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Global Financial Crisis and Regional Responses to Prevent and Control the Impacts M.İbrahim Turhan Deputy Governor September 22, 2011 New York Background of the Crisis An extraordinary crisis; Occurred after a long period of • low interest rates and abundant liquidity, • high economic growth and low levels of inflation, • imbalances in savings and investment hence in the current account, • deregulated innovations in financial markets In terms of its source, dimensions and impacts • started in advanced countries, • had global effects, • changed long-standing perceptions in favor of emerging markets, • led to decoupling between emerging markets and advanced economies 2 Decoupling in Central Bank reactions… EM Central Banks will be more concerned about inflation whereas AE Central Banks may be more concerned about growth. Many EM policy makers already employed measures such as raising policy rates and reserve requirements to tame robust domestic demand. In EMs and developing economies, Tighter monetary policy Exchange rate appreciation Higher inflation targets AE central banks left in between hiking rates to tame inflation but risk hurting the fragile growth at its early stages. THE RISE OF EMERGING MARKETS EMs are outperforming AEs Share in World Total GDP (Percent, PPP based) GDP Annual Change (Percent, YoY) 10 70 Advanced Economies 8 65 6 60 4 55 2 50 0 45 -2 40 -4 Advanced Economies Emerging and Developing Economies -6 2006 Source: IMF WEO. 2007 2008 2009 2010 35 30 Source: IMF WEO. Emerging and Developing Economies EMs are outperforming AEs Savings and Investment Government Debt (Percent, Ratio to GDP, Average of 2000-2011) (Percent, Ratio to GDP) 120 35 Advanced economies Advanced economies Emerging and developing economies 30 Emerging and developing economies 100 25 80 20 60 15 40 10 20 5 0 0 Investment Source: IMF WEO. Gross national savings 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: IMF WEO. RESILIENCE OF THE TURKISH ECONOMY CDS of Turkey versus 900 Turkey Hungary 800 700 600 500 400 300 200 100 0 Source: Bloomberg, CBRT Bulgaria Romania Crotia Strength of Turkey Risks are limited both in financial and public sector due to appealing leverage structure; • Low debt levels of households, • Low and decreasing government debt due to fiscal discipline, • Strengthening FX positions of public and private sectors, • Hedged private sector debt under control, • Limited FX open positions and high capital adequacy ratios in banking sector, • Extending maturities of borrowing Fundamental Advantages • Young Population • Flexible labor market and hence production structure New Policy Mix • Policy rate • Reserve Requirement • Wider interest rate corridor 9 Household Debt Remains Low Ratio of FX-Indexed Consumer Loans to Total Consumer Loans (percent) Ratio of Household Liabilities to GDP (percent, Average of 2005-2010) 16 60 50 12 40 8.6 8 30 6.4 4.8 4.7 3.6 4 3.9 20 3.3 1.6 1.5 2010 Jan 2011 0 2003 2004 Source: CBRT 2005 2006 2007 2008 2009 10 0 Turkey Eastern Europe EU Source: European Central Bank, CBRT 10 Public Debt is Low Public Debt Stock (Ratio to GDP) 120 120 110 110 80 73,7 Developed G-20 Countries 90 80 80 Turkey* 70 60 60 50 50 40 40 59,2 60 52,3 50 46,1 40 45,5 39,4 39,5 2008 90 70 67,4 100 2007 100 70 41,6 30 Developing G-20 Countries 30 30 2008 2010 *Medium-Term Program (2011 -2013) Targets Source: IMF WEO October 2010, Treasury, BRSA, CBRT 2012 2014 2010 2006 2009 2004 2006 2002 2005 2000 2004 20 2003 20 2002 20 Source: Treasury, CBRT 11 Private Sector Debt is Under Control Trading Volume of Turkish Derivatives Exchange Market Currency Contracts (billion TL) Foreign Exchange Position of Non-financial Sector 25,000 20,000 15,000 10,000 5,000 0 2005 Source: Turkdex , CBRT 2006 2007 2008 2009 Source: Bloomberg, CBRT 12 100 150 6 100 4 50 2 0 0 0 Source: Eurostat, CBRT France Lithuania Latvia Bulgaria Estonia Hungary Italy Poland Romania Turkey 300 Greece 200 Belgium 150 250 Turkey Spain 200 Slovakia 400 Germany 16 Denmark 450 Austria 18 Portugal Loan to Deposit Ratio as of 2009 (percent) Loan to GDP Ratio, % (2009) Malta 300 500 Finland 250 Belgium Luxem Turkey Czech Ro man ia Greece Slo vakia lan d PoTurkey United. Czech Rep Poland ia Lith uan Germa Bulgaria Spain Hungary Bulgari Greece Holland land Fin ia Slo ven Romani Belgium Malta n ia Esto Hungar Latvia Portuga Italy Austria ce Fran France Germany Slovaki Austria Finland Sweden Italy al Po rtug Sloveni ain Sp lland Ho Ireland Estonia Denmark Lithuani Ireland ited… UnLatvia Swede Malta urg Luxembo Denmar Strength of Banking Sector Non-Performing Loans Ratio as of 2009 (percent) 14 350 12 10 Turkey 8 50 Source: Eurostat, CBRT 13 Source: Eurostat, CBRT 0 Capital Adequacy Ratio as of 2009 (percent) 30 Turkey 25 15 10 Latv ia Lithuania Es tonia Ireland Denmark Belgium Germany Franc e Holland United Greec e Slov enia Aus tria Sweden Italy Portugal Finland Lux embo Spain Romania Slov ak ia Poland Bulgaria Cz ec h Hungary Malta Turk ey Turkey Malta Bulgaria Belgium Luxembourg Holland Romania Denmark Hungary Finland United Kingdom Latvia Czech Rep. Germany Ireland Lithuania Poland Austria Sweden Slovakia Spain France Estonia Greece Italy Slovenia Portugal Strength of the Banking System Return on Assets as of 2009 (percent) 3 Turkey 2 1 20 0 -1 -2 -3 5 -4 -5 Source: Eurostat, CBRT 14 Demograpichs: Young Population Source: UN, CBRT 15 Economic Policies and Resilience Economic policies secured the resilience of the Turkish economy and Turkey has become an outperformer Monetary Policy • The CBRT introduced a policy mix; a comprehensive set of all available monetary policy tools in addition to the conventional ones in the context of liquidity management framework. o o o interest rate corridor, collateral policy, reserve requirements • Macroprudential measures to restrict domestic credit and domestic demand while keeping the short term interest rate differentials as low as possible. • The monetary policy stance in this framework is determined not only by policy rates, but also other the policy instruments. 16 Economic Policies and Resilience Economic policies secured the resilience of the Turkish economy and Turkey has become an outperformer Fiscal Policy • Prudent fiscal policy and a credible medium term program strengthened the predictability and hence decreased the risks • Decreasing debt ratio eliminated fiscal dominance. Regulation Policy • Restrictions on loan to value ratio, credit card borrowing, and consumer lending. • Households are not allowed to borrow in FX. • Unlimited responsibility for bank owners and executive directors. 17 The Policy Mix CBRT Policy Rate 25 TL Reserve Requirement Ratios O/N Lending - Borrowing Interest Rate Corridor 1- week Repo Rate 20 Adoption of 1-week repo rate as the policy rate 15 10 5 0 Source: CBRT. Source: CBRT. 18 TURKEY AND THE BALKAN COUNTRIES The Balkans Leading investor nations in the Balkans have economical problems. • Austria: Banking sector exposure to Eastern Europe countries because of excessive euro denominated credit lending to households and corporates which do not have FX income. • Italy: High debt to GDP ratio, structural problems • Greece: High debt to GDP ratio, structural problems, political instability Ongoing problems of Greek and Italian economies regarding the sustainability of their sovereign debt have potential to threat the Euro zone. Greek and Italian economies have own problems CDS Spreads 5047 3000 2500 Greece 2000 1500 1000 Italy 500 Turkey 0 Source: Bloomberg, CBRT 21 The Balkans and Turkey Common History Culture Economy Future Integration to European Union * Official candidate states: Croatia FYR Macedonia Montenegro Turkey * Potential candidate states: Albania Bosnia and Herzegovina Serbia Turkey versus Growth (2010, Percent, GDP annual change) 10 8 6 4 2 0 -2 -4 -6 Source: IMF WEO, CBRT 23 Turkey versus Annual Average Employment Growth* (2007-2010) % *Difference of natural logarithms Source: WEO, Turkstat, CBRT 24 Turkey versus Unemployment Change During 2009-2010 (Percent of Total Labor Force) 4 3 2 1 0 -1 -2 -3 Turkey EU-15 Italy Romania Portugal Serbia Spain Greece Bosnia Her. Croatia Bulgaria Source: IMF WEO, CBRT 25 Turkey versus Budget Deficits (percent of GDP) 18 2009 2010 16 14 12 10 8 6 4 2 0 Source: Treasury, IMF, CBRT 26 Summary Turkey and the Balkan countries can benefit from cooperating with each other. Turkey has experiences of structural reform programmes, building stability, ensuring economic development and EU membership process to guide the Balkan countries. The Balkan countries and Turkey have always been an integrated economic area. Commonalities between our nations offer a huge opportunity beneficial to all parties. Global Financial Crisis and Regional Responses to Prevent and Control the Impacts M.İbrahim Turhan Deputy Governor September 22, 2011 New York