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Formulating Monetary Policy In The Face of Current Global Challenges Turalay Kenç Deputy Governor October 2, 2012 Contents • RISING ROLE OF EMES IN THE WORLD ECONOMY • WHY HAS TURKEY’S MONETARY POLICY BECOME EFFECTIVE? - TURKEY’S STOCK BALANCES - RICH MONETARY FRAMEWORK • MONETARY POLICY RESPONSE AGAINST GLOBAL CHALLENGES 2 RISING ROLE of THE EMEs 3 Share of EMEs in the world GDP has been increasing. Shares in the World GDP (%, GDP Based on PPP) 80 70 60 50 40 30 20 Advanced economies 10 Emerging and developing economies 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: HSBC, World in 2050, January 2012 4 Both stock and flow balances in EMEs are better than those of ACs. Growth prospects are better. Unemployment rates in G7 are higher. Stock balances (Public debt/GDP etc.) are better. Risk premia are better. 5 Policy space and effectiveness in EMEs are bigger than those of ACs. Close to zero effective rates in ACs Constraints to QE policies in ACs (collateral etc.) High budget deficit and debt stock Low macroprudential buffers 6 The impact of transmission channels has been weakening. Trade Channel: Increased trade between EM Financing Channel: Buffers such as FX reserves, CCSs and collateral agreements Expectation Channel: Policy Coordination in EMEs 7 WHY HAS TURKEY’S MONETARY POLICY BECOME EFFECTIVE? - TURKEY’S STOCK BALANCES - RICH MONETARY FRAMEWORK 8 Fiscal dominance continues to decline… Public Debt Stock (% of GDP) 80 74 70 67.7 60 59.6 52.7 50 40 46.5 46.1 39.9 40 42.4 39.4 37 35 32 30 20 10 0 Source: Treasury, CBRT *MTP forecasts (2012-2014) 9 …with significant improvement in its composition. Average Maturity of Domestic Borrowing** Currency Composition (%) FX 80 90% 80% 46.3 41.5 37.6 37.2 26.7 29.6 27.2 31.3 33.8 29.1 60.8 60 58.1 50 60% 44.1 44.7 40 50% 30% 53.7 58.5 62.4 62.8 73.3 70.4 72.8 68.7 66.2 70.9 30 20 28 35.3 31.7 14.8 41.9 10 27.7 2006 34 40% 20% 70 2005 70% (month) TL 100% 9.4 11.6 10% *August 2012 Source: Treasury 2012* 2011 2010 2009 2008 2007 2004 2003 2012* 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 Source: Treasury, CBRT 2002 0 0% *August 2012 **Flow data 10 While real sector liabilities are low… Household Liabilities Corporate Liabilities (% of GDP) (% of GDP) Brazil Turkey Litvania Slovakia Hungary Slovenia Czech Rep Poland Hungary Latvia Israel Italy Estonia Belgium Austria France Germany Greece Finland Spain Sweden US S. Korea Portugal UK Ireland The Netherlands Denmark Hungary UK Germany Finland Germany Turkey 35.1 France Greece Sweden Austria Italy Denmark Ireland The Netherlands Portugal Spain 0 Source: ECB, CBRT. Poland 19.0 50 100 150 0.0 20.0 40.0 60.0 80.0 100.0 Source: ECB, CBRT. 11 …housing loans do not pose a risk. Housing (Mortgage) Loans (% of GDP) Turkey Brazil Hungary Poland Belgium Italy Romania Austria Estonia Greece Germany Israel France Finland Korea Luxembourg Ireland Spain Sweden The Netherlands Portugal UK Denmark 5.6 0 20 40 60 80 100 120 140 Source: ECB, CBRT. 12 Banking sector capital base presents a healthy outlook. Financial Soundness of the Banking Sector (%) Capital Adequacy Ratio (as of 2011 Q4, %) 20 18 30 1.6 1.4 16.6 25 16 1.2 14 20 1.0 12 10 15 0.8 08 10 06 CAR 04 05 0.6 0.4 Liquidity Index (RHS) 0.2 02 00 00 Source: FSI - IMF, CBRT. Return on Equity Latest Observation: June 2012 for Turkey 0.0 Source: CBRT. 13 …as well as the NPL ratios. NPL Ratios Financial Soundness of the Banking Sector (%) (as of 2011 Q4, %) 12 Growth of Credit Portfolio Delinquency Rate (RHS) Coverage Index (Provisions / Non-performing Loans) (RHS) 10 45 6 40 08 5 35 30 06 4 25 3 20 04 15 2.7 2 10 02 1 05 00 Source: FSI - IMF, CBRT. 00 0 *2010 14 FX position of households presents a healthy outlook. Real Sector FX Assets and Liabilities Net FX Positions (%) (Cumulative Figures, Billion USD) 60 58 56 54 80 12.09 FX Assets / FX Liabilities 12.10 12.11 08.12 60 40 20 52 50 48 0 -20 46 -40 44 -60 42 40 -80 -100 38 -120 36 -140 Households Source: CBRT. CBRT Banking Public Corporates TOTAL Source: CBRT BOP Statistics. 15 Export diversification continues. Export Diversification (Yearly % contribution) 40 Other North, Central and South America 30 MENA Europe exc. EU 20 EU 10 0 -10 -20 01-10 Source: Turkstat 04-10 07-10 10-10 01-11 04-11 07-11 10-11 01-12 04-12 Latest Observation: June 2012 16 Exchange rate volatility is low compared to Major EMEs. Implied Volatility: Major EM Countries vs. Turkey (12-month, %) 30 Turkey 25 Emerging Economies 20 15 10 5 Source: Bloomberg. Latest Observation: September 2012 17 Interest rate volatility is also low compared to Major EMEs. Implied Volatility: Major EM Countries vs. Turkey (benchmark rates, standard deviation, 20-day moving window) 0.35 0.3 Emerging Economies* 0.25 0.2 Turkey 0.15 0.1 0.05 Source: Bloomberg. Source: CBRT. 08/12 06/12 04/12 02/12 12/11 10/11 08/11 06/11 04/11 02/11 0 Latest Observation: September, 2012 18 Rich Monetary Framework Aggregate Demand Management + Liquidity Management INSTRUMENTS CREDIT POLICY KEY INDICATORS OBJECTIVES Reserve Requirement Reserve Option Coefficient PRICE STABILITY (Primary Objective) INTEREST RATE POLICY Expectations Weekly Repo Rate TL Liquidity Management Interest Rate Corridor OMO and Effective Funding Rate FX Liquidity Management Reserve Option Coefficient Credit Growth FINANCIAL STABILITY LIQUIDITY POLICY 19 Markets consider Turkey as an investment grade country. CDS Rates (5Y, January 29, 2009=0) 1500 Brazil Turkey 1200 Spain Italy 900 Mexico Portugal 600 Ireland Belgium 300 Indonesia 0 -300 -600 Source: Bloomberg, CBRT. Latest Observations: October 1, 2012. 20 Anchored inflation expectations indicate effective monetary policy. Medium Term Inflation Expectations (%) 14 Actual CPI 12-month 24-month IT 12 11.14 10 9.07 8.88 8 7.5 6.5 6 5.5 5 4 5 4 4 2 Source: CBRT. 21 MONETARY POLICY RESPONSE AGAINST GLOBAL CHALLENGES 22 While ACs’ central banks pumping liquidity… Policy Rates in Advanced Economies Liabilities of Major Central Banks (%) (% of GDP) 35 6 FED USA 30 5 Euro Area ECB BOJ Japan 25 4 UK 3 20 2 15 1 10 0 5 Source: Bloomberg Last Observation: August 2012 Source: Bloomberg Last observation: August 2012 23 …global stress increases the capital flow volatility. Capital Inflows to Emerging Markets (Billion USD) 10 Bond Flows Borçlanma Senedi Fonları Hisse EquitySenedi Flows Fonları 8 6 Sources of Volatility 4 EZ Problems 2 0 Results of QE Policies -2 -4 Risks on energy prices -6 US and China growth -8 040712 230512 110412 290212 180112 071211 261011 140911 030811 220611 110511 300311 160211 050111 -10 Source: EPFR, Bloomberg. 24 Main financial stability concern in 2010 was the current account balance. Main Sources of Current Account Deficit Finance* Current Account Balance (Seasonally Adjusted, Quarterly Average, Million USD) 2000 (12-months Cumulative, Billion USD) 80 1000 70 0 60 -1000 Portfolio and Short-Term* FDI and Long-Term** Current Account Deficit 50 -2000 40 -3000 30 -4000 20 CAB -5000 10 -6000 CAB (excluding energy) 0 -7000 -10 -8000 1 2 3 2008 4 1 2 3 2009 4 1 2 3 2010 4 1 2011 2007:09 2007:11 2008:01 2008:03 2008:05 2008:07 2008:09 2008:11 2009:01 2009:03 2009:05 2009:07 2009:09 2009:11 2010:01 2010:03 2010:05 2010:07 2010:09 2010:11 2011:01 -20 4 Source: TURKSTAT, CBRT. • • Current account (CA) deficit widened significantly In contrast to pre-crisis episodes, most of CA deficit was financed by short-term capital flows *Short-term capital movements are sum of banking and real sectors' short term net credit and deposits in banks. Long-term capital movements are sum of banking and real sectors’ long term net credit and bonds issued by banks and the Treasury. Source: CBRT. 25 Credit growth was very strong. Credit Change and CA Deficit / GDP Total Loan Growth Rates (13-Week m.a., Annualized, FX Adjusted, Percent) (12 month cumulative, Percent) 10 14 60 12 8 45 10 30 CA Deficit / GDP 6 8 15 6 4 0 4 2 Jan-11 Nov-10 Sep-10 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 Jan-09 Nov-08 -30 Δ in Credit Stock / GDP (right axis) 0 2 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 -15 Source: CBRT • • Credit growth was very strong Positive correlation between credit growth and CA deficit 26 Monetary policy aimed to establish rebalancing. Rising current account deficit financed by portfolio and short term capital inflows have increased the risk of a sudden stop Engineering a soft-landing without hampering the primary objective of price stability 27 Rich monetary policy framework employed against global risks. Predominant Policy Before August 2011 Macroprudential Tightening After October 2011 Monetary Tightening 28 Interest rate corridor, OMO and RRR were used actively. 13 Interest Rate Corridor Reserve Requirements (%) (%) Interest Rate Corridor ISE Repo/Reverse Repo 12 18 The range of RRR 16 Average Funding Rate 11 14 10 12 9 10 8 8 7 6 6 4 5 4 Source: CBRT. Weighted average RRR 2 0 Source: CBRT. 29 Reserve Option Coefficient is introduced as an automatic stabilizer. Automatic Stabilizer Excess Reserve Coefficient 2,0 1,9 1,7 1,4 1,1 Source: CBRT. 40 45 50 55 60 Amount to be held in FX (%) 30 Deceleration in loan growth has been achieved. Consumer Loan Growth Rates Total Loan Growth Rates (13-Week M.A., Annualized, FX Adjusted, Percent) (13-Week M.A., Annualized, FX Adjusted, Percent) Consumer loans (2012) 45 Consumer loans (2007-2011) Total Credits(2012) Total Credits (2007-2011) 40 40 35 35 30 30 25 25 20 20 15 15 Week 52 49 46 43 40 37 34 31 28 25 22 19 16 13 10 7 4 52 49 46 43 40 37 34 31 28 25 22 19 16 13 10 0 7 0 4 5 1 5 1 10 10 Week Source: CBRT. 31 Domestic demand grows at a moderate pace. Final Domestic Demand and Exports (Seasonally Adjusted, 2008Q1=100) 115 Export 110 Final Domestic Demand 105 100 95 90 85 80 75 70 1 2 3 2005 4 1 2 3 2006 4 1 2 3 2007 4 1 2 3 2008 4 1 2 3 2009 4 1 2 3 2010 4 1 2 3 2011 4 1 2 2012 Source: CBRT, Turkstat. 32 Employment continues to increase. Employment Rate (%, seasonally adjusted) 46 45 44 43 42 41 40 39 38 37 Source: Turkstat, CBRT 33 Reforms have been introduced to control current account deficit… Increasing Domestic Savings • Sustaining Fiscal Discipline • Increasing Household and Firm Savings Transition to government subsidized New Private Pension Scheme Regulations on supporting insurance sector Decreasing Foreign Dependence in Energy 34 ..in both structural and conjunctural aspects. Increasing competitiveness, diversity of goods and markets • New Incentive System • Input Provision Strategy (GİTES) • Diversifying export markets Increasing the quality of financing • Encouraging long-term savings • Supporting corporate (firms and banks) bond issuance • Diversifying government debt instruments: Rent Certificates • Tax incentives for Private Participation Capital and Venture Capital Funds 35 Therefore, rebalancing continues. Current Account Balance (12-month cumulative, Billion USD) 90 80 MTP December 2012 Forecast 70 60 50 40 30 20 10 0 Source: CBRT, Turkstat 36 Inflation is expected to converge to target in 2013. Inflation (%, yearly change) 14 Actual CPI Inflation SCA-I Change CBRT Year-End Forecast IT 12 10 8.88 8 7.17 6 6.2 5 4 2 09.12 05.12 01.12 09.11 05.11 01.11 09.10 05.10 01.10 09.09 05.09 01.09 09.08 05.08 01.08 09.07 05.07 01.07 09.06 05.06 01.06 0 Source: CBRT. 37 Formulating Monetary Policy In The Face of Current Global Challenges Turalay Kenç Deputy Governor October 2, 2012