Türkiye Is Bankasi : October 2023​

Monthly Economic

Review

Global Economy

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October 2023

Economic Research Division

Alper Gürler

Division Head [e-mail]

H. Erhan Gül

Unit Manager [e-mail]

Dilek Sarsın Kaya

Asst. Manager [e-mail]

Berkay Arık Asst. Economist [e-mail]

Utkan İnam Asst. Economist [e-mail]

Turkish Economy ...……………………..…..……….2

Financial Markets …………...…...…..…...………...7

OECD raised its global economic growth forecast for 2023 from 2.7% to 3%. The organization stated that the weaker-than-expected recovery in China will put pressure on global growth, as well as evident effects of tight monetary policy, and lowered its growth forecast for 2024 from 2.9% to 2.7%.

In the US, where economic activity continued its moderate course, annual CPI inflation rose to 3.7% in August.

In the Euro Area, PMI data remained below the threshold in September, indicating that the weak outlook in economic activity continued.

Meetings of major central banks were closely monitored in September. Fed and BoE kept their policy rates unchanged, while the ECB raised its key interest rates by 25 basis points each. In this period, statements by the officials of major central banks indicated that tight monetary policy stance will continue for a while.

While leading indicators in China signaled some recovery in economic activity, the People's Bank of China (PBoC) kept interest rates unchanged in September to prevent a possible depreciation in yuan.

Oil prices, which rose by 8.7% in September to their highest level since November 2022 due to supply disruptions, caused concerns about global inflation to rise.

Turkish Economy

The Medium Term Program (MTP), covering the period 2024-2026, was published in the Official Gazette dated September 6, 2023. According to the Program, the growth forecast for Turkish economy was set as 4.4% and 4.0% for 2023 and 2024, respectively.

In July, seasonally adjusted unemployment rate was realized as 9.4%, the lowest level since January 2014.

According to calendar adjusted figures, industrial production index rose by 7.4% yoy in July, the fastest increase in 13 months.

Although ISO Türkiye Manufacturing PMI rose to 49.6 in September, it remained below the threshold value throughout the third quarter, indicating that operating conditions in manufacturing industry followed a weak course.

In August, house sales declined by 1.1% yoy but remained at 122K units, the highest level since the beginning of the year.

Current account deficit increased by 58.1% yoy to 5.5 billion USD in July and reached 58.5 billion USD according to 12-month cumulative figures.

In August, central government budget posted a surplus of 51.3 billion TRY thanks to the support of tax revenues that doubled on an annual basis. Thus, the budget deficit in January-August period was realized as 383.4 billion TRY, 23.5% of the deficit projected for 2023 in the MTP.

In September, CPI increased by 4.75% mom and 61.53% yoy, respectively. Domestic PPI also rose by 3.40% mom and 47,44 yoy in this period.

At its September meeting, CBRT raised the policy rate by 500 basis points to 30% in line with market expectations. In the text of the meeting, CBRT stated that the increase in

Banking Sector.….…..………...………………………….…8

Concluding Remarks.…………..….........….....9

Graphs……………………………………………..…………...………. 10

Tables…………………………………………………….…….….………12

domestic and foreign demand for Turkish lira assets would contribute to price stability.

International credit rating agencies Fitch and S&P affirmed Türkiye's credit rating at "B" and revised the rating outlook from "negative" to "stable".

Leading Indicators

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Unemployment rate fell to its lowest level in 9 years in July.

In July, seasonally adjusted unemployment rate decreased by 0.2 points compared to June and was realized as 9.4%, the lowest level since January 2014. This development was driven by an increase in employment by 318K persons against a rise in labor force participation of 280K persons. Thus, the employment rate rose to 48.4% and the labour underutilization rate, the broadest defined unemployment rate, decreased by 1.5 points compared to June and was realized as 22.7%. In this period, youth unemployment rate became 18%.

Industrial production index rose by 7.4% yoy in July.

According to calendar adjusted figures, industrial production index rose by 7.4% yoy in July, the fastest increase in the last 13 months. On the other hand, according to seasonally and calendar adjusted figures, the index fell by 0.4% mom in July. In this period, the 10.5% monthly increase of production in the mining and quarrying sector stood out. The sector has been performing weak since May 2022. In July, production in electricity, gas and steam sector increased by 3.7% mom while it decreased by 1.4% mom in manufacturing industry. While production declined in half of the 24 sub-sectors of the manufacturing industry, the contractions in manufacture of other transportation vehicles sector (-17.9%) and in computers, electronic and optical products sector (-10.7%) were noteworthy. On the other hand, production of basic pharmaceutical products rose sharply by 14.8% mom.

Istanbul Chamber of Industry Türkiye Manufacturing PMI rose to 49.6 in September.

Türkiye Manufacturing sector PMI, published by Istanbul Chamber of Industry, recorded an increase for the first time since April and became 49.6 in September. Thus, the index remained below the threshold value throughout the third quarter, and signaled that operating conditions in manufacturing industry followed a weak course. In September, manufacturing activity signaled an improvement with a lower contraction compared to August, while the employment index posted a limited increase, extending its expansionary trend to its fifth month. The common view of surveyed firms was that the increases in input costs and final product prices slowed down significantly compared to August. Analyzing the sectoral PMI data for September, it was observed that the index remained below the threshold value in all sectors except food products, while the most negative assessment regarding production activities was recorded in textile products sector.

Demand indicators follow a volatile course.

Following a flat course in June, retail sales volume at constant prices increased by 2.7% mom in July. On the other hand, according to the data released by CBRT, CPI-adjusted monthly average debit and credit card expenditures decreased by 3.1% mom in August, indicating a loss of momentum in domestic demand. According to 4-week averages, real expenditures on airline transportation

decreased by 24.8% in August, and expenditures on grocery stores, shopping malls and fuel expenditures also followed a downward trend. In this period, expenditures on clothing and accessories, electrical-electronic goods and computers continued to increase.

House sales in August were at the highest level of the year.

House sales, which increased by 16.7% yoy in July thanks to the low base effect, decreased by 1.1% yoy in August. However, 122K units were sold in this period, the highest sales figure since the beginning of the year. In August, mortgaged sales decreased by 26.1% yoy, while other sales, which increased by 4.3% yoy, accounted for 86.6% of total sales. Analyzing the data by sales status, new house sales decreased by 9.5% in the said period, while second-hand sales, which account for approximately 70% of total sales, recorded a limited rise of 2.7%. The 42% annual decline in sales to foreigners in August was noteworthy. Thus, total house sales in January-August period decreased by 15.5% compared to the same period of 2022.

According to the data released by CBRT, the house price index increased by 7.3% mom in July, below the monthly CPI inflation for the first time since December 2021. Annual nominal increase in house prices was realized as 94.7%, the lowest level of the last 18 months, while the real increase in prices was 31.2%.

		House Sales
250		(thousand units)	50
	Other Sales
200		Mortgaged Sales	30
		% change, yoy (right-axis)
150				10
100				-10
50				-30
0				-50
Aug-22	Nov-22	Feb-23	May-23	Aug-23

Consumer confidence index rose by 5.1% mom in September.

In September, consumer confidence index recorded a monthly increase for the first time since May. According to seasonally adjusted figures, the index, which fell to 68.1 in August, the lowest level of the last 15 months, rose by 5.1% mom to 71.5 in September. Analyzing the sub-indices, expectations for the next 12 months generally improved. In this period, seasonally adjusted real sector confidence index rose by 0.5 points mom to 105.1 in line with the improvement in assessments regarding the general outlook and total employment in the next 3 months. On the other hand, sectoral confidence indices increased by 3% and 1% respectively in retail trade and construction sectors, and decreased by 2% in services sector. Hence, economic confidence index rose to 95.4 in September.

Source: CBRT, Datastream, ISO, Turkstat

October 2023	2

Foreign Trade and Balance of Payments

Foreign trade deficit was 12.2 billion USD in July.

According to the released by TURKSTAT, Türkiye's exports increased by 8.3% yoy to 20.1 billion USD in July, while imports rose by 10.5% yoy to 32.3 billion USD. Thereby, foreign trade deficit widened by 14.2% yoy to 12.2 billion USD. In July, the import coverage ratio continued to remain at low levels with 62.2%.

Current account deficit was realized as 5.5 billion USD.

In July, current account deficit increased by 58.1% yoy to 5.5 billion USD. According to the Reuters poll, current account deficit was estimated to be 4.5 billion USD in this period. The rapid rise in the current account deficit was mainly driven by expanding foreign trade deficit due to the 45.8% yoy increase in net gold imports. In July, current account excluding gold and energy posted a surplus of 717 million USD. On the other hand, the favorable course in passenger transportation and tourism revenues limited the widening in the current account deficit as they were in June. In July, net 7 billion USD revenues were recorded from these two items. In the first 7 months of the year, current account deficit increased by 31.4% yoy to 42.3 billion USD, and it reached 58.5 billion USD according to 12-month cumulative fig- ures.

		Current Account Balance
		(12-month cumulative, USD billion)
80
60
40					3 8 .5
20
0
-20
-40					-5 8.5
-60	CAB		CAB excl. Net Energy and Gold Trade
-80
	2019	2020	2021	2022	2023

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The moderate course in foreign direct investments continued.

In July, net foreign direct investments in Türkiye were realized as 392 million USD, the highest level of the last 3 months. In this period, non-residents' net capital investments in Türkiye increased rapidly compared to June and became 510 million USD, while real estate investments were realized as 206 million USD, the lowest level since May 2021. In January-July period, net foreign direct investments decreased by 47.3% yoy to 2.5 billion USD.

Capital inflows continued in portfolio investments.

Portfolio investments posted a net capital inflow of 1.2 billion USD in July, following the strong capital inflow of 1.8 billion USD in June. In this period, non-residents' net purchases in the equity market continued to increase and became 734 million USD, while debt securities market recorded the highest capital inflow since February with 368 million USD. Thus, portfolio investments recorded a net capital inflow of 49 million USD in the first 7 months of the year. In the same period of the previous year, portfolio investments had posted a net capital outflow of 12.2 billion USD.

	Long-term Debt Rollover Ratios
		(12-month cumulative, %)
250
	Banks
200	Other Sectors
150					1 0 8
100
50					8 5
0
2018	2019	2020	2021	2022	2023

Other investments recorded a capital inflow of 2.3 billion USD.

In July, other investments presented the most favorable outlook of the last 3 months with a net capital inflow of 2.3 billion USD. In this period, foreign banks' effectives and deposits in Türkiye

100

80

60

40

20

0 -20-40-60-80-100

Net Capital Flows

(12-month cumulative, billion USD)

	(*) Negative values indicate an increase in reserves.			3.5
							8.6
							41.6
								6.2
							-58.5
							-1.3
		Reserves (*)		Net Errors and Omissions		Other Investment
		Portfolio Investment		Direct Investment		Current Account Balance
Jul.20	Jan.21	Jul.21	Jan.22	Jul.22	Jan.23	Jul.23

October 2023	3

Foreign Trade and Balance of Payments

increased by 980 million USD, while domestic banks' effective and deposits at their correspondents abroad decreased by 942 million USD. In July; banking sector, General Government and other sectors made net loan payments abroad amounting to 483 million USD, 35 million USD and 181 million USD, respectively. According to 12-month cumulative figures, long-term debt rollo- ver ratios in banking and other sectors declined to 85% and 108%, respectively.

CBRT Reserves and Net Errors and Omissions

(monthly, USD billion)

20

15

10

5

0

-5

-10

-15

CBRT's Reserves

Net Errors & Omissions

-20

-25

-30

J

A

S

O

N

D

J

F

M

A

M

J

J

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Reserve assets and net errors and omissions…

In July, reserve assets increased by 2.8 billion USD, while the total decline in reserve assets in the first 7 months of the year was

23.8 billion USD. Net errors and omissions item, which recorded a capital inflow of 8.2 billion USD in June, continued in July with an increase of 4.4 billion USD. In January-July 2023 period, capital outflows from this item amounted to 711 million USD.

Expectations…

According to preliminary data released by the Ministry of Trade, foreign trade deficit remained high with 8.9 billion USD in Au- gust. In addition to relatively high oil prices due to the decisions taken for the continuation of production cuts, the fact that the export climate index, which shows the course of economic activity in Türkiye's export markets, fell below the threshold value in August indicates that risks on the foreign trade balance will con- tinue. On the other hand, we consider that the positive outlook in financing side of the current account deficit may continue thanks to the recent evaluations made by international credit rating agencies regarding the Turkish economy.

Balance of Payments						(USD million)
	Jul.	Jan. - Jul.	%		12-month
	2023	2022	2023	Change	Cumulative
Current Account Balance	-5,466	-32,178	-42,286	31.4	-58,517
Foreign Trade Balance	-10,477	-50,165	-61,261	22.1	-100,617
Services Balance	5,999	24,132	25,730	6.6	51,667
Travel (net)	4,795	18,523	20,760	12.1	39,554
Primary Income	-903	-5,498	-6,881	25.2	-9,969
Secondary Income	-85	-647	126	-	402
Capital Account	-25	-30	-110	266.7	-115
Financial Account	-1,078	-16,030	-43,107	168.9	-50,033
Direct Investment (net)	-392	-4,771	-2,514	-47.3	-6,180
Portfolio Investment (net)	-1,160	12,169	-49	-	1,310
Net Acquisition of Financial Assets	-58	4,421	1,712	-61.3	1,786
Net Incurrence of Liabilities	1,102	-7,748	1,761	-	476
Equity Securities	734	-3,580	229	-	-229
Debt Securities	368	-4,168	1,532	-	705
Other Investment (net)	-2,304	-15,503	-16,789	8.3	-41,644
Currency and Deposits	-2,699	-11,571	-12,895	11.4	-37,222
Net Acquisition of Financial Assets	-879	5,249	9,007	71.6	-2,738
Net Incurrence of Liabilities	1,820	16,820	21,902	30.2	34,484
Central Bank	32	4,434	13,667	208.2	16,550
Banks	1,788	12,386	8,235	-33.5	17,934
Foreign Banks	980	8,418	6,182	-26.6	9,516
Foreign Exchange	1,186	5,106	3,689	-27.8	6,212
Turkish Lira	-206	3,312	2,493	-24.7	3,304
Non-residents	808	3,968	2,053	-48.3	8,418
Loans	931	-2,348	141	-	-1,329
Net Acquisition of Financial Assets	232	958	89	-90.7	-1,157
Net Incurrence of Liabilities	-699	3,306	-52	-	172
Banking Sector	-483	-2,845	307	-	-2,601
Non-bank Sectors	-181	5,744	87	-98.5	2,456
Trade Credit and Advances	-520	-1,543	-3,998	159.1	-3,044
Other Assets and Liabilities	-16	-41	-37	-9.8	-49
Reserve Assets (net)	2,778	-7,925	-23,755	199.7	-3,519
Net Errors and Omissions	4,413	16,178	-711	-	8,599

Source: CBRT, Datastream

October 2023	4

Budget Balance

Central government budget posted a surplus of 51.3 billion TRY in August.

Following July, the central government budget posted a surplus of 51.3 billion TRY in August. Budget revenues more than doubled compared to the same period of the previous year, reaching 614 billion TRY, while expenditures increased by 86.1% yoy to 562.7 billion TRY. Thus, in January-August period the central government budget deficit declined to 383.4 billion TRY. In this period, primary balance posted a surplus of 16.7 billion TRY.

In August, tax revenues almost doubled on an annual basis.

Tax revenues, which nearly doubled yoy to 543.2 billion TRY in August, accounted for 88% of total budget revenues. In addition to the hikes in tax rates, the rise in tax revenues was also driven by the 76.9 billion TRY increase on an annual basis in import and domestic value added tax due to high inflation and rising exchange rates. Moreover, special consumption tax revenues rose by 164.5% yoy to 104.1 billion TRY in line with the rising sales in the automobile market while income tax revenues went up by 101.5% yoy to 68.2 billion TRY. Corporate tax also supported the rise in tax revenues by recording an increase which is close to the annual CPI inflation, becoming 161.1 billion TRY. In August, interest, shares and fines increased by 140% yoy and accounted for 9% of the budget revenues.

	Tax Revenues
January-August 2022	(TRY billion)
January-August 2023		513	551
	473
398
367			361
	285
		241
206
		108
Income Tax Corporation Domestic VAT	Special	VAT on
	Tax		Consumption	Imports
			Tax

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The rise in current transfers was effective in budget expenditures.

In August, budget expenditures excluding interest expenditures went up by 70% yoy. This was mainly driven by the 89.7% yoy rise in current transfers due to the rapid rise in Treasury aids as well as the 125.5% yoy rise in personnel expenditures. In August, capital transfers increased by 241.3% yoy while lending expenditures contracted by 38% yoy due to the high base effect despite the 24 billion TRY payment to the Turkish Grain Board. In August, interest expenditures almost quadrupled on an annual basis due to the rise in interest payments on government domestic borrowing bonds to 58.1 billion TRY.

		Budget Expenditures
			(TRY billion)
January-August 2022
January-August 2023		627
	498
346
288
	94	131	181		102
	134
					30
Compensation	Capital	Interest	Current	Lending
of Employees	Expenditures	Expenditures	Transfers

Expectations...

Supported by the rapid increases in tax revenues, central government budget displayed a positive performance in August as in July. Thus, the budget deficit in January- August period constituted 23.5% of the budget deficit target of TRY 1,633 billion set for 2023 in the Medium Term Program published on September 6th.

Central Government Budget							(billion TRY)
	August	%	January-August	%	MTP	Real./ MTP
	2022	2023	Change	2022	2023	Change	Target	Target (%)
Expenditures	302.3	562.7	86.1	1,735.2	3,382.1	94.9	6,562.6	51.5
Interest Expenditures	22.6	87.1	284.8	174.0	400.1	130.0	646.1	61.9
Non-Interest Expenditures	279.7	475.5	70.0	1,561.2	2,982.0	91.0	5,916.5	50.4
Revenues	305.9	614.0	100.7	1,768.3	2,998.7	69.6	4,929.7	60.8
Tax Revenues	271.9	543.2	99.8	1,474.5	2,595.8	76.0	4,270.7	60.8
Other Revenues	34.1	70.8	107.7	293.8	402.9	37.1	659.0	61.1
Budget Balance	3.6	51.3	1,329.6	33.1	-383.4	-	-1,633.0	23.5
Primary Balance	26.2	138.4	427.6	207.1	16.7	-91.9	-986.8	-

Numbers may not add up to total value due to rounding.

Source: Datastream , Ministry of Treasury and Finance

October 2023	5