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Recent Developments in the World Economy and Implications for Turkey Mark Lewis IMF Senior Resident Representative to Turkey Presentation at Atılım University Ankara May 27, 2013 RECENT DEVELOPMENTS IN THE GLOBAL ECONOMY The risks have been reduced, but the global economy remains weak Policies have addressed major risks but other risks remain Global economy in broadly three speeds Emerging market and developing countries (EMDE): coping well US, other advanced economies (AE): shift from public to private demand in train Euro area: the handover from public to private demand is still stuck Priorities AE: achieving a better fiscal/financial/monetary policy mix EMDE: rebuilding policy room for maneuver and structural reforms Activity is beginning to recover after the slowdown in 2012 Industrial Production and World Trade (annualized percent change of three-month moving average over previous three-month moving average) 30 25 Advanced economies 20 Emerging market economies CPB trade volume index 15 10 5 0 -5 Feb. 2013 -10 2010 2011 2012 Source: Haver Analytics; Netherlands Bureau for Economic Policy Analysis for CPB trade volume index; and IMF staff calculations. 2013 Financial conditions have also improved Net Portfolio Capital Flows to Emerging Markets Equity Markets (billions of US dollars; quarterly flows) (2007 = 100; national currency) 140 40 Others LAC 120 30 Developing Asia 100 20 80 10 60 0 40 DJ EURO STOXX PRC S&P 500 20 -10 Emerging Market Japan - Topixx 0 00 02 04 06 08 10 Sources: Haver Analytics; EPFR Global; and IMF staff calculations. 12 Apr. 13 2005 2006 2007 2008 2009 2010 2011 2012 -20 2013 However, bank lending conditions still tight, especially in the euro area Lending Conditions Nonfinancial Firm and Household Credit Growth 1\ (Net percentage of domestic respondents tightening standards for loans) (year-over-year percent change) 15 100 United States 80 Euro area U.S. 10 Spain Italy Euro area 60 5 40 0 20 -5 0 -20 2007 12:Q4 12:Q2 2008 2009 2010 2011 2012 -10 2006 2007 2008 2009 2010 2011 2012 Sources: Lending surveys by the Bank of England, European Central Bank, Bank of Japan, and the U.S. Federal Reserve for house holds and corporations; Haver Analytics; and IMF staff estimates. 1\ Flow of funds data are used for the euro area, Spain and the United States. Italian bank loans to Italian residents are corrected for securitizations. Credit growth in Emerging Markets (EMs) has slowed Credit to GDP Real Credit Growth (percent) (percent change from one year ago) 140 80 40 Brazil India 130 70 35 China Turkey 120 60 110 50 30 25 20 100 40 15 90 30 10 80 20 Brazil India Turkey China (Left Scale) 70 5 10 60 0 Jan. 13 0 2006 08 10 12: Q4 Sources: Haver Analytics; IMF, World Economic Outlook; and IMF staff calculations. 2010 2011 2012 -5 2013 7 The Outlook is still weak and uncertain. The forecast has been revised down WEO Real GDP Growth Projections (percent change from a year earlier) World U.S. Euro Area Japan Brazil Russia India China Turkey 2013 (April 2013) 3.3 1.9 -0.3 1.6 3.0 3.4 5.7 8.0 3.4 2013 (Jan. 2013) 3.5 2.0 -0.2 1.2 3.5 3.7 5.9 8.2 3.4 2014 (April 2013) 4.0 3.0 1.1 1.4 4.0 3.8 6.2 8.2 3.7 2014 (Jan. 2013) 4.1 3.0 1.0 0.7 4.0 3.8 6.4 8.5 3.9 Source: IMF, World Economic Outlook. 8 The forecast suggests a three-speed global economy Advanced Economies Emerging Economies (percent change from a year earlier) (percent change from a year earlier) 15 15 April WEO 2013 Jan. WEO 2014 2013 2014 United States 1.9 3.0 2.0 3.0 Euro area -0.3 1.1 -0.2 1.0 Japan 1.6 1.4 1.2 0.7 10 10 5 5 0 0 April WEO 2013 2014 -5 -10 2000 02 04 Source: IMF Staff Estimates. 06 08 10 12 14: Q4 Jan. WEO 2013 2014 Emerging Asia 7.1 7.3 7.1 7.5 Latin America 3.4 3.9 3.6 3.9 SSA 5.6 6.1 5.8 5.7 -5 -10 2000 02 04 06 08 10 12 14:… LAC: Latin America and the Caribbean; SSA: Sub-Saharan Africa; data are interpolated from annual frequency values What to do? Work on medium-term policies and don’t overburden monetary policy! Euro area • Accommodative monetary policy (2014 inflation < < 2% !!) and working on better pass through • Restructuring weak banks, with help of ESM if needed • Stronger EMU: banking union and capital market integration • More entitlement reform and more structural reform U.S and Japan • Medium-term fiscal plans and entitlement reform • U.S. needs to durably address debt ceiling • Japan needs a strong medium-term growth strategy • Accommodative monetary policy, including BoJ reforms EMDC • Rebuild policy space • Watch for legacies of past credit growth or ongoing expansions • Structural reforms: to reaccelerate potential output, absorb inflowing capital productively, rebalance growth FINANCIAL STABILITY RISKS REMAIN In the U.S, corporations are building more debt U.S. high-yield covenant-lite loans U.S. corporate debt-to-earnings (Billions of U.S. dollars ) (100 = start of cycle) 140 120 1997:Q1 130 (Percen 35 Cov-lite loan issuance (left scale) Share of institutional leveraged loans (right scale) 100 30 2000:Q4 25 120 80 20 110 60 15 2007:Q4 100 40 10 Current cycle (2011:Q4) 90 20 80 5 0 0 4 8 12 Quarters from start of cycle 16 0 20 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’12 10 Emerging Markets are also accumulating debt Selected emerging market bond, equity and loan issuance (U.S. dollar, bn) Emerging Market nonfinancial corporate leverage (percent, debt-to-equity) 120 2,500 Turkey Equities 100 Loans 2,000 China Philippines Brazil Chile Thailand Bonds Korea Mexico India 80 1,500 2012 Malaysia Indonesia 60 Poland 1,000 Russia 40 Hungary South Africa Peru Romania 500 Colombia 20 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0 0 0 20 40 60 80 2007 100 120 12 Very sensitive to external factors Nonresident holdings of local currency government debt (share of total; in percent) Local currency yield tightening (Dec 08-Dec 12) (in basis points) Yield Hungary 40 External Factors Domestic Factors 0 -50 35 -142 Indonesia -100 30 Malaysia -150 25 -200 Poland 20 -465 South Africa Turkey Mexico -250 -300 15 Brazil -323 -350 10 Korea 5 0 2007 -400 -450 -500 2008 2009 2010 2011 2012 2013 13 For financial stability, dealing with old risks and new challenges Remaining Old Risks Euro Area • Stronger integration • Make banks, corporates and sovereigns safer U.S. & Japan • Keep sovereigns safe Global • Safer global financial system New Challenges U.S. Emerging Markets • Avoid financial excesses • Smooth exit • Avoid bad releveraging • Keep the guard up 15 TURKEY ACHIEVED A “SOFT LANDING” 16 Turkey: a welcome slowing of growth and domestic demand 30 Contributions to Growth (Percent, contribution to real GDP) 20 10 0 -10 Net Exports Domestic Demand Real GDP growth -20 -30 17 Lower imports reduce the current account deficit; although financing still is short term 40 Current Account (Billion of U.S. dollar) 20 Current Account Financing (12-m rolling, billions of U.S. dollar) 90 70 0 50 -20 30 -40 10 -60 Non-fuel -10 MLT debt Non-debt flows CAD Jan-13 Jul-12 Oct-12 Jan-12 Apr-12 Oct-11 Jul-11 Apr-11 Jan-11 Jul-10 Oct-10 Jan-10 Apr-10 Oct-09 Jul-09 Apr-09 Jan-09 Jan-08 -30 Apr-08 Jan-13 Oct-12 Jul-12 Jan-12 Apr-12 Oct-11 Jul-11 Apr-11 Jan-11 Jul-10 Oct-10 Jan-10 Apr-10 Oct-09 Jul-09 Apr-09 Jan-09 Jul-08 Oct-08 Apr-08 Jan-08 -100 ST Debt Jul-08 -80 Oct-08 Total 18 Inflation is not high 12.0 Inflation (Percent) 10.0 8.0 6.0 4.0 Headline CORE,I Services 2.0 0.0 Jan-10 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Unemployment has increased, but not much 16 16 Unemployment Rate (Percent) 2010 14 14 2011 2012 12 12 10 10 8 8 6 6 J F M A M J J A S O N D 20 Short-term model suggests momentum in Q1 6.0 Actual and Estimated GDP Growth (q/q sa, non-annualized) 4.0 2.0 0.0 Actual growth -2.0 -4.0 -6.0 -8.0 Estimated growth Reflecting, among other things, faster credit growth 22 A soft landing is a new achievement 23 THE GLOBAL ECONOMY AND TURKEY 24 Domestic savings are low, which means: Savings, 2012 (% of GDP) 60 50 40 30 20 10 0 There is a high current account deficit Current Account Balance, 2012 (% of GDP) 8 6 4 2 0 -2 -4 -6 -8 Making Turkey dependent on foreign capital inflows 30 25 35 External Financing Requirement (2011, percent of GDP) 30 25 20 20 15 15 10 10 5 5 0 0 Brazil India Poland Turkey 27 Source: IMF DTS and Turkstat CIS EU MENA Developing ASIA Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 Sep-08 May-08 Jan-08 Sep-07 May-07 Jan-07 Sep-06 May-06 Jan-06 Sep-05 May-05 Jan-05 Sep-04 May-04 Jan-04 Sep-03 May-03 Jan-03 Sep-02 May-02 Jan-02 Sep-01 May-01 Jan-01 Sep-00 May-00 Jan-00 There has been trade diversification, but the EU still important Turkey Total Trade (excl. Gold, 3MMA, %) 60 50 40 30 20 10 0 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 A challenge is to preserve and expand market share Market Share Developments (Turkey's exports in % of region's Imports, 2000=100, 6MMA) 350 300 250 200 150 100 50 0 Source: IMF CIS EU MENA Developing Asia Turkey will benefit from more Foreign Direct Investment FDI, 2011 (Net Inflows, % of GDP) 8 7 6 5 4 3 2 1 0 Source: World Bank 30 Thank You! For more information: IMF Website: www.imf.org IMF Turkey Website: www.imf.org/Ankara