Fallen star: First recession in Turkey for a decade

Fallen star: First recession in Turkey for a decade
By Akin Nazli in Belgrade March 11, 2019

No longer an emerging markets star performer, Turkey has fallen into its first recession since the financial crisis a decade ago. Its seasonally and calendar-adjusted GDP contracted by 2.4% q/q in Q4, following the 1.6% q/q contraction recorded in Q3statistical institute TUIK said on March 11.

A Reuters poll released last week forecast a GDP contraction of 2.7% for Q4 and 2.55% for all of 2018.

TUIK’s data also showed that the Turkish economy contracted at a worse-than-expected 3% y/y in the final quarter of last year but grew at a slightly better-than-expected 2.6% y/y in full-year 2018.

Private consumption shrank by 8.9% y/y in Q4 while gross fixed capital formation declined by 12.9% y/y. Government consumption grew by just 0.5% y/y.

Turkey’s annual GDP at current prices declined to $784bn in 2018 from $851bn in 2017 while GDP per capita for 2018 stood at $9,632, compared to a little over $10,000 in 2017.

Au revoir to the trillion-dollar dream
The country’s dream of achieving a trillion-dollar economy has been significantly set back. And the idea that many voters will use the end-of-March local elections as a referendum on President Recep Tayyip Erdogan’s 16-year-long rule—with one key question being whether it was his unsound economic stewardship and undermining of central bank independence that led to Turkey’s credit-fuelled economy running off the rails and suffering a full-blown currency crisis—has strengthened.

Turks are especially feeling the pain because prior to the currency blowout, partly caused by deteriorating relations with the US that unnerved markets, they enjoyed an almost uninterrupted expansion that lifted the economy by an average of nearly 7% each quarter since late 2009.

The trigger for Turkey's ongoing economic woe was last summer's Turkish lira crisis. The currency lost towards a third of its value against the dollar during 2018.

“This is an indictment of Erdonomics and a direct consequence of a monetary policy in 2018 conducted in the interests of short-term political expediency rather than economic pragmatism,” Julian Rimmer, a trader at Investec Bank in London, was quoted as saying by Bloomberg.

The slowing momentum “is just a warning signal that the Turkish economy is going down a cliff,” Nora Neuteboom, a Netherlands-based economist at ABN Amro, told Reuters.

Major election issues
Rising prices, especially for food, and high unemployment, have become major election issues, although government officials insist the worst of Turkey’s economic difficulties is over, and some analysis supports that view. Finance minister Berat Albayrak has asserted that Turkey is on track for a rapid recovery, with growing exports and tourism income to be key drivers of growth. But there is significant doubt as to whether Turkey can really manage a V-shaped recovery, with deleveraging pressures in evidence across the economy.

If the Erdogan administration survives the local elections relatively unscathed, it will know at least that it is not scheduled to face another election for another four years. And prior to the polls it has another card up its sleeve—a recession is typically technically defined as two consecutive quarters of negative growth, but Turkish economy officials have suggested that a year-over-year measure is the well-known approach used in Turkey to ascertain when a recession has begun. Turks may therefore not be officially advised on whether the country is in a recession until the first-quarter GDP data is put out.

“The worst of the downturn may now have passed, the weak carry over means that we expect GDP to decline by 2.5% this year,” Jason Tuvey of Capital Economics said in a research note, noting that the Capital forecast is much gloomier than that of the consensus, and adding: “Investment dropped by 3.6% q/q in Q4. That was a better performance compared with Q3 and may reflect the easing of financial conditions over the quarter. The one crumb of comfort is that net trade provided another sizeable boost to the economy. Exports rose by a fairly solid 1.4% q/q whereas imports fell by 4.6% q/q.”

“The low-profile indicators available for the start of 2019 suggest that the downturn has passed its trough. Inflation has fallen back, financial conditions have continued to ease and the government has provided some fiscal stimulus ahead of March’s local elections. Industrial production figures for January due on [March 14] will provide a clearer steer on how the economy has shaped up,” Tuvey added.

$500mn eurobond
Meanwhile, on the debt markets, Turkish glassmaker Sisecam sold $500mn worth of 7-year USD-denominated eurobonds at a 6.95% coupon rate, the company said on March 8 in a bourse filing. The yield to the investor stood at 7.25%, Reuters reported.

Private lender Yapi Kredi Bank has issued $500mn worth of 5.5-year USD-denominated eurobonds at a yield and coupon rate of 8.25%, the lender said on March 8 in a bourse filing.

“It’s interesting to see the market so busy,” an emerging markets syndicate banker told Global Capital on March 7, adding: “Turkey does still look like good value.”

The Capital Markets Board (SPK) has approved the Turkish Development Bank’s (TKB’s) second wealth management fund’s application to sell TRY1bn worth of asset-backed paper based on mortgage-backed securities to be issued by Isbank, Akbank and Yapi Kredi Bankaccording to the SPK’s latest weekly bulletin published on March 8.

The bulletin also showed that Turkcell received the green light to sell $750mn worth of eurobonds.

Yapi Kredi Bank has received approval from the SPK to issue TRY400mn worth of 5-year mortgage-covered bonds abroad, the lender said on March 11 in a bourse filing.

“Rebound in TRY lending striking”
“The rebound in Turkey's TRY-denominated lending is striking, especially its composition. Private domestic & foreign banks are consolidating still, so—unlike any previous period—the lending rebound [in Q1] is almost entirely due to public banks,” Robin Brooks of the Institute of International Finance (IIF) said on March 10 in a tweet.

Real banking credit in Turkey shrank by 7.2% on a quarterly basis in the last three months of 2018. Government officials have been busy ‘persuading’ banks to issue more and cheaper loans.  How the public lenders are financing their lending growth has become a worrying question for analysts, but annualised credit growth turn positive in February for the first time since August. 

“Our model continues to signal fair value for $/TRY [Turkish lira] around 5.50, largely because the current account adjustment at this stage is mostly cyclical,” Brooks wrote on March 8.

“Growth wasn’t balanced”
“Turkey was one of the fastest-growing emerging economies in 2017, but its growth wasn’t balanced. Excess government spending and rapid credit growth caused imports to surge and the current account deficit to widen. Unsurprisingly, the economy is paying the price for past excesses,” Ziad Daoud of Bloomberg Economics said in comments on the Q4 GDP data.

Although not reaching 2017 levels, Turkey’s damaged economy has experienced current account deficits—albeit at relatively limited levels—since December while government spending and the public lenders’ loan provision is booming in the build-up to the local polls.

Turkey posted a relatively limited current account deficit of $813mn in January versus a $7bn deficit in January 2018, the central bank said also on March 11. The 12-month cumulative deficit declined further to $21.6bn in the month from $27.8bn in December.

A Bloomberg survey had predicted a deficit of $650mn for January.

Standard & Poor’s forecasts Turkey’s GDP will contract by 0.5% y/y in 2019 amid tight financing conditions and elevated inflation.

On the capital flows front, Liam Carson said on March 8 in Capital Economics’ Emerging Markets Capital Flows Monitor for February: “The improvement in capital flows in the first two months of 2019 mirrored the good start to the year for EM financial markets. Global investor appetite for riskier assets was supported by a dovish shift by the Fed and easing trade tensions between the US and China.”

“Inflows have started to dry up”
He added: “However, more timely data suggest that inflows have since started to dry up. Daily figures on purchases of stocks and bonds provided by a handful of EMs point to a fall in inflows in early-March. Admittedly, these figures don’t match the official balance of payments figures with a high degree of accuracy—the daily data cover fewer countries and a more limited range of assets. They do, though, offer a sign that the deterioration in risk appetite has led to a pullback from EM bonds and equities.”

Capital Economics sees investor sentiment as likely to deteriorate further this year. It expects that concerns about slower global GDP growth will intensify over the coming quarters, resulting in a further rise in risk aversion and reducing demand for EM assets.

“The Turkish lira was one of the worst performing EM currencies [last] week which, in part at least, seems to reflect investors no longer buying the central bank’s hawkish rhetoric… One possible explanation for this is a rise in risk-off sentiment in recent days. Another is that investors are worried about a fresh deterioration in Turkey-US relations [with the row over Turkey’s planned purchase of Russia’s S-400 missile defence system coming to the fore],” Tuvey said on March 8 in Emerging Europe Economics weekly.

Start of easing cycle expected for June
The upshot, said Capital Economics, was that it would not read too much into the central bank’s monetary policy statements and it did not see its hawkish tone as precluding policy from being loosened. It expects an easing cycle to start in June and has pencilled in a total of 400bp of rate cuts by year-end.

“My sense is the recession will be deeper and longer than previously (thought) given the balance sheet nature of this recession. Any unorthodox response [by the government, such as] early monetary policy easing at this stage will make things much worse,” Timothy Ash of BlueBay Asset Management told Reuters on March 11.

VTB Capital has kept its Buy recommendation on Turkish automakers Tofas and Ford Otosan, and also its Hold recommendation on car retailer Dogus Otomotive and cement makers Cimsa and Akcansa, Vladimir Bespalov of Russian investment bank said on March 7 in the latest version of his CEEMEA Industrials report.

VTB Capital upgraded London-listed DP Eurasia, which operates the Domino’s Pizza brand in Turkey and Russia, to Buy from Hold, the investment bank said on March 7, adding: “Downside risks come from weaker consumption in Turkey and Russia, less openings, operational mismanagement by franchisees, and the slower ramp up of Russian restaurants to the mature profitability.”

Turkish car parts maker Ege Endustri and airport operator Tav Havalimanlari were among Finland-based Evli Emerging Frontier Fund’s Top 10 holdings as of end-February, according to the fund’s latest available investment frontier.

“February took us to Egypt, Turkey, Thailand, and Indonesia where we met with 25 companies… In Turkey, we learned more about the aviation industry as we met with an airport operator, an airline, and a baggage handler. The most timely theme was around the new airport [Istanbul’s new mega airport which officials want to eventually make the busiest in the world] which is expected to open in March, replacing the 66 year old Ataturk airport which has operated at full capacity for years. With plenty of new capacity, the baggage handler should benefit from increasing passenger traffic in the medium term. Meanwhile the low cost carrier based in the city’s secondary airport may benefit in the short-term as the new one is home to its main competitor, is farther from the city, and still lacks a metro line. Overall, we remain cautious on Turkey and only hold fx-hedged firms,” Evli said on February 28 in its monthly review.

Aksu Enerji’s stake talks
Turkish energy company Aksu Enerji launched stake sale talks with a US-based investment company, Aksu Enerji said on March 11 in a bourse filing.

Aksu Enerji shares were up 2.86% d/d to TRY9 as of 10:30 local time after hitting to TRY9.22.

South Korean Samsung, which has a TV sets assembly line in Turkey, plans to initially produce vacuum cleaners in the country and later to launch white goods production facilities, Samsung Electronics Turkey Head DaeHyun Kim said on March 10.

Spain’s Saica Group has agreed to acquire a corrugated cardboard plant with a production capacity of 75mn square metres, located in Sakarya province of Turkey, from local cardboard maker Norm Ambalaj, media reports indicated last week. Turkey’s paper products industry has been in trouble since August’s currency crash due to extra costs tied to its dependence on material imports.