Turkey’s calendar-adjusted industrial production index contracted by larger-than-expected 5.7% y/y in October, data from national statistics office TUIK showed on December 17.

A Bloomberg survey had predicted an annual contraction of 4.3% in the month. The October data followed the decline of 2.4% y/y (revised figure) recorded for September. 

“The weaker-than-expected Turkish industrial production data for October suggest that, after contracting in Q3, the economy has probably entered a technical recession in Q4. Weak economic growth, coupled with last month’s fall in inflation and the recovery in the lira, means that the central bank is likely to push ahead with rate cuts at the start of next year,” Jason Tuvey of Capital Economics said in a research note entitled “Output slumps, economy probably in technical recession in Q4”.

The annual contraction registered in October’s industrial production was the deepest recorded since the 2009 economic crisis.

Pace of contraction escalating
September brought an end to a 23-month-long era of uninterrupted growth in Turkish industrial output stretching back to October 2016. The October data confirmed that industrial production in Turkey has entered a phase of contraction, and at an escalating pace.

“Industrial production in October recorded another sharp contraction at -1.9% MoM, the third negative reading in a row, showing a deepening downturn in the economy,” Muhammet Mercan of ING Bank said in a research note.

“The October [industrial production] data in general confirms our expectation that the economy might have entered into a contractionary phase from 4Q. Although we may witness some MoM improvement in November following three consecutive months of contraction, we expect to see continued IP contraction on a YoY basis in the upcoming few months,” Serkan Gonencler of Seker Invest said in a research note.

The Turkish Automotive Manufacturers Association (OSD) said on December 15 that vehicle production declined by 21% y/y to 128,875 units in November, while the 11-month cumulative production decline was 7.5% y/y to 1.43mn units.

Turkish automakers have thus far addressed the slump in domestic sales via their dependence on the dominance of exports in their sales. However, the recent contraction seen in vehicle sales in Europe, Turkish automakers’ main export market, could weigh on the Turkish auto industry.

White goods sales in Turkey have also continued to decline. They fell by 18% y/y to 427,742 units in November despite tax cuts, the sectoral association Turkbesd said on December 17. Sales of white goods declined by 17% y/y to 5.8mn units in the January-November period, while production declined by 1% y/y to 23.46mn units, thanks to exports rising by 6% y/y to 17.68mn units.

The mounting expectations for a slowdown in Europe are bad news for Turkish white goods producers.

Negative construction and unemployment readings
The construction materials index compiled by the sectoral association IMSAD declined to 83.81 in November, the third consecutive record low seen since September, the IMSAD said also on December 17. The index stood at 101.32 in March but has been in free fall in the eight months since.

Also on December 17, the TUIK announced in a separate release that the unemployment rate rose to 11.4% in September, the highest level seen since March 2017.

“The labour market conditions are likely to deteriorate further in the period ahead given the ongoing adjustment process in the economy, while the risks are significantly on the upside,” Mercan of ING Bank said in a separate research note entitled “Turkish unemployment maintains uptrend”.

Also on November 17, the finance ministry announced that the central government budget surplus declined by 11% y/y to TRY8bn in November while the 11-month cumulative deficit grew by 106% y/y to TRY54.5bn.

“The slowdown in economic activity has been reflected in tax revenues since the second half of the year. In addition, it is noteworthy that the incentives given to stimulate domestic demand suppress the budget revenues. Considering that the year-end budget deficit forecast is 72.1 billion TRY, it is expected that the budget deficit will be higher in December. We think that the weak performance of tax revenues due to the slowdown in private consumption expenditures and the removal of the one-off factors that has played an important role in the gradual recovery in November budget revenues will be effective in this development,” Isbank Economic Research Division said in a research note on the November budget figures.

“Primary balance shows some nominal improvement with strong non-tax revenue generation despite the significant expansion in primary expenditures,” Mercan added in a research note on the November budget.

Lira again tests 5.40
Following the industrial production data release, the Turkish lira (TRY) again tested over 5.40 to the dollar. It was trading at TRY5.3734, weaker 0.20% d/d, as of 18:50 local time.

The currency was the only major loser on December 17 across the emerging markets universe, according to Reuters.

“The market was expecting a negative [industrial output] number on a year-on-year basis and it came out worse,” Paul Fage of TD Securities told the news agency.

The central bank intervenes in the FX market at 5.40-5.45 levels via Borsa Istanbul futures and the options market (VIOP), and public banks also support the central bank’s efforts to control the local currency, Murat Muratoglu wrote on December 15 in his column for daily Sozcu.

It does indeed appear that the central bank has been intervening at those levels, given that when the local currency passes the unofficial target of 5.40, it is pulled back to below 5.40.

Market anomalies
Local observers are also closely following the government’s domestic borrowing moves, which have lately resulted in market anomalies.

At the first scheduled domestic lira auction held on December 11, the Treasury sold 2-year benchmark fixed coupon bonds at an average annual compounded cost of 18.51% and market rates rose to 20.98% following the auction from 20.50-20.60% prior to the auction, Ugur Gurses, a former central bank official, noted on December 13 looking at the government’s continuing efforts to curb lira interest rates in a blog post.

“[At the 2-year lira bond auction on December 11] the Treasury borrowed a total of 2 billion [lira], 1.5 billion TRY from noncompetitive bids and 504 million TRY from the competitive one. It was noteworthy that the average compound yield declined compared to the previous issuance. On the same day of the auction, the 2-year benchmark bond yield was 21.37% in the secondary market,” Isbank Research said on December 17 in its weekly bulletin.

The Treasury’s second and last scheduled lira auction for this month is set to be held on December 18 for 7-year floating coupon bonds (re-open).

This week, the Treasury is collecting demand from individual investors for USD and EUR-denominated domestic bonds between December 17 and December 21, and also for gold lease certificates that will last for a total of seven phases from December 17 to February 1.

Share of FX debt
The share of FX-denominated debt in the Turkish Treasury’s total domestic debt stock declined to zero in 2012 from as high as 35% in 2006. As of end-October, the Treasury had only €42mn worth of FX-denominated debt in its overall domestic debt stock of TRY589.8bn (€97bn).

Turkish markets will also closely watch the US Fed meeting this week, with more tightening anticipated.

The Turkish private sector had obligations to repay $64.75bn in foreign-loan principal payments within one-year as of end-October, down from $66.3bn at end-September, the central bank said on December 14.

Turkey was obliged to repay a total of $173.8bn in foreign debt within one-year as of end-October, down from $176bn at end-September, the central bank added on December 17.