Turkey: IP rebounds strongly in September

Industrial output expanded 6.2%oya, comparing favorably with a market consensus of 2.0% in September. Adjusted for seasonal and working day effects, IP jumped 3.9%m/m. As we have said many times in the past, the IP series is a rather volatile one and one should be very cautious in interpreting the results. Data get even more noisy during and after the Ramadan period. The 3.9% jump in September follows the 2.0% contraction in August. As some of the firms adopt flexible working hours, IP generally loses momentum during the Ramadan period and recovers afterwards. The Ramadan period shifts backward by 10 days because of the adoption of the lunar year and this makes it very difficult to forecast the IP data especially around the Ramadan period.

 

Hence, we doubt that the September IP data will have any meaningful impact on market dynamics and on the CBRT’s policy outlook. Having said that, we feel that there is a growing risk of a sharper than expected recovery in domestic demand which could have negative repercussions on the inflation and external balances fronts. We think that there is some upside risk to our 2012 GDP growth forecast of 2.8%.

 

Fitch’s rating upgrade along with the reduction in Syria-related news flow could lead to an improvement in domestic sentiment and hence stronger demand. Towards this end, one needs to monitor the developments in the loan market and the domestic demand indicators more closely in the coming months. Note that lending rates have remained relatively sticky, but as the CBRT lowers the upper band of its interest rate corridor, banks may cut their lending rates aggressively. This is not our base-case and we expect the CBRT to remain cautious and take the necessary measures if there is such a sharp increase in bank lending. However, stronger than expected activity data will likely make the market participants extra sensitive to the risk of strong domestic demand recovery in the coming weeks.