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GLOBAL FINANCIAL TURBULENCE AND ITS IMPACTS MEHMET YÖRÜKOĞLU CENTRAL BANK OF TURKEY DEPUTY GOVERNOR October 2008 Contents I. Reasons behind the turbulence, II. Measures taken so far … III. Impacts of the turmoil on; III.1. Emerging markets, III.2. Turkey; IV. Prospects. 2 Reasons Behind the Turmoil Real Policy Rate in USA Loose Monetary Policies: (January 1981 – September 2008, percentage) 5 As a result of low real interest rates in the 4 developed economies, especially in USA, 3 2 1 0 -1 -2 -3 during the period 2001 – 2005, investors initiated leveraged transactions and used risky instruments in order to gain high yields. Lack of Transparency and Supervision : -4 Parallel to the widespread use of originate-to95 distribute business models, financial innovation 96 97 98 99 07 08 OFHEO 0 -5 -10 -15 Case&Shiller Source: OFHEO, Standard&Poors 07-08 01-08 07-07 01-07 07-06 01-06 07-05 01-05 07-04 01-04 07-03 -20 01-03 about increase in the mortgage foreclosure rate. 06 5 07-02 household consumption demand and brought 05 10 01-02 the first quarter of 2006 adversely affected 04 15 07-01 Decline in house prices in USA that began in 03 (January 2001 – July 2008, annual percentage change) 20 01-01 Problems in the Housing Sector : 02 Housing Price Index instruments were used widely, which in turn analysis of these investments. 01 Soruce: FED, Bureau of Labor Statistics and technolobical advancements, complex complicated tracing of the investments and risk 00 3 Reasons behind the Turbulence What triggered the crisis? Increased delinquency rate in sub-prime mortgages and therefore decline in mortgage-backed securities (MBS). • Big exposures of financial institutions which also have high leverages to these MBS. Increased risk appetite in the face of low real interest rates Creation of complex financial instruments in search of higher profitability “Originate to distribute” model and extensive use of off-balance sheet instruments Imprudent credit decisions • Erosions of capital due to financial losses Cut back in loan supply 4 Reasons behind the Turbulence Uncertainty in financial markets transformed into a trust problem between financial institutions In spite of correcting actions of regulatory bodies, arising financial weaknesses of large financial institutions such as Lehman Brothers, Bear Stearns, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual Fund and AIG. 5 Global Losses As of October total losses that the international financial system has suffered reached 659 billion US Dollars. IMF revised its global loss forecast from 945 billion US Dollars to 1.4 trillion US Dollars. During the same period banks were able to raise up equity by 638 billion US Dollars. Due to the financial turmoil banks faced significant losses and hence they tightened the credit standards significantly. Losses in the Banking and Financial Sector Ratio of Banks Reporting Tightening Credit Standards to the Total Banks (billion US dollars) World 200 60 USA 150 (2006 Q1 – 2008 Q3, quarterly, percentage) 70 Europe 50 Europe 40 100 USA 30 20 Asia 10 50 Source: Bloomberg Source: FED, ECB 2008 Q3 2008 Q2 2008 Q1 -20 2007 Q4 08 Q3 2007 Q3 08 Q2 2007 Q2 08 Q1 2007 Q1 07 Q4 2006 Q4 07 Q3 2006 Q3 2007 Q2 and Earlier 2006 Q2 -10 0 2006 Q1 0 6 Measures taken so far … Coordinated response of Central Banks by providing liquidity support Bail outs from U.S. and European governments Intervention of US government by its fiscal policy • Capital injection and assets expansion by accepting as collateral, • Encouraging some banks to fund the troubled banks by secured funding, • Paying interest on depository institutions required and excess reserve balances (by Fed), Guarantee on bank deposits and/or other liabilities in USA and Europe 7 Impacts of the Turmoil Volatility index (VIX) has reached its highest level of the last 19 years, surpassing previous highs seen during the Asian crisis, dot-com bust and after the 11 September attacks. TED spread, an indicator of credit risk in the economy, used to range around 50 basis points prior to the start of the turmoil but lately the spread has widened to around 460 basis points. Difference Between LIBOR and US Treasury Bill (3 month) Volatility Index 72 (2 January 1990 – 20 October 2008) (1 January 2007 – 6 October 2008, basis points) 400 64 350 56 300 48 250 40 200 32 150 Long-term average 100 24 Source : Bloomberg 09-08 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 Source: Bloomberg 03-07 0 8 01-07 50 16 8 Foreign Exchange Rates and Risk Indicators Since the beginning of August fall in the value of Turkish Lira against US Dollars is close to the average depreciation rate of emerging economies’ currencies. In the second quarter of 2008 Turkey’s risk premium increased more than that of other developing countries. Yet, a marked correction has been observed since July 2008. Change in the Spot Foreign Exchange Rate vs USD Risk Indicators (2 January 2008 – 20 October 2008, basis points) (between 1 August 2008 and 16 October 2008, percent) 700 Isralie Shekel Taiw an Dolar Indonesian Rupee Singapore Dolar Phillippine Peso Malaysian Ringgit Ukraine Hryvnia Russian Ruble Lithuanian LTL Latvian Lats Indian Rupee Czech Koruna Turkish Lira South Korean Won Romanian Ley Chilean Peso Mexican Peso Polish Zloty South African Rand Colombian Peso Hungarian Forint Brazilian Real Iceland Koruna 650 400 600 550 300 500 450 200 EMBI + EMBI + Turkey 400 100 350 300 0 250 (Turkey) – (EMBI+) 200 Source: OANDA Source: JP Morgan 15.10.2008 29.09.2008 12.09.2008 27.08.2008 28.07.2008 12.08.2008 10.07.2008 25.06.2008 10.06.2008 45 08.05.2008 40 23.05.2008 35 23.04.2008 30 08.04.2008 25 24.03.2008 20 06.03.2008 15 04.02.2008 10 20.02.2008 5 17.01.2008 0 -100 02.01.2008 -5 500 9 Potential Impacts on Turkish Economy Banking and Financial Sector Capital Inflows and Current Account Deficit Economic Activity Exchange Rate and Inflation 10 Impacts on Turkish Banking and Financial Sector Until now, limited effects on banking and financial sector due to, • Considerable improvement in macroeconomic stability, • Prudent macroeconomic policies, • Conservative Regulation and Supervision, • Tools used by Central Bank of Turkey to calm the markets, such as reintroduction of FX deposit market, • Tight fiscal policy and monetary policies. 11 Banking Sector Compared to earlier periods Turkish banking sector’s resilience has improved remarkably. The sector does not hold a noteworthy FX short position. Net FX positions of the banks are at a low level compared to their equity capital. Net FX Position of the Banking Sector (2000 Q1 – 2008 Q3*, billion USD) 1 0 -1 -2 -3 -4 -5 -6 2008 Q3 2008 Q1 2007 Q3 2007 Q1 2006 Q3 2006 Q1 2005 Q3 2005 Q1 2004 Q3 2004 Q1 2003 Q3 2003 Q1 2002 Q3 2002 Q1 2001 Q3 2001 Q1 2000 Q3 Capital Adequacy Ratio 28 (December 2005 – July 2008, percent) 24 respectively. 20 Strong capital structure and high profit to equity ratios curtail banking sector’s vulnerability to the financial turmoil. 16 Operational risk included Target rate is 12% 12 8 Legal limit is 8% 4 Source: BRSA, CBT 06-08 04-08 02-08 12-07 10-07 08-07 06-07 04-07 02-07 12-06 10-06 08-06 06-06 04-06 0 02-06 Banks’ short-term FX liquidity and total short-term liquidity adequacy ratios remain above the legal limits of 80% and 100%, * As of 19 September 2008 Source: BRSA, CBT 12-05 The capital adequacy ratio is well above the legal limit and the EU average of 12.1%. 2000 Q1 -7 12 Banking Sector Short-Term FX Liquidity Ratio Total Short-Term Liquidity Ratio (6 July 2007 – 12 September 2008, percent) (6 July 2007 – 12 September 2008, percent) 300 300 250 250 0-7 days 0-7 days 200 200 Up to 1 month Up to 1 month Source: BRSA, CBT 09-08 08-08 07-08 06-08 05-08 04-08 03-08 02-08 01-08 12-07 09-08 08-08 07-08 06-08 05-08 04-08 03-08 02-08 01-08 12-07 11-07 10-07 0 09-07 0 08-07 50 07-07 50 11-07 Legal limit is 80% Legal limit is 100% 10-07 100 09-07 100 08-07 150 07-07 150 Source: BRSA, CBT 13 Banking Sector Ratio of Non-Performing Loans to Total Loans (2003 vs. 2007, percent) 14 12 11.5 10 Developing Countries* 8 6 Turkey Developed Countries** 4.9 3.9 4 3.5 3.7 2.8 2 0 2003 2007 * Developing countries: Argentina, Brazil, Bulgaria, Czech Republic, Croatia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, Ukraine ** Developed countries: France, Germany, Italy, United Kingdom, USA Source: IMF, CBT 14 Bank Credits Business Loans and Retail Loans (1 January 2006 – 5 September 2008, year-on-year percentage change) 90 80 70 60 50 40 Retail Loans 30 20 Business Loans 10 08-08 07-08 06-08 05-08 04-08 03-08 02-08 01-08 12-07 11-07 10-07 09-07 08-07 07-07 06-07 05-07 04-07 02-07 03-07 01-07 12-06 11-06 10-06 09-06 08-06 07-06 06-06 05-06 04-06 02-06 03-06 01-06 0 Source: CBT 15 Households FX Debt of Households Total Household Liabilities ((2003 – September 2008, percent of total consumer loans) (2004 – 2006, percent of GDP) 70 10 63 60 8.6 57 60 8 6.4 European Union 50 6 4.8 4 4.6 3.6 40 Eastern Europe 3.9 30 23 Turkey 2 20 17 12 0 10 2003 2004 2005 2006 2007 Sep-08 9 8 5 0 2004 Source: CBT 2005 2006 Source: ECB, CBT 16 Impacts on Turkish Banking and Financial Sector Banking sector is still quite small with a strong potential to grow. (%) Italy Greece Finland Latv ia Czech Republic Bulgaria Hungary Lithania Poland Turkey (B) Turkey (A) Romania Denmark Belgium Netherlands France EU27 Austria MU13 Germany Spain Portugal Sweden Ireland UK Luxembourg (2533) • 0 100 200 300 400 500 600 700 800 900 Turkey (A) shows the data of 2007 including participation banks; Turkey (B) shows the data of June 2008 including participation banks. For EU members, the data of 2007 is used. Source: Turkstat, BRSA-CBRT, ECB. 17 0.7 Leasing companies Factoring companies Consumer finance 0.6 0.5 0.5 0.1 Investment companies 1.2 Pension funds 2.0 Real estate investment 3.0 Securities brokerage firms 3.3 Insurance companies 88.1 Mutual funds 100 90 80 70 60 50 40 30 20 10 0 Banks (incl.participation (%) Impacts on Turkish Banking and Financial Sector Source: BRSA,CBRT, Association of Capital Market Intermediary Institutions, CMB (1) Figures are as of June 2008. •Financial system in Turkey is bank dominated; •No toxic financial instruments in banks’ portfolio; •Shallow markets for complex financial derivatives. 18 Impacts on Turkish Banking and Financial Sector Financial Stability Index Index 122.0 119.0 116.0 113.0 Financial Stability Index 08.08 12.07 12.06 12.05 12.04 12.03 12.02 110.0 Average Source: CBRT •FSI is a composite index that is used as a measure of the financial soundness. •It indicates a sound Turkish banking sector. 19 Inflation Developments in Turkey Thanks to achievements in price stability, Turkey’s ranking in terms of inflation has improved. While in the 1997-2003 period, Turkey was among the 10 countries with highest inflation in the world, as of September she declined to the 62th position. 140 Turkey in the Global Inflation Ranking Inflation in Turkey (1997 – 2008) 70 (1980 – 2008*) 62 120 60 55 100 50 80 40 60 Inflation Targeting Regime 40 34 30 25 26 7 10 8 9 2003 0 4 7 2002 10 1999 20 1998 20 4 * 2008 forecast of the Central Bank of Turkey Source: IMF, TURKSTAT, CBT * Most recent data as of September 2008 The total number of countries is 155. The ranking is in descending order. Source: IMF, TURKSTAT, CBT 2008* 2007 2006 2005 2004 2001 2000 1997 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 20 Effects on the Turkish Economy; Inflation As a result of global crisis commodity prices, especially food and energy prices, declined drastically. Falling commodity prices, moderating domestic demand and depreciation of Turkish Lira will have favorable effects on the current account deficit and an improvement in the current account deficit is expected in the months to come. Current Account Balance and The Effect of Energy Prices on the Current Account Deficit* Wheat Price (1 January 2007 – 9 October 2008, US Dollars/Bushel) 14 12 (2002 – 2007, percent of GDP) 10 8 2002 2003 -0.7 -1.8 2004 2005 -2.5 -2.4 2006 2007 0 6 -1 09-08 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 03-07 01-07 4 -2 -2.9 Source: Chicago Board of Trade Oil Prices (NYMEX WTI, 1 January 2007 – 9 OCtober 2008, US Dollars) 160 -3 -4 140 120 -5 -2.7 -2.5 -3.7 -4.6 Current Account Deficit 100 -6 80 60 -7 Source: Bloomberg 09-08 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 03-07 01-07 40 -5.7 -6.1 * Keeping energy prices constant at 2002 levels. Source: TURKSTAT, CBT 21 Effects on the Turkish Economy; Inflation Favorable developments in commodity prices and deterioration in the domestic demand suggest that inflation will improve in the following months. However, recent depreciation of Turkish Lira may create upward pressure on the inflation rate in the short-run. The items outside the domain of monetary policy such as food prices, food and energy prices prices contributed to annual inflation by 41% in 2004-2006 period, whereas their contribution rose to 63% in September 2008. Components of Annual Inflation (percentage share) 2004 – 2006 Average Food and Energy September 2008 Food and Energy 40.9 37.5 59.1 62.5 Other Goods and Services * Food: Food and Non-Alcoholic Beverages ** Tobacco: Tobacco Products and Alcoholic Beverages Source: TURKSTAT, CBT Other Goods and Services 22 Balance of Payments – Current Account Domestic Savings and Investments (2001 – 2007, percent of GNP) 30 25.4 Investments 25 24.9 23.8 24.4 22.6 20.0 20 19.2 19.3 20.2 18.2 17.5 15 17.3 16.0 15.1 Domestic Savings 10 2001 2002 2003 2004 2005 2006 2007 * 1987 based series Source: SPO Program for 2008, CBT 23 Balance of Payments – Current Account Current Account Balance and The Effect of Energy Prices on the Current Account Deficit* (2002 – 2007, percent of GDP) 2002 2003 2004 2005 2006 2007 0 -1 -0.7 -1.8 -2.5 -2 -2.4 Current Account Deficit Excluding the Effect of Energy Prices -2.9 -3 -2.7 -2.5 -4 -3.7 -4.6 -5 Current Account Deficit -6 -5.7 -6.1 -7 * Keeping energy prices constant at 2002 levels. Source: TURKSTAT, CBT 24 Capital Flows Financing of the Current Account Financing of the Current Account (2000 – 2008*, percent of current account deficit) 100 Long Term Credits 2 80 (2000 – 2008*, percent of current account deficit) 100 Non-Bank Private Sector Credits 2 80 Portfolio Investments 4 Foreign Direct Investment 3 60 Foreign Direct Investment 3 60 40 40 20 20 0 0 Bank Credits 1 Equities 5 Short Term Credits 1 -20 -20 -40 -40 2000 * 2003 2004 2005 2006 2007 2008* Last 12 months as of 2008 May Short Term Credits: Net short term loans of the banking sector, non-bank private sector and the public sector, plus trade credits 2 Long Term Credits : Net long term loans of the banking sector, non-bank private sector and the public sector 3 Foreign Direct Investment: Foreign direct investment inflows 4 Portfolio Investment: Purchases of equities and securities by nonresidents and deposits of nonresidents 1 Source: CBT Public Sector Borrowing 4 2000 * 2003 2004 2005 2006 2007 2008* Last 12 months as of 2008 May Bank Credits: Short and long-term borrowing of the banking sector 2 Non-Bank Private Sector Credits : Short and long term borrowing of the non-bank private sector, plus trade credits 3 Foreign Direct Investment: Foreign direct investment inflows 4 Public Sector Borrowing: Purchases of government securities (including Eurobonds) by nonresidents, credits to central government and to the Central Bank (including IMF credits) 5 Equaities: Purchases of equities by nonresidents Source: CBT 25 1 Foreign Direct Investment Foreign Direct Investment Foreign Direct Investment Inflows (Annual, billion US dollars) (2006, billion US dollars) 30 25 22.0 19.9 20 15 10.0 10 5 1.0 1.1 1.8 Average of 19902001 2002 2003 2.9 0 2004 2005 2006 2007 China 83.5 Hong Kong 60.0 Russia 52.5 Singapore 24.1 Turkey 22.0 Mexico 24.7 Brazil 34.5 India 22.9 Romania 9.7 Chile 14.4 Source: UNCTAD Source: CBT 26 Economic Growth Cumulative GDP Growth (Percentage change, 2001-2007) 60 48.6 50 40 32.9 30 30.4 30.2 24.9 23.9 18.6 20 10 0 Brazil Czech Republic South Africa Hungary Mexico Poland Turkey Source: TURKSTAT, IMF World Economic Outlook 27 Productivity and Wages Productivity, Real Wages and Real Unit Wages in the Manufacturing Industry (1998 Q4 – 2008 Q1, per hour worked, 4-quarter moving average, logarithmic scale) 2.25 2.10 Productivity Index (lhs) 2.20 2.05 2.00 2.15 1.95 2.10 1.90 Real Wages Index (rhs) 1.85 2.05 1.80 2.00 Real Unit Wages Index (rhs) 1.75 1.95 Source: TURKSTAT, CBT 2007 Q4 2007 Q2 2006 Q4 2006 Q2 2005 Q4 2005 Q2 2004 Q4 2004 Q2 2003 Q4 2003 Q2 2002 Q4 2002 Q2 2001 Q4 2001 Q2 2000 Q4 2000 Q2 1999 Q4 1999 Q2 1998 Q4 1.70 28 Export Performance Turkey’s Share in World Exports (1950 – 2007, percent) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 0.0 Source: WTO, CBT 29 Foreign Trade Real Imports and Real Exports Indices (1982 – 2007, 2003 = 100) Imports and Exports Growth 40 180 (January 2006 – August 2008, 12-month rolling year-on-year change, in USD, percent) 35 30 160 Exports 25 20 140 15 Imports 10 120 5 100 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 03-07 01-07 11-06 09-06 07-06 05-06 Imports 03-06 80 01-06 0 35 30 60 Exports 25 40 Exports 20 20 Imports (ex-oil) 15 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 03-07 01-07 11-06 09-06 07-06 05-06 03-06 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 Source:TURKSTAT, CBT 01-06 10 0 Source:TURKSTAT, CBT 30 Export Performance Composition of Turkey’s Exports (top 8 export sectors, billion USD) 100 14.5 Apparel and clothing 9.7 Textile yarn, fabrics 9.0 Food and live animals 8.8 Industrial Machinery 9.9 Chemicals and petroleum products 13.5 Iron and steel 15.2 Electrical machinery and appliances Motor vehicles 80 60 40 8.1 20 - 6.1 2.7 3.6 0.7 1.3 1.3 1.9 1.0 6.6 3.7 2.9 1.3 2.1 1.6 1.9 2.3 4.3 3.1 1.8 3.2 2.2 2.8 3.6 22.4 1996 2000 2002 2008 * 12-month rolling as of May 2008 Source: TURKSTAT, CBT 31 Public Sector Public sector has become more resilient to external shocks due to tight fiscal policy that has been implemented since 2001. The Treasury maintains a high level of FX reserves with the aim of minimizing any liquidity risk that might arise in cash and debt management. Public Sector Net Debt Stock / GDP EU Defined General Government Budget Deficit (2000 – 2008 Q2, percent of GDP) (2001 – 2007, percent of GDP) 30 25 70 66 Total Net Debt Stock 62 24.5 60 50 20 Maastricht Criteria: 3.0% 55 49 43 39 40 15 30 10.2 9.0 10 36 34 38 0.6 1.3 0.1 0 0 2001 2002 Source: Treasury 2003 2004 2005 2006 2007 28 26 35 30 28 4.5 10 29 36 29 20 5 Net Domestic Debt Net Foreign 42 Debt 14 25 17 13 6 4 28 27 24 1 1 2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 Q1 Q2 Source: Treasury 32 Central Bank Foreign Exchange Reserves Ratio of Short Term Debt to Central Bank FX Reserves Central Bank FX Reserves (2002- September 2008, billion USD) (1996 – 2008 Q1, percent) 90 160 80 76.2 71.3 70 120 58.3 60 100 48.3 50 80 40 30 140 33.7 36.0 60 27.0 20 40 10 20 0 2002 2003 Source: CBT 2004 2005 2006 2007 2008 Sep 0 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: CBT 33 Prospects for World Economy Challenges for the world economic outlook • • • • • • • • Coupling, Further squeeze in liquidity and increase in funding cost, Further deterioration of expectations and confidence in international markets, Slowdown in world economic growth, Unemployment, New architecture of financial markets • Consolidation • Reshaping of financial institutions Need for effective regulation and supervision, Coordination and cooperation among both local and cross border authorities. 34 Thank you. MEHMET YÖRÜKOĞLU CENTRAL BANK OF TURKEY DEPUTY GOVERNOR October 2008 Public Sector General Budget Primary Expenditures and Tax Revenues (Program defined, 3-month total, 2006 Q1- 2008 Q3*, Central Government Primary Balance (March 2007 – August 2008, year-on-year change, 3-month moving average, percent) TRY billion) 12 2008 2007 40 10 Tax Revenues 30 8 20 6 10 4 0 2 Primary Expenditures *July-August average Source: Undersecretariat of Treasury 08-08 07-08 06-08 05-08 04-08 03-08 02-08 01-08 12-07 11-07 10-07 09-07 08-07 07-07 Ç4 06-07 Ç3* 05-07 Ç2 04-07 Ç1 03-07 -10 0 Source: Ministry of Finance 36 Corporate Sector The FX position of the non-banking sector was USD 73.8 billion as of the first quarter of 2008. Short term net FX position of the real sector is about 2 billion USD. Maturity composition of the real sector debt has extended considerably. FX Position of the Corporate Sector Maturity Composition* of the Long-term External Debt of the Corporate Sector (2005 – 2008 Q1, billion USD) (as of July 2008, billion USD) 200 FX Assets 160 120 100 72 80 63 70 FX Liabilities 108 66 128 117 68 73 155 139 78 60.1 60 81 46 50 39.9 40 40 30 0 22.9 17.6 20 -40 -80 Net FX Position -120 10 0 2005 2006 Source: CBT 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 * Days to maturity Source: CBT 2009 2010 2011 and later 37 Households In Turkey, the practice of variable interest rate for consumer loans is limited. FX denominated loans are not extended to consumers and companies with no FX income. FX-indexed consumer loans make up only 4.1 % of total amount of consumer loans. Household indebtedness is at a low level compared to European Union and Eastern Europe countries.. 20 Ratio of FX-indexed Consumer Loans to Total Consumer Loans Ratio of Household Liabilities to GDP 70 (2004-2006, percent) (2003 – September 2008, percent) 18 63 60 57 60 16 European Union 50 14 12 40 10 Eastern Europe 8.6 30 8 23 6.4 6 4.8 3.6 4 3.9 4.1 Turkey 20 17 12 10 2 9 8 5 0 0 2003 Source: CBT 2004 2005 2006 2007 2008 Eylül 2004 Source: ECB, CBT 2005 2006 38 Commercial Activities Parallel to the economic activities that gained pace between 2002 and 2007, the number of bad checks increased in line with the number of bank checks used.The ratio of the amount of bad checks to the total checks submitted to the clearing house, which was 6.8% in 2003, declined to 5.5% in 2007. This ratio stood at 5.1% as of July 2008. Likewise, the ratio of protested bills to commercial loans (an indicator of commercial activities) declined to 2.9% in Augustos 2008 after reaching 11% in 2002. Ratio of the amount of Protested Bills to (12 months, cumulative, real) Total Commercial Loans (January 1999 – August 2008, real, percent) Ratio of Bad Checks to the Total Amount of Checks Submitted to the Clearing House (2003-2008*, percent) 7 6.8 12 10 6.0 6 8 5.6 5.5 6 5.2 5.1 5 4 2 4 2003 2004 * January-July average Source:CBT, ICHC 2005 2006 2007 2008* 0 1999 2000 Source:CBT 2001 2002 2003 2004 2005 2006 2007 2008 39 Inflation and Policy Rates Developing countries that followed a tight monetary policy in 2007 were in better position to resist inflationary pressures in 2008 as compared to countries that followed accomodative monetary policies. Change In Inflation Rate and Real Policy Rates In Developing Countries 500 Thailand 400 Israel Malaysia Change in the Inflation between August2007 and 300 August 2008 (basis points) Poland 200 S. Korea Czech Republic 100 Chile Russia Romania S. Africa Brazil Mexico Turkey 0 -2 0 2 4 6 8 10 Hungary -100 Real Policy Rate in August 2007 (ex-ante) Source: Central Banks 40