No surprise: GDP of Turkey increased by 15.6% q/q in 3Q2020

Gross Domestic Product (GDP) of Turkey increased by 6.7% in the third quarter of the year 2020 (3Q2020) compared to the same quarter of the previous year according to the unadjusted terms. In 2Q2020 when the Covid-19 was declared as pandemic by WHO, GDP contracted by 11% compared to previous quarter (q/q) and 9.9% compared to the same quarter of the previous year (y/y) due to the Covid-19 based tight restrictions.

In seasonally and calendar-based adjustments GDP expanded by 15.6% q/q in 3Q2020 while the year-on-year expansion realized as 6.5% in calendar adjusted figures. Before the announcement, CEFIS of Bilgi University forecasted q/q expansion of 15.85%.

In the graph below, orange colored bars show q/q percentage changes in seasonally and calendar adjusted production-modelled-GDP figures while blue bars represent the y/y percentage changes in the calendar adjusted figures.

Source: TUIK

In the graph above, we can see that 31.1% q/q increase in the industrial sector and 33.4% q/q increase in the services sector were the main drivers of the q/q GDP growth in 3Q2020. Taxes less subsidies on products expanded 8.7% q/q in 3Q2020. Worth to remind that tax delaying in 2nd quarter to the 3rd quarter influences aforementioned revenue increase.

On the other hand, the graph below shows the quarterly changes in consumption which supports production. The orange colored bars show the quarterly changes in calendar and seasonally adjusted consumption-based GDP components while blue bars show yearly changes in calendar adjusted GDP components.

Source: TUIK

In the graph above, we understand that a 30.1% q/q increase of exports of goods and services in 3Q2020 supported both industrial and services sectors on the production side. Moreover, we see that a 27.6% quarterly increase in imports of goods and services supported the exports of goods and services in 3Q2020. Because we all know that Turkey’s industrial production depends mostly on imports of intermediate goods. Furthermore, gross fixed capital formation rising by 20.8% q/q in 3Q2020 shows the rise in investment expenditures to meet the demand and increase the stocks.

The leading indicators regarding 4Q2020 comprising the period of October-November-December (exports, real sector confidence index, capacity utilization of manufacturing sector, manufacturing sector PMI) signal that;

. the industrial sector supports the industrial sector as well as GDP growth in the period of October-November, and

. the services sector (sectoral confidence indices, SAMEKS indices, tourism) puts downward pressure on GDP growth compared to 3Q2020 due to the latest engaged COVID-19 related restrictions.

Fulya Gürbüz, Ph.D.

Signs of increasing pressure on interest rates in the Treasury’s cash balance data

Being a leading indicator for Central government budget data, Treasury’s cash balance gave a deficit of TRY 30.8 billion (USD 4.5 billion) in July up TRY 4 billion from June figures. Cash balance has been in a row of negative territory since February 2020.

Revenues rose by 42% m/m to TRY 87 billion in July while expenditures rose by 32% to TRY 118,2 billion.

Year-to-date aggregate cash deficit hit to top to TRY 140 billion in the first seven months of 2020 alone while total cash deficit recorded TRY 131 billion in 2019 and TRY 70 billion in 2018.

Source: Turkey Data Monitor, Ministry of Treasury and Finance

Another importance of cash balance is that it provides information about the sources of financing of cash deficit. Budget deficit of TRY 30,8 in July was financed with net borrowing of TRY 48.9 billion and the change in exchange rate of TRY 1.2 billion in the Cash/Bank item, and lastly the excess amount of TRY 18.2 billion was transferred to the deposit account of Treasury in the Central Bank of Turkey (CBT).

The main financing source of the cash deficit is the borrowing item. Let’s focus on borrowing strategy of the Treasury in July:

. The Treasury being a net payer in foreign borrowing since March 2020 did not borrow from abroad while paying its foreign debt of TRY 0.4 billion in July. For sure, this is due to the lower level of foreign debt payments. The first higher foreign debt payment of USD 4.6 billion is due on March 2021 while USD 1.3 billion of foreign debt is due on June 2021.

. The Treasury borrowed a debt of TRY 64.2 billion from domestic markets July while paying domestic debt of TRY 14.9 billion. Thus, net domestic borrowing amounted to TL 49.3 billion in July.

Source: Turkey Data Monitor, Ministry of Treasury and Finance

As it is understood, the Treasury concentrated on domestic borrowing in a current time of decreasing revenues, soaring expenditures, and depreciation of Turkish lira due to pandemic. It is quite reasonable that the Treasury concentrates on domestic borrowing to decrease the currency risk in a time of CBT melting its foreign exchange reserves so that Turkish lira not to depreciate.

What are the costs of CBT melting its foreign exchange reserves?

. Opening the credit taps mainly through public banks at lower interest rates to increase domestic demand,

. Returns on deposits and government bonds being under inflation rate (which is called as negative real rates)

. CBT financing the banks at the rates below policy rate (which makes the deposit rates being under inflation rate),

. Latest implementations jeopardizing asset quality of banking sector, and lastly

. All of the factors counted above combined with concerns on second wave of pandemic resulted in

.. interest rate of 2-year government bond increased above 14% on August 11th from the levels of 9% seen in the beginning of July,

.. USD/TRY increased above 6% and EUR/TRY increased above 5% compared to the levels at the end of July, and

.. Turkey’s 10-year CDS premium surged above 600.

CBT responded all these developments above as

. reducing liquidity limits of primary banks to half of their current limits on August 7th,

. increasing funding rate of banks to 8.25%,

. reducing liquidity limits of primary banks to zero on August 11th.

Besides, in its announcement dated August 6th, BDDK (Banking Regulation and Supervision Agency) announced that international development banks are exempted from the limitations of accessing TRY in case of fulfilling specified conditions.

CBT will convene for monetary policy meeting on August 20th. Bank’s policy rate, which is 1-week repo rate, is at 8.25%. CBT has been holding policy rate since May 2020 when CBT decreased the policy rate by 50 bps to 8.25%. Considering latest liquidity tightening measures, any rate hike seems uncertain as for now. Even if CBT decides to hold the policy rate next week, steps should be taken to restore confidence in the current environment where the budget deficit continues to increase. Otherwise, even if not in September, the pressure on bond yields may increase in October, when the Treasury’s redemptions will increase twice compared to September, as the Treasury tries to roll over its increasing domestic debt by issuing bonds. This may force the CBRT to raise interest rates drastically sooner or later. We witnessed drastic rate hikes when CBT raised policy rate from 4.5% to 10.0% in January 2014, from 8.0% to 16.5% in June 2018, from 17.75% to 24,0% in September 2018.

Source: Turkey Data Monitor

Fulya Gürbüz, Ph.D.