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CENTRAL BANK OF THE REPUBLIC OF TURKEY PRESENTATION BEFORE THE COUNCIL OF MINISTERS / THE PLANNING AND BUDGET COMMISSION OF THE GREAT NATIONAL ASSEMBLY OF TURKEY Durmuş YILMAZ Governor 21 April 2009 1 Presentation Outline I. International Developments II. Effects of the Global Financial Crisis on the Turkish Economy III. Financial Stability in Turkey IV. Inflation Outlook V. Monetary Policy Stance 2 I. International Developments 3 Global Crisis The turmoil in the global markets that broke out in July 2007 has not yet come to an end. What differs this crisis from previous banking crises is that it is not a “classical banking crisis”; it covers complex and large-volume derivative products. Risk Appetite Index Market Capitalization (Jan 2005 – Apr 2009) (2001 – 2008*, USD trillion) 70 10 US Stock Market US Bond Market US Mortgage Based Securities Market Credit Default Swap Market 60 Euphoria 8 6 50 4 40 2 30 0 Increasing Risk Aversion -2 20 -4 10 Panic -6 0 2001 2002 2003 2004 2005 2006 2007 2008 -8 2005 2006 2007 2008 2009 * CDS data as of the first half of 2008 Source: ISDA, WFE, SIFMA Source: Credit Suisse, CBT 4 Global Crisis The liquidity crunch has been eliminated to a large extent as a result of monetary policy measures. Nevertheless, asset write-downs and other losses incurred in this period eroded the capitals of financial institutions and caused massive damage on balance sheets. Losses Incurred by the Global Banking Sector The Difference Between 3-Month LIBOR Rate and 3-Month US Treasury Bills (TED Spread) (2007 Q2 – 2009 Q1, billion US Dollars, cumulative) (January 2007 – April 2009, basis points) 500 450 Liquidity measures taken by the central banks and the IMF 1400 World 1200 400 1000 350 USA 300 800 250 600 200 Europe 400 150 200 100 50 0 0 01-07 04-07 07-07 10-07 01-08 04-08 07-08 10-08 01-09 04-09 Source: Bloomberg, CBT 2007 Ç2 ve Öncesi 2007 Ç3 2007 Ç4 Source: Bloomberg, CBT 2008Ç1 2008 Ç2 2008 Ç3 2008 Ç4 2009 Ç1 5 Global Crisis Financial institutions that managed to survive are still reluctant to extend credits to the non-financial sector. As a consequence, credit conditions remain tight. Shares of the Banks Tightening Credit Conditions Credit Default Swap (CDS) Premia (2006 Q1 – 2009 Q1, percent) (June 2007 - April 2009, basis points) 600 90 1200 Bankruptcy of Lehman Brothers USA 80 500 70 Europe 60 400 800 Developing Countries (right axis) 50 40 1000 300 600 200 400 100 200 30 20 10 0 -10 06 Q1 06 Q3 07 Q1 07 Q3 08 Q1 Source: Federal Reserve and European Central Bank, CBT 08 Q3 09 Q1 0 06-07 Firms with credit rating BBB and higher * (left axis) 09-07 12-07 03-08 06-08 09-08 * Firms with BBB or higher credit ratings in the USA Source: JP Morgan, CBT 0 12-08 03-09 6 Global Crisis Extreme tightness in financial conditions still persists despite measures taken by monetary and fiscal authorities. Financial Conditions Index Size of Financial Rescue Packages* (January 2005 – February 2009) (2008 - 2010, relative to 2007 GDP baseline, percent ) 103 2008 2009 2010 China 0.4 3.2 2.7 S. Korea 1.1 2.3 1.3 Russia 0.0 2.3 1.6 USA 1.1 2.0 1.8 S. Africa 1.7 1.8 - Canada 0.0 1.5 1.3 Germany 0.0 1.5 2.0 Mexico 0.0 1.5 - 96 Japan 0.4 1.4 0.4 95 France 0.0 0.7 0.7 India 0.6 0.6 - Brazil 0.0 0.4 0.2 Tight 102 101 USA 100 99 EU 98 97 Japan Loose 94 2005 2006 Source: Goldman Sachs, CBT 2007 2008 2009 * Excluding financial sector support. Source: IMF,CBT 7 Effects on the Global Economy The effect of the global financial crisis on world economies has emerged in an abrupt and devastating manner since the last quarter of 2008. Industrial Production in Developed and Developing Countries GDP Growth Projections for 2009 (annual percentage change) 15 2 Developing Countries 1 10 0 Euro Zone -1 -2 -3 (January 2001 – February 2009, annual percentage change) 5 0 USA -5 -4 -10 Source: Consensus Forecasts, CBT -15 01-09 07-08 01-08 07-07 01-07 07-06 01-06 07-05 01-05 07-04 01-04 07-03 01-03 07-02 -20 01-02 Japan 09-08 10-08 11-08 12-08 01-09 02-09 03-09 07-01 -6 Developed Countries 01-01 -5 Source: Bloomberg, CBT 8 Effects on the Global Economy Global trade displays a sharp downturn on quantity and value bases owing to the deterioration in financing conditions and the decline in aggregate demand. Global Trade Unit Value Index Global Trade Quantity Index (January 2003 – January 2009, annual percentage change) (January 2003 – January 2009, annual percentage change) 30 20 25 15 20 15 10 10 5 5 0 0 -5 -5 -10 -15 2003 2004 Source: CPB, CBT 2005 2006 2007 2008 2009 -10 2003 2004 2005 2006 2007 2008 2009 Source: CPB, CBT 9 Confidence Indices and Leading Indicators The downward trend in leading indicators and confidence indices led by malfunctioning of the credit mechanism in the last quarter of 2008 has recently been replaced by a partial recovery. Global Purchasing Managers’ Index (PMI) And Leading Indicators Baltic Dry Index (January 2002 – Apr il 2009) (January 2004 – March 2009) 70 4 14,000 65 Global Leading Indicators 3 (right axis) 12,000 60 2 55 1 50 0 Global PMI (left axis) 45 -1 40 -2 35 -3 30 -4 25 -5 20 2004 -6 2005 2006 Source: Bloomberg, Goldman Sachs, CBT 2007 2008 2009 10,000 8,000 6,000 4,000 2,000 0 2002 2003 2004 2006 2007 2009 Source: Bloomberg, CBT 10 II. Effects of the Global Financial Crisis on the Turkish Economy 11 Financial Developments in Turkey The recent recovery in global risk perceptions has favorably affected Turkey’s risk premium, domestic market interest rates and exchange rates. Foreign Exchange Rates Risk Indicators (1 July 2008 – 17 April 2009, Value of the US Dollar in Terms of Various Currencies, July 2008=100) (1 January 2008 - 17 April 2009, basis points) 170 1000 Central and Eastern Europe Index* (right axis) 160 900 150 800 EMBI+ 140 700 130 600 120 500 TRY / USD (left axis) 110 EMBI+Turkey 400 300 100 90 200 01-08 03-08 05-08 Source: Bloomberg, CBT 07-08 09-08 11-08 01-09 03-09 80 04-08 06-08 08-08 10-08 12-08 02-09 04-09 * Central and Eastern Europe Index: Equally-weighted average of the national currencies of the Czech Republic, Croatia, Hungary, Lithuania, Poland, Romania, Slovakia and Ukraine. Source: Bloomberg, CBT 12 Financial Developments in Turkey Turkey’s risk indicators performed relatively better in this period. Volatility in the foreign exchange and capital markets in Turkey remained fairly restricted compared to other countries. Exchange Rate Volatility Stock Market Volatility (September 2008 - March 2009, standard deviation of daily changes in foreign exchange rates) (September 2008 - March 2009, standard deviation of daily changes in indices) New Zealand Chile Chile Colombia Colombia Mexico Poland Czech Rep. S. Africa New Zealand Mexico Turkey Turkey India Hungary Korea Poland Hungary S. Africa Argentina Czech Rep. Korea Brazil Brazil 0.012 Russia 0.014 0.016 Source: Bloomberg, CBT 0.018 0.020 0.022 0.024 0.026 0.015 0.025 0.035 0.045 0.055 0.065 Source: Bloomberg, CBT 13 Financial Developments in Turkey Turkey’s risk premium has resisted the deterioration in global risk perceptions more than implied by her credit rating. Countries that enjoyed a decline in their risk premia, as in the case of Turkey, also enjoyed room for policy rate cuts. Change in Credit Ratings and Risk Premiums of Countries Change in Policy Rates and Countries’ Risk Premia (12 September 2008 - 17 April 2009) (12 September 2008 - 13 April 2009) 450 Russia 400 India Hungary 350 Change in CDS (basis points) Change in CDS (basis points) 400 300 Mexico Korea 250 Poland S. Africa Czech Rep. Chile 200 Colombia Brazil 150 India 350 Hungary 300 Mexico 250 Korea 200 Brazil Chile 150 Poland S. Africa Czech Rep. Colombia Turkey Turkey 100 100 0 2 4 6 S&P Credit Ratings(1=A+, 9=BB-) Note: Trend line includes countries other than Turkey. Source: Bloomberg, CBT 8 -6 -5 -4 -3 -2 -1 0 1 Change in Interest Rates (percent) Note: Trend line includes countries other than Turkey. Source: Bloomberg, CBT 14 Turkish Economy Along with other countries, Turkey is also experiencing a marked economic slowdown due to the hightened risk perceptions and adverse effects of the global crisis on the banks’ funding facilities. Growth Components Growth components (2006 Q4 – 2008 Q4, year-on-year contribution, percent) (2006 Q4 – 2008 Q4, year-on-year contribution, percent) 10 10 GDP Net Exports 8 6 8 Agriculture 6 4 4 2 2 0 0 -2 Industry Construction Services -2 -4 -4 Final Domestic Demand -6 -6 Source: TURKSTAT, CBT Source: TURKSTAT, CBT 08 Q4 08 Q3 08 Q2 08 Q1 07 Q4 07 Q3 07 Q2 07 Q1 -8 06 Q4 08 Q4 08 Q3 08 Q2 08 Q1 07 Q4 07 Q3 07 Q2 07 Q1 06 Q4 -8 15 Turkish Economy Domestic demand underwent a sharp decline mainly owing to the shrinkage in private consumption and investment expenditures. Growth Components GDP and Final Domestic Demand (2007 Q1 – 2008 Q4, year-on-year contribution, percent) (2004 Q1 – 2008 Q4, seasonally adjusted, in constant prices of 1998, billion TL) 6 28 Final Domestic Demand 4 27 26 2 GDP 25 0 24 -2 23 -4 22 Final Government Expenditures Net Exports 21 Gross Capital Formation -6 Stock Changes Resident Households' Consumption Expenditures Source: TURKSTAT, CBT 08 Q4 08 Q3 08 Q2 08 Q1 07 Q4 07 Q3 07 Q2 07 Q1 06 Q4 06 Q3 06 Q2 2008 Ç4 06 Q1 2008 Ç3 05 Q4 2008 Ç2 05 Q3 2008 Ç1 05 Q2 2007 Ç4 05 Q1 2007 Ç3 04 Q4 2007 Ç2 04 Q3 2007 Ç1 04 Q2 -8 04 Q1 20 Source: TURKSTAT, CBT 16 Production Side The downtrend in seasonally adjusted data for industrial production, which has been continuing since April 2008, became more apparent as of December. Industrial Production Index* (January 2006 – February2009) and Capacity Utilization Ratio* (January 2006 – March 2009) 85 125 120 80 Capacity Utilization Ratio (left axis) 115 75 110 Industrial Production Index (right axis) 70 105 100 65 95 60 01-05 90 07-05 01-06 07-06 01-07 07-07 01-08 07-08 01-09 * Seasonally adjusted Source: TURKSTAT, CBT 17 Domestic Demand Side Domestic demand indicators maintain their weak course, albeit a limited recovery was observed compared to the previous quarter. Domestic Sales of White Goods* (January 2007 – February 2009) and Automobiles* Demand Indicators (January 2007 – March 2009) (January 2007 – March 2009, December 2006=100) 60 170 PMI – New Orders Index* 150 Automobile Sales 40 130 20 110 0 90 -20 BTS – Next 3 Months’ Domestic Order Expectation** White Goods Sales -40 70 -60 50 01-07 05-07 09-07 * Seasonally adjusted Source: WGSA, AMA, CBT 01-08 05-08 09-08 01-09 01-07 05-07 09-07 * PMI: Purchasing Managers’ Index ** Business Tendency Survey Source: ABN Amro, CBT 01-08 05-08 09-08 01-09 18 Consumer Confidence and Expectations The deterioration in consumer confidence indices that had displayed a sharp decline due to the impact of global crisis stopped in recent period. Consumer Confidence Index* Growth Expectations* (January 2007 – March 2009) (January 2008 – April 2009, percent) 110 6 2008 5 100 2007 4 90 Consumer Confidence Index (CBT) 80 3 2009 2 1 70 60 0 Consumer Confidence Index (CNBC-e) -1 -2 50 01-07 05-07 09-07 * Seasonally adjusted Source: CNBC-e, CBT 01-08 05-08 09-08 01-09 -3 04-06 10-06 04-07 10-07 04-08 10-08 04-09 * CBT Survey of Expectations. Growth expectations for each year is indicated by adding the expectations for the next year to that of the current year. Source: CBT 19 Credit Market The downtrend in bank loans that started in the third quarter of 2008 continued throughout March due to the developments in supply and demand-side. Monthly Changes in Business and Consumer Loans Domestic Real Credit Volume (January 2006 – March 2009, January 2006=100) 190 (January 2008 – March 2009, 4–week moving average, percent) 1.5 180 1.0 170 160 Consumer Loans 0.5 150 0.0 140 130 -0.5 Corporate Loans 120 -1.0 110 100 01-06 07-06 Source: BRSA, CBT 01-07 07-07 01-08 07-08 01-09 -1.5 01-08 03-08 05-08 07-08 09-08 11-08 01-09 03-09 Source: BRSA, CBT 20 Labor Market Data on labor market confirm the rapid slowdown in economic activity. Unemployment Rates* Change in Non-agricultural Unemployment* (January 2000 - January 2009, percent) (January 2000 - January 2009, quarterly change, thousand people) 20 500 400 Non-agricultural Unemployment Rate 16 300 200 12 100 0 Unemployment Rate 8 -100 -200 4 *Seasonally adjusted Source: TURKSTAT, CBT 01-09 01-08 01-07 01-06 01-05 01-04 01-03 01-02 01-01 01-00 01-09 01-08 01-07 01-06 01-05 01-04 01-03 01-02 01-01 01-00 -300 *Seasonally adjusted Source: TURKSTAT, CBT 21 Labor Market Though the rise in the labor force participation has been influential on the rise in the unemployment rate, albeit partly, the slowdown in employment is believed to be the main determinant. Total Labor Force and Employment 1400 Ratio of Urban Employed Population to Total Population Over the Age of 15 (January 2007 – January 2009, annual change, thousand people) (December 2000 – January 2009, annual moving average, percent) 67 24 1200 1000 65 22 Women 800 Men (left axis) 63 600 20 Men 400 61 18 59 16 200 Women (right axis) -200 57 Source: TURKSTAT, CBT 14 2009 2008 2006 2005 2004 2003 12 2002 55 2001 1-09 10-08 7-08 4-08 1-08 10-07 7-07 4-07 1-07 -600 2000 Employment -400 2007 0 Source: TURKSTAT, CBT 22 Labor Market The decline in non-agricultural employment in January 2009 on annual basis was mainly driven by the employment loss in industrial sector. Contribution to Non-Agricultural Employment (January 2007 - January 2009, percent contribution year-on-year) 5 Services 4 Construction Industrial 3 2 1 0 -1 -2 01-09 11-08 09-08 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 03-07 01-07 -3 Source: TURKSTAT, CBT 23 Foreign Trade The seasonally adjusted data indicate that the deterioration in exports that started in October 2008 stabilized in early 2009. Nevertheless, in view of the global demand conditions, the recovery in exports is predicted to take a long time. Export Volume Index * (January 2007 – February 2009) and Expectations for Exports** (January 2007 – March 2009) Real Exports and Imports* (January 2005 – February 2009, 2005=100) 50 25 40 20 30 15 20 10 10 5 0 0 -10 -5 Export Volume Index (right axis) -20 -10 -30 150 Exports 140 130 120 110 100 Exports (excluding gold) -15 Current Export Orders (left axis) -40 -20 -50 -25 01-07 05-07 09-07 01-08 05-08 09-08 01-09 * Quarterly cumulative percentage change ** Difference between increase and decrease in expectations for exports in the Business Tendency Survey (moved one month) Source: TURKSTAT, CBT 90 80 2005 2006 2007 Imports 2008 2009 * Workday adjusted, deflated by respective price indices and seasonally adjusted. Source: TURKSTAT, CBT 24 Balance of Payments Foreign trade deficit and current account deficit have been significantly narrowing since the third quarter of 2008. The financing requirement has sharply declined owing to the recovery in current account balance. Foreign Trade Balance Current Account Balance (January 2005 – February 2009, billion USD) (January 2005 – February 2009*, CAD to GDP Ratio, percent) 7 45 Energy 40 6 Energy 5 35 4 30 3 25 2 Non-energy Current Account* 1 Trade Deficit Excluding Energy 20 15 0 -1 10 01-05 07-05 01-06 07-06 01-07 Source: TURKSTAT, CBT 07-07 01-08 07-08 01-09 -2 01-05 07-05 01-06 07-06 01-07 07-07 01-08 07-08 01-09 * Forecast Source: TURKSTAT, CBT 25 Balance of Payments While the share of corporate sector in financing of the current account deficit narrowed, that of direct capital inflow pursued a stable course. Selected Capital Account Figures in Relation to Current Account (January 2006 – February 2009, 12-month moving average, percent) 100 80 Non-bank Sector Credits2 60 40 Direct Investment 3 Bank Credits 1 20 0 Portfolio Investments 4 -20 01-06 05-06 09-06 01-07 05-07 09-07 01-08 05-08 09-08 01-09 1 Bank Credits: Short and long term foreign liabilities of the domestic banking sector 2 Non-bank Sector Credits: Short and long term net foreign credit liabilities of the non-bank sector 3 Direct Investment: Direct Investment Flows 4 Portfolio Investments: Equity and treasury bill purchases of foreign residents 26 Balance of Payments The private sector debt rollover ratio, which decreased to 75 percent in November 2008, stood at 88 percent in the first two months of 2009. Private Sector Debt Rollover Ratio* Private Sector Debt Rollover Ratio* (January 2000 – February 2009, Ratio of External Debt Utilization to capital payments, percent) (January 2008 – February 2009, Ratio of External Debt Utilization to Capital Payments, percent) 260 160 150 140 12 month moving average Non-banks Sectors 220 Banks 130 180 120 110 140 100 90 100 80 Ticari Krediler 70 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 * Total of short and long-term commercial, banking sector and other sector credits. Source: TURKSTAT, CBT 60 1-08 3-08 5-08 7-08 9-08 11-08 1-09 * Total of short and long-term credits Source: TURKSTAT, CBT 27 Balance of Payments Balance of Payments Developments in October 2008- February 2009 period USAGE Billion USD Current Account Balance -5.3 Portfolio Investments -8.8 (Equity Equity, Equity Debt instruments, Currency and Deposits ) Credits (Trade, Banks, Government, Other Business Services) -9.7 SOURCE Net Errors and Omissions Billion USD 14.9 FDI 5.2 Other 2.0 Reserve Assets 1.7 (Official Reserve, FX Deposit in Banks) Net Errors and Omissions Residents in Turkey have transferred FX deposits from abroad to banks in Turkey due to the certain reasons like Repatriation Amnesty. Savings not registered in the banking sector have been sold in exchange for Turkish Lira. Foreign currency losses/gains realized during the accounting of the FX transactions. 28 III. Financial Stability in Turkey Banking Sector Corporate Sector Household Public Sector 29 Banking Sector The banking system in Turkey entered the global crisis with a relatively strong position. The main factor reinforcing the resilience of our economy in the face of the global crisis is the sound and stable structure of our financial system. FX Position Net FX Position (January 2008 – April 2009, billion USD) (2000 Q1 – 2009 Q1*, billion USD) 14 14 Off balance sheet position 12 10 12 10 8 8 6 6 4 4 2 2 0 -2 0 -2 -4 -4 -6 -6 -8 -8 -10 -10 On balance sheet position -12 -14 01-08 02-08 04-08 Source: BRSA, CBT 05-08 07-08 09-08 10-08 01-09 03-09 1 0 -1 -2 -3 -4 -5 -6 -12 -14 -7 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 * As of 4 February 2009 Source: BRSA, CBT 30 Banking Sector High level of capital adequacy ratio and short-term liquidity adequacy ratio and low level of FX positions have enhanced resilience of our financial system. Capital Adequacy Ratio Short-term FX Liquidity Adequacy Ratios (July 2007 – February 2009, percent) 24 300 20 250 16 200 12 150 (1 January 2008 – 3 April 2008, percent) 0-7 days Up to 1 month Target ratio: 12 percent 8 100 Legal limit: 8 percent Source: BRSA, CBT 03-09 01-09 11-08 09-08 07-08 05-08 03-08 Legal limit: 80 percent 01-08 01-09 11-08 09-08 07-08 05-08 03-08 01-08 0 11-07 0 09-07 50 07-07 4 Source: BRSA, CBT 31 Banking Sector Non-performing loan ratio has been increasing since September 2009. Non-Performing Loan Ratio (March 2005 – April 2009, percent) 10 9 8 Credit Cards 7 6 5 Commercial Loans 4 3 Consumer Loans 2 1 0 03-05 09-05 03-06 09-06 03-07 09-07 03-08 09-08 03-09 Source: BRSA, CBT 32 Corporate Sector The FX position of the non-banking sector reached USD 78 billion by the last quarter of 2008. Firms’ FX Assets and Liabilities Maturity Composition of Firms’ Outstanding Long-Term FX Denominated Foreign Debt* (2005 – 2008 Q4 billion USD) (February 2009, billion USD) FX Liabilities 200 45 167 161 154 FX Assets 150 129 100 108 50 63 40 139 35 117 30.2 30 100 72 41.9 172 66 73 68 78 81 86 87 83 25 46 19.0 20 13.5 15 0 2005 2006 2007 Q1 2007 Q2 2007 Q3 2007 Q4 -50 2008 Q1 2008 Q2 2008 Q3 2008 Q4 10 5 0 2009 -100 2010 2011 2012+ Net FX Position Source: CBT * Number of days to maturity Source: CBT 33 Corporate Sector 75 percent of small and medium-scale enterprises does not have FX-denominated debt. The FX-denominated loans are used mostly by large-scale enterprises and export-oriented manufacturing companies. Ratio of Corporate Sector’s Short Term Debt to Total Debt* Debt Dollarization of the Real Sector (2000 – 2007, percent) (2000 – 2007, percent) 90 90 Firms with High Export Share Manufacturing Sector 80 Manufacturing Industry 80 Non-Manufacturing Sectors Firms with Low Export Share 70 70 Non-manufacturing Sector 60 60 50 50 40 * According to days to maturity Source: CBT 2007 2006 2005 2004 2003 2002 2001 30 2000 2007 2006 2005 2004 2003 2002 2001 2000 40 Source: CBT 34 Corporate Sector Funding conditions of the corporate sector have deteriorated sharply as of the last quarter of 2008 . However, it is observed that rollover ratios of corporate sector have gone into a stable course recently. Net Foreign Debt Usage (January 2008 – February 2009, billion USD) 5.0 4.0 Non-banks Credits 3.0 2.0 1.0 0.0 -1.0 Trade Credits -2.0 01-08 02-08 03-08 04-08 05-08 06-08 07-08 08-08 09-08 10-08 11-08 12-08 01-09 02-09 Source: CBT 35 Households The ratio of household indebtedness is at a low level compared to the EU and Eastern European countries. The share of FX loans in total consumer loans is quite limited and this curbs households’ exchange rate exposure. 20 Ratio of FX-Indexed Consumer Loans to Total Consumer Loans (2003 – April 2009, percent) Ratio of Household Liabilities to GDP (2005 – 2007, percent) 70 18 60 55 16 56 56 50 14 Eastern Europe 12 40 10 European Union 8.6 Turkey 30 8 28 6.4 6 23 4.8 4.7 3.6 4 3.8 4.5 10 2 17 20 12 10 8 0 2003 Source: CBT 2004 2005 2006 2007 2008 April 2009 0 2005 2006 2007 Source: European Central Bank, CBT 36 Public Sector The public sector has become more resilient to external shocks in time. Public Sector Net Debt Stock Composition of Central Government Debt (2000 – 2008 Q4, ratio to GDP, percent) (2003 – 2009*) Total Net Debt Stock 66 70 61 60 Total Net Debt Stock 55 46 49 50 43 34 35 34 33 33 32 35 33 32 2006 2007 2008 2009 38 37 28 32 31 30 31 2004 2005 Net Foreign Debt 39 42 36 40 34 38 30 31 42 29 36 29 28 29 26 25 24 24 29 35 20 30 24 6 4 1 1 2 1 2 2008Ç1 2008Ç2 2008Ç3 2008Ç4 13 2004 2003 2002 2001 0 2000 27 2007 17 14 27 2006 10 28 25 2005 28 Source: Undersecretariat of Treasury, CBT 2003 Fixed Variable * As of February 2009. Source: Undersecretariat of Treasury, CBT FX 37 Central Bank FX Reserves The strong foreign exchange reserve position helps eliminate the unfavorable effects of potential shocks and contributes to increasing confidence in the economy. Ratio of Short-term Foreign Debt to Central Bank FX Reserves Central Bank FX Reserves (2002 – April 2009, billion USD) (1996 – 2008 Q4, percent) 160 80 71.3 70.0 140 70 63.7 58.3 60 48.3 50 40 33.7 30 120 100 80 36.0 27.0 60 20 40 10 20 0 0 2002 2003 Source: CBT 2004 2005 2006 2007 2008 2009 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: Undersecretariat of Treasury, CBT 38 IV. Inflation Outlook 39 Price Stability and Monetary Policy Price Stability Deflation Risk Inflation Risk • Steep increase in the global unemployment rate. • Excessively low policy rates in real terms. • Loss of confidence in investors and consumers. • Excessive funding of the markets by central banks • Weakening of the global demand. • Shrinkage of domestic demand in economies. • Delay in recovery of global growth. ...may lead to persistent declines in price. • Global expansionary fiscal policies. • Recovery of global growth earlier than expected. • Failure to tighten fiscal and monetary policies on time. ... may cause inflationary effect in the medium term Monetary Policy Stance of Central Banks 40 40 Deflation Risk Deflation, which is accompanied by contraction in the domestic demand and concerns over financial stability, may have devastating effects on growth. Growth and Inflation in the USA (annual percentage change) 1930-1933 2009 0 -1 -2 CPI** -3 GDP* -4 -5 -6 -7 -8 CPI GDP * Forecast (Consensus Forecast) ** Forecast (The Economist) Source: BEA, BLS, CBT 41 Poland England Spain Korea New Zealand Mexico Canada Australia South Africa Portugal Netherland Denmark Russia China Austria 0.8 Greece Ireland Luxembourg France Italy Germany Belgium Finland Norway Taiwan USA Japan Deflation Risk The global economy faces an apparent risk of deflation for the first time since the 1930s. Deflation Vulnerability Index (2009) 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Source: IMF 42 Monetary Policy Against Deflation Risk In the forthcoming period, the level of flexibility of economies vis-à-vis deflationary pressures will play a significant role in the decoupling of the economies. In this context, the course of real interest rates is believed to be an important indicator. Real Policy Rates (As of March 2009*, percent) Ukraine Iceland Israel Korea Malaysia Russia Chile Indonesia Czech Republic Poland Peru Mexico Colombia Thailand S.Africa Romania Turkey Hungary Brazil China -10 -8 -6 -4 Source: CBT, Central Banks and Statistical Offices -2 0 2 4 6 8 43 Fiscal Policy Against Deflation Risk Slowdown in economic activities and counter-cyclical fiscal policies have led to rise in budget deficits in many countries. 2008 Budget Deficit and 2009-2010 Budget Deficit Forecasts* (Ratio to GDP, percent) India England Japan USA France Developed Economies Turkey Developing Economies China Mexico S.Africa Brasil 0 -2 -4 -6 2008 -8 2009 -10 2010 -12 • • KEP forecasts are used for Turkey and IMF forecasts for the rest. Source: IMF, KEP, CBT 44 Deflation Risk and Labor Market Decline in non-agricultural employment driven by the dwindling consumption and investment expenditures is a factor increasing deflationary risks. Non-agricultural Employment (January 2007 – February 2009, annual percentage change) 5 4 3 Turkey 2 1 EU 0 -1 -2 USA -3 01-09 10-08 07-08 04-08 01-08 10-07 07-07 04-07 01-07 -4 Source: TURKSTAT, BLS, EUROSTAT, CBT 45 Deflation Risk and Credit Market Failure to overcome tightness in the financial conditions, due to deterioration in risk perceptions, is another potential factor for decoupling. Credit Market (January 2008 – April 2009, 4-week moving average, percent) 24 22 Interest Rate on TRY Denominated Commercial Loan 20 18 16 14 Interest rates on BB-rated US corporate bonds (US Dollar Denominated) 12 10 8 01-08 03-08 05-08 07-08 09-08 11-08 01-09 03-09 * Interest rates on bonds issued by US firms with BB credit rating. Source: JP Morgan, CBT 46 Commodity Prices Commodity prices remain low parallel to the slowdown in global growth Commodity Price Index (1 January 2006 – 16 April 2009) 600 500 400 Agriculture 300 Metals 200 Energy 100 01-06 05-06 09-06 01-07 05-07 09-07 01-08 05-08 09-08 01-09 Source: Bloomberg 47 Inflation Developments in Turkey The steady decline in annual inflation was temporarily interrupted in March owing to soaring unprocessed food prices. Consumer Price Index Food and Energy Inflation (January 2007 – March 2009, annual percentage change) (January 2007 – March 2009, annual percentage change) 13 20 12 18 Food and Energy 11 16 10 CPI 14 9 12 8 10 Source: TURKSTAT, CBT 01-09 10-08 07-08 04-08 01-08 10-07 07-07 04-07 01-09 10-08 07-08 04-08 4 01-08 4 10-07 6 07-07 5 04-07 8 01-07 6 CPI excluding Food and Energy 01-07 7 Source: TURKSTAT, CBT 48 Inflation Developments in Turkey The slowdown in services prices that started in the final quarter of 2008 on weaker economic activity and lower costs intensified in March, and annual services inflation dropped by about 1 percentage point. Goods and Services Inflation Services Inflation (January 2007 – March 2009, annual percentage change) (January 2007 – March 2009, annual percentage change) 14 25 Services Inflation 12 Transportation 20 Rent 10 15 8 Restaurants and Hotels 10 6 Goods Inflation 5 Other Services 4 Source: TURKSTAT, CBT 03-09 01-09 11-08 09-08 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 03-07 01-07 03-09 01-09 11-08 09-08 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 03-07 01-07 0 Source: TURKSTAT, CBT 49 Inflation Developments in Turkey Due to the sharp increase in unprocessed food prices, contribution of food and energy prices to headline inflation soared in March 2009. Food Prices (January 2007 – March 2009, annual percentage change) 30 26 22 Processed Food 18 14 10 Unprocessed Food 6 2 03-09 01-09 11-08 09-08 07-08 05-08 03-08 01-08 11-07 09-07 07-07 05-07 03-07 01-07 -2 Source: TURKSTAT, CBT 50 Inflation Developments in Turkey The ongoing slowdown in economic activity continued to mitigate the exchange rate pass-through on durable goods’ prices. Durable Goods Prices Durable Goods Prices and Exchange Rate* (January 2008 – March 2009, annual percentage change) (January 2006 – March 2009, annual percentage change) 15 16 Electrical and NonElectrical Appliances 10 40 14 Durable Goods (Excluding gold, left axis) 12 10 Furniture 8 5 30 20 Exchange Rate Basket (right axis) 6 4 10 2 0 0 0 -2 -5 Automobile -4 -10 -6 01-09 10-08 07-08 04-08 01-08 10-07 07-07 04-07 01-07 10-06 07-06 04-06 03-09 01-09 11-08 09-08 07-08 05-08 03-08 01-08 Source: TURKSTAT, CBT -20 01-06 -8 -10 * Equally weighted US dollar – euro Source: TURKSTAT, CBT 51 Inventory and Cost Developments It is envisaged that there will be an acceleration in the depletion of inventories of firms, which in turn, would partially add to the exchange rate pass-through on the prices of durable goods. Stock of Finished Products* (January 2007 – March 2009) 25 20 15 10 5 0 01-07 04-07 07-07 10-07 01-08 04-08 07-08 10-08 01-09 * Difference between "above the season” and “below the season” answers given to the current stock of finished goods question in the “Business Survey” conducted by CBT. Source: CBT 52 Inflation Expectations As the inflation data vindicated the policy rate cuts, inflation expectations reacted favorably. A significant improvement in medium-term inflation expectations observed particularly since January. Inflation Expectations 10 (January 2006 – February 2009, annual percentage change) 9 8 12 Month Expectations 7 6 5 4 01-06 24 Month Expectations 05-06 09-06 01-07 05-07 09-07 01-08 05-08 09-08 01-09 Source: TURKSTAT, CBT 53 Inflation and Output Gap It is expected that it will take some time for the economic activity to recover, downward pressures on inflation will prevail and the disinflation process will gain pace in the short-term. Inflation and Output Gap Forecasts (2008 Q3 – 2011 Q4) Forecast Range* Output Gap (Base) Uncertainty Band for 2009 End-Year Inflation Targets 12 10 Control Horizon 8 4 2 0 -2 -4 11-IV 11-III 11-II 11-I 10-IV 10-III 10-II 10-I 09-IV 09-III 09-II 09-I -8 08-IV -6 08-III Percent 6 Source: CBT 54 V. Monetary Policy Stance 55 Monetary Policy Coupled with worries related to a more-than-anticipated slowdown in economic activity due to the economic crisis, inflation concerns were replaced by deflation risk. Inflation Rate Unconventional Monetary Policy Practices (January 2000 – January 2009, annual percentage change) 12 Country Measures Purchase of Mortgage Backed Securities (MBS) worth 1.25 trillion US Dollar in 2009. 10 Developing Countries 8 USA Purchase of long-term Treasury securities worth 300 billion US Dollar. 6 Developed Countries Purchase of toxic assets. 4 2 0 00 01 02 03 04 05 06 07 08 09 England Purchase of corporate, medium and longterm Gilts, worth 75 billion Pound. Switzerland Purchase of CHF denominated corporate sector debt instruments. Kaynak: IMF 56 Monetary Policy Central banks of developing countries maintained a cautious stance in the first half of 2008 in view of the depreciation of exchange rates and concerns over financial stability. Inflation (January 2008 – February 2009, average, annual percentage change) and Policy Rates in Emerging Markets (January 2008 – March 2009, average, percent) 10 Inflation Rate 9 8 Policy Rate 7 6 03-09 02-09 01-09 12-08 11-08 10-08 09-08 08-08 07-08 06-08 05-08 04-08 03-08 02-08 01-08 5 Source: CBT, Central Banks 57 Monetary Policy With the disappearance of factors that were driving the inflation rate up, Central Bank of Turkey started monetary easing and thereby assumed a leading role amongst the emerging markets. Policy Rate Change in Emerging Market Economies (percent) February 2008 – August 2008 September 2008 – April 2009 Romania Turkey Brazil Chile Chile Colombia Turkey S. Korea Peru Poland Indonesia Thailand Hungary Czech Rep. Mexico Brazil Poland Mexico Indonesia Colombia Thailand Peru S. Korea Romania Czech Rep. Hungary 0.0 1.0 Source: CBT, Central Banks 2.0 3.0 -8.0 -6.0 -4.0 Source: CBT, Central Banks -2.0 0.0 2.0 58 Monetary Policy To have a better understanding of the monetary policy pursued by the CBT, it is imperative to take into account global and domestic economic conditions. CBT O/N Interest Rates (January 2005 – April 2009, simple, percent) 20 18 16 14 May-June 2006 12 After October 2008 10 04-09 01-09 10-08 07-08 04-08 01-08 10-07 07-07 04-07 01-07 10-06 07-06 04-06 01-06 10-05 07-05 04-05 01-05 8 Source: CBT 59 Monetary Policy Key Drivers of the Monetary Policy : Domestic and external supply-demand conditions and factors affecting them Core inflation indicators Financial and monetary conditions Monetary Policy Stance Changes in import prices, labor costs, commodity and other input prices Central Bank’s inflation forecasts and factors affecting the medium-term inflation expectations 60 How Monetary Policy Evolved After 2002? III II Adverse Supply Shock 2008 Q2 Rising inflation Strong Demand and Adverse Supply Shock 2006 Q2 Policy Reaction Policy Reaction Target revision, Measured rate hikes Price Stability Strong monetary tightening TARGET (Inflation Target) IV Falling inflation I Weak Demand Shock Favorable Supply Shock 2008 Q4 2003-2005 Policy Reaction Policy Reaction Policy rate cuts Precautionary rate cuts and Non-interest rate instruments: Stronger regulation and supervision Contracting GDP Sustainable Growth Expanding GDP 61 Monetary Policy Central Bank implemented monetary tightening during the turbulence in 2006 in order to contain the effects of exchange rate depreciation on inflation expectations under strong domestic and external demand conditions. CBT Short-Term Interest Rates and Benchmark Government Securities CBT Policy Rate and Exchange Rate* (January 2005 – February 2009) (1 January 2006 – 31 December 2006 , compound, percent) 20 20 Policy Rate (right axis) 18 15 26 Benchmark Government Securities Interest Rate 24 16 22 14 10 12 Monthly Change in FX Basket (left axis) 10 5 8 20 18 Policy Rate 16 6 14 4 * Equally weighted US dollar - euro basket Source: CBT Source: Undersecretariat of Treasury, CBT 12-06 11-06 10-06 09-06 08-06 07-06 06-06 05-06 04-06 10 03-06 01-09 09-08 05-08 01-08 09-07 05-07 01-07 09-06 05-06 01-06 09-05 05-05 0 01-05 -5 12 02-06 2 01-06 0 62 Monetary Policy In the current juncture, economic developments not only necessitated but also made possible a “controlled but quite rapid rate cut cycle”. Pass-through from Exchange Rates to Goods and Services’ Prices Output Gap (2004 Q4 – 2008 Q4, percent) 1 (5 –month cumulative percentage change) 25 May 2006 - September 2006 0 October 2008 - February 2009 20 -1 15 -2 May-June 2006 -3 10 -4 5 After October 2008 -5 0 -6 -5 -7 04-Q4 Source: CBT 05-Q4 06-Q4 07-Q4 08-Q4 Exchange Durable Rate Basket Goods (ex. Gold) Furniture * Equally weighted, US dollar – euro basket Source: TURKSTAT, CBT Electric and Automobiles Non-Electric Appliances 63 Monetary Policy Interes rates on benchmark government securities adopted a sharp downward course in view of the moderate recovery in risk perceptions and the Central Bank’s rate cuts backed by the announced inflation data. CBT Short-Term Interest Rates and Benchmark Government Securities Interest Rate 26 (1 January 2008 – 18 April 2009, compound, percent) Benchmark Government Securities Interest Rate 24 22 20 18 16 Policy Rate 14 12 10 01-08 03-08 05-08 07-08 09-08 11-08 01-09 03-09 Source: Undersecretariat of Treasury, CBT 64 Monetary Policy Stance The tightness of financial conditions still persists to some degree despite recent policy rate cuts. Nevertheless, it is noteworthy that lending rates have recently declined below the levels observed in October 2008, when the global financial turmoil reached its peak. Commercial Loan Interest Rates Consumer Loan Interest Rates (January 2008 – April 2009, annual percentage) (January 2008 – April 2009, annual percentage) 32 32 30 30 28 28 26 26 Other Consumer Credit 24 24 22 22 20 * 4-week moving average Source: BRSA, CBT Interest Rate Cuts Housing 18 04-09 03-09 02-09 01-09 12-08 11-08 10-08 09-08 08-08 07-08 06-08 05-08 16 04-08 03-09 02-09 12-08 11-08 10-08 09-08 08-08 07-08 06-08 05-08 04-08 03-08 02-08 01-08 16 01-09 Interest Rate Cuts 03-08 18 02-08 Commercial Credit 01-08 20 Automobile * 4-week moving average Source: BRSA, CBT 65 Monetary Policy Stance In 2009, rise in the public sector borrowing requirement may impair monetary policy decisions’ impact on the economic activity. Short-term expansion in the fiscal policy should be supported by a fiscal framework that would ensure the medium-term sustainability of the debt dynamics. Central Government Tax Revenues and Primary Expenditures (March 2007 – March 2009, annual percentage change, quarterly moving average) 35 30 Primary Expenditures 25 20 15 10 5 0 -5 Tax Revenues 03-09 12-08 09-08 06-08 03-08 12-07 09-07 06-07 03-07 -10 Source: Undersecretariat of Treasury, CBT 66 Measures on Turkish Lira Liquidity The general framework of the Central Bank’s liquidity management is fairly flexible and well-structured to effectively meet the liquidity requirement of the banking system. Policy Rate and Overnight Interest Rate in the Repo-Reverse Repo Market TL Liquidity Provided by the Central Bank (1 January 2008 – 28 February 2009 , billion TL) (Between 1 January 2008 - 28 February 2009, percent) 20 25 Sterilization 19 Overnight Interest Rate 18 Funding 20 15 17 16 10 15 5 Policy Rate 14 0 13 -5 12 -10 11 02-09 01-09 12-08 11-08 10-08 09-08 08-08 07-08 06-08 05-08 04-08 03-08 02-08 02-09 01-09 12-08 11-08 10-08 09-08 08-08 07-08 06-08 05-08 04-08 03-08 02-08 01-08 Source: ISE, CBT 01-08 -15 10 Source: CBT 67 Potential Measures on TL Liquidity In case of an increase in TL liquidity squeeze in the market in the upcoming period, the Central Bank will take the following measures, provided that they do not conflict with the price stability objective; 1. The operational structure may be modified by bringing forward a technical interest rate cut, 2. Depending on the course of the liquidity squeeze, a. extension of the maturity of repo funding, b. direct purchases of government securities from the secondary market could be considered. 3. If the liquidity squeeze becomes permanent and other measures fall short of being sufficient, TL required reserves may be reduced moderately. 68 Measures on FX Liquidity The Central Bank is well aware of the significance of FX liquidity in the banking system and progressively puts into effect necessary measures in order to get through this period with minimum damage. Outstanding Balance for FX Deposits and Interest Rates in the FX Deposit Market (9 October 2008 – 28 February 2009) 1.0 5 Outstanding FX Deposits (billion US Dollar, left axis) 0.6 Interest Rate (1-month, right axis) Interest Rate (1-week, right axis) 0.4 4 3 Percent 0.8 2 0.2 1 Source: CBT 26-02 19-02 12-02 05-02 29-01 22-01 15-01 08-01 01-01 25-12 18-12 11-12 04-12 27-11 20-11 13-11 06-11 30-10 23-10 0 16-10 0.0 09-10 Billion US Dollar 6 69 Measures on FX Liquidity In response to speculative price formation due to a decrease in the depth of the foreign exchange market, the CBT resumed foreign exchange selling auctions on 10 March 2009. After 18 auctions, they were suspended on 3 April. FX Selling Auctions (October 2008 – April 2009) 250 1.80 Price Amount Asked (million US Dollar, left axis) (Weighted Average, right axis) 200 1.75 150 1.70 100 1.65 Amount Sold: 50 million US Dollar 2.4.2009 1.4.2009 31.3.2009 30.3.2009 27.3.2009 26.3.2009 25.3.2009 24.3.2009 23.3.2009 20.3.2009 19.3.2009 18.3.2009 17.3.2009 16.3.2009 13.3.2009 1.55 12.3.2009 0 11.3.2009 1.60 10.3.2009 50 70 Export Rediscount Credits In order to mitigate the adverse effects of the global financial turmoil on the corporate sector, the limit for export rediscount credits was increased from USD 500 million to USD 2.5 billion and the utilization of these credits was facilitated. Export Rediscount Credit Utilization (1992 – April 2009) 600 513 500 400 300 200 1993 1994 1995 1996 12 12 54 32 31 27 20 3 2 2 2008 1 39 2007 1 29 2006 5 1998 12 1997 10 1992 100 * As of 17 April 2009 Source: CBT 2009* 2005 2004 2003 2002 2001 2000 1999 0 71 Potential Measures on FX Liquidity The Central Bank, when deemed necessary, will always continue to take additional measures within its means prudently in order to ensure the smooth functioning of the FX market and to support FX liquidity Measures That May Be Taken: 1. Directly intervening in the foreign exchange market under the basic principles of the floating exchange rate regime in the event of further intensifying of the financial turmoil in global markets that might have negative impacts on the Turkish economy, 2. Increasing transaction limits for banks in the Foreign Exchange and Banknotes Markets, 3. Extending borrowing maturities and reducing lending rates in the Foreign Exchange Deposit Markets, 4. Further reducing the FX required reserve ratio to a limited extent could be considered. 72 Transition from YTL to TL The transition process that started with the removal of six zeros from the Turkish currency and putting the New Turkish lira banknotes and coins into circulation was completed on 1 January 2009 with the removal of the prefix “New” from the currency. Value (%) Amount (%) Banknotes 75 73 Coins 20 15 * As of 17 April 2009 73 CENTRAL BANK OF THE REPUBLIC OF TURKEY PRESENTATION BEFORE THE COUNCIL OF MINISTERS / THE PLANNING AND BUDGET COMMISSION OF THE GREAT NATIONAL ASSEMBLY OF TURKEY Durmuş YILMAZ Governor 21 April 2009 74