Turkey Watch
Group Economics Emerging Markets Research
12 November 2015
Policy uncertainty to take over Peter de Bruin Senior Economist Tel: +31 20 343 5619 peter.de.bruin@nl.abnamro.com
The AKP secured a majority in parliament during the elections Political uncertainty has been replaced by policy uncertainty Economy not affected by turmoil surrounding elections Monetary policy to remain tight
AKP seized a majority in parliament during the elections Unexpectedly, the AKP seized back the majority in parliament during the 1 November elections. While polls had indicated a large probability that the elections would lead to another hung parliament, the AKP secured 49.5% of the vote, which translates into 317 of the 550 seats in Turkey’s parliament. In contrast, during the 7 June elections, when the AKP lost its majority in parliament as voters rejected President Erdogan’s plans to strengthen the role of the Presidency, the AKP won only 40.9% (or 258 seats) of the votes. We believe the that the renewed popularity of the AKP reflects voters’ desire for political stability following the suicide attacks in Ankara, the resurgent conflict with the PKK, and the failed coalition talks following the outcome of the June elections. The latter also explains why the support for the Nationalistic Movement Party, the MHP, has fallen significantly. The MHP is generally perceived as having been inflexible during the coalition talks following the June elections. Finally, although the Kurdish HDP managed to surpass the constitutional threshold of 10% to enter parliament, it also lost support during the latest round of elections. Most likely, this reflects that the HDP failed to distance itself sufficiently enough from the PKK movement.
AKP grasps majority during latest elections Seats in the Grand National Assembly
350 300 250 200 150 100 50 0 AKP
CHP November
MHP
HDP
June
Source: Various media sources
Insights.abnamro.nl/en
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Turkey Wa atch – Policy y uncertaintty to take ov ver - 12 November 2015 5
Politic cal uncertain ty has recede ed,‌ The vic ctory of the AK KP has clearly reduced r political uncertainty, even though itts majority fell sho ort of a constitu utional majority y. Indeed, as th he AKP securedd a majority in parliament there is now no need d to enter cumb bersome coalition talks that coould ultimately y trigger new electio ons. Also, there e is no change that a formed coalition c could break down fu urther down the roa ad. Finally, poliitical stability is s being bolstere ed by the fact tthat both the President and the ma ajority in parliam ment stem from m the same party. All this expplains why a low wer political risk pre emium helped to support the lira and the Tu urkish stock maarket in the imm minent aftermath of the elecctions.
Turkis sh lira has strrengthened as a political ris sks have eassed Turkish h lira to $US
3.5
3.0
2.5
2.0
1.5 13
14
15
Source: Thomson Reuterrs Datastream
‌but at the expens se of more pollicy uncertaintty Unfortunately, the vicctory of the AK KP is likely to lead to more pollicy uncertainty y down the road. This T is because e it is now very y likely that Pre esident Erdogann will try to amend the constittution in order tto strengthen the role of the Presidency. P Altthough Erdoga an has been active in the campaig gn in the run up p to both elections, the functioon of the President in Turkey y has, originallyy, been largely y a ceremonial office. Howeveer, President Erdogan wants that the Presid dency holds substantially morre responsibilitiies, broadly co omparable to sian or US-styl e Presidency. Opposition parrties, while opeen to changing the a Russ constittution, fear thatt changing the role of the Pre esident would eerode the checks and balanc ces in Turkish p political system m. This would give President E Erdogan too much m power. While the AKP is unl ikely to find enough support in parliament too gather the ba acking of the 367 de eputies needed d to change the e constitution directly, it takess only the appro oval of 330 members of parliame ent to take the proposal to a nationwide n refeerendum. Early y polls st that such a rreferendum wo ould be unsuccessful, as a maajority of the Turks favour sugges a parlia amentary syste em over and above a preside ential one. Still,, an attempt by y the AKP to try to strengthen s the role of the Presidency could lead to a furtheer polarisation of Turkish society y and spark civvil unrest. Another fear relates s to the ongoinng erosion of th he power of Turkish institutions. I n particular, the central bank has frequentlyy been put under pressure to loos sen policy, or re efrain from tigh htening in order to support eco conomic growth h. Ultimately, this co ould jeopardize e its independence.
Econo omy not affec cted by uncertainty surrou unding electiions Despitte the uncertain nty in the run up u to the electio ons, the econom my seems not to have been affected a too mu uch. In particula ar, industrial prroduction, afterr surging by 7.2 2% YoY in
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Turkey Wa atch – Policy y uncertaintty to take ov ver - 12 November 2015 5
Augus st, rose by 2.8% % in September. This helped industrial produuction to grow by 3.4% in the third quarter of th his year, only marginally m lowe er than the 3.6% % that was rec corded in the second d quarter. Give en the close rellationship betw ween GDP grow wth and industrrial produc ction growth, th his suggests that the economy slowed only sslightly in the third t quarter. After growing g by a he ealthy 3.8% in the second quarter, we thereefore think that growth slowed d to around 3.5 5% in the third quarter of this year.
Ec conomic perfformance nott affected by elections… e
…but too t weak to push p down un nemployment rate
%y yoy
our force % of labo
20 15 10 5 0 -5 -10 -15 -20 -25
15 14 13 12 11 10 9 8 7 06
07
08
09
10
11
Industrial prod duction
Sou urce: Thomson Re euters Datastream m
12
13 GD DP
14
15
6 5 05
06
07
0 08
09
10
11
12
13
14
15
Source: Thomson T Reuters Datastream
Howev ver, while such h an outcome would w keep grow wth moving brooadly sideways s, the perform mance of the e economy has not been strong enough to pussh down the unemp ployment rate i n a sustainable e manner. Although the econoomy is generating a fair share of jobs, gains iin employmentt have been outpaced by grow wth in the labour force. as pushed up tthe amount of persons that are unemployedd recently. The economy This ha therefo ore would need d to see the implementation of o structural refo forms to perk up its growth rate. In n particular, the e savings rate is too low, therre is an overrelliance on the lo ow value added construction ssector, and labo our market regulation is too riigid. While the election outcom me has manage ed to buttress sentiment, it is therefore cruccial that the new w govern nment will emb brace a credible e reform agend da to continue tto support the economy. Fall in n the lira has te emporarily pu ushed current account balaance in surplus s More positively, p the ffall in the lira ha as temporarily pushed the cuurrent account balance b in surplus s. In Septembe er of this year, it rose to $0.09 95bn, up from $$0.027bn in Au ugust, and from$ -3.3 bn in July . Diving a bit deeper into the statistics that ddrive the curren nt account balanc ce, we can see e that the impro ovement stems from two factoors. Firstly, the balance on goods has become ssignificantly les ss negative. This reflects that due to the wea akening of the lira a it has become e more expens sive to import goods, while thee fall in commo odity prices has als so depressed iimports. At the same time, a lower l lira makees exported go oods cheape er, boosting Tu urkey’s compettitive position. The T other factoor is that seaso onal influen nces currently ffavour develop pments in the current accountt. The services balance was close to its histo orical high in Se eptember. This s, however, refllects that aroun nd August, eason, the serv vices balance tends to peak. IIn turn, this imp plies that as due to the tourism se the services balance e comes down again a due to th he end of the toourism season,, Turkey’s current account bala nce is likely to fall into a defic cit again. This aalso helps to explain why on a 12-months rollin ng basis, which h averages out seasonal influeences, Turkey still had a
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Turkey Wa atch – Policy y uncertaintty to take ov ver - 12 November 2015 5
current account deficcit of $40.6bn in n September, representing r 5..7% of GDP, th hough – admitte edly – this mea asure puts less s emphasis on recent developpments.
Cu urrent accoun nt balance ha as improved… …
…help ped by better trade and serrvices balanc ce
$ billion b
$ billion
6 4 2 0 -2 -4 -6 -8 -10 -12
2
20
0
0
-2
-20
-4
-40
-6
-60
-8
-80
-1 10
-100 4 15 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0 08 09 10 11 1 12 13 14 15 00 01 02 03 04 05 06 07 Trade balaance
Servicess net
Current account a balance
Sou urce: Thomson Re euters Datastream m
Curren nt account balancee Curren nt account 12-M rolling balance (rhs) Source: Thomson T Reuters Datastream
Risks surrounding our current ac ccount deficit forecast tilted d to the down nside… While being extreme ely volatile and therefore difficult to forecast, recent developments sugges st that the riskss surrounding our o current acc count deficit forrecast of 5.5% of GDP for this ye ear and 5.0% o of GDP for nextt year are tilted to the downsidde. This is bec cause even as the services surpl us deteriorates s, this will be partly offset by aan ongoing narrowing of the good deficit on th he back of the weak w lira. We would w like to aw wait more data a, but if these develo opments were tto play out and d the current ac ccount deficit w were to improve e consid derably next ye ar, this would take t away a major negative fo for the Turkish lira.
But fa all in lira has pushed up external e debt % of GDP
60 55 50 45 40 35 30 00 01 02 03 04 05 06 07 08 0 09 10 11 12 13 14 15 16 6 Source: EIU
…but weak lira and d current acc count deficit have h pushed d up external debt Howev ver, while help ping the current account balance to improove, this year’s s slide in the lira a in conjunctio on with Turkey y’s current acc count deficit w will push up extternal debt ratios. According to the EIU, exte ernal debt is ex xpected to risee from 50% off GDP in 2014 to t 57% of GDP P in 2015, while the debt-to-exports ratio should increa ase from 1.8
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Turkey Wa atch – Policy y uncertaintty to take ov ver - 12 November 2015 5
to 1.9 in 2015. Overrall, Turkey’s external e vulnerabilities will tthus remain elevated (see also ABN A AMRO: T The top 6 emerrging markets at risk, 8 Sepptember 2015)). Mone etary policy to o remain tigh ht %
14 12 10 8 6 4 2 0 1 10
11
12
13
14
15
Overnightt borrowing rate
Overnight lend ding rate
One weekk repo rate
One week inteerbank rate
Source: Thomson Reuterrs Datastream
Monetary policy to o remain tightt… Meanw while, we thinkk that monetary policy will remain tight in the foreseeab ble future. Despitte it falling bacck from 8% in September to o 7.6% in Octoober, inflation has remain ned stubbornlyy high, and we ell above the central c bank’ss target of 5%. What is more, the significan nt weakening of o the lira that we saw duringg the past months, ests that upwa rd pressure on consumer prices is likely tto continue to persist in sugge coming time. In add dition, we think k that the central bank (CBT T) will opt to ke eep monettary policy tigh ht as the Fed starts s to normalise its policyy, which we think will advan nce in Decemb ber of this year. This explain ns why the CB BT has continu ued to push interba ank rates agaiinst the upperr bound of its interest rate coorridor. C simplifie es policy fram mework …as CBT Interes stingly, the CB BT has expres ssed its intention to simplify its monetary policy framew work during th he time that the Fed starts normalising n rattes. This is be ecause Turkey y’s monetary p policy framew work is opaque, to say the leeast, and the central c bank would like to expresss a clearer message to inve estors during w what could be ecome turbule ent times. In p particular, the CBT wants to make the inteerest rate corrridor more symmetric around th he one week repo r rate, and d wants the widdth of the corrridor to be narrow wed. As due to o elevated inflationary press sures, externaal vulnerabilitie es, and Fed lift off, monetary pollicy needs to remain r tight, th he CBT, in ou r view, has no o other choice e than to hike the one-week k repo rate in coming c monthss. This would bring it closerr to the level off the one-wee ek interbank ra ate, which is thhe most indica ative of the curren nt monetary po olicy stance.
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Turkey Wa atch – Policy y uncertaintty to take ov ver - 12 November 2015 5
Key forecasts f for the economy y of Turkey 2012
2 2013
2014 4
2015e
20 016e
GDP (% yoy)
2.1
4.1
2.9
3.0
3.0
CPI in nflation (% yoyy)
8.9
7.5
8.9
7.5
7.5
-2.1
-1.2
-1.5
-1.5
-2.0
( GDP) Government debt (%
38
37
35
33
33
ent account (% % GDP) Curre
-6.2
-7.9
-6.0
-5.5
-5.0
Grosss fixed investm ment (% GDP)
20.3
20.4
20.1
19.8
19.7
Grosss national savvings (% GDP P)
20.2
20.7
20.2
19.8
19.7
USD//TRY (eop)
1.8
2.1
2.3
3.1
2.9
EUR//TRY (eop)
2.3
2.9
2.8
3.4
2.9
Budg et balance (% % GDP)
Budget balance, b current aaccount for 2015 and a 2016 are roun nded figures Source: EIU, ABN AMRO O Group Economic cs
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Turkey Wa atch – Policy y uncertaintty to take ov ver - 12 November 2015 5
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