15% -12% Macro Focus Quarterly - YF · now visible in the second half of 2015, which is very likely to resume into 1Q16. An easing (quarterly) manufacturing PMI index, on the right,

Macro Focus Quarterly

Review and Outlook:

A Limited Window of Opportunity to Ease…

Executive Summary

It has been more than five months since Turkey concluded its loaded election cycle. In the aftermath, Turkish assets have been subject to several domestic uncertainties as well as a global market sell-off in the first 6 weeks. Discussions over a new Constitution to contain an executive presidency casted doubt over policy implementation. The fate of the suspended Kurdish peace process and corresponding security threats side-by-side geopolitics of the Russian and Syrian conflicts not only contested the improving external balances but also shook investor confidence. Appointment of the next CBT governor, a task recently finalized, also kept headlines busy. EU negotiations over the refugee crises and belated structural reforms were all addressed within this period. Amidst all, with a bit of a hand from the oil price slump, Turkey’s macro dynamics have shown considerable resilience. As Turkey’s growth story seems to be uninterrupted, the country retained its investment grade in the first rounds of Fitch/Moody’s reviews.

Turkey resumes its growth momentum above the pack. The new government put forward several pro-growth strategies to achieve its YoY 4.5% GDP growth target in the medium-term plan. YoY 5.7% growth in 4Q was better than expected, with personal consumption expenditures being the engine of growth. Scenario will be more or less the same into 2Q16, but with lesser contribution from household spending, but to be reinforced with revival of the Euro zone demand. Loan growth is at its lowest since late 2009, yet the approx. 3mn refugees keep providing a solid residual demand. Faltering private investment will again be the weakest chain throughout 2016. We expect annual growth to converge to 3.7% this year.

The rolling current account deficit still moves on its downward trajectory thanks to ongoing falls in energy prices. Global commodity outlook is still favoring Turkey, improving its terms of trade. The rolling “core” current account is in the negative territory for the last 9 months, as a strong sign of domestic demand. But the balance will be distorted by the loss of USD 6-7bn tourism revenues this year. We expect C/A to GDP ratio to stay tight at 4.4%. Term structure of the debt financing is increasing and portfolio inflows come handy.

The fiscal discipline is still a firm anchor for Turkish economy. The election pledge of a 30% minimum wage increase (among others) has not adversely affected budget balance so far.

A surprise decline in food inflation and easing of F/X pass-through made way to a sizeable downward adjustment in headline inflation in 1Q16. The effects of 30% minimum wage hike and some additional indirect tax adjustments have been felt rather mildly. We still believe CBT target will be missed with YoY 8.0%. A rapid improvement in inflation outlook has resurrected expectations from CBT to cut the 1-week repo (policy) rate and the upper band, starting from April. TRY performance vis-a-vie the basket currency will determine the extent of these cuts, but we pencil in a 100bps repo rate cut at the end of 1H16, only to conclude the year at 7.0% as the FED retains its normalization policy in 2H16. We believe there is room for easing in the rates for this limited period of time and the new governor of CBT may not miss this chance. Turkish assets may enjoy the easing cycle, but we see risks to downside thereafter.

2013 2014 2015 2016 F

GDP 4.2% 3.0% 4.0% 3.7%

Private Consumption 3.4% 1.0% 3.0% 2.8%

Public Consumption 0.7% 0.5% 0.7% 0.8%

Public Sector Investment 1.0% -0.4% 0.3% 0.3%

Private Sector Investment 0.1% 0.1% 0.5% 0.2%

Stock Changes 1.6% -0.2% -0.3% -0.7%

Net Goods and Services Exports -2.6% 2.0% -0.3% 0.3%

Source: TurkStat, Y.F. Securities

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%-10%

-5%

0%

5%

10%

15%

20

00Q

1

20

00Q

4

20

01Q

3

20

02Q

2

20

03Q

1

20

03Q

4

20

04Q

3

20

05Q

2

20

06Q

1

20

06Q

4

20

07Q

3

20

08Q

2

20

09Q

1

20

09Q

4

20

10Q

3

20

11Q

2

20

12Q

1

20

12Q

4

20

13Q

3

20

14Q

2

20

15Q

1

20

15Q

4

Real GDP Growth (LHS) C/A Balance (% GDP, reversed, RHS) Source: CBT, Y.F. Securities

1.58

7.5%

-1.1

-0.4

0.3

1.0

1.7

2.4

-4%

0%

4%

8%

12%

16%

Ja

n 1

0

Ma

y 1

0

Se

p 1

0

Ja

n 1

1

Ma

y 1

1

Se

p 1

1

Ja

n 1

2

Ma

y 1

2

Se

p 1

2

Ja

n 1

3

Ma

y 1

3

Se

p 1

3

Ja

n 1

4

Ma

y 1

4

Se

p 1

4

Ja

n 1

5

Ma

y 1

5

Se

p 1

5

Ja

n 1

6

Ma

y 1

6

Se

p 1

6

FX Pass Through (15M rolling, pps, RHS)

Core Inflation Momentum

cumulative effect (pps)

Source: TurkStat, Y.F. Securities

9.59

8.75

3

4

5

6

7

8

9

10

11

12

13

De

c 1

1

Ma

r 1

2

Ju

n 1

2

Se

p 1

2

De

c 1

2

Ma

r 1

3

Ju

n 1

3

Se

p 1

3

De

c 1

3

Ma

r 1

4

Ju

n 1

4

Sep

14

De

c 1

4

Ma

r 1

5

Ju

n 1

5

Se

p 1

5

De

c 1

5

Ma

r 1

6

2 Year Benchmark Bond Rate

Blended Cost of Funding

Source: CBT, Y.F. Securities

Sources of Growth

15 April 2016

Can Uz [email protected]

+90 (212) 334 98 37

Inflation Dynamics

Growth and Current Account Deficit

CBT’s Rate Corridor

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Macro Focus, 24th

of December 2012 Macroeconomic Outlook 2Q2016

GROWTH:

Turkey resumes its growth momentum above the pack. The new government put forward several pro-growth strategies to achieve its YoY 4.5% GDP growth target in the medium-term plan. YoY 5.7% growth in 4Q was better than expected, with personal consumption expenditures being the engine of growth. Scenario will be more or less the same into 2Q16, but with lesser contribution from household spending, but to be reinforced with revival of the Euro zone demand. Loan growth is at its lowest since late 2009, yet the approx. 3mn refugees keep providing a solid residual demand. Faltering private investment will again be the weakest chain throughout 2016. We expect annual growth to converge to 3.7% this year.

Turkish economic growth exceeded market consensus to reach out to 5.7% in 4Q15, making it the fastest growing country in the European emerging market. Main contributors to 4Q15 growth were personal consumption expenditures, public spending and external demand. The sequential growth printed the sixth consecutive positive growth rate since 3Q14. Though a pleasant reading, a deceleration is now visible in the second half of 2015, which is very likely to resume into 1Q16. An easing (quarterly) manufacturing PMI index, on the right, also signals a milder sequential growth in the first quarter.

Admittedly, 4.0% annual growth is below Turkey’s potential but considering the tightness in monetary stance and several political uncertainties in a calendar of two general elections, Turkish economy reveals a solid stamina. With more tightening in financial conditions into the first half of 1Q16, we expect some slack to presume in the economy and we expect the YoY growth in 1Q16 to come down to 3.6%.

2014 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2015

Gross Domestic Product 3.0% 2.5% 3.7% 3.9% 5.7% 4.0%

Agriculture -0.2% 0.2% 0.6% 1.6% 0.2% 0.7%

Industry 1.0% 0.3% 1.3% 0.3% 2.0% 1.0%

Construction 0.1% -0.2% 0.1% 0.1% 0.3% 0.1%

Services 2.5% 2.5% 2.4% 2.8% 3.7% 2.8%

Financial intermediation services

indirectly measured0.6% 0.9% 1.3% 1.6% 1.4% 1.3%

Tax - Subsidy 0.2% 0.6% 0.7% 0.6% 0.9% 0.7%

Source: TurkStat, Y.F. Securities

Industry grew by a remarkable YoY 7.5% in 4Q; but more importantly, the sector increased its momentum at the back of a solid manufacturing performance, which had a sequential growth of 1.9%. Industry itself explains 2.0pts of total GDP growth in 4Q. Recall that manufacturing made a solid start to 2016 thanks to export-oriented production lines and cement sector. We calculate the IP growth in 1Q as a rather weak YoY 0.6%, due mostly to a high base effect; but we remark that the index moved higher by a better than expected QoQ 0.8% so far. Construction also gained ground in 4Q as the sector grew by another YoY 5.4% but failed to feed in annual growth rate. Agriculture sector decelerated in Q4 with a limited YoY growth of 2.8%. Services exceeded our expectations at YoY 6.1% with a kick from the retail.

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Macro Focus, 24th

of December 2012 Macroeconomic Outlook 2Q2016

Personal consumption expenditures (PCE) and public spending lifted up growth in 4Q, and further reinforcement came out from external demand. Private consumption expenditures grew by YoY 4.7% in 4Q but the private “business” investment spending lagged behind with YoY 1.3%. On the former, we expect to see PCE having lost some pace in Q1 at the back of declining consumer loans. Core retail sales (excl. food and gas), accordingly, do ease out from year-end 2015 to 1Q16. QoQ 0.8% increase in core retail sales are most visible on big ticket items, such as electronics, furniture, telecommunications, white-goods, audio/video equipment, and this tempts us to be more optimistic regarding the rest of the year. But, we have long been arguing that there was a substantial residual demand that has been brought about with the Syrian refugees; this seemed to be less effective in 4Q but it is difficult to separate the effect from loss of tourist spending. Admittedly, housing, furniture and house appliances share in total spending keeps increasing. More direct evidence is put forward by upwards trend in the share of medical expenses in domestic spending. Sustaining this residual demand will be important for growth dynamics. On business investments, we anticipate only a mild recovery on the appetite in 2Q. Capital goods production is likely to reveal another round of slump in 1Q16 and the pace in capital good imports is not very promising. Moreover the outlook for commercial loan growth and sectoral confidence indices are far from signalling a rapid come-back. The CBT’s “expected” rate cuts, effective from April till June, may change the view, but only marginally.

Both consumer loans and commercial loans showed deceleration in 1Q16. The speed of decay in commercial loans slightly exceeds that of consumer loans. Recall that 13-week annualized growth rate of total loans floated around 20% in 1Q15. Yet in 1Q16, growth trend stood in the range of 5.0% - 8.5%, which is well below CBT’s implicit target of 15%. Loan growth rate witnessed its lowest levels in 1Q16 since the beginning of the year 2012. In line with expectations regarding CBT’s cut on its upper band of the rate corridor, a fall in consumer loans interest rates is expected, promoting domestic demand. One obstacle is the elevated loan-to-deposit ratio, currently at 114%, although we admit that deposit growth is on an upward trajectory.

Lastly, exports contributed positively to growth in 4Q after 3 quarters of decline. This is likely to continue into 1Q16. More on this on the current account section...

2014 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2015

Gross Domestic Product 3.0% 2.5% 3.7% 3.9% 5.7% 4.0%

Private Consumption 1.0% 3.0% 3.5% 2.3% 3.2% 3.0%

Public Consumption 0.5% 0.3% 0.8% 0.8% 1.1% 0.7%

Fixed Capital Formation (A+B) -0.3% 0.1% 2.4% 0.0% 0.9% 0.9%

A. Public Sector (1+2) -0.4% 0.0% 0.4% 0.4% 0.5% 0.3%

1. Equipment Investment 0.0% -0.1% 0.1% 0.0% 0.2% 0.0%

2. Construction Investment -0.4% 0.1% 0.3% 0.4% 0.4% 0.3%

B. Private Sector (1+2) 0.1% 0.2% 2.0% -0.4% 0.3% 0.5%

1. Equipment Investment -0.5% 0.5% 2.1% -0.2% 0.2% 0.6%

2. Construction Investment 0.6% -0.3% 0.0% -0.2% 0.2% -0.1%

Stock Changes -0.2% 0.5% -1.8% 0.9% -0.7% -0.3%

Goods and Services Exports 1.9% -0.4% -0.7% -0.4% 0.6% -0.2%

(minus) Goods and Services Imports -0.1% 1.1% 0.4% -0.3% -0.8% 0.1%

Net Goods and Services Exports 2.0% -1.4% -1.2% -0.1% 1.3% -0.3%

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Macro Focus, 24th

of December 2012 Macroeconomic Outlook 2Q2016

INFLATION and MONETARY POLICY:

March CPI at MoM -0.04% came out significanly below market consensus and annual CPI fell down to 7.46%, below the CBT’s upper confidence limit at 8.4% for the year 2016. Unexpectedly high level of decline in food prices made the impact on headline in February and March. Administrative ceiling on meat prices and Russian sanctions on some fruit and vegatable produces do have some impact on such a sharp decline. Consequently, the annual food price slumped to 4.6%, all the way from 11.7% in January. This was not actually what we anticipated as a mean-reversion and we doubt that it may be sustainable as food prices in Turkey are highly volatile. We still work with an annual food inflation at 9.4%.

We have been arguing since October that the core inflation momentum was and is easing, but the level effect has been pushing the core inflation higher. Also we had claimed last month that “the level effect would also ease out starting from [March] onwards, unless we met with some fresh currency shock”. Our call was proven to be true: Despite the fact that core inflation went up by MoM 0.41% at the back of rising services prices, annual core inflation inched down by 21bps to 9.51%, exactly matching year-end 2015. Besides, the core momentum (run rate) kept decelerating and moved down to 7.50% annualized. As the residual effects of TRY weakness ease out, we calculate that the pass-thru has lifted the core inflation by some 158 basis points in the course of 15 months, but will possibly shrink to as little as some 0.50 points at the end of 2016, provided the equally weighted basket currency stays around 3.20.

There is still a significant upwards pressure regarding the overall service prices (from insurance to social and cultural services and rents to education), in which the annual change stays very close to the 9.0% mark. This poses some upside risks on the core inflation dynamics which has shown signs of easing lately.

Domestic PPI came at MoM 0.40%, taking the YoY headline figure lower to 3.80%; lowest in 12 months, thanks to falling prices in energy related sectors, such as electricity, gas and petroleum, as well as base metals. Rapid falls in energy prices for the last four months had helped out PPI; but March readings stayed on the upside with refinered petrol products lifting the headline up. We also observed that the effect of minimum wage hike mostly triggered the marginal cost structure of the consumption goods producing firms. With the help of falling energy prices, and a stable TRY, domestic PPI may be expected to stay under control in the rest of the year.

With the March print, we revised our year-end 2016 CPI forecast down to 8.0%. For 2016, with the relative easing in the currency pressure (if stays permanent), we expect the implied pass through to diminish, as cited above. The effects of tax measures seemed to be almost fully priced-in. Yet the effects of minimum wage hike is still felt on production costs, especially in the manufacturing sectors. To the extent that the producers reflect the burden on domestic final prices, there will be retained risks on core price. Besides, we were working with an average Brent petrol price assumption of USD 37 and there are some potential upside risks on this. Hence lower gasoline prices for the upcoming months are not anticipated to lift the inflation downwards..

Still, we believe CBT will use this chance to lower the rates by significant amounts, maybe some 100bps, within a time period of two to three months. CBT has already started to cut the rates from the upper band and signalled more gradual cuts in the sequel, as per the intended simplification policy, gradually narrowing the rate corridor.

5

Macro Focus, 24th

of December 2012 Macroeconomic Outlook 2Q2016

Eyes are set on MPC meeting on April, 20. The Turkish cabinet approved the appointment of Murat Çetinkaya as the new chief of the central bank on Monday. Mr. Çetinkaya’s Islamic finance background hints on a compromise between President Erdoğan and PM Davutoğlu. Investors who had feared a power struggle over the nomination were reassured after Deputy PM Mehmet Şimşek said that the name will be one of CBT’s own. The first round of uncertainty ended with the appointment. Next round will be the market test on Çetinkaya’s command on monetary policy as little is known about his insights on the debts of theory and his stamina on a stressful front-man job.

Some key drivers to put light on 2Q16 decisions on monetary policy:

We were puzzled by FOMC’s overly accommodative approach, with their significant downward revisions on their forward guidance, which triggered an immediate risk-on movement and halt the ongoing strength in USD. Positive sentiment is bound to continue up until FOMC meeting in June, yet we believe FED will wait for the effects of a potential Brexit.

Oil prices had hit above USD 44, as the pessimistic views on stagnant global growth faded out with recently better than expected Chinese data. Likewise, industrial metals revealed an upward trend, led mainly by iron ore. As the pressure on growth expectations eased, valuation on equities and bonds recorded steeper hikes, bearing little pressure on TRY.

A lower than expected February and March inflation were almost too good to be true. Weak consumer confidence, stagnant retail sales and low growth rate on consumer loans are the key factors to restrain demand-side inflation. On the other hand, cost-side inflation dynamics also eased off by weakening of USD in February and March. Year-end, 12 months ahead and 24 months ahead inflation expectations all came down, respectively, to 8.3%, 7.9% and 7.2% in the month of March. Declines in expectations came up after an extended period.

CBT is deliberately easing financial conditions since last week of February. Cost of funding reached at 9.13% on 22nd of February. Thereafter, on 14th of April, CBT took down the cost of funding to 8.72%. Hereby, Bank lowered lending utilization rate below 40% on 13rd of April, the first time since mid-January. This is possibly the most solid signal for CBT’s orientation.

CBT acknowledges that the interbank O/N rates (a market rate) play an upmost important role in pricing of loan and deposit rates, rather than policy rates (Binici, et al., TCMB Çalışma Tebliği, 2016). But, it is a well-known fact that since March 2015, interbank overnight repo rate is determined at the upper bound. With respect to growth concerns, to boost consumer loans, the Bank will opt to lower the upper bound.

5YR – 3M bond yield spreads in yield curve may have reached a trough, signaling an end of tightening. Hence, if the yield curve is to get flatter, it would be possible with an easing in the shorter sector. CBT’s February and March expectation surveys support such an outcome situation.

In real terms, pressure on TRY is easing despite the rapid declines in Turkish CPI.

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Macro Focus, 24th

of December 2012 Macroeconomic Outlook 2Q2016

EXTERNAL BALANCE:

The 12M-rolling deficit decreased to USD 30.5bn in February, the lowest in 66 months. Yet the 12M-rolling core balance (gold / energy excluded) at USD 2.6bn deficit kept expanding for the third month, though at a gradual pace as the domestic demand in 1Q16 proves to be weaker in comparison to that in 1Q15. We increased our C/A deficit to GDP ratio forecasts for year-end 2016 from 4.3% to 4.4%. We now expect USD 6.0bn loss in tourism revenue and some USD 4.0bn improvement in core trade deficit as our revised export projections point out to 6.0% increase by year-end.

Turkish energy imports shrank by USD 17.8bn within a time frame of 12 months, and Turkey’s energy deficit reduced to USD 30.5bn (which is the whole C/A deficit), thanks to slump in oil prices. Recall that oil prices weakened by 39.5% in the course of 2015 and declined by another 12% in the first two months of 2016. Energy’s share in total imports kept falling. It stands, now, at 17.2%, below its long-term trend line. Contrary to this, imports of crude oil [measured in tones] went up by another YoY 12.7% in February. Recall that with the falling oil prices, Turkey purchased some 25.1mn tons of crude oil in 2015, some 43.4% (or 7.6 mn tones) more than that of 2014. Besides, gold trade contributed positively to goods balance. 12-M cumulative gold trade recorded a USD 2.6bn surplus. These factors keep playing the major role in reducing the current account deficit.

Loss of tourism revenues pose risks on current account deficit in 2016. Tourism revenues fell by USD 3.4bn to USD 26.2bn in the last 12 months and keep falling. Within two months, number of Russian tourists decreased by 55% to only 45k. We expect potential loss of tourism revenue in 2016 will stand at USD 6.0bn (2015 year-end net tourism revenue was 26.6bn).

Term structure improvement in deficit financing slowed down with the start of the year; put portfolio inflows revived after 10 months. A total of USD 49.5bn long-term financing (FDI, long-term portfolio flows and loans/deposits) funded the C/D. Although we are not optimistic for a recovery in FDI inflows, portfolio inflows may take some burden out of loan and deposit financing in the rest of the year. Portfolio investment recorded a net inflow of USD 1.1bn in February. Non-residents’ equity and GDDS indicated net purchases of USD 0.4bn and USD 0.7bn, respectively; banks issued USD 76mn worth of bonds in international capital markets. This is expected to resume in March and April.

A word on external debt. By 2015 year-end, Turkey’s total [gross] external debt stock stands at USD 398.0bn. GDP to gross external debt stock ratio is at 55.3%. When banking sector and CBT’s external debt / net assets are excluded, total [net] external debt stock comes down to USD 253.9bn, or 35.3% of GDP. USD 248.5bn of total debt originates from private sector; whereas, public sector owes USD 145.9bn. 79% of private sector’s external loan debt is originally long term nature. In comparison to 2015 year-end, in 1Q16, long term external loans increased by USD 2.8bn while short term external loans (including trade credits) decreased by USD 1.8bn. 53.1% of total long term loans are taken by the financials with 82.4% of it belonging to banking sector. Up until 2016 year-end, private sector has to fund a total of USD 63.9bn as principle payment. Of this total, USD 19.1bn is of short term duration and USD 44.8bn is of long term nature.

In page 7, the reader will find our forecasts on external balance developments for the year 2016.

7

Macro Focus, 24th

of December 2012 Macroeconomic Outlook 2Q2016

2013 2014 2015 F 2016 F 2014 2015 F 2016 F 2014 2015 F 2016 F

CURRENT ACCOUNT BALANCE level -64.7 -43.6 -32.1 -32.4 -32.6% -26.3% 0.8% 21.1 11.4 -0.2

/ GDP (%) -7.9% -5.4% -4.5% -4.4%

Trade Balance -79.9 -63.7 -47.9 -40.6 -20.3% -24.8% -15.2% 16.2 15.8 7.3

Export (fob) 151.8 157.6 143.9 149.9 3.8% -8.7% 4.2% 5.8 -13.7 6.0

Import (cif) -251.7 -242.2 -207.2 -204.0 -3.8% -14.4% -1.5% 9.5 35.0 3.2

(net) -99.9 -84.6 -63.3 -54.1 -15.3% -25.1% -14.6% 15.3 21.2 9.2

Core Export (excl. Gold and Energy) 141.7 148.3 132.0 140.0 4.6% -11.0% 6.1% 6.6 -16.3 8.0

Core Import (excl. Gold and Energy) -180.6 -180.2 -165.9 -170.0 -0.2% -7.9% 2.4% 0.4 14.2 -4.1

(net) -38.9 -31.9 -34.0 -30.0 -18.0% 6.5% -11.7% 7.0 -2.1 4.0

Gold Export 3.3 3.2 7.4 6.0 -4.1% 129.8% -18.7% -0.1 4.2 -1.4

Gold Import -15.1 -7.1 -3.4 -4.0 -53.0% -51.8% 16.8% 8.0 3.7 -0.6

(net) -11.8 -3.9 4.0 2.0 -66.9% -201.4% -49.4% 7.9 7.9 -2.0

Energy Export 6.7 6.1 4.5 3.9 -9.1% -26.1% -13.7% -0.6 -1.6 -0.6

Energy Import -55.9 -54.9 -37.8 -30.0 -1.8% -31.1% -20.7% 1.0 17.0 7.8

(a) Crude Oil Import -35.4 -32.7 -24.8 -20.0 -7.7% -24.1% -19.4% 2.7 7.9 4.8

(b) Gas Import -20.5 -22.3 -13.0 -10.0 8.9% -41.7% -23.2% -1.8 9.3 3.0

(net) -49.2 -48.8 -33.3 -26.1 -0.8% -31.7% -21.7% 0.4 15.5 7.2

Shuttle Trade 7.4 8.6 5.5 3.5 15.8% -36.2% -36.4% 1.2 -3.1 -2.0

Transport and Insurance 12.9 12.7 9.9 10.0 -1.8% -22.1% 1.3% -0.2 -2.8 0.1

Others -0.4 -0.4 0.1 0.0 0.3% -125.0% -100.0% 0.0 0.5 -0.1

Services Balance 22.8 26.8 24.0 16.7 17.2% -10.3% -30.3% 3.9 -2.8 -7.3

Revenues from tourism 28.0 29.6 26.6 20.6 5.6% -9.9% -22.5% 1.6 -2.9 -6.0

Expenditures in tourism -4.8 -5.1 -5.4 -5.9 5.3% 5.8% 9.3% -0.3 -0.3 -0.5

(net) 23.2 24.5 21.2 14.7 5.6% -13.2% -30.6% 1.3 -3.2 -6.5

Insurance, Finance, and Others (net) -0.3 2.3 2.8 2.0 -781.0% 20.9% -27.7% 2.6 0.5 -0.8

Income Balance -7.6 -6.7 -8.2 -8.5 -11.5% 22.1% 3.5% 0.9 -1.5 -0.3

YF Securities Forecasts

(USD bn) (annually % change) (annual change)

BUDGET BALANCE:

Budget performance was better than expected in the first quarter of 2016 concluding the term with a small surplus. Revenue growth (16.4%), at the back of tax incomes and privatization installment revenues, exceeded the expenditure growth (11.0%). Moreover, the growth rate of tax revenues (12.7%) is not far from the growth rate of non-interest expenditures (14.6%)

Admittedly, personnel spending hiked in March and with election promises materializing in the remainder of the year (hiring subcontractors in the public sector), non-interest expenditures may rise. But as of now, Turkey runs only a marginally more expansionary fiscal stance.

Also we remind that CBT announced a net profit (after tax) of TRY 13.9bn. This is the highest amount the institution has announced so far. A big chunk of this amount will be paid as dividend to the Treasury. Also we should expect CBT’s tax payment approaching TRY 2.0bn. We will see this in the consolidated budget next month and this will be very positive for budget balance.

Turkey's budget deficit/GDP ratio was around 1.3% in the last five years. For this year, the ratio may inch up a bit but all in, the budget discipline seems to be intact throughout the year.

8

Macro Focus, 24th

of December 2012 Macroeconomic Outlook 2Q2016

KEY TAIL RISKS TO BEAR IN MIND IN 2Q…

Turkey’s main opposition party CHP announced that they will lend support to a government proposal on a provisional change in the constitution that would allow parliament to lift the immunities of Peoples’ Democratic Party (HDP) lawmakers and others. The proposal is expected to be referred to the plenary floor very soon. In the Nov. 1, 2015, election the AKP secured 317 seats in the 550-member parliament. For a constitutional change in parliament, a party needs to win 367 seats, although 330 are enough to take a constitutional change to a referendum. AKP – CHP combined makes it 450 votes, and MHP will almost surely give further support. AKP already stated that if the parliament super majority fails, they will not push the case for a referendum. The outcome of this vote may be the ousting of some HDP deputies from the parliament. If we stretch the possible line of events, this may lead to local deputy elections to fulfill the left spots and change the arithmetic of the Grand Assembly, possibly producing more deputies for AKP.

The new CBT governor Murat Çetinkaya may be tested by the markets on the grounds for tool independence of CBT and/or dovish stance on rates. There is a dominant market consensus that Mr. Çetinkaya will lead pro-growth monetary approaches and the market forces may lead the Bank to resort to some extensive discretionary policies.

Discussions over a Constitutional change with executive presidency embedded in it may get heated in the second half of 2016.

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Macro Focus, 24th

of December 2012 Macroeconomic Outlook 2Q2016

2011 2012 2013 2014 2015 2016F

GDP (TRY bn) 1297.7 1416.8 1567.3 1748.2 1953.6 2195.4

GDP (USD bn) 774.0 786.3 823.0 799.4 720.0 742.4

GDP Real Growth 8.8% 2.1% 4.2% 3.0% 4.0% 3.7%

CPI (annual; eop) 10.5% 6.3% 7.4% 8.2% 8.8% 8.00%

CPI (annual; average) 6.5% 8.9% 7.5% 8.9% 7.7% 7.69%

Interest Rate (Benchmark, eop) 11.04% 6.16% 10.03% 7.97% 10.78% 10.00%

Interest Rate (Benchmark, average) 8.83% 8.35% 7.37% 9.34% 9.71% 9.62%

Interest Rate (Policy rate, eop)* 5.75% 5.50% 4.50% 8.25% 7.50% 7.00%

Interest Rate (Policy rate, average)* 6.14% 5.73% 4.88% 8.65% 7.57% 7.25%

USD/TL (eop) 1.8889 1.7776 2.1304 2.3230 2.9128 3.0500

USD/TL (average) 1.6725 1.7919 1.9036 2.1915 2.7227 2.8772

EURO/TL (eop) 2.4438 2.3452 2.9344 2.8258 3.1833 3.4000

EURO/TL (average) 2.3250 2.3040 2.5300 2.9116 3.0222 3.2778

Primary Surplus (IMF-defined, as % of GDP) 1.0% 0.3% 0.9% 0.3% 0.8% 1.8%

Budget Balance (as % of GDP) -1.5% -2.0% -1.2% -1.6% -1.3% -1.7%

Exports (USD bn) 135.0 152.5 151.8 157.6 143.9 149.9

Imports (USD bn) -240.8 -236.5 -251.7 -242.2 -207.2 -204.0

Trade Balance (USD bn) -105.9 -84.1 -99.9 -84.6 -63.3 -54.1

C/A Balance (USD bn) -75.0 -48.5 -64.7 -43.6 -32.1 -32.4

C/A Balance / GDP (%) -9.7% -6.2% -7.9% -5.4% -4.5% -4.4%

Yatırım Finansman Securities

Macroeconomic Forecasts

Yatırım Finansman Securities

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Institutional Sales

Cenk Erdal Director of Sales & Trading [email protected] +90 (212) 334 98 45-46

Müjde Erdoğan Birdal Director of Sales [email protected] +90 (212) 334 98 42-43

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Equity Research

Zümrüt Can Ambarcı Head of Equity Research, Banks [email protected] +90 (212) 334 98 35

Mehmet Akif Daşıran Telecom, Retail, Aviation [email protected] +90 (212) 334 98 39

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Özden Öntürk Associate [email protected] +90 (212) 334 98 38

Macroeconomic Research

Can Uz Chief Economist [email protected] +90 (212) 334 98 37

Sinem Vural Associate [email protected] +90 (212) 334 98 89

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