Download Emerging Market Policies in a Volatile Global Turalay Kenc Deputy Governor

Emerging Market Policies in a Volatile Global
Environment: The Case of Turkey
Turalay Kenc
Deputy Governor
The National Asset-Liability Management Europe Symposium
3 March 2016, London
Outline

An overview of the challenges facing emerging market central
banks in an increasingly interconnected world.

Resilience of emerging market economies (EMEs) to global
financial conditions
•

together with their macroeconomic and prudential policy responses.
The Central Bank of Turkey’s roadmap of policy actions before
and after global monetary policy normalization.
2
Heightened Global Financial Market Volatility

The volatile global environment

Gradually worsening global economic and financial problems


essentially related to growth, stock balances and policy uncertainty
problems.
The increasingly interconnected world through production, financing
and communication technology channels.

underscores globally increased degree of external shocks’ transmission.
3
Weak Global Economy


Weak recovery with uneven growth despite unprecedented
easy monetary conditions
=>
A synchronous and protracted deceleration in EME growth

Growth slowdown in China as its economy transforms into a domestic
consumption – services sector driven one
4
Declined Potential Growth

Potential growth across the world has declined due to

the global slowdown in productivity growth,

persistently weak investment,

aging population and

weakened global trade.

Rising inequality, on the other hand, exacerbates both the recovery
and long-term growth problems.

=>
G20 policy coordination is the way forward.
5
The Debt Overhang Problem

The weak recovery is also very much related to high
indebtedness levels


in government and private balance sheets of AEs and EMEs
EME private balance sheets largely consist of external liabilities as
opposed to domestic currency denominated assets
•
Currency mismatch

Recent research suggests that agents tend to cut their
spending when their debt reach certain levels.

Only a gradual improvement on this stock balances problem
6
Heightened Policy Uncertainty

Sources of policy uncertainty
i.
ii.
iii.
The appropriate mix of demand and supply side policies,
the extent and type of monetary policy and
the effectiveness of macro-prudential policy

Likewise, China has their own acute policy uncertainty
problem as mentioned above.

Reasons behind heightened policy uncertainty are policy
paralyses and unconventional policies

Heightened policy uncertainty holds back investment and
growth and causes heightened market volatility.
7
Increasingly Interconnected World

Global trade has increased, broadened and deepened
drastically







because of trade liberalization,
unprecedented capital flows and
internationally fragmented production into global supply chains.
EMEs are increasingly more connected
Increased external financial linkages
Advances in communication technology
Together with sharply risen external liabilities has reinforced
the proposition of the Impossible trinity (the Trilemma) on
money policy dependence as monetary conditions have
become more correlated than before.
8
EM Reforms in the Wake of the Past EM FCs





Reformed financial regulatory and supervisory systems
Strengthened public finances and fiscal discipline
Granted central banks independence
Adopted flexible exchange rate systems
These reforms enabled them to implement more prudent and
countercyclical policies as well





Better stock and
and flow balances
=>
=>
Accumulated adequate foreign exchange reserves
Deepened and broadened domestic financial markets =>
Improved economic confidence =>
9
How Resilient are EMEs to Global Financial Conditions?

Channels of external shock transmission

Trade channel


Funding channel


Higher degree of trade openness but more diversified markets and
products
More integrated and higher levels of FX liabilities but more diversified
funding sources and lengthened maturities of liabilities
Expectations channel
Ample policy spaces
 Better policy frameworks
 EME agents are more confident


EMEs are better positioned to withstand financial turbulences
now than in the past.
10
Policy Actions by EMEs to Heightened Global Volatility =>

Commodity importers vs exporters

Level of external funding needs

Better policy frameworks and more credible institutions


Inflation outlook vs tightened global financial conditions

Monetary policy actions vs liquidity and macro-prudential measures
9 EME central banks have decreased the policy rate since the
taper tantrum, 8 increased and 2 did not change.
11
The Economic Outlook in Turkey

Sound flow and stock balances
•
•

Substantially improved current account balance thanks to =>
•
•

bar inflation
=>
better growth outlook =>
prudent policies =>
sharp fall in oil prices
Flexible monetary policy framework and rich policy tools =>
12
The Central Bank of Turkey’s roadmap of policy actions before
and after global monetary policy normalization

The aim of the CBRT’s road map is to improve the resiliency of
the economy to external shocks through
i.
ii.
iii.
iv.
v.

maturity lengthening – encouraging banks to shift their non-core
liabilities from short-term to long-term; =>
providing incentives to banks for borrowing and lending directly
from and to the Central Bank
bolstering safety-nets
supporting financial stability – providing incentives to banks to
improve loan to deposit ratios; and
simplifying the monetary policy framework.
All but the interest rate corridor simplification step on the
roadmap have already been taken and the focus is now
firmly on fine-tuning their parameters.
13
THANK YOU
Weak Recovery…
World Output Growth (%)
6
5
4
1990-2006 Average
3
2
1
0
2015(f)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
-1
Source: IMF WEO July 2015
15
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
…And Still Ongoing Recovery.
-2
4 years
Source: OECD Long-term baseline projections 2014
<=
<=
Global Output Gap (%)
6
4
2
0
2 years
12 years
-4
-6
Investment level has been low in the post-global crisis era.
World Gross Capital Formation (% of GDP)
25
24
23
22
21
20
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014*
Source: WB WDI
* Gross capital formation in 2014 is computed by using 5-year average growth rate.
17
Productivity growth has been low since the crisis with no signs
of strengthening in the near future.
Average Total Factor Productivity Growth (%)
1.5
1990-2007
2010-2013
1.0
2014
0.5
0.0
-0.5
-1.0
Aes
EMEs
World
Source: The Conference Board
18
Slower global trade growth in the post-GFC era.
Global Trade Growth (yoy)
20
15
10
5
0
-5
-10
-15
Global Trade Growth (3 months moving
average)
1997-2007 Global Trade Growth Average
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-20
Source: CPB World Trade Monitor
<=
19
Lower Indebtedness Levels of EM Government Sectors
Government Debt to GDP (%)
Source: Bloomberg
20
Lower Indebtedness Levels of EM Private Sectors
Loans to Private Sector to GDP (%)
Source: BIS
21
EM banking sector is well capitalized
Leverage Ratios
Source: BIS
<=
22
Average GDP growth rates of EMEs are still above that of AEs
Annual GDP Growth Rates (%)
10
8
6
%
4
2
0
-2
AEs
EMEs
-4
AEs 1980-2001 Average
EMEs 1980-2001 Average
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-6
Source: IMF WEO October 2015
23
EM probably biggest post-crises' success is improved price
stability
Annual CPI Inflation Rates (%)
140
1980-2001 Average
120
100
%
80
60
40
20
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
Source: IMF WEO October 2015
<=
24
Declined Original Sin Ratio
Ratio of FX Denominated Liabilities to Total Liabilities
Source: BIS
<=
25
Source: Bloomberg
2015
2015
2014
2013
2013
2012
2011
2011
2010
2009
2009
2008
2007
2007
2006
2005
2005
2004
2003
2003
2002
2001
2001
2000
1999
1999
1998
1997
1997
1996
1995
1995
Improved level of Business Confidence
Average Business Confidence Level of EMEs
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
<=
26
The decline in global volatility observed at the end of 2015 has not
proved persistent.
VIX and MOVE Indices
(5-Day Average)
40
130
VIX (Percent)
MOVE (Basis Points, Right Axis)
35
115
Source: CBRT
02/16
01/16
12/15
11/15
10/15
40
09/15
10
08/15
55
07/15
15
06/15
70
05/15
20
04/15
85
03/15
25
02/15
100
01/15
30
*The shaded area indicates the period after Fed rate hike.
Last Observation: February 17, 2016.
27
Risk premiums continue to be volatile across emerging economies, ...
Regional EMBI Indices
(Basis Points)
800
800
EMBI Europe
EMBI Turkey
EMBI Latin America
EMBI Asia
Source: Bloomberg.
02/16
12/15
10/15
08/15
06/15
04/15
02/15
12/14
10/14
08/14
06/14
04/14
02/14
12/13
10/13
08/13
06/13
100
04/13
100
02/13
200
12/12
200
10/12
300
08/12
300
06/12
400
04/12
400
02/12
500
12/11
500
10/11
600
08/11
600
06/11
700
04/11
700
Last Observation: February 17, 2016.
28
… as well as exchange rates.
Implied FX volatility
(1 month, Percent)
35
35
30
30
Turkey
Emerging Economies*
25
25
Source: Bloomberg
.
<=
02/16
12/15
10/15
08/15
06/15
04/15
02/15
12/14
10/14
08/14
06/14
04/14
02/14
12/13
10/13
08/13
06/13
04/13
02/13
12/12
10/12
08/12
0
06/12
0
04/12
5
02/12
5
12/11
10
10/11
10
08/11
15
06/11
15
04/11
20
02/11
20
*Emerging market currencies include Brazil, Chile, Colombia, Mexico,
Poland, Czech Republic, South Africa, Indonesia, Romania against USD.
Last Observation: February 17, 2016.
29
Medium term inflation expectations displayed an upward movement
during the past year.
Inflation Expectations
8.5
(Percent)
8.0
12 months
7.5
7.0
6.5
24 months
6.0
5.5
Source: CBRT
.
<=
02/16
12/15
10/15
08/15
06/15
04/15
02/15
12/14
10/14
08/14
06/14
04/14
02/14
12/13
10/13
08/13
06/13
04/13
02/13
12/12
10/12
08/12
06/12
04/12
02/12
12/11
10/11
08/11
5.0
Last Observation: February 2016.
30
GDP continues to grow at a robust and steady pace.
Annual GDP Growth and Contributions
(Percentage Points)
20
Change in Inventories
Net Exports
Final Domestic Demand
GDP
15
10
5
0
-5
Source: TURKSTAT.
<=
09/15
06/15
03/15
12/14
09/14
06/14
03/14
12/13
09/13
06/13
03/13
12/12
09/12
06/12
03/12
12/11
09/11
06/11
03/11
12/10
09/10
06/10
03/10
-10
Last Observation: 2015 Q3
31
Declined current account deficit is also financed through long term
borrowing and FDI flows.
(12-Months Cumulative, Billion USD)
Portfolio and Short Term**
FDI and Long Term*
CAD
85
75
65
55
45
35
25
15
5
Source: CBRT
.
<=
12/15
10/15
08/15
06/15
04/15
02/15
10/14
12/14
08/14
06/14
04/14
02/14
12/13
10/13
08/13
04/13
06/13
02/13
12/12
10/12
08/12
06/12
04/12
02/12
10/11
12/11
08/11
06/11
04/11
02/11
12/10
10/10
-5
*Long term inflows are sum of banking and real sectors’ long term net credit and bonds issued by
banks and the Treasury. Short term capital movements are sum of banking and real sectors' short
term net credit and deposits in banks.
Last Observation: December 2015.
32
The tight monetary policy stance will be maintained as long as deemed
necessary.
Interest Rates
(Percent)
13
Interest Rate Corridor
CBRT Average Fund Rate
BIST Interbank Market O/N Rates
One-Week Repo Rate
13
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
05/13
06/13
07/13
08/13
09/13
10/13
11/13
12/13
01/14
02/14
03/14
04/14
05/14
06/14
07/14
08/14
09/14
10/14
11/14
12/14
01/15
02/15
03/15
04/15
05/15
06/15
07/15
08/15
09/15
10/15
11/15
12/15
01/16
02/16
12
Source: CBRT
Last Observation: February 17, 2016.
33
Yield curve remains flat.
Cross Currency Swap Rates
(Percent)
5-Year
14
3-Month
14
12
12
10
10
8
8
6
6
4
5 year-3 month spread
4
0
-2
-2
Source: CBRT.
<=
02/15
04/15
06/15
08/15
10/15
12/15
02/16
0
02/13
04/13
06/13
08/13
10/13
12/13
02/14
04/14
06/14
08/14
10/14
12/14
2
04/11
06/11
08/11
10/11
12/11
02/12
04/12
06/12
08/12
10/12
12/12
2
Last Observation: February 17, 2016.
34
Commercial loans grow at a faster pace than consumer loans, contributing to
price stability, financial stability, and the rebalancing process.
Loan Growth Rates
50
50
(Annual Percentage Change)
45
45
40
40
35
35
30
30
Commercial
25
25
20
20
15
15
Consumer
10
10
Source: CBRT
<=
.
0116
1115
0915
0715
0515
0315
0115
1114
0914
0714
0514
0314
0114
1113
0913
0713
0513
0313
0113
1112
0912
0712
0512
0312
0112
1111
0911
0711
0511
0311
0111
1110
0910
0710
0
0510
0
0310
5
0110
5
Last Observation: February 12, 2016.
Inclusive of loans extended by all types of banks (deposit banks,
Participation banks, and development/investment banks). FX adjusted.
35
Maturity lengthening in the noncore FX liabilities of financial
institutions has continued recently.
Maturity Breakdown of Non-Core FX Liabilities
(Percent Share)
60
55
50
Up to 1-Year
45
40
Longer than 3-Years
35
30
Required Reserve
Measures
25
Source: CBRT
11/15
10/15
09/15
08/15
07/15
06/15
05/15
04/15
03/15
02/15
01/15
12/14
11/14
10/14
09/14
08/14
07/14
06/14
<=
05/14
04/14
03/14
02/14
01/14
20
Last Observation: December 04, 2015.
36
EMEs have accumulated macro-prudentional policy spaces over
the years
Number of Macro-Prudential Measures
4.0
3.5
3.0
2.5
2.0
1.5
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1.0
Source: Cerutti et al. (2015)
37