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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