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Presentation before the Council of Ministers Erdem Başçı Governor November 14, 2011 Outline I. Global Problems II. Policy Tools III. Price Stability IV. Financial Stability 2 Outline I. Global Problems II. Policy Tools III. Price Stability IV. Financial Stability 3 Turkey and US 135 GDP Unemployment (Real, 2007=100) (Percent) Turkey US 12 130 US Turkey (right hand side) 15 14 10 125 13 8 120 12 115 6 11 110 10 105 4 9 100 2 8 95 90 0 Source: IMF WEO, CBRT. *Medium Term Program projections used for Turkey, other country projections are based on IMF data. 7 Source: IMF WEO, CBRT. *Medium Term Program projections used for Turkey, other country projections are based on IMF data. 4 Turkey and UK GDP Unemployment (Real, 2007=100) (Percent) 135 Turkey UK 130 8,5 15 UK Turkey (right hand side) 8,0 14 125 7,5 120 7,0 115 6,5 12 110 6,0 11 105 5,5 13 10 100 5,0 95 4,5 90 4,0 Source: IMF WEO, CBRT. *Medium Term Program projections used for Turkey, other country projections are based on IMF data. Source: IMF WEO, CBRT. *Medium Term Program projections used for Turkey, other country projections are based on IMF data. 9 8 5 Turkey and Eurozone GDP Unemployment (Real, 2007=100) (Percent) 135 Turkey Eurozone 130 10,5 10,0 Eurozone Turkey (right hand side) 15 14 125 9,5 120 9,0 115 8,5 12 110 8,0 11 105 7,5 13 10 100 7,0 95 6,5 90 6,0 Source: IMF WEO, CBRT. *Medium Term Program projections used for Turkey, other country projections are based on IMF data. 9 8 Source: IMF WEO, CBRT. *Medium Term Program projections used for Turkey, other country projections are based on IMF data. 6 Turkey and Japan GDP Unemployment (Real, 2007=100) (Percent) 5,5 135 Turkey Japan 15 Japan Turkey (right hand side) 130 14 5,0 125 13 120 4,5 12 115 110 11 4,0 105 10 100 3,5 9 95 90 3,0 Source: IMF WEO, CBRT. *Medium Term Program projections used for Turkey, other country projections are based on IMF data. 8 Source: IMF WEO, CBRT. *Medium Term Program projections used for Turkey, other country projections are based on IMF data. 7 Employment Average Annual Employment Growth* (Percent, 2007-2010) 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 Source: IMF WEO, TURKSTAT, CBRT. *Difference of natural logs. 8 Labor Participation: Turkey and US Labor Participation Rate* (Percent) 67 51 US 66,5 Turkey (right hand side) 49 66 47 65,5 45 65 43 64,5 41 64 39 63,5 63 37 Source: TURKSTAT, BLS, CBRT. *Seasonally adjusted 9 Employment: Turkey and US Total Employment* (Million people) 117 24,5 US Turkey (right hand side) 23,5 115 22,5 113 21,5 111 20,5 19,5 109 18,5 107 17,5 105 16,5 Source: TURKSTAT, BLS, CBRT. *Seasonally adjusted 10 Leading Indicators EU and Turkey Purchasing Managers Index (PMI) 65 65 Turkey EU 60 60 55 55 50 50 45 45 40 40 35 35 30 30 25 25 Source: Bloomberg. 11 Housing Prices (US) Case-Shiller Home Price Indices (Jan 2000 = 100) 220 200 180 160 140 120 100 Source: Bloomberg, CBRT. 12 Outline I. Global Problems II. Policy Tools III. Price Stability IV. Financial Stability 13 Policies against the Crisis Policies in Advanced Economies; 1. Monetary Expansion • Extending long term credits to banks • Bond buying programs known as Quantitative Easing 2. Moving away from Fiscal Discipline • Soaring public spending • Fall in tax revenues 14 Monetary Expansion (US) Excess Reserve (FED) (Billion USD) 1800 1600 1400 1200 1000 800 600 400 200 0 Source: FED, CBRT. 15 Monetary Expansion (UK) (Billion Pound) Excess Reserve* (BoE) 180 160 140 120 100 80 60 40 20 0 Source: BoE, CBRT. *Excess Reserve= Banking sector free deposits + Short term open market operations 16 Monetary Expansion(Eurozone) (Billion Euro) Excess Reserve* (ECB) 500 450 400 350 300 250 200 150 100 50 0 Source: ECB, CBRT. *Excess Reserves=ECB Balance Sheet Deposit Facility + Fixed Term Deposits 17 Monetary Expansion (Japan) Excess Reserve (BoJ) (Billion Yen) 30000 25000 20000 15000 10000 5000 0 Source: BoJ, CBRT. 18 Policies Against the Crisis Policies in Emerging Economies; 1. Monetary Discipline • Controlled monetary incentives • Measures against short term inflows 2. Strengthening the Fiscal Discipline • Cautious public spending • Rise in tax revenues 19 Monetary Expansion (Turkey) Excess Reserve* (CBRT) (Billion TL) 60 50 40 30 20 10 0 Source: CBRT. * Note: Excess Reserves =Sterilization through ON Borrowing + Banking Sector Free Deposit - Banking Sector Required Reserves 20 Policies Against the Crisis Policies Against Short Term Capital Flows (Emerging Economies) Contrary to the global monetary expansion trends , emerging economies should provide incentives for financial inflows with a tendency towards; More equity, less debt, More domestic currency, less foreign currency, More long term, less short term. 21 Policy Tools Fiscal Policy Monetary Policy Financial Sector Policy Primary Surplus Policy Rate Capital Adequacy Budget Deficit Interest Rate Corridor Liquidity Adequacy Public Debt Required Reserves Loan/Value Arrangement Reserve Policy FX Depo Market 22 FISCAL POLICY 23 Primary Balance Primary Balances of Selected Economies (Ratio to GDP, percent, 2010) 4 2 0 -2 -4 -6 -8 -10 Source: IMF WEO, CBRT, Ministry of Development. 2011 forecast for Turkey taken from MTP. 24 Budget Deficit (Advanced Economies) Budget Deficit (Ratio to GDP, percent, 2010) 11 9 7 5 3 1 -1 Source: IMF WEO, CBRT, Ministry of Development 2011 forecast for Turkey taken from MTP. 25 Public Debt (Advanced Economies) Public Debt (Ratio to GDP, percent, 2010) 160 140 120 100 80 60 40 20 0 Source: IMF WEO, CBRT, Ministry of Development 2011 forecast for Turkey taken from MTP. 26 Budget Deficit (EM Economies) Budget Deficit (Ratio to GDP, percent, 2010) Source: IMF WEO, CBRT, Ministry of Development 2011 forecast for Turkey taken from MTP. 27 Public Debt (EM Economies) Public Debt (Ratio to GDP, percent, 2010) Source: IMF WEO, CBRT, Ministry of Development 2011 forecast for Turkey taken from MTP. 28 MONETARY POLICY 29 Policy Rate Definition • 1 week repo rate • Main policy tool Impact Channel • Market rates employed by banks and other financial institutions • Credits provided by banks, prices of equities and other financial assets, foreign exchange Timing • Set in monthly Monetary Policy Committee (MPC) meeting • One week repo auctions opened daily. • Auction amount determined at 10.00 am. 30 Interest Rate Corridor Definition • CBRT overnight borrowing and lending rate interval • Borrowing 5% • Lending 12.5% Impact Channel • Short term rates in the secondary market • FX rates • Credit growth Timing • Interest rate corridor set in monthly MPC meeting. 31 Required Reserves Definition • The cash amount that banks are required to hold at the CBRT against the deposits and other liabilities. Impact Channel • Credit growth rates • Deposit terms • FX and gold reserves of CBRT Timing • Determined by CBRT communiques. • The frequency of change is at least 14 days. 32 Reserve Policy Definition • Daily purchase/sales auctions • Direct intervention Impact Channel • FX volatility • CBRT can intervene the markets through purchases or sales in case of unhealthy price formations are observed. Timing • Daily auction amount announced at 11:00 am. • Offers received from banks between 13:40 – 14:00. 33 FX Deposit Market Definition • CBRT acts as an intermediary in order to increase the FX liquidity in the market. Impact Channel • Banks with excess liquidity provide FX liquidity to the banks which need it. • Facilitates external borrowing for banks in the times of distress. Timing • Established following the Lehman crisis on October 9, 2008 and operated for 2 years. • Re-established as of November 10, 2010. 34 Policies Against Short Term Capital Inflows Strong Inflows Outflows/Weak Inflows FX Purchases FX Sales Decreasing the lower bound of the interest rate corridor Increasing the upper bound of the interest rate corridor RRR hikes RRR cuts 35 The Policy Mix CBRT Policy Rate and Interest Rate Corridor 25 TL Reserve Requirement Ratios (RRR) O/N Lending-Borrowing Interest Rate Corridor 1-week Repo Rate 20 Adoption of 1 week repo rate as the policy rate 15 10 5 0 Source: CBRT. Source: CBRT. 36 FX Reserves of the CBRT FX Reserves of the CBRT (Including gold, million USD) 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 Source: CBRT. 37 Gold Reserves of the CBRT Gold Reserves of the CBRT (Million USD) 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Source: CBRT 38 The Policy Mix Policy Dimension Current Stance 1. Fiscal Policy Neutral 2. Policy Rate Accommodative 3. Liquidity Policy Non-Accommodative 4. Financial Sector Policy Non-Accommodative Net Policy Stance Non-Accommodative 39 Policy Rates in Turkey and other EMs Policy Rates in Inflation Targeting EM Economies (Percent) 20 Emerging Economies Turkey 18 16 14 12 10 8 6 4 Source: Bloomberg, CBRT. EM Countries include: Brazil, Mexico, Poland, Indonesia, S.Africa, Thailand, Czech R., Colombia, Hungary, Romania, Philippines. 40 Real Interest Rates (Policy) (%) 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 Source: Bloomberg, CBRT. * Year-end inflation targets for Turkey are taken from October Inflation Report , others from Consensus Forecast. 41 Real Interest Rates (1 Year Bonds) (%) 25 20 15 10 5 0 -5 Source: Bloomberg, CBRT. * Year-end inflation targets for Turkey are taken from October Inflation Report , others from Consensus Forecast. 42 Interest Rates (10 Year Bond, Euro denominated) (%) 30 25 20 15 10 5 0 Source: Bloomberg, CBRT. 43 Monetary Expansion (US-Turkey) (Million TL) (Million USD) 1800000 50000 US 1600000 Turkey (right hand side) 45000 40000 1400000 35000 1200000 30000 1000000 25000 800000 20000 600000 15000 400000 10000 200000 5000 0 0 Source: FED, CBRT 44 Capital Adequacy Ratios Capital Adequacy Ratios (2010) (%) 20 18 16 Basel II Adequacy Ratio 14 12 10 8 6 4 2 0 Spain Greece Source: IMF , CBRT. Italy India Korea US UK Germany Brazil Turkey 45 Outline I. Global Problems II. Policy Tools III. Price Stability IV. Financial Stability 46 Inflation Comparison Inflation in Turkey and Emerging Markets (Percent) 30 30 25 25 20 20 15 15 Turkey 10 10 5 5 EM Economies* 0 0 Source: Bloomberg, CBRT *EM countries include Brazil, Mexico, Czech R., Hungary, Poland, S.Africa, China, India, Russia 47 Inflation and Monetary Policy Outlook Inflation and Output Gap Forecasts Forecast Range* Uncertainty Band Year-End Inflation Targets Output Gap Assuming that annual rate of credit growth decelerates gradually, and monetary conditions are tightened significantly in the final quarter in line with the policy measures taken in October, inflation is expected to be, with 70 percent probability, 12 10 Control Horizon 8 4 between 7.8 and 8.8 % (with a midpoint of 8.3 %) at the end of 2011, 2 0 between 3.7 and 6.7 % (with a midpoint of 5.2 %) at the end of 2012, -2 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 -4 09-10 Percent 6 stabilize around 5 % in the medium term. * Shaded region indicates the 70 percent confidence interval for the forecast. 48 Outline I. Global Problems II. Policy Tools III. Price Stability IV. Financial Stability 49 Excess Borrowing Growth Rates of Private Sector Credits (Percent, 2010) 45 40 35 30 25 20 15 10 5 0 -5 -10 Source: IMF, World Bank, CBRT. 50 Saving Rates Saving Rates in Selected Countries (Percent of GDP, 2010) 60 50 40 30 20 10 0 Source: IMF WEO, CBRT. 51 Composition of Savings Saving Rates in Turkey (Percent of GDP) 30 Public Private Total 25 20 15 10 5 0 -5 -10 Source: Ministry of Development, CBRT. 52 Balance of Payments Current Account Balance (Seasonally Adjusted, Monthly Average, Million USD ) 3000 2000 1000 0 -1000 -2000 -3000 -4000 -5000 -6000 Current Account Current Account (Excluding Energy) -7000 -8000 1 2 3 2007 4 1 2 3 2008 4 1 2 3 2009 Source: TURKSTAT, CBRT. *July and August figures are realization, September and Q4 figures are forecast. 4 1 2 3 2010 4 1 2 3* 4* 2011 53 Composition of Capital Flows Main Sources of Current Account Deficit Finance (12-months Cumulative, Billion USD) 80 80 Portfolio and Short-Term* FDI and Long Term Current Account Deficit CBRT Measures 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 -10 -10 -20 -20 Source: CBRT. *Short-term capital movements are sum of banking and real sectors' short term net credits and deposits in banks. 54 Exchange Rates Value of TL and Other EM Currencies against USD (11 November 2010=1) 1,4 Global Sell-off CBRT Measures 1,3 1,2 Depreciation TL 1,1 1 0,9 EM average includes: Brazil, Chile, Czech R., Hungary, Mexico, Poland, S.Africa, Indonesia, Korea and Colombia. Source: CBRT, Bloomberg. Appreciation EM Average 55 Exchange Rate Volatility FX Volatility (Percent, implied volatility for the next 12 months) 30 25 EM Economies Turkey 20 15 10 5 Source: Bloomberg, CBRT. EM average includes Brazil, Chile, Colombia, Mexico, Poland, Hungary, Czech R., S.Africa, Indonesia, Korea and Turkey. 56 Credit Growth Consumer Loans (Annualized, percent, 4 weeks moving averages) 70 RRR Hikes 60 BRSA Measures 50 40 30 20 10 2010 2011 2006-2010 Average 0 Source: CBRT. 57 De-dolarizarion of Loans FX Loan Growth (Annualized, percent, 20 days moving average) 140 140 120 120 100 100 2010 80 60 80 60 2006-2010 Average 40 40 20 20 0 0 -20 -20 2011 -40 Source: CBRT. -40 58 Non-Performing Loans Non-Performing Loans of Banking Sector (percent) 4,5 4,0 5,5 Consumer Loans 5,0 3,5 4,5 3,0 4,0 2,5 3,5 2,0 3,0 1,5 2,5 1,0 2,0 Source : CBRT Corporate Loans Source : CBRT 59 Overview • Economic recovery that started after the global crisis of 2008 continues at a strong pace in Turkey. • Economic recovery in advanced economies still falters. • High public debt and budget deficit problems experienced in the advanced economies put downside risks on the growth of global economy. • Quantitative easing engineered in advanced economies as a quick solution for their problems leads to increased volatility in short-term capital flows to emerging economies. • In Turkey, measures taken during the last year aiming to reduce short term capital flows have been successful to a large extent. 60 Overview The upward trend of current account deficit has been taken under control starting from the last quarter of 2011. The quality of current account deficit financing continues to improve. Structural reforms aiming to rise the saving rates and reduce the export dependence of energy sector will bring a permanent solution to the current account deficit problem provided they are implemented as outlined in Medium Term Program. Tax increases that aim to control current account deficit in the short term have raised the inflation figure in the last months of 2011. As a result of the implemented tight monetary policies, we expect inflation to decline starting from early 2012 and reach to 5 percent target level at the end of the next year. 61 Presentation before the Council of Ministers Erdem Başçı Governor November 14, 2011