Download Speech By Deputy Prime Minister Ali Babacan at Institute of

SPEECH
BY
ALI BABACAN
Deputy Prime Minister of
Republic of Turkey
AUSTRALIAN G20 PRESIDENCY &
INSTITUTE OF INTERNATIONAL
FINANCE
HIGH LEVEL PUBLIC – PRIVATE
SECTOR CONFERENCE
21 Şubat 2014
Ladies and Gentleman,
It is my real pleasure and honor to be in the presence of such a distinguished audience.
At the outset I would like to express my appreciation to the IIF for organizing this event
jointly with Australian Presidency. I have to mention that we, as the policy makers,
highly value the IIF’s inputs to strengthen the efficiency, transparency and stability of the
global financial system. As the world’s only global association of financial institutions,
the IIF assumes very distinctive and critical role to support the financial industry in
prudently managing risks and developing best practices and standards.
Turkey will be the next president of G-20 after Australia. We are already working as a
part of the Troika structure. During our presidency, we are very open and willing to work
closely with IIF.
Distinguished Guests,
As we all witnessed, the world experienced an unprecedented economic and financial
crisis, which shattered even the perceivably most robust economies. Since then, several
response measures, some unprecedented as the crisis itself, have been taken individually
by countries and collectively by international platforms. However, despite these steps, the
global economic recovery remains subdued and the downside risks still prevail.
When the crisis first hit in 2008, it was mostly the financial sector and the complex
financial instruments that came under scrutiny. Starting from 2010, the credibility of the
sovereign signatures started to be questioned. In 2011 and 2012, the pace of recovery in
many advanced economies remained persistently weak. And finally starting from May
last year, we have seen new risks surfacing for emerging markets.
The emerging markets, over the last 6 years, assumed a critical role as the engines of
global recovery. Their solid public finances and capacity to implement counter-cyclical
policies served to accelerate the world-wide recovery. However, as financially open
economies, they are not immune to external shocks and they have several sources of
vulnerability.
We have seen these vulnerabilities came to surface with the increasing concerns about the
termination of the ultra-accommodative monetary policies by the advanced countries.
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Starting from end-May last year, the macro-financial environment for the emerging
market economies has worsened considerably. At the initial stages, the mere speculation
on a possible early exit, had adverse impacts on these economies’ financial indicators.
Ladies and Gentlemen,
It is indeed emerging markets’ responsibility to adopt the necessary safeguards against
both domestic and external shocks. However, their unilateral steps alone would not be
sufficient to restore the market confidence. We should keep in mind that even when a
country implements a well-justified monetary and fiscal policy framework, it would still
remain highly exposed to the financial volatilities imposed by external factors. Emerging
market economies are nowadays very very open economies when compared to previous
times.
Therefore, it is now time for greater policy coordination. Given the very complex nature
of the possible spillovers that may arise from the advanced economies’ exit strategies; we
need stronger international policy cooperation and coordination, maybe this time more
than ever. With a better policy coordination mechanism globally, not only the EMs, but
also the advanced economies would be better off. We should always remember that
unless the dynamism of the emerging markets continue it will be very difficult to
continue the growth in the advanced economies which we have finally seen recently. We
should always keep in mind that no single country can alone put the world economy to a
better trajectory. We are all in the same boat and the key to restore financial stability
would be to act collectively.
The underlying problem here is that several advanced economies have failed to
implement highly-needed structural, financial and fiscal reforms and consequently
resorted to extreme measures on the monetary policy front. In a way it was mostly the
central banks in the scene trying to their best during times when enough action was not
there on the fiscal or reform side. These policies created a monetary volume which is well
beyond the absorption capacity of the advanced markets and hence resulted in a
substantial liquidity influx to the emerging markets.
Within this outlook, the emerging market economies were essentially left with three main
policy choices, all imposed by reserve-currency issuers’ own actions and all associated
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with significant risks and costs. These worse-than-ideal choices were: (i) trying to fendoff the inflows via macro-prudential measures or in some extreme cases with capital
controls; (ii) trying to isolate the pressure on domestic economy via direct interventions
to the FX market, which would result in substantial and costly reserve build-ups; and (iii)
letting the market forces play their role, which often led to local currency appreciation
and current account deterioration.
The emerging market economies, given their circumstances, have made their policy
choices. The effectiveness of the choices, however, was not entirely independent from the
external factors. This is why several risks came to surface recently. Therefore, given the
near-term panorama, our focus should mainly be on four key issues. I will now touch
upon these four issues briefly.
The first one is the monetary policy normalization in the advanced economies. These
economies should be very prudent in tailoring the pace of exit from their unconventional
monetary policies. The volatility in financial markets induced by a mis-calibrated exit
would have substantial negative spillovers to other countries, risking their
macroeconomic and financial stability.
It is also important to note that the economic conditions differ across countries and the
business cycles are not aligned. This means that the exit from ultra-easy monetary
policies by advanced economies will come at different times. This would serve to
alleviate the pressure on emerging countries to a certain extent. To put in different words,
the continuation of expansionary policies elsewhere could somewhat offset the drain
from other regions. In a way not simultaneous but sequential exit for the developed
countries central banks will be very important. An Orderly and a well-managed exit from
these policies is likely to result in a reversal of capital flows and some volatility in
financial markets. So again, international policy cooperation is highly needed.
The second issue is the slowing growth in emerging markets. This is a risk that we should
most definitely talk about. The past ten years versus next ten years for emerging markets,
for developing economies, will be different. On average the developing countries during
next ten years will have lower growth rates compared to the past ten years. But still even
these lower growth rates will be rates which are much higher than the rates of the
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developed countries. Compared to their own past growth rates it will be somewhat lower
but compared to the advanced economies on average it will be much much higher.
Let me be very frank and express my strong disagreement with those who argue that the
recent volatility in emerging markets resemble the crisis in 90s. The emerging markets
have become much more resilient in recent years thanks to their stronger fundamentals,
higher international reserves, more resilient banking system, firm fiscal positions, and
more flexible exchange rate regimes on the other hand. It is true that much remains to be
done. These economies should now focus on increasing productivity, boosting
competitiveness, and addressing source of vulnerabilities in their economic structures.
The third issue is the ongoing need for fiscal consolidation in advanced economies. Until
last year, the noise pertaining to the medium term fiscal strategies of the advanced
economies has hampered the trust in the markets. Yet, the G20 took a significant step in
the right direction by laying out fiscal strategies for all the G-20 members last year. I
think it is now time for the advanced economies to implement their fiscal strategies in a
decisive manner. This is very important actually, to relieve some of the pressure on
central banks to tighten monetary policies. In a way when the fiscal policy continues to
be much looser than it should be than the job tightening is left to central banks and this
does have spillover effects globally.
Finally, I would like to touch upon the global rebalancing problem. Although the global
imbalances have significantly mitigated after the crisis, they still remain at considerable
levels and the improvement seems to be cyclical rather than structural. Unless a
permanent improvement is achieved, the vulnerabilities of deficit countries could
potentially destabilize not only local but also global dynamics. This is why, in order to
shore up the global systemic stability, surplus economies need to boost their domestic
consumption and complement the domestic balancing efforts by the deficit economies.
Ladies and Gentlemen, Dear Guests
Now, I would like to give a short update about Turkish economy and what we have been
doing lately. For the last 11 year fiscal discipline and strong banking system have been
the main sources of strength for Turkish economy for a decade. Turkish economy for a
decade has changed considerably with all the structural reform efforts that we have put in
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action. Since 2009, public debt to GDP ratio dropped from 45% to 35% during an era of
higher and higher government debt and our budget deficit dropped from 5.5% to 1.1% of
GDP during the same time. In addition, the Turkish banking sector has a robust position
which supports economic growth and helps mitigate the impact of macro-financial risks,
Basel II standards have already been implemented in capital adequacy calculations since
July 2012. And we are already starting to kick in Basel III requirements. Currently,
average capital adequacy ratio of Turkish banks is 15.3 percent, and no bank below 12%
which is our required capital adequacy rate. Besides, in Turkey, household liabilities as
percentage of GDP is one of the lowest in Europe or beyond. And all this household debt
is in local currency not in FX.
Average growth rate of the last 4 years was around 6%. During the very same 4 years, 6
million additional jobs have been created. So this growth came with huge employment.
On the other hand, we observed high current account deficit and accumulation of private
sector foreign liabilities. Therefore improvement in external imbalances is a priority area
for Turkey’s economic policies. Macro prudential measures aiming to slow down
domestic demand and current account deficit via curbing credit growth have been taken
by our Central Bank (CBRT) and Banking Regulation and Supervision Agency (BRSA)
since the second half of 2011. Accordingly, the CBRT implemented an unconventional
monetary policy by using variety of tools such as policy rate, interest rate corridor,
reserve requirement, reserve option mechanism, all backed by macro prudential measures
of the BRSA. As a consequence, we managed to curb the credit growth significantly and
rebalance external and domestic demands in 2012 and reduced our current account deficit
by almost four percentage points in one year.
Dear Guests,
In 2013, Turkey was affected by developments in international markets due to our strong
links with the global economic and financial system. We have already presumed the
central banks of advanced countries would leave ultra-easy monetary policy sooner or
later; Actually in G-20 meetings before the tapering announcement even started in May, I
called my counterparts in the advance economies to make their monetary policy as
transparent as possible as predictable as possible because it was probably time to
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normalize. So we had started to take necessary measures to strengthen the economy for a
while. The latest Medium Term Program (MTP) covering 2014-2016 has been prepared
within this framework and we have started to implement it already. Reducing current
account deficit is one of the main objective of our medium term program.
In order to address external imbalances, reducing dependency on energy imports,
increasing
private
savings,
enhancing
competitiveness,
improving
investment
environment and improving quality of financing are very important structural reform
areas of our Medium Term Program. Our central bank already switched to a tighter and
predictable monetary policy framework recently. Tight fiscal policies are there to remain
not for debt sustainability but to help for the saving rates of the country on the public
sector side.
Accordingly, we have experienced currency, capital inflows and more stable markets
since late January.
However we realize that there is no room for complacency.
Ladies and Gentlemen,
Turkey has also gone through a very important political reform process over the last 10
years. The reforms will be very important to even strengthen further when it comes to our
democracy, practices of fundamental rights, freedoms, rule of law, supremacy of law, and
we have already taken universal norms as our benchmarks. In this context our European
Union accession process is very very important. The accession process itself provides
Turkey criteria, benchmarks, norms, standards when it comes to the standards of our
democracy and rule of law. Recently we have speeded our efforts in that area especially
with the new French government which is now more conducive to our EU accession
process and we were able to open one more Chapter in the negotiations and probably two
more chapters will be opened within this year.
Confidence at the end of the day is the driver of economic growth and we realize that. So
transparency, accountability, zero tolerance to corruption, rule based market economy,
well functioning competition, equal access to all the opportunities in our economy, will
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continue to be our guidelines. Although we have problems here and there about
implementation the key principles are there to stay.
Ladies and Gentlemen, Distinguished Guests,
Just final words about our G-20 presidency. G-20 has assumed an important role, during
the post crisis era. We actually started to have G-20 summits after the crisis. We didn’t
have summits before the crisis, just ministerial meetings, central bank governors
meetings. So it is good that the leaders are meeting now regularly, discuss about global
economic issues. It is no longer G-7 or G-8 but it is G-20. Because when we look at PPP
adjusted GDPs of the economies, the developing countries’ GDP have already exceeded
the developed countries’ GDP. So the developing countries have to be on board whenever
it is about global policy coordination.
Well-coordinated actions by the G20 members in the aftermath of the crisis demonstrated
the platform’s role as the premier forum for global economic cooperation. G20’s major
achievements, in crisis resolution, include: (i) reforming international financial
institutions; (ii) mobilizing official resources; (iii) increasing the IMF’s and the MDB’s
lending capacities; (iv) stabilizing financial markets; (v) coordinating financial regulatory
reforms; event the creation of FSB itself (vi) improving discipline and tightening
oversight over national financial institutions and regulators; and (vii) perhaps most
importantly launching a global economic recovery.
Yet the G-20 has a lot more to do. And it is actually still the only international platform
which is highly representative to enable countries to sit down around a table. A table
which is not too big so that people just don’t meet to give speeches, but to actually
discuss in a very interactive way, and a table which is not to small to be not
representative, but a tablet that has the optimum size to be representative and to have the
opportunity to have a real discussion platform. This is what makes G-20 important. Some
people think that G-20 is it still important, do we really get too much about it but think
about if the G-20 didn’t exist at all. What would be the means for policy coordination
during the very difficult years that we have already passed? So I think it is still much
much better to have a G-20 rather than not having one at all. That is why we shouldn’t
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expect too much, we should adjust our expectations in a realistic way and try to get as
much as possible from this platform through consensus building.
Now, it has been more than five years since the inception of the global crisis and the tail
risks have diminished. Yet, the global economy is still facing many risks. It is therefore
critical for the G20 to maintain and strengthen its role.
The spirit of collective action is indeed no less important today than it was in 2008 or
2009. The G20’s ability to “reach consensus, flexibly and effectively” confirms the
platform’s role as a cohesive unit, capable of taking collective decisions for the good of
the world economy. I, therefore, believe that the platform will remain relevant in the post
crisis world order. On that note, I would like to move to our G20 Presidency in 2015.
Distinguished Guests,
G20 Presidency will present Turkey a historical opportunity to drive an ambitious global
economic agenda and to entrench key reforms in a variety of fields. In 2015, we will seek
to maintain the momentum within the platform and to ensure the continuity of the
dialogue on all agenda items.
As the chair of the G20 in 2013, Russia has appropriately framed its focus on the theme
of creating jobs and growth, and Australia has strongly endorsed this approach. Our
Australian colleagues have made a very good start by streamlining meetings, focusing on
tangible outcomes, developing linkages across topics and promoting the role of the
Troika. Similar to the heritage from 2013, Australia’s G20 agenda will have a significant
bearing on our 2015 plans; and we will build on the success of our predecessors.
We will give special emphasize on reach out activities. Turkey has also a 10 year
responsibility for the least developed countries. We have hosted the least developed
countries conference which is taking place every 10 years and we are making lot of lof of
meetings in Istanbul for the LDCs. Thus reach out activities of G-20 is going to be an
important area for us during our presidency. We have not yet announced the priorities or
main themes but at the start out I can say that reach out of to the non-G-20 countries will
be key priority for our presidency.
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As our G20 Presidency is on the horizon, we have already initiated preparatory process
and started internal discussions on our priorities per the 2015 agenda.
Distinguished Guests,
I am mindful of today’s intense agenda; and hence I now give an end to my words. I am
sure that you will have fruitful discussions in both of today’s sessions and provide key
inputs to the G20 Agenda.
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