Türkiye Is Bankasi : September 2023​

Monthly Economic

Review

Global Economy

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September 2023

Economic Research Division

Alper Gürler

Division Head [e-mail]

H. Erhan Gül

Unit Manager [e-mail]

Dilek Sarsın Kaya

Asst. Manager [e-mail]

Ahmet Berat Ocak

Asst. Economist [e-mail]

Berkay Arık Asst. Economist [e-mail]

Utkan İnam Asst. Economist [e-mail]

Turkish Economy ...……………………..…..……….2

Financial Markets …………...…...…..…...………...8

Banking Sector.….…..………...………………………….…9

Concluding Remarks.…………..….........…..10

Graphs……………………………………………..…………...………. 11

Tables…………………………………………………….…….….………13

The US economic growth data for the second quarter of 2023 was revised down from 2.4% to 2.1%.

PMI figures in advanced economies signalled that the weak outlook in the manufacturing sector continues. In August, Euro Area services PMI declined to 48.3, falling below the threshold for the first time since the beginning of the year.

In the US annual CPI inflation continued to fall, realizing at 3.2% in July. According to the preliminary data, annual CPI inflation in the Euro Area remained unchanged at 5.3% in August, despite the market expectations for a decline.

The statements made at the Jackson Hole Symposium strengthened the expectations that interest rates will be kept at high levels until inflation is taken under control.

While the data released in China showed that the stagnation in economic activity continued in line with the weak outlook in domestic and foreign demand, the People's Bank of China announced a series of decisions.

At the BRICS summit which was held in South Africa, it was agreed that Saudi Arabia, Iran, Egypt, United Arab Emirates, Argentina and Ethiopia will become the new members of the union from early 2024.

Following a volatile course in August, Brent crude oil prices rose by 1.5% mom to 86.9 USD/barrel.

Turkish Economy

According to the chain linked volume index, Turkish economy grew by 3.8% yoy in the second quarter of 2023, above market expectations. In this period, private consumption expenditures continued to be the largest contributor to growth.

In June, seasonally adjusted unemployment rate was realized as 9.6% while the labor underutilization rate rose to 24.2%, the highest level since May 2021.

Istanbul Chamber of Industry Türkiye PMI® Manufacturing Index fell to 49.0 in August, the lowest level since December 2022. In this period, slowdown in new orders due to the price increases as well as cost pressures led to a rapid contraction in production.

In August, seasonally adjusted consumer confidence index fell to 68.0, corresponding to the fastest monthly decline in the data set.

In June, current account posted a surplus for the first time since October 2021 and 12-month cumulative current account deficit narrowed to 56.5 billion USD.

In July, the central government budget posted a surplus of 48.6 billion TRY thanks to the rapid rise in tax revenues. In January-July period, budget deficit was 434.7 billion TRY.

In August, CPI increased by 9.09%, above market expectations, while annual CPI inflation rose to 58.94%. D-PPI was realized as 5.89% mom and 49.41% yoy.

CBRT raised the policy rate to 25% in August, exceeding market expectations.

BIST-100 index closed August with an increase of 9.7%, while Türkiye's CDS premium was realised as 377 basis points at the end of the month.

GDP Growth

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Turkish economy grew by 3.8% yoy in the second quarter of 2023.

GDP with chain linked volume index increased by 3.8% yoy in the second quarter of 2023, slightly above market expectations. TURKSTAT revised the annual growth data for 2022 from 5.6% to 5.5%, and the first quarter growth data of 2023 from 4% to 3.9%. Thus, Turkish economy grew by 3.9% yoy in the first half of the year. As the number of working days was lower in the second quarter compared to the same period of the previous year, calendar adjusted annual growth realized as 5%.

According to seasonally and calendar adjusted figures, GDP recorded a strong quarterly growth of 3.5% offsetting the contraction in the first quarter due to the earthquake disasters.

Turkish economy expanded by 60.7% yoy at current prices in the second quarter of 2023, and the annualized GDP exceeded 1 trillion USD.

Consumption expenditures continue to be the engine of economic growth.

Private consumption expenditures continued to be the largest contributor to growth in the second quarter, albeit with a slight deceleration. Investment expenditures grew by 5.1% yoy in the second quarter and recorded the fastest growth in the last eight quarters, due to the growing need after the earthquake disaster. Construction and machinery- equipment investments gained momentum in this period. Thus, consumption and investment expenditures contributed a total of 12.7 percentage points to growth in the second quarter. On the other hand, net exports reduced growth by

6.3 percentage points in this period. This development was mainly driven by the rapid rise in imports as well as the sharpest decline in exports recorded since the pandemic.

Contributions to Growth

		2021		2022				2023
	Annual Annual		Q1	Q2	H1
Consumption		9	.6	12	.2	12	.4	11	.4	11	.9
Private	9.2	11.7	11.6	10.7	11.2
Public	0.4	0.6	0.8	0.7	0.7
Invetment	1	.9	0	.3	0	.9	1	.3	1	.1
Stock Change	-5	.1	-7	.7	-6	.1	-2	.6	-4	.2
Net Exports	5,0	0	.7	-3	.4	-6	.3	-4	.9
Exports	5.4	2.4	-0.7	-2.4	-1.5
Imports	-0.4	-1.7	-2.7	-3.9	-3.3
GDP (yoy, %)	11.4	5.5	3.9	3.8	3.9

Change in stocks, which has been dragging down growth since the last quarter of 2020, also lowered growth rate by 2.6 percentage points in the second quarter of the year.

The decline in industrial production limited the growth by 0.5 points.

The contraction trend in industrial production, which started in the third quarter of 2022, continued in the second quarter of this year. Industrial production, which declined by 2.6% yoy in this period, limited the growth by 0.5 points. Construction sector, supported by the accelerated construction activities following the earthquake disaster, recorded the fastest increase of the last 21 quarters with 6.2% yoy contributing 0.3 points to economic growth on an annual basis. Agricultural sector also recorded a limited growth of 1.2% yoy in the second quarter of the year.

In the second quarter of the year economic activity slowed down broadly in the services sector. In this period, the contribution of the services sector to the growth was realized as 2.2 points, the lowest level since the pandemic.

		Contributions to GDP Growth by
	Services		Production Approach*
		(annual, % point)
24	Construction

1. Agriculture

1. Industry

12	GDP (annual % change)
8	3	.3	3.9	3 .8
4
0
-4
-8
-12
	Q2-19Q4-19Q2-20Q4-20Q2-21Q4-21Q2-22Q4-22Q2-23

Expectations…

In the second quarter of the year, consumption expenditures continued to be the main driver of the growth despite losing momentum, while the recovery in investment expenditures supported the growth. In this period, net exports limited growth to a large extent, especially due to the sharp decline in exports, while the contraction in the industrial sector and the loss of momentum in services were the notable developments. In the second half of the year, with the implementation of economic policies that prioritize the fight against inflation, we expect that the contribution of consumption expenditures to growth may decline slightly and the contribution of net exports may remain under pressure in line with the slowdown in our main export markets.

Numbers may not add to total due to rounding.
(*) Taxes and subsidies excluded.	Source: Datastream, Turkstat
September 2023	2

Leading Indicators

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Unemployment rate was 9.6% in June.

Seasonally adjusted unemployment rate which fell to 9.5% in May, lowest level for the last 9 years, increased by 0.1 points to 9.6% in June. In this period, the unemployment rate remained relatively flat as the labour force contracted by 359 thousand people despite the 363 thousand decrease in employment. On the other hand, the employment rate declined to 47.8% in June, and the composite measure of labour underutilization rate, the broadest defined unemployment rate, reached its highest level since May 2021 with 24.2%. According to seasonally adjusted data, youth unemployment rate which covers the 15-24 age group, increased by 1.2 points compared to May and realized as 18.6%.

		Labor Statistics
40		(%)		61
Unemployment Rate
35	Labor Underutilization Rate		58
30	Labor Force Participation		55
25				52
20				49
15				46
10				43
5				40
2019	2020	2021	2022	2023

Industrial production index rose by 1.6% mom in June.

Seasonally and calendar adjusted industrial production index continued to recover in June by performing a 1.6% increase mom. In this period, production contracted in mining and quarrying and electricity, gas, steam sectors, while it increased by 2.3% in manufacturing industry. Production increased in 16 out of 24 sub-sectors of the manufacturing industry. In this period, rapid rise of 20.4% in the manufacture of computers, electronic and optical products was remarkable. In June, calendar adjusted industrial production also rose by 0.6% yoy. On the other hand, mining and quarrying sector, which contracted by

11.6% in this period, continued its downward trend for the 14th month.

In June, retail sales volume at constant prices decreased by 0.1% mom and presented a flat outlook. In this period, food, beverage and tobacco sales increased by 2.3%, while non-food sales contracted by 1.3%, indicating some loss of momentum in domestic demand.

Istanbul Chamber of Industry Türkiye Manufacturing PMI fell to 49.0.

Manufacturing PMI data published by Istanbul Chamber of Industry fell to 49.0 in August, the lowest level since December 2022. The index realized below the threshold value for two consecutive months, showing that the weak

September 2023

course in the manufacturing industry continued. In this period, the index recorded the fastest contraction since February in line with the slowdown in new orders caused by stagnant manufacturing activity, cost pressures and price increases. The rise in employment volume, which started in May, continued in August albeit at a slower pace. In this period, production volume contracted in six out of ten sectors monitored, while clothing and leather products and the textiles displayed the weakest outlook with PMI values of 42.3 and 43.5, respectively.

Confidence indices fell sharply in August.

According to seasonally adjusted data, consumer confidence index which was 80.1 in July, recorded the fastest monthly decline in the data set in August, falling by 15.1% and becoming 68.0. Thus, consumer confidence has declined by 25.3% since May. In August, seasonally adjusted real sector confidence index decreased by 0.3 points compared to July and realized as 104.6. According to the survey, evaluations regarding the general outlook, current stock of finished goods, the amount of export orders and production volume in the next three months affected the index downwards. In August, sectoral confidence indices decreased by 1.7% in services, 0.4% in retail trade and 0.7% in construction. Thus, economic confidence index fell to 94.1 in August, the lowest level for the last 13 months.

	Confidence Indices
120		(sa)
110				104.6
100
90				94 .1
80
70
60	Consumer Confidence		68 .0
50	Real Sector Confidence
40	Economic Confidence
Aug-21Dec-21	Apr-22	Aug-22Dec-22	Apr-23	Aug-23

In July, house sales increased by 16.7% yoy.

Having displayed a downward trend on an annual basis for the last one year, house sales increased by 16.7% yoy to

109.5 thousand units in July. In this period, mortgaged sales decreased by 24.1% while other house sales, which increased by 27.1%, accounted for 86.7% of total sales. In July, 71.1% of house sales were second-hand sales. In this period, the decline in house sales to foreigners continued in line with the loss in demand from Russian citizens. On the other hand, annual rise in the house price index continued to lose momentum, becoming 95.9% in June, down from the triple-digit levels recorded since March 2022. Thus, the annual real increase in house prices was realized as 38%.

Source: CBRT, Datastream, ISO, Turkstat

3

Foreign Trade and Balance of Payments

Foreign trade deficit was 5.2 billion USD in June.

According to the data announced by TURKSTAT, exports declined by 10.5% yoy to 20.9 billion USD in June, while imports decreased by 17.5% yoy to 26.1 billion USD due to the annual decline in global energy prices. Thus, the foreign trade deficit narrowed by 37.3% yoy to 5.2 billion USD. In June, import coverage ratio was realized as 80.2%.

In June, the current account posted a surplus of 674 million USD.

In June, the current account posted a surplus (674 million USD) for the first time since October 2021. Annual decrease of balance of payments defined foreign trade deficit by 42.5% yoy to 3.7 billion USD was behind this development. In June, tourism revenues continued their positive course rising by 14.4% on an annual basis. Thus, in the first half of 2023, the current account deficit widened by 28.1% yoy and became 36.8 billion USD. 12-month cumulative current account deficit declined from 59.7 billion USD in May to 56.5 billion USD as of June.

		Current Account Balance
	(12-month cumulative, USD billion)
20
0
-20
-40
					-56.5
-60
-80
2018	2019	2020	2021	2022	2023

The weak course in direct investments continues.

In June, net direct investments to Türkiye continued to be weak, and was realized as 135 million USD. In this period, non-residents' net direct capital investments were realized

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as 166 million USD, the lowest level since April 2021. Moreo- ver, the decline in non-residents real estate investments in Türkiye by 31.7% on a monthly and 79.6% on an annual basis drew attention. Thus, in the first half of the year, net foreign direct investment inflows decreased by 52.1% yoy to 2.1 billion USD.

Portfolio investments recorded a net capital inflow of 1.8 billion USD.

In June, portfolio investments recorded a net capital inflow of 1.8 billion USD. Thus, portfolio investments recorded the first net capital inflow since February and reached its peak level since July 2021. In this period, non-residents made net purchases of 1.1 billion USD in equity market and of 46 million USD in domestic government debt securities markets. Despite the inflow recorded in June, portfolio investments posted a net capital outflow of 1.2 billion USD in the first half of the year.

	Net Capital Inflows
	(monthly, USD billion)
8
6	Portfolio Investment	Direct Invesment
4
2
0
-2
-4
-6
Jun-21	Dec-21	Jun-22	Dec-22	Jun-23

Positive trend in other investments...

In June, net capital inflows in other investments recorded a significant improvement compared to May and were realized as 3.1 billion USD. In this period, total deposits of foreign banks in Türkiye increased by 2.4 billion USD, recording the fastest monthly rise since February 2022. In June, the bank-

80

60

40

20

0

-20

-40

-60

-80

Net Capital Flows

(12-month cumulative, billion USD)

Negative values in reserves indicate an increase in reserves.	3.2
	6.2
	44.3
	6.1

						--56.5
						-3.1
Reserves		Net Errors and Omissions	Other Investment
Portfolio Investment	Direct Investment	Current Account Balance
Jun.20	Dec.20	Jun.21	Dec.21	Jun.22	Dec.22	Jun.23

Source: Datastream, Turkstat, CBRT

September 2023	4

Foreign Trade and Balance of Payments

ing sector and the General Government made net loan repayments of 458 million USD and 97 million USD, respective- ly, while other sectors borrowed a net amount of 17 million USD from abroad. According to 12-month cumulative figures, long-term debt rollover ratios of the banking sector and other sectors were realized as 86% and 134%, 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

J

A

S

O

N

D

J

F

M

A

M

J

Reserve assets and net errors and omissions...

In June, reserve assets increased (by 11.2 billion USD) for the first time since the beginning of the year. Thus, the decline in reserve assets came down to 27.8 billion USD in the January-

Balance of Payments

	Jun.
	2023
Current Account Balance	674
Foreign Trade Balance	-3,697
Services Balance	5,019
Travel (net)	4,203
Primary Income	-799
Secondary Income	151
Capital Account	-13
Financial Account	6,184
Direct Investment (net)	-135
Portfolio Investment (net)	-1,797
Net Acquisition of Financial Assets	-580
Net Incurrence of Liabilities	1,217
Equity Securities	1,089
Debt Securities	128
Other Investment (net)	-3,084
Currency and Deposits	-1,622
Net Acquisition of Financial Assets	923
Net Incurrence of Liabilities	2,545
Central Bank	-62
Banks	2,607
Foreign Banks	1,653
Foreign Exchange	757
Turkish Lira	197
Non-residents	2,410
Loans	-211
Net Acquisition of Financial Assets	-749
Net Incurrence of Liabilities	-538
Banking Sector	-458
Non-bank Sectors	17
Trade Credit and Advances	-1,238
Other Assets and Liabilities	-13
Reserve Assets (net)	11,200
Net Errors and Omissions	5,523

September 2023

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June period. Net errors and omissions item, which recorded an inflow of 5.5 billion USD in June, recorded a total decrease of 7.2 billion USD in the first half of the year.

Expectations…

Foreign trade deficit, which was 12.4 billion USD in July, came down to 8.9 billion USD according to preliminary figures but remained high in August. The economic outlook in Türkiye's main export market Europe, as well as recent increases in energy prices due to supply concerns, will continue to impact the foreign trade balance. However, the continuation of the relative recovery recorded in the financing side in June, as a result of the improvement in risk perception towards Türkiye thanks to recent economic policy steps, will be essential in the coming period.

				(USD million)
Jan. - Jun.	%		12-month
2022	2023	Change	Cumulative
-28,721	-36,803	28.1	-56,491
-40,907	-50,675	23.9	-99,289
17,881	19,731	10.3	51,919
13,947	15,965	14.5	39,335
-4,992	-5,989	20.0	-9,583
-703	130	-	462
-14	-86	514.3	-107
-16,714	-44,041	163.5	-50,389
-4,478	-2,146	-52.1	-6,105
11,538	1,150	-90.0	3,140
4,214	1,809	-57.1	2,090
-7,324	659	-	-1,050
-3,358	-505	-85.0	-1,185
-3,966	1,164	-	135
-11,426	-15,222	33.2	-44,260
-10,271	-9,740	-5.2	-35,367
4,265	9,021	111.5	-1,740
14,536	18,761	29.1	33,627
3,977	12,344	210.4	15,684
10,559	6,417	-39.2	17,943
4,695	2,503	-46.7	5,437
3,025	2,699	-10.8	3,797
2,839	1,215	-57.2	8,709
7,720	5,202	-32.6	9,234
33	-1,021	-	-4,976
663	-143	-	-1,094
630	878	39.4	3,882
-2,014	789	-	-2,853
2,267	500	-77.9	6,353
-1,155	-4,440	284.4	-3,876
-33	-21	-36.4	-41
-12,348	-27,823	125.3	-3,164
12,021	-7,152	-	6,209

Source: CBRT, Datastream

5