as rates drop,” Fercan Yalinkilic of Bloomberg tweeted on November 26.

Weighted average interest rates (WAIR) on lira-denominated consumer loans (personal+vehicle+housing+real person overdraft account) fell to 32.26% as of November 16 from 32.64% as of November 9, according to the latest data from the central bank. The rate stood as high as 32.9% as of October 26, and was at 21.05% at the end of June and 20.22% at the end of March.

WAIR on commercial lira loans fell sharply to 26.44% as of November 16 from 31.88% as of November 9. The rate stood as high as 35.94% at end-September, and was recorded at 23.52% at end-June and 17.88% at end-March.

Bank loans down 7.7%
Turkey's banking sector loans fell by 7.7% to Turkish lira (TRY) 2.48 trillion as of November 16 from as high as TRY2.69tn as of August 10.

Turkish banking watchdog BDDK on November 23 released draft regulations that will relax conditions for local financial institutions’ funding of travel, accommodation and mobile phone expenditures.

“The recent drop in oil prices will help Turkey’s balance of payments adjustment and should boost the terms of trade and growth in large EM oil importers including South Africa and India,” William Jackson of Capital Economics said on November 26 in a research note, adding: “On an annualised basis, every $10pb fall in oil prices boosts incomes by about 0.5- 0.7% of GDP in major EM oil importers, such as Turkey, India, South Africa, Korea, Chile, the Philippines and Thailand.”

“Many of the EMs with the largest net energy import bills relative to the size of their economies, e.g. Turkey, Pakistan and Jordan, run large current account deficits and are facing strains in their balance of payments. Their windfalls seem more likely to be saved,” Jackson also said.

“Oil prices melting - big winner? Turkey - each $10 a barrel drop typically saves $4bn from current account and drives inflation lower,” Timothy Ash of Bluebay Asset Management said on November 23 in a note to investors.

“Large current account deficits were a key theme in early 2018, with Turkish Lira and Argentinian Peso substantially overvalued as a result. But those deficits are correcting at lightning speed, and 2019 will start with no big overvaluations in EM FX, a big difference from 2018,” Brooks said on November 25 in a tweet, adding: “Our fair value estimates don't change much over time, so still 5.50 for $/TRY. That might seem counter-intuitive, given how much the current account has swung, but we look at the c/a on a cyclically-adjusted basis, i.e. control for activity. Don't treat this as a forecast!”

The ‘go-it-alone’ lira
“Argentina versus Turkey is a case study in IMF program versus ‘go-it-alone’. The Lira has recovered twice as much as the Peso since September, partly because its ‘go-it-alone’ approach means a harder ‘sudden stop’ to the economy, which is bad for growth but good for the currency,” Brooks said on November 24, adding: “Turkey has seen its trade deficit shrink by more than 2008/9, a huge adjustment that in turn reflects a sharp slowdown in activity. Argentina's adjustment is slower and thus less obviously positive for the Peso.”

The TRY picked up strength to trade in the 5.22s against the USD on November 26, the lowest level seen since the beginning of August. It was trading at 5.2502, stronger by 0.69% d/d, as of around 18:05 local time.

Turkey’s business confidence index stood at 89.6 in September, the lowest recorded level since April 2009. The index decline in September equated to 7% m/m from the 96.4 reading in August, meaning it was posted as the sharpest monthly decline seen since October 2011.

The 100-point level on the index separates optimism from pessimism. Turkish business confidence stayed in optimistic territory for 18 uninterrupted months from February 2017 through to July this year. The 2018 peak of 111.9 came in March. A four-month trend of pessimism has been registered since August.

Seven of the business sentiment survey’s eight main sub-indices recovered in November month on month. The sharpest monthly improvement, of 36% m/m, was seen in participants’ assessments of the general business situation which saw as low as 55.6 in September but stood at 90 in November.

The only negative development was recorded in the sub-index measuring the total amount of orders in the past three months.

Meanwhile, the seasonally-adjusted business confidence index rose by 6% m/m to 96.8.

The adjusted index saw 110.9 points in January before posting declines for the next eight months, falling to 90.4 in September.

CUR lowest since March 2015
The central bank also reported on November 26 that the capacity utilisation rate (CUR) of Turkey's manufacturing industry fell from 75.4% in October to 74.1% in November, the lowest level in evidence since March 2015.

The CUR stood as high as 78.3% in June, and at 79% last December.

The seasonally-adjusted CUR fell to 73.7% in November from 75% in October.

November 26 also saw statistics institute TUIK announce that in November seasonally adjusted business sentiment in retail and services recovered slightly but continued to deteriorate in construction.

The seasonally-adjusted services confidence index rose by 5.4% m/m to 79.8 from a record low of 75.7 in October.

The retail confidence index increased by 4.3% m/m to 90.7 from a record low level of 87 in October.

The construction confidence index decreased by 3.5% m/m and fell to a fresh record low of 56.6 in November following the 2.3% recovery in the previous month.

Also on November 26, the central bank released its investment tendency statistics. Accordingly, investment volume measured at current prices is expected to rise 23.2% y/y in 2019 while it increased by 32% y/y in the Autumn term of 2018.

Turkey’s annual consumer price inflation rate moved up to 25.24% in October from 24.52% in SeptemberTUIK announced on November 5.

On November 23, the central bank said that the financial services confidence index rose by 2.5 points to 140.1 in November.

Turkey's consumer sentiment index rose by 4% m/m to 59.6 in November from the 57.3 reading recorded in October, the lowest level seen since December 2008TUIK data showed on November 22.

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