Turkey Update on Economic Measures Taken

Prime Minister Yildirim announced yesterday various measures to support economic activity. The most noteworthy of these measures is that the government will support bank lending up to TRY250bn to exporters and SMEs through government guarantees. This measure basically aims to encourage the banking sector to overcome its low confidence in some counterparties following the failed coup attempt in July, and is similar to a scheme that the government used during the 2008-2009 global crisis.

Although the NPL ratio is about 3.5% in the banking sector, the government will set aside 7% of this amount, i.e. TRY17.5bn (about 0.7% of GDP over 3-4 years), in the budget as a contingency in case these guarantees need to be exercised. The maximum burden on the budget will be around TRY4-4.5bn (0.2% of GDP) per year, according to Deputy Prime Minister Simsek who clarified the scheme during Yildirim’s press conference. and will not require any changes in next year’s budget given the existing reserves.

The announced measures did not include possible issuance of dollar-linked bonds by the Treasury that was mentioned by some local sources earlier this week. Industrial output growth momentum moved into positive territory in October after a sharp fall in 3Q following the coup attempt in mid-July. According to data released by the Statistics Office yesterday, seasonally and workday adjusted industrial output was up 3.7% mom in October, broadly in line with the Bloomberg consensus forecast of 4.0% mom. (We do not forecast this variable due to its volatile nature.) On 3m/3m basis, industrial output growth momentum moved into positive territory in October for the first time since May; it was 2,0% compared to -2.9% in September and -0.6% in June. The increase in industrial output growth momentum in October was broad-based, but the momentum in domestic-demand-oriented sub-sectors was stronger than that in export-oriented sub-sectors, on our rough classification.

This suggests that the incentives announced by the government in late September to stimulate household spending and the increase in consumer loan growth momentum since September impacted industrial output favorably in October. Whether this was sustained through November, given the rapid depreciation of the lira and its consequent potential negative impact on sentiment across the country during that month, remains to be seen. However, the October data give support to our view that there is a cyclical recovery in economic activity in 4Q following the adverse developments of 3Q.