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CENTRAL BANK OF THE
REPUBLIC OF TURKEY
PRESENTATION BEFORE THE COUNCIL OF
MINISTERS, AND
THE PLANNING AND BUDGET COMMISSION OF
THE GREAT NATIONAL ASSEMBLY OF TURKEY
Durmuş YILMAZ
Governor
May 2008
1
Presentation Plan
I.
International Developments
II.
Effects of International Developments on the Turkish
Economy
III.
Financial Stability in Turkey
IV.
Inflation Developments, Forecasts and Risks
V.
Monetary Policy Stance
VI.
Markets
VII. Economic Outlook
2
I. International Developments
3
International Developments
The financial turbulence in global money and capital markets, which started
in August 2007, has not abated yet. The magnitude of the turbulence is
larger than that experienced in 2006. The full scale of damage that it might
cause in economic activities is still uncertain.
Volatility Index*
35
(1 January 2004 – 23 May 2008)
30
Volatility Index Average
25
20
15
10
5
* VIX measures the implicit volatility of the options prices of the S&P 500 stock index.
Source: Bloomberg
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
10-04
07-04
04-04
0
01-04

4
Reasons for the Turbulence
How did we end up here?
1st APPROACH: GLOBAL LIQUIDITY
CONDITIONS
Abundant credit facilities
supported by accommodative
monetary policies
Surge in leveraged
transactions
Excessive risk appetite
and search for high yields
5
Reasons for the Turbulence

In response to deceleration in economic activities, the Federal Reserve Bank,
European Central Bank and Bank of Japan loosened their monetary policies
considerably and cut benchmark interest rates.
Inflation and Federal Funds Rates in the USA
Inflation and Policy Rates in the Eurozone
(January 2000 – April 2008, percent)
(January 2000 – April 2008, percent)
7
7
6
Federal Funds Rate
6
5
5
4
4
3
3
2
2
1
Policy Rate
Inflation
1
Inflation
01-08
07-07
01-07
07-06
01-06
07-05
01-05
07-04
01-04
07-03
01-03
07-02
01-02
07-01
01-01
07-00
01-08
07-07
01-07
07-06
01-06
07-05
01-05
07-04
01-04
07-03
01-03
07-02
01-02
07-01
01-01
07-00
01-00
Source: Federal Reserve
01-00
0
0
Source: European Central Bank, Eurostat
6
Reasons for the Turbulence

The accommodative monetary policies led to a rise in asset prices. They also
encouraged banks to borrow at low interest rates for short maturities and extend
loans with longer maturities.

With the aim of increasing the demand for loans, banks started to offer diversified
loan alternatives and flexible loan conditions, which in return led to a rapid rise in
credit utilization of especially subprime borrowers.
Total Housing Loans
Total Housing Loans in the USA
(2001 and 2007, as % of GDP)
(1997-2007, as % of GDP)
80
73.6 74.7
69.4
70
65.7
100
85.0
61.3
60
57.0
74.7
80
2001
60.3
60
52.1
47.0
52.1
50
46.6
44.3 45.3
48.4
40
2007
32.5
40
20
0.2
30
3.8
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Federal Reserve
England
USA
Source: Federal Reserve, IMF, ECB, CBT
EU-25
Turkey
7
Reasons for the Turbulence

After a three-year period, the Federal Reserve resumed hikes in the
federal funds rate as of the second quarter of 2004 to alleviate inflationary
pressures.

Problems arose in the repayments of loans, especially of flexible rate
subprime mortgage loans,.

In mid-2005 demand for houses slowed down and house prices started to
decline.

The reversal of the upward trend in house prices restricted customers’
chances of selling their properties to pay off their debt.
8
Reasons for the Turbulence
How did we end up here?
2nd APPROACH : NON-TRANSPARENT
OPERATIONS
Complex instruments
due to increased
financial engineering
practices
Business model
based on originateand-distribute
Arbitrage opportunities
arising from the lack of
regulations
and supervision
9
Reasons for the Turbulence
Market Sizes
 The low levels of long-term interest rates as
a result of expanding global liquidity supply led
(2001 – 2007, trillion USD)
50
to excessive risk appetite in search of high
Credit Default Swap
Market
yields.
40
 One of such risk-bearing assets was subprime mortgage loans. These assets were
converted to securities and re-marketed. In this
30
US Bond Market
way, they started to be transacted widely in the
global financial system.
20
 Volume of derivatives transaction increased
US Stock Market
rapidly and reached astronomical levels.
10
US Mortgage Based
Securities Market
markets, as well as problems in supervision of
Source: ISDA, WFE, SIFMA
2007
2006
2004
2003
0
2002
risks.
2001
such securities hindered the accurate pricing of
2005
 However, lack of liquidity in secondary
10
Reasons for the Turbulence

Supervision, regulation and information facilities in the finance sector and risk
management of the private sector lagged behind the rapid transformation in the
business world, which paved the way for problems such as excessive risk
appetite, maturity mismatches and inflation in asset prices.

Problems observed since 2006 in the repayment of housing loans have led to
difficulties in pricing securities that are linked to credit repayments. Investor
demand for asset-based securities and commercial papers declined due to loss
of credibility, whereas the demand for risk-free government papers increased.

Financial institutions started to face difficulties in using their asset-based
securities as collateral in order to meet their short-term liquidity requirements.

The financial turbulence that appeared as a liquidity squeeze in the markets at
first, later turned into solvency problems as financial institutions reported high
losses on their balance sheets, which brought them to the edge of bankruptcy.
11
Reasons for the Turbulence

Both of these views on the underlying causes of the financial turbulence
should not be perceived as alternatives of each other.

They are in fact complementary and explain different aspects of the
financial turbulence.
1st VIEW:
2nd VIEW:
GLOBAL LIQUIDITY
CONDITIONS
NON-TRANSPARENT
OPERATIONS
Turbulences in
Financial Markets
12
Recent Developments
Measures Taken

In the face of a credit crunch, the Federal Reserve Bank started to cut the federal
funds rate from September 2007 onwards. The federal funds rate was reduced from
5.25% to 2% by April 2008.

At the beginning of the crisis, a strong demand emerged for central bank liquidity,
which was met by central banks of developed countries.

However, due to the growing need for liquidity, the Federal Reserve, the European
Central Bank and the Bank of England intervened in a coordinated manner.

The scope of collateral defined for liquidity operations was widened, maturities were
extended and new liquidity tools were formed in addition to the discount window.

With the aim of underpinning economic growth in the United States, an economic
package including extensive fiscal policies was put into force. For the first time since
1970, a bank that had liquidity problems and faced bankruptcy was bailed out in the
United Kingdom through expropriation.
13
Recent Developments
Current Situation and
Outlook
The Difference Between Interbank Interest Rates
and 3 Month Treasury Bills in US Dollars and Euro
(1 January 2007 – 22 May 2008, basis points)
250
200
US Dollars
150
 There is a credit crunch in the United
100
States and the European Union.
50
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
Source: Bloomberg
these markets in the second half of
2007.
03-07
interest rates increased remarkably in
0
02-07
money markets of developed countries,
Euro
01-07
 Due to the setbacks observed in the
Collateralized Debt Obligations Issuance
(2004 Q1 – 2007 Q4, US Dollars billion)
200
150
The issuance of complex securities
declined significantlly, while the risk
100
50
Source: SIFMA
2007 Q4
2007 Q3
2007 Q2
2007 Q1
2006 Q4
2006 Q3
2006 Q2
2006 Q1
2005 Q4
2005 Q3
2005 Q2
2005 Q1
2004 Q4
2004 Q3
0
2004 Q2
market increased to high levels.
2004 Q1
premium in the private sector bond
14
Recent Developments
Global Risk Appetite Index
 The Global Risk Appetite Index
indicates that the deterioration trend in
risk perceptions that became apparent
(1 January 1999 – 22 May 2008)
8
6
Excessive Optimism
mid-October intensified in early 2008
and reached “panic” level as investors
4
continued to prefer low-risk
2
instruments.
0
The improvement seen in the index
-2
in late January did not last long and
-4
Panic
the index once more approached to
the “panic” level.
-6
 The negative outlook in the risk
perceptions still continues.
01-99
05-99
09-99
01-00
05-00
09-00
01-01
05-01
09-01
01-02
05-02
09-02
01-03
05-03
09-03
01-04
05-04
09-04
01-05
05-05
09-05
01-06
05-06
09-06
01-07
05-07
09-07
01-08
05-08
-8
Source: Credit Suisse
15
Recent Developments

The problems in the sub-prime mortgage markets gradually have spreaded
to other parts of the housing loan market and other financial markets.

The April 2008 Global Financial Stability Report of the International
Monetary Fund (IMF) estimated that the total loss to be incurred would be
about USD 945 billion. The October 2007 Report by the same institution
had forecasted the total loss to be USD 240 billion.
16
Recent Developments

While the developments in the last nine months showed the fragility of the global
financial system, they have also led to the questioning of the effectiveness of the
measures taken.

Currently, central banks have succeeded in solving the liquidity problem. Yet,
central banks can only provide liquidity, they cannot solve the entire credit
problems. Moreover, it should be kept in mind that the measures taken might
lead to the moral hazard problem in the financial markets in the future.

Policy makers should carefully analyze the factors causing the developments
experienced since mid-2007 and encourage the private sector to use effective
risk management techniques and to increase transparency. To minimize
possible similar fragilities in the upcoming period, regulation and supervision
functions should be reviewed.

Considering the moral hazard problem, it is crucial that the measures taken
should be selective, clearly defined, and temporary.
17
Global Economic Growth

It is inevitable that the current financial turbulence will have affects on growth and
employment performance.

In fact the data for the United States and European economies in the last quarter
of 2007 and early-2008 have signaled that the turmoil in financial markets have
started to spread to the real sector.

The financial turbulence is expected to significantly drop growth rates throughout
the world, and mainly in the USA.
Growth Expectations Worldwide (percent)
Regions
2007
World
USA
EU
Russia-Central Asia
Central and Eastern Europe
Middle East
4.9
2.2
2.6
8.5
5.8
5.8
Source: IMF World Economic Outlook
2008
(7/07
forecasts)
4.8
2.8
2.5
7.1
5.4
5.5
2008
(10/07
forecasts)
4.4
1.9
2.1
7.0
4.9
6.0
2008
(1/08
forecasts)
4.1
1.5
1.6
7.0
4.6
5.9
2008
(4/08
forecasts)
3.7
0.5
1.4
7.0
4.4
6.1
18
Global Economic Growth
Real Sector Confidence Index in the US and the EU
 The real sector confidence index in
the USA, which had been falling since
mid-2007, dropped to its lowest level
since 2001.
(January 2005 – April 2008)
106
105
European Union
104
103
102
101
100
USA
99
98
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
01-06
11-05
09-05
07-05
05-05
03-05
97
01-05
Although the real sector confidence
in the EU index has been declining, it
is still higher than that of the USA.
Source: OECD
(January 2005 – January 2008)
109
European Union
108
107
106
USA
105
104
103
Source: OECD
11-07
09-07
07-07
05-07
03-07
01-07
11-06
09-06
07-06
05-06
03-06
01-06
11-05
09-05
07-05
05-05
102
03-05
 The International Monetary Fund is
expecting a recession in the USA
economy in 2008.
Leading Indicators in the US and the EU Economies
110
01-05
 The leading indicators show that
the slowdown in the USA economy is
more severe than that in the EU.
19
Expectations and Risks
World Growth Figures and Expectations
 Recent forecasts suggest that the impact
of the current financial turmoil on
developing countries will be less severe
(2006-2009, percent)
8
compared to earlier periods.
7
 The progress made in recent years
6
towards macroeconomic stability in
5
7.9
7.8
Developing countries
6.7
5.0
4.9
developing countries reinforces this view.
World
4
 Other supporting factors are the reforms
adopted in the corporate structure, the
adoption of good governance principles
3.3
3
European Union
2
3.7
3.8
1.8
1.7
0.5
0.6
2008
2009
3.1
2.9
USA
and the expanded volume of trade between
developing countries.
6.6
2.2
1
0
2006
2007
Source: IMF
20
Expectations and Risks
 The prevailing turmoil is not simply a liquidity squeeze. It is expected to have
more widespread, deeper and more complicated impacts on the world
economy.
 Four major risks for the upcoming period are:
1.
Recession in the US economy and a severer-than-expected
slowdown in the global economy,
2.
Wide fluctuations in commodity and housing prices,
3.
Fragilities arising from weakened capital structures of financial
institutions,
4.
Problems in accessibility to the credit.
 The International Monetary Fund anticipates that with 25% probability, global
growth will be below 3%, which would imply a global recession.
21
II. Effects of International
Developments on the Turkish
Economy
22
Effects on the Turkish Economy
Risk Indicators
380
 Big losses incurred by international
340
financial institutions coupled with concerns
300
260
220
Source: JP Morgan
 Risk indicators for the Turkish economy
80
2007 and February 2008, parallel to the
60
increase in other developing countries.
40
05-08
03-08
01-08
11-07
09-07
07-07
05-07
03-07
Risk Indicators
(1 January 2006 – 23 May 2008, basis point)
100
increased in the period between August
01-07
100
11-06
of developing countries.
EMBI +
09-06
140
07-06
perceptions and increased the risk premium
05-06
180
01-06
led to significant deterioration in risk
03-06
over recession in the USA economy have
(1 January 2006 – 23 May 2008, basis point)
EMBI + Turkey
(Turkey) – (EMBI +)
20
Source: JP Morgan
05-08
03-08
01-08
11-07
09-07
07-07
05-07
03-07
01-07
11-06
09-06
07-06
-40
05-06
March.
-20
03-06
risk premium of Turkey since the start of
0
01-06
 There has been a deterioration in relative
23
Effects on the Turkish Economy
Slowdown in the global
economy
Likely to strain growth in
external demand
Exports
(January 2007 – April 2008, year-on-year change,
3-month moving average, percent)
 The economic data for 2008 Q1
suggest that the financial fluctuations
have not yet had a significant
40
Leading indicator 50
(right scale)
Euro
(left scale)
30
decelerating effect on external
demand.
40
USD
(right scale)
30
20
20
 Data for Q1 and leading indicators
10
Source: TURKSTAT, UFT, TEA (TIM)
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
0
03-07
0
02-07
of exports continues.
10
01-07
for April suggest that the rapid growth
24
Effects on the Turkish Economy
Likely to limit domestic demand
by increasing the cost of credits
extended by domestic banks
Problems in external credit
markets
FX Position of the Banking Sector
 The recent deterioration in risk
(9 July 2007 – 16 May 2008, billion USD)
perceptions is likely to decrease in
14
the Turkish banks’ tendency to
10
8
borrow from abroad and lend
14
12
12
Off-Balance Sheet
Position
10
8
6
6
4
4
2
2
0
-2
0
-2
-4
-4
-6
-6
strain credit expansion and domestic
-8
-10
-8
-10
demand in the upcoming period.
-12
-12
04-08
03-08
02-08
02-08
01-08
12-07
-14
11-07
10-07
-14
On-Balance Sheet
Position
09-07
credit conditions will continue to
08-07
 It is estimated that tightened
07-07
domestically in YTL.
Source: BRSA
25
A Shock-Resistant Economy
 Effects of fluctuations in financial markets are felt in all economies of the
world. However, the extent and the duration of these effects will vary in
each country and will depend on the economic policies followed in this
period.
 Global economic outlook for 2008 and 2009 underlines the significance
of adhering to good governance principles and the decisive
implementation of reforms to support growth, for Turkey as well as for
other countries.
 As long as the economic program is implemented decisively and no
concessions are made from policies of sustainable growth, the Turkish
economy will be more resistant and less vulnerable to shocks.
26
A Shock-Resistant Economy
 Tight fiscal policy along with budget management compatible with the
principles of transparency, unity, generality and accountability has made
significant contribution to the progress made since 2002 in reaching
sustainable growth as well as in reducing inflation (Public Fiscal
Management and Control Law No: 5018).
 It should be kept in mind that in the recent period when external risks
became more pronounced, should notions indicating a possible diversion
from fiscal discipline occur, there might be a deterioration in the risk
perceptions regarding the Turkish economy.
 In order to enhance the resistance of the Turkish economy against
exogenous shocks, maintaining and improving the gains in public finance,
as well as the reforms made in institutional infrastructure are essential.
27
A Shock-Resistant Economy
Accordingly:

Instead of policies that will increase the rate of growth artificially in the
short run, a reform agenda should be created with a long-term
perspective; reforms that would be implemented as a part of this agenda
should be listed in a transparent manner and shared with the public.
These steps will provide an anchor and affect expectations on the
Turkish economy favorably.

Preparing a road map for the implementation of the reform agenda that
includes time and performance criteria for the implementation schedule is
essential.

If the targets cannot be achieved in due time, causes and measures to be
taken should be shared with the public, as stipulated by the principle of
accountability. Mechanisms to be created for this end will enhance the
credibility of the economic program.
28
A Shock-Resistant Economy

Turkey has made significant progress towards macroeconomic stability
in recent years, compared to previous periods.

Yet, it is crucial that the efforts to reach price stability and to sustain
high growth rates continue.

In this framework, the European Union accession process and the
implementation of structural reforms envisaged in the economic
program remain crucial.
29
III. Financial Stability in Turkey
Banking Sector
Corporate Sector
Households
Public Sector
30
Banking Sector
Net FX Position of the Banking Sector
(2000 Q1 – 2008 Q2, billion USD)*
2
 The sector does not hold a noteworthy
1
FX short position. Net FX positions of the
-1
banks are at a low level compared to
-3
their equity capital.
0
-2
-4
-5
-6
of 12.1%.
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
above the legal limit and the EU average
2000 Q3
-7
2000 Q1
 The capital adequacy ratio is well
* As of 16 May 2008
Capital Adequacy Ratio
(December 2005 – March 2008, percent)
28
24
Operational
risk included
16
Target rate is 12%
12
an indirect credit risk on the banking
8
sector.
4
Legal limit is 8%
Source: CBT - BRSA
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
FX short position of the real sector poses
20
12-05
 Still, it should be kept in mind that the
31
Banking Sector
Short-Term FX Liquidity Adequacy Ratio
(6 July 2007 – 9 May 2008, percent)
Up to 1 month
150
100
05-08
04-08
03-08
02-08
01-08
12-07
0
11-07
ratios remain at high levels, as well.
50
07-07
 Total short-term liquidity adequacy
Legal limit is 80%
10-07
legal limit of 80%.
200
09-07
adequacy ratios are well above the
0-7 days
250
08-07
 Banks’ short-term FX liquidity
300
Total Short-Term Liquidity Adequacy Ratio
(6 July 2007 – 9 May 2008, percent)
300
 Recent fluctuations in global
250
financial markets once again
200
highlighted the importance of liquidity
150
risk management. In this juncture, it
100
is important for banks to be cautious
50
Up to 1 month
Legal limit is 100%
Source: CBT – BRSA
05-08
04-08
03-08
02-08
01-08
12-07
11-07
10-07
09-07
08-07
0
07-07
in liquidity management.
0-7 days
32
Banking Sector
 The ratio of non-performing loans to total loans dropped by 8 points to 3.5%
in the 2003-2007 period. The current level of the ratio is below the average of
other developing countries.
Ratio of Non-Performing Loans to Total Loans
(2003 and 2007, percent)
14
12
11.5
Developing Countries*
10
Turkey
8
6
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
33
Corporate Sector
Corporate Sector’s Resistance
to Exogenous Shocks
FX Position of the Non-Banking Sector
(2005 Q4 – 2007 Q2, billion USD)
140
120
 The FX short position of the non-
FX Liabilities
FX Assets
100
banking sector was USD 51 billion
80
as of the second quarter of 2007.
60
87
96
98
105
77
50
53
54
58
67
123
113
69
72
40
20
 Exchange rate risk exists in both
directions. It is crucial that
companies hedge themselves
against exchange rate risk.
0
Net FX Position
-20
-40
-60
2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2
Source: CBT
34
Corporate Sector

In Turkey, the ratio of short-term debt to total debt of the real sector is higher than
that of other developing countries. Yet, the borrowing maturity has improved in
recent years.

The share of real sector’s short-term FX-denominated debt continues to decline.
Ratio of Short-Term Debt of the Real Sector
to Total Debt * (2000-2007, percent)
90
Ratio of Short-Term FX-Denominated Debt of the
Real Sector to Total FX-Denominated Debt *
(2000-2007, percent)
90
Manufacturing
80
70
80
Manufacturing
70
Non-Manufacturing
60
60
Eastern Europe Average (2005)
50
50
Non-Manufacturing
Latin America Average (2005)
40
* According to days to maturity
Source: CBT
* According to days to maturity
Source: CBT
2007
2006
2005
2004
2003
2002
2001
2000
2007
2006
2005
2004
2003
2002
2001
2000
40
35
Corporate Sector

Similarly, although the dollarization of the real sector’s debt (i.e. the ratio of FX-denominated
loans to total loans) is relatively high in Turkey, it has followed a downward trend in the
recent period.

Debt dollarization is higher for export-oriented companies and large-scale companies,
whereas it is lower for companies manufacturing for domestic markets and small-scale
companies.
Debt Dollarization of the Manufacturing Sector
Debt Dollarization of the Real Sector
(2000-2007, percent)
90
Companies with High Export Share
Manufacturing Sector
Non-Manufacturing Sector
Companies with Low Export Share
80
70
(2000-2007, percent)
90
80
70
Large-Scale Companies
60
60
50
50
Medium-Scale Companies
40
Source: CBT
Small-Scale Companies
Source: CBT
2007
2006
2005
2004
2003
2002
2001
20
2000
2007
2006
30
2005
2004
2003
2002
2001
20
Latin America Average (2005)
2000
30
40
36
Corporate Sector

It may be assumed that the companies with FX-denominated income (exports, tourism, etc.)
have a natural hedge against exchange rate risk. In addition to this natural hedge, exchange
rate risk can also be contained via forward and derivative transactions.

The sectors where FX loan utilization is high also have large shares of sales to foreign
markets, whereas FX loan utilization is below the sector average in the sectors that generally
have sales to the domestic market.

The companies with YTL-denominated income should manage exchange rate risk with
caution.
Exports and FX-denominated Loans (2006, percent)
80
Main Metal
FX Credit / Total Credit
70
Transport and
Comm. Other Metal
60
50
Chemicals
Construction
Food
40
Vehicle
Textile
Plastic
Average
Electronic
Machinery
Commerce
Average
30
10
20
30
40
Exports / Net Sales
Source: CBT Company Accounts
50
60
37
Corporate Sector
 The financial structure ratios of the corporate sector show that the ratio
of total debt to equity declined in the 1996-2006 period, whereas there was a
recovery in the interest coverage ratio. This situation ensures a considerable
degree of safety for creditors.
Ratio of Companies’ Total Debt to Equity and Interest Coverage
Ratio (Operating Profit /Interest Payments)
(1996 - 2006, percent)
350
300
Interest Coverage Ratio
Total Debt / Equity Capital
250
200
150
100
50
Source: CBT Sectoral Balance Sheets
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
38
Households
Exchange Rate and Interest Rate Risk
of Households
10
Ratio of FX-indexed Consumer Loans to Total
Consumer Loans
(2003 – May 2008, percent)
8.6
8
6.4
 In Turkey, the practice of variable interest
6
rate for consumer loans is limited.
4
 FX denominated loans are not extended
2
to consumers and companies with no FX
0
4.8
2003
income.
loans.
2005
3.9
4.1
2006
2007
May 2008
Source: CBT
Ratio of Household Liabilities to GDP
 FX-indexed consumer loans make up
only 4.1% of total amount of consumer
2004
3.6
(2004-2006, percent)
70
57
60
63
60
European Union
50
Eastern Europe
 The ratio of non-performing loans to
40
consumer loans is 1.57%, by May 2008.
30
 Household indebtedness is at a low level
compared to European Union and Eastern
Europe countries.
Turkey
20
10
12
5
23
17
9
8
0
2004
Source: ECB, CBT
2005
2006
39
Public Sector
Public Sector Net Debt Stock / GDP
Public Finance
(2000-2007, percent)
70
Net Domestic Debt
60
50
39
40
 Thanks to fiscal policies implemented since
2001, public sector has become more resilient
to external shocks.
Net Foreign Debt
36
38
30
36
29
35
20
28
10
25
17
14
13
2002
2003
2004
4
1
2005
2006
2007
Central Government FX-denominated and FXindexed Debt Stock (2004 Q4-2008 Q2*, Ratio to
 The ratio of FX-debt within the total central
government debt stock is 32% as of April 2008.
Ratio of net foreign debt stock to GDP declined
to 1% by end-2007.
2001
28
6
0
2000
30
Total Central Government Debt, percent)
70
60
50
40
* As of April 2008
Source: Treasury, CBT
2008 Q2
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
20
2001 Q2
reserves with the aim of minimizing any liquidity
risk that might arise in cash and debt
management.
30
2000 Q4
 The Treasury maintains a high level of FX
40
Central Bank Foreign Exchange Reserves

Even in floating exchange rate regime, keeping a strong foreign exchange reserve
position is very important for the economies of developing countries like Turkey in
order to eliminate the unfavorable effects of potential shocks and to boost
confidence in the country’s economy.

Foreign exchange reserves of the Central Bank amounts to USD 77.5 billion as of
May 2008.
Ratio of FX Reserves to GDP in 2007 in the Countries
Implementing Floating Exchange Rate Regime*
Central Bank FX Reserves
(2002- May 2008, billion USD)
(2007, percent)
18.7
20
18
16
14
12
10
8
6
4
2
0
90
80
11.0
71,3
70
58,3
60
48,3
50
40
30
77,5
33,7
36,0
2003
2004
27,0
20
Average of Countries
Implementing Floating Exchange
Rate
Turkey
* Countries used in the calculation: Argentina, Brazil, Chili, Colombia, Croatia, Czech
Republic, India, Indonesia, Kazakhstan, Mexico, Paraguay, Peru, the Philippines, Poland,
Romania, Russia, South Africa, South Korea, Thailand, Uruguay
Source: IMF, CBT
10
0
2002
2005
2006
2007
2008 May
Source: CBT
41
Overall Assessment

Evidently, in the floating exchange rate regime, the Central Bank can
implement a more flexible liquidity policy in comparison to fixed or
managed exchange rate regime. It can also respond to liquidity
requirements of the banking system in a more flexible and prompt
manner, and prevent any excessive volatility in money market interest
rates.

However, it is imperative that the banking sector and the real sector
should not slacken risk management principles by relying on the more
flexible and effective Turkish lira liquidity management and the foreign
exchange liquidity facility of the Central Bank.

Considering the fact that they operate in an environment where the
exchange rate risk is in the market, they should establish mechanisms
that will ensure the effective management of this risk.
42
Overall Assessment

All in all, current indicators show that endurance of the Turkish
economy in the face of fluctuations in global markets has relatively
increased compared to the previous years.

Having said that, the decline in fragilities in comparison to the previous
periods should not be interpreted as the absence of risks.
43
IV. Inflation Developments,
Outlook and Risks
44
Global Inflation Developments
Global Inflation Developments
(January 2005 - March 2008, consumer
prices, year-on-year change, percent)
14
 Since 2007, there is an apparent
12
upward acceleration in consumer
10
Turkey
prices inflation all over the world.
8
Developing Countries
6
 The rate of increase in developed
World
4
countries’ annual inflation is at its
2
highest level of the last 16 years.
Developed Countries
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
01-06
11-05
09-05
07-05
05-05
03-05
01-05
0
Source: IFS, Central Banks, CBT
45
World Commodity Prices
International Price Indices of Selected Products
380
metal, and energy are among the main
330
factors leading to global inflation risk.
280
Metal
Energy
230
Wheat
180
130
developing countries, mainly China and
80
India, has createsda demand-driven
Source: IMF
pressure on commodity prices.
Crude Oil Prices and Global Growth Rate
 Moreover, the utilization of food stuff
80
such as corn, wheat, and sugar beet in
70
%4
40
%3
30
20
%2
10
Source: IMF
2007
2006
2005
2004
2003
2002
2000
1999
1998
1997
1996
1995
%1
1994
0
1993
commodity prices.
%5
50
1992
factors leading to an increase in the
%6
Oil Prices (USD, left scale)
Global Growth Rate
(right scale)
60
1991
unfavorable weather conditions are
(1990 –2007)
1990
producing biofuels accompanied with
Rice
01-04
03-04
05-04
07-04
09-04
11-04
01-05
03-05
05-05
07-05
09-05
11-05
01-06
03-06
05-06
07-06
09-06
11-06
01-07
03-07
05-07
07-07
09-07
11-07
01-08
03-08
 Recovery in the general prosperity of
2001
 Hikes in the prices of especially food,
(January 2004 – March 2008, 2002=100)
46
World Commodity Prices
Crude Oil Prices, Europe (Brent)
100
130
(1 January 2007 – 23 May 2008)
120
90
110
In US dollars
(right scale)
 Although economic slowdown is
80
expected in the developed countries,
70
90
60
80
In Euro (left scale)
50
05-08
04-08
03-08
02-08
01-08
12-07
11-07
10-07
09-07
08-07
07-07
06-07
countries.
05-07
40
04-07
30
03-07
expectations in the developing
60
40
02-07
continued in 2008 due to high growth
70
50
01-07
the upsurge in commodity prices has
100
Source: Bloomberg
 In May 2008, crude oil prices
surpassed their highest level
Spot Gold Prices*
800
1100
(1 January 2007 – 23 May 2008)
1000
In US dollars
(right scale)
700
experienced in 1979 in real terms.
900
600
800
 In the first quarter of 2008,
600
* Price of one ounce of gold quoted on the London gold market
Source: World Gold Council
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
500
03-07
400
02-07
gold prices.
In Euro (left scale)
01-07
consecutive peeks were observed in
700
500
47
Inflation Differentiation Among Country Groups
Share of the Food Items in the CPI Basket
(2006, percent) Income Per Capita (Purchasing Power
 Inflation rates of both developed and
Parity, 2006, USD)
developing countries has accelerated
70
differentiation in underlying inflation dynamics
between these two groups.
 The most important reason for the
differentiation is significant differences
between the consumer prices baskets used in
inflation calculation.
• Food products have a substantial weight in the
inflation basket of developing economies.
• Technological products, prices of which have
downward tendency, have significant weight in
the inflation basket of the developed countries.
Share of the Food Items in the CPI Basket (percent)
recently, but there also appears to be a
White Russia
Haiti
My anmar
Sri Lanka
Bangladesh
Armenia
Ky rgy zstan
Egy pt
60
Jamaica
Algeria Bulgaria
Senegal
Morocco
Russia
Zimbabwe
Y emen
UkraineTunisia
India
RomaniaLithuania
50 Uganda
Portugal
Ghana
Keny a
Colombia
Guatemala
Malta
HondurasMacedonia
Costa Rica
Latv ia
Israel Uruguay Croatia
Thailand
Ecuador
Argentina
40
Malay sia
Kuwait
Panama Poland Estonia
Chile
Saudi Arabia
Korea
ChinaTurkey
Hong Kong
Singapore
Israel
Japan
Slov akia
Hungary Slov enia
30
Ireland
Brazil
Germany
South Af rica
New Zealand
20
Austria
France
Switzerland
the Netherlands
Australia
Iceland
the USA
Belgium
Canada
Norway
Finland
Sweden
the United
Kingdom
Denmark
10
Developed Countries
0
0
10000
20000
30000
40000
Income Per Capita
Source: ILO
48
Differentiation in Monetary Policies

Food prices have caused upward inflationist pressures in all country groups. This
pressure is more evident in the developing countries.

Due to problems in financial markets, the central banks of the developed countries
have given more priority to financial stability and growth, whereas the central banks
of the developing countries focus on price stability.

Consequently, a tighter monetary policy stance is observed in the developing
countries.
Policy Rates in Developing Countries*
Policy Rates in Developed Countries*
* USA, Eurozone, UK, Japan, Canada
Source: Central banks
04-08
03-08
02-08
01-08
12-07
11-07
6.1
10-07
2.6
09-07
6.3
08-07
2.8
07-07
6.5
06-07
3.0
05-07
6.7
03-07
3.2
02-07
6.9
01-07
3.4
03-08
7.1
01-08
3.6
11-07
7.3
09-07
3.8
07-07
7.5
05-07
4.0
03-07
7.7
01-07
4.2
04-07
(January 2007 – April 2008, percent)
(January 2007 – April 2008, percent)
* Brazil, Czech Republic, China, South Africa, S. Korea, Hungary, Malaysia,
Mexico, Poland, Romania, Russia, Chile, Thailand, Taiwan, Ukraine
Source: Central banks
49
Effects on the Turkish Economy
Effects of global inflation
60
developments on the Turkish economy
Inflation and Import Unit Prices in Turkey*
(January 2007 – March 2008, year-on-year change, percent)
50
Agricultural Products
Import Unit Price
40
 High increases especially in the prices
of agricultural products have caused a
Mining Products
Import Unit Price
30
significant burden for developing
countries like Turkey where the share of
Import Unit Price
20
food expenditures within total consumer
expenditures is high.
 As Turkey is a net commodity importing
CPI
10
0
country, hikes in the prices of energy and
balance.
* In US dollars
Source: TURKSTAT, CBT
03-08
02-08
01-08
12-07
11-07
10-07
09-07
08-07
07-07
06-07
05-07
04-07
03-07
02-07
both inflation and the foreign trade
-10
01-07
metals have also unfavorable impacts on
50
Comparative Inflation Developments
Inflation Developments in Turkey and the World
(Difference Between the Inflation Rates of 2006 and 2007,
-2
0
2
4
6
percent)
 Despite unfavorable
exogenous shocks, Turkey is
among the few countries that
lowered inflation in 2007.
 In this period, the inflation rate
increased by approximately 2
percentage points on average
among 60 countries, while the
said rate decreased by 1.3
percentage points in Turkey.
LATVIA
BOLIVIA
BULGARIA
VENEZUELA
BELARUS
CHILE
UKRAINE
ESTONIA
CZECH R.
LITHUANIA
CROATIA
CHINA
SINGAPORE
SAUDI ARABIA
ISRAEL
S.AFRICA
SLOVENIA
RUSSIA
PERU
MALTA
POLAND
AUSTRIA
URUGUAY
SWEDEN
ECUADOR
ROMANIA
SPAIN
USA
KOREA
HONG KONG
BELGIUM
GERMANY
SWITZERLAND
BRAZIL
COLOMBIA
USA
LUXEMBOURG
FRANCE
HUNGARY
GREECE
HOLLAND
ITALY
CANADA
NORWAY
N.ZEALAND
DENMARK
JAPAN
FINLAND
PORTUGAL
INDONESIA
IRELAND
THAILAND
AUSTRIA
MEXICO
ENGLAND
PHILIPPINES
MALAYSIA
SLOVAKIA
INDIA
ICELAND
TURKEY
8
Average
Increase
Turkey
-2
0
Source: IMF, TURKSTAT, CBT
2
4
6
8
51
Comparative Inflation Developments
 Turkey’s ranking in inflation has
Turkey in the Global Inflation Ranking
(1997 – 2008, January)
70
improved in recent years.
59
60
53
 Between 1997 and 2003 Turkey
was among the 10 countries that had
50
the highest inflation.
40
 Despite the exogenous shocks in
30
2007, Turkey moved down to the
59th place as of January 2008.
34
25 26
20
10
4
7
7
10
8
9
4
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20072008*
* Most recent data announced in January 2008
The total number of countries is 155.
Tha ranking is in descending order.
Source: IMF, TURKSTAT, CBT
52
Comparative Inflation Developments
Inflation Differential Between the Countries
Implementing Inflation Targeting* and Turkey
(December 2005 – April 2008, year-on-year change, percent)
 In the third quarter of 2006, the
9
Monetary
Tightening
inflation in Turkey was 8 percentage
points higher compared to the
inflation figures in other developing
8
Prudent Rate
Cuts
7
countries that implement inflation
targeting.
6
5
 The said difference began to
narrow due to the monetary
tightening exercised from mid-2006
4
3
onwards and decreased to 3
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
02-06
2
12-05
percentage points by early-2008.
* Countries Implementing Inflation Targeting Regime: Brazil, Czech Rep., Colombia,
Philippines, South Africa, Israel, Hungary, Mexico, Peru, Poland, Romania, Chile,
Slovakia, Thailand
Source: Central Banks, TURKSTAT, CBT
53
Comparative Inflation Developments
Inflation Targets, Uncertainty Band and
Inflation in Countries Implementing Inflation
Targeting Regime
(April 2008)
12
Ratio of Inflation to Inflation Target in
Economies Countries Inflation Targeting
Regime
(April 2008)
3
Inflation
10
Inflation Target
Uncertainty Band
2
8
6
1
4
Brazil
Thailand*
Colombia
Mexico
Poland
Philippines
Slovak Republic
Hungary
Czech Republic
Romania
Israel
Turkey
Peru
Thailand*
Slovak Republic
Israel
Peru
Poland
Mexico
Hungary
Czech Republic
Chile
Romania
Turkey
Philippines
Colombia
Brazil
South Africa
* In Thailand inflation targets are determined according to core inflation. Therefore,
calculations were made utilizing the core inflation rate instead of consumer prices.
Source: Central Banks, TURKSTAT, CBT
Chile
0
0
South Africa
2
* In Thailand inflation targets are determined according to core inflation. Therefore,
calculations were made utilizing the core inflation rate instead of consumer prices.
Source: Central Banks, TURKSTAT, CBT
54
Inflation Developments in Turkey
Consumer, Services and Goods Inflation
 In the first three quarters of 2007, inflation,
as projected, fell gradually and was 7.1% in
18
(January 2004 – April 2008, year-on-year change,
percent)
Services Inflation
September 2007.
16
 In the last quarter of the year, supply-side
shocks such as drought and hikes in energy
14
prices as well as adjustments in administered
prices interrupted the downward tendency of
12
Consumer
Inflation
inflation.
10
 As of April 2008, year-on-year inflation
 Despite the downward trend apparent in
services inflation, goods inflation has
followed a more upward course due to
external and supply-side factors.
8
6
Goods Inflation
4
01-04
03-04
05-04
07-04
09-04
11-04
01-05
03-05
05-05
07-05
09-05
11-05
01-06
03-06
05-06
07-06
09-06
11-06
01-07
03-07
05-07
07-07
09-07
11-07
01-08
03-08
stood at 9.66%.
Source: TURKSTAT, CBT
55
Inflation Developments in Turkey

Prices of the items outside the control of monetary policy such as food, energy
and administered prices contributed to the annual inflation by 51% in
2004-2006 period, whereas this contribution increased to 71% in April 2008.
Annual Inflation Components
(share, percent)
April 2008
Average of 2004 – 2006
Tobacco**
Tobacco**
Energy
Others
9.7
28.4
25.5
17.0
Others
6.0
Energy
49.4
23.9
Food*
40.0
Food*
* Food: Food and non-alcoholic beverages
** Tobacco: Tobacco products and alcoholic beverages
Source: TURKSTAT, CBT
56
Inflation Developments in Turkey
 Food prices stand as one of the main
factors that have impeded the disinflation
process in 2007.
- As of April 2008, food group has added 3.9
percentage points to annual inflation.
Food and Non-Food CPI*
16
14
(January 2004 – April 2008, year-on-year change,
percent)
Food and NonAlcoholic Beverages
12
- Non-food inflation, which was 9.1% in
December 2006, declined to 4.98% in
October 2007.
- Adjustments to administered prices in
November and January halted the
deceleration in non-food inflation. As of April
2008, the year-on-year increase in non-food
inflation was 8.1%.
10
8
6
CPI Excluding Food
4
2
0
01-04
03-04
05-04
07-04
09-04
11-04
01-05
03-05
05-05
07-05
09-05
11-05
01-06
03-06
05-06
07-06
09-06
11-06
01-07
03-07
05-07
07-07
09-07
11-07
01-08
03-08
 Non-food inflation demonstrated a
significant slowdown in 2007 compared
to 2006.
*CPI excluding food and non-alcoholic beverages
Source: TURKSTAT, CBT
57
Inflation Developments in Turkey
Food Inflation:

Year-on-year increase in unprocessed food inflation declined significantly by 6.7 percent in
comparison to April 2007.

Year-on-year increase in processed food prices maintained their upward trend and reached 20.2
percent on. Year-to-date inflation in processed food prices stood at 9.2 percent.

Bread and cereals prices continue to climb in response to soaring domestic and global wheat
prices. The year-to-date increase of the prices in this group is 12.8 percent.
Unprocessed Food and Processed Food Inflation
Food Prices
(January 2006 –April 2008, year-on-year change, percent)
(2006 –2008, year-to-date change, percent)
24
24
2008
21.2
20
Unprocessed
Food
16
Processed
Food
20
2007
16
12
13.5
12
9.2
8
9.9
12.8
2006
11.0
9.2
10.5
8
4
Non-food CPI
4
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
01-06
0
4.0
5.0
2.2 2.6
0
Processed Food
Unprocessed Food
Fresh Fruit and
Vegetable
Bread and Cereals
58
Inflation Developments in Turkey
Goods Inflation:
Goods Group Inflation and Selected Sub-items
(January 2006 – April 2008, year-on-year change, percent)
 Year-on-year goods inflation, which
started to decelerate in March 2007,
Automobile
15
Furniture
Goods
Group
declined to 5.7% in July, but rebounded to
9.8% in April 2008 due to increased food
10
and energy prices along with adjustments
to administered prices.
5
 Prices of durable goods posted a yearon-year decrease, albeit limited, while the
0
rise in gold prices continued to affect
Durables
(excluding Gold)
-5
energy and unprocessed food.
Source: TURKSTAT, CBT
03-08
01-08
11-07
09-07
07-07
05-07
03-07
01-07
11-06
07-06
05-06
01-06
-10
09-06
Electrical and NonElectrical Appliances
03-06
adversely the prices of goods excluding
59
Inflation Developments in Turkey
Services Inflation and Selected Sub-items
(January 2006 – April 2008, year-on-year change, percent)
 Services inflation stood at 9.2% as
21
of April 2008.
19
Restaurants and Hotels
Transport
Services
15
energy prices curbed the downtrend in
services inflation.
13
- The deceleration in rent inflation is
11
9
which was 20% at end-2006,
03-08
01-08
05-07
03-07
01-07
11-06
09-06
05-06
03-06
5
01-06
decreased to 14.4% in April 2008.
Services Group
7
07-06
noteworthy. Year-on-year increase,
11-07
services due to soaring food and
17
09-07
- Price hikes in catering and transport
Rent
07-07
Services Inflation:
Source: TURKSTAT, CBT
60
Inflation Developments in Turkey
In the last three years as of April;

Services inflation has slowed down significantly compared to previous years.

Year-on-year inflation in energy prices displays a higher trend compared to that of 2005
and 2006 owing to supply shocks.

Year-on-year inflation excluding energy and unprocessed food increased by 8.6% in April
2008. This development was mainly driven by significant price hikes in processed food,
tobacco and gold.
Inflation by Groups
Inflation by Groups
(2006-2008, year-on-year change, as of April, percent)
(2006 –2008, year-to-date change, as of April, percent)
22
20
18
16
2006
2007
2008
17.5
16
12
14
10
12
10
11.8
11.3
2007
2006
9.9
2008
8.0
8.7
9.1
8
6.7
6
8.6
5.6
4
Energy
Source: TURKSTAT, CBT
Unperocessed
Food
Goods exc. Energy
and Unprocessed
Food
9.2
7.8
8
9.2
Services
13.5
14
16.6
16.3
6
4
3.3 2.9 3.5
3.4
3.4
2.0
1.6
2
0
Services
Energy
Source: TURKSTAT, CBT
0.0
Unprocessed Food Goods exc. Energy
and Unprocessed
Food
61
Inflation – Expectations
 The recent upward movement in
expectations has increased the risks to the
price setting behavior.
Inflation and Inflation Expectations
14
(January 2005 – May 2008, year-on-year change, percent)
 Inflation expectations
• Year-end: 9.64%
CPI
12
12 Months
• 12 months ahead: 7.88%
• 24 months ahead: 6.67%
 Increases in food and energy prices
9,66
10
24 Months
7,88
8
6,67
impede the disinflation process as well as
the recovery in expectations.
 Moreover, the deterioration in exchange
6
4
rate movements and risk perception have
expectations.
2
01-05
04-05
07-05
10-05
01-06
04-06
07-06
10-06
01-07
04-07
07-07
10-07
01-08
04-08
07-08
10-08
01-09
04-09
07-09
10-09
01-10
04-10
negative implications on inflation
2008-2009-2010 Target: 4 %
Source: CBT, TURKSTAT
62
Inflation – Trend

The slowdown in the inflation trend observed throughout the four quarters from
September 2006, was interrupted in the last quarter of 2007.
Potential second round effects of rising food and energy prices will continue to
be monitored closely in the upcoming period.
Inflation Trend
(January 2006 – April 2008, year-on-year change, percent)
11
10
9
8
7
6
5
4
3
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
2
01-06

* Annualized monthly change of seasonally adjusted SCA-I index (3-month moving average) .
Source:TURKSTAT, CBT
63
Inflation – Forecasts

Persistency of supply shocks, ongoing uncertainties in global economy
and second round effects have necessitated a significant upward
revision in our inflation forecasts.
The Sources of Changes in Inflation Forecasts
(percentage point)
2008
2009
Food Prices
1.2
1.1
Oil Prices
0.9
0.4
1.5 – 2.0
1.0
Other
-
0.5
Total
3.8
3.0
Exchange Rate
Source: CBT
64
Inflation – Forecasts
Forecasts for Inflation and Output Gap
Baseline scenario assumptions:
2008
2009
2010
Oil Prices
$ 105
$ 105
$ 105
Food Prices
13%
8%
7%
 Under the assumption that policy
rates are increased gradually and
cautiously until mid-2008 and then
kept flat for the rest of the year...
(2007 Q4 – 2011 Q1, percent)
12
Forecast Range*
Output Gap
Medium Term Target
Uncertainty Band for 2008
10
8
6
4
2
0
-2
2011-I
2010-IV
2010-III
2010-II
2010-I
2009-IV
4.0 %
2009-III
mid-2011
2009-II
4.9 %
2009-I
2010
-6
2008-IV
6.7 %
2008-III
2009
2008-II
9.3 %
2008-I
2008
-4
2007-IV
Inflation Forecasts:
*The shaded region indicates the 70 percent confidence interval for forecast.
Source: CBT
65
Inflation – Risks
Pessimistic scenario:
Inflation Forecast
2008
2009
2010
Oil Prices
$ 125
$ 150
$ 150
Food Prices
17%
11%
10%
 Increasing the policy rates gradually until
end-2008.
(2007 Q4 – 2011 Q1, percent)
12
Pessimistic Scenario
Baseline Scenario
10
Optimistic Scenario
Medium Term Target
8
6
2011-I
0
2010-IV
 Increasing the policy rates cautiously in the
upcoming months, then keeping constant,
followed by gradual cuts in the last quarter of
2008.
2
2010-III
%4
2010-II
5%
2010-I
9%
2009-IV
Gıda Fiyatları
2009-III
85 $
2009-II
85 $
2009-I
95 $
2008-IV
Petrol Fiyatları
4
2008-III
2010
2008-II
2009
2008-I
2008
2007-IV
Optimistic scenario:
Source: CBT
66
Inflation – Risks
Risks: Energy and Food Prices

A protracted period of rising food and energy prices have led to a
significant overshooting of the inflation targets since the adoption of the
inflation targeting regime and consequently increased stickiness in
inflation expectations, as economic agents have become more backward
looking.

Risks related to energy and food prices exist in both directions:
•
In case the prices turn out to be worse than expected, the monetary policy
stance might get tighter.
•
In case the prices turn out to be better than expected, inflation is expected to
reach the level of 4 percent in a shorter period of time.
67
Inflation – Risks
Risks: Expectations and Pricing Behaviors

Under normal conditions, supply shocks are expected to affect relative
prices temporarily, not the underlying inflation trend.

Nevertheless, the fact that several long-lasting shocks appeared
concurrently has increased the risks to price setting behavior.

In the period ahead, it may be necessary to pursue a tighter monetary
policy for a longer duration in comparison to the aforementioned baseline
scenario, should the price setting behavior continues to deteriorate and
inflation continues to be more rigid than expected.

It is assumed that government expenditures will evolve in line with the
budget and that there will be no further increases in indirect taxes or
administered price adjustments, except those required by the automatic
pricing mechanism. Any deviation from this may have an effect on the
outlook for inflation and monetary policy.
68
Inflation – Risks
Risks: International Developments

Another major risk to the inflation outlook is a sharper than expected
slowdown in the global economic activity, which, in turn, could lead to
further volatility in financial markets.

Movements in exchange rates resulting from global uncertainties carry
the risk of impeding the disinflation process.

On the other hand, given the weak demand conditions, second round
effects of the exchange rate pass-through should be relatively limited at
this point.

The Central Bank of Turkey will not react to temporary fluctuations in
financial markets via policy rates. Yet, we will not hesitate to tighten
monetary policy in case of a significant worsening in the general pricing
behavior.
69
VI. Monetary Policy Stance
70
Monetary Policy Decisions
Monetary Policy Decisions
Interest Rate Decisions of the
Monetary Policy Committee
(January 2007 – May 2008, percent)
 At its meeting of 13 September 2007,
Monetary Policy Committee initiated a cautious
rate cut cycle, which continued until 19 March
2008 and involved a total of 225 basis point
cut.
 The recent rise in food and energy prices,
along with the ongoing uncertainties in global
economy, has increased the risks regarding
the price setting behavior and the degree of
inflation persistence.
 The MPC decided to raise policy rates by 50
basis points in May 15 meeting to prevent the
the potential second-round effects of the
Meeting Date
Policy Rates
Change
16 January 2007
15 February 2007
15 March 2007
18 April 2007
17.50
17.50
17.50
17.50
0
0
0
0
14 May 2007
17.50
0
14 June 2007
17.50
0
12 July 2007
17.50
0
14 August 2007
13 September 2007
16 October 2007
14 November 2007
13 December 2007
17 January 2008
14 February 2008
19 March 2008
17 April 2008
15 May 2008
17.50
17.25
16.75
16.25
15.75
15.50
15.25
15.25
15.25
15.75
0
- 0.25
- 0.50
- 0.50
- 0.50
- 0.25
- 0.25
0
0
+ 0.50
Source:CBT
adverse developments in food and energy
prices.
71
Monetary Policy Decisions

2008 January Inflation Report: “Main message of the forecast is that continuation of the
gradual easing cycle that started in 2007 September will remain conditional on favorable
data and developments.”

MPC Decision dated 14 February 2008: ”Ongoing uncertainties in the global economy
and the risks to the price setting behavior compel the CBT to be cautious with regard to
the monetary policy”

MPC Decision dated 19 March 2008: “The Committee assesses that rising global
uncertainty and the adverse developments in food and energy prices may lead to some
delay in reaching the inflation target.”

2008 April Inflation Report: “Supply shocks have turned out to be more persistent than
expected, increasing the risks to the second round effects and necessitating a significant
upward revision in our inflation forecasts. Accordingly, monetary policy has already
assumed a more cautious stance.”

MPC Decision dated 15 May 2008: “Central Bank will continue to take necessary
measures to prevent the potential second round effects of the adverse developments in
food and energy prices. Accordingly, the Committee will consider the possibility of a
further measured rate hike in the next meeting.”
72
Monetary Policy Decisions
Ensuring a steady decline in inflation will likely require tight monetary policy
to be maintained for an extended period.
Policy Rates (simple interest) and Core Inflation Indicators
(January 2006 – May 2008, year-on-year change, percent)
13
20
Policy Rate (right scale)
12
19
11
18
10
17
9
16
SCA-H (left
scale)
8
15
7
14
6
13
5
12
SCA-I (left scale)
05-08
03-08
01-08
11-07
09-07
07-07
05-07
03-07
01-07
11-06
09-06
10
07-06
3
05-06
11
03-06
4
01-06

Source: TURKSTAT, CBT
73
Monetary Policy Stance

The rise of risks related to food and energy prices indicate that reaching
the 4 percent inflation target will take longer than estimated.

Monetary policy focuses on price stability in the medium term. However,
under current circumstances, the CBT will not stick to a tight stance
about the duration of reaching the target.

In fact, a strong response to the hike in inflation caused by supply
shocks may lead to undesired fluctuations in the economic activity and
relative prices. Therefore, we envisage a framework, in which inflation
will realize above the target at the end of 2009.

In this period where uncertainties and risks grow, the CBT will continue
to implement the policies focusing on keeping inflation under control,
ensuring convergence to the target in the medium term and maintaining
the achievements on the way to price stability.
74
Monetary Policy Stance

The Central Bank will not let the recent deterioration in inflation
expectations worsen the overall pricing behavior.

In this respect, the CBT will be more responsive against bad news than
good news and will consider a measured tightening when needed.

In this conjuncture, where economic uncertainties increase throughout the
world, the CBT will put effort to keep the monetary policy relatively
foreseeable, but resilient to shocks at the same time.
75
Monetary Policy Stance
Importance of the Coordination Between Monetary and Fiscal Policies:

Prudent monetary policy is a necessary but not a sufficient condition in
itself for attaining price stability.

The support from fiscal policy and structural reforms are also critical in
this respect.

Sound fiscal policy has been one of the main factors in driving inflation
down to single digits.

The role of fiscal policy will continue to be critical on the road to price
stability. Preserving the resilience of the economy, especially under
current conditions, requires the continuation of fiscal discipline and
structural reforms.
76
Inflation Target

The views on the persistency of the rise in energy and food prices have started
to gain more support recently.

In case the food and energy-driven inflationary pressures persists, the 4 percenttarget may not be attained in the short run.

In April, the Committee meeting agenda covered the issue of target revision.
Committee members indicated that changing the target for end-2008 would not
be appropriate, since doing so would be a clear violation of the accountability
principle in practice.

Regarding targets for 2009 and afterwards, the Committee assessed that, given
the uncertainty surrounding the food and energy prices as well as the global
economy, it would be wiser to reconsider the issue towards the end of this year
in tandem with the budget preparations.

We envisage a framework in which the inflation forecasts announced in 30 April
2008 serve as intermediate anchors while the medium term is anchored by the 4
percent target.
77
Monetary Policy Stance

Current liquidity conditions provide the CBT with a flexible tool to engineer a
rapid monetary tightening when needed.

The excess liquidity in the money market has been shrinking during the past
few months, due to factors such as reduced daily minimum amount in
reserve purchase auctions, the Treasury’s preference of borrowing in YTL,
and rising money demand. This trend is expected to prevail in the
forthcoming period, possibly leading to a tightening in monetary conditions.

This framework provides the CBT with a flexible and efficient tool, which
makes it possible to implement a monetary tightening without conducting a
formal MPC meeting.
78
Monetary Policy Stance

Monetary policy stance is determined in view of inflation targets, available data,
future expectations and medium-term inflation expectations.

Any new data related to the medium-term inflation outlook will lead to revision of
future stance of monetary policy.

Examples of data dependency in the event of:
•
Sharper than expected slowdown in European economies: External
demand would slow down, inflation expectations would drop below the
target, the monetary policy would be loosened.
•
Loosening of fiscal policies: Inflation forecast would surpass the inflation
target, a new monetary policy (monetary tightening) would be implemented
to render the inflation expectations consistent with the target.
79
Monetary Policy for Price Stability

Significant progress has been achieved on the way towards price stability,
but we have not reached price stability yet.

In this conjuncture, a monetary policy that is consistent with inflation
targets and that take domestic demand under control will be pursued in
order to reduce inflation and to ensure its convergence to the inflation
target.

Many developed countries that have achieved price stability were obliged
to adopt strong monetary tightening in the past in order to bring inflation
under control.
80
Monetary Policy for Price Stability
Example : USA, 1976 – 1982
(1976 – 1986, year-on-year change, percent)
20
 The strong monetary tightening that was put into
practice in 1980 was instrumental in taking the
inflation - under control and restoring price
stability.
16
 The main reasons for severe monetary
tightening in this period were that a monetary
policy, which would bring inflation under control,
was not adopted in the 1976-1980 period and that
the rises in policy rates lagged inflation
developments.
10
 Eventually, the cost of reestablishing price
stability became much more higher for the US
economy.
Strong monetary
tightening
18
14
Lagged
response
Policy Rate
12
8
6
4
2
Inflation
0
01-76
07-76
01-77
07-77
01-78
07-78
01-79
07-79
01-80
07-80
01-81
07-81
01-82
07-82
01-83
07-83
01-84
07-84
01-85
07-85
01-86
07-86
 In the early 1980s, the rate of inflation rose to
14% due to the failure of the monetary authority to
give a strong response to the inflation that had
gained pace in late 1970s.
Policy Rates (simple interest)
and Inflation in the USA
Source: FED
81
Monetary Policy for Price Stability
Policy Rates (simple interest)
and Inflation in Brazil
Example 2: Brazil, 2002 – 2003
(2000 – 2007, year-on-year change, percent)
 In the 2001-2003 period, inflation in Brazil
overshot the targets due to the sudden stop
30
Strong monetary
tightening
Policy rate
25
in capital inflows as well as the depreciation
of the Brazilian currency against the US
dollar.
 As a result of strong monetary tightening
20
15
10
Inflation
and disciplined fiscal policy, inflation was
taken under control in the following periods
5
and driven back to the target path.
07-07
01-07
07-06
01-06
07-05
01-05
07-04
01-04
07-03
01-03
07-02
01-02
07-01
01-01
07-00
01-00
0
Source: Banco Central do Brasil (BCB)
82
-2
Source: Central Banks
07-96
01-96
-2
07-95
10-94
2
01-94
10
04-93
Inflation
07-92
10-91
01-91
Inflation
04-90
0
07-89
6
10-88
6
01-88
10
07-86
04-87
12
10-85
Policy rate
01-85
12
04-84
Sweden
07-83
6
10-82
8
01-82
Policy Rate
07-80
04-81
12
10-79
16
01-78
05-78
09-78
01-79
05-79
09-79
01-80
05-80
09-80
01-81
05-81
09-81
01-82
05-82
09-82
01-83
05-83
09-83
01-84
05-84
09-84
01-85
05-85
09-85
England
01-79
8
07-95
10
01-95
07-91
01-92
07-92
01-93
07-93
01-94
07-94
01-95
07-95
01-96
07-96
10
07-94
01-94
07-93
01-93
07-92
01-92
14
07-91
18
01-91
07-90
01-90
0
07-89
07-85
01-86
07-86
01-87
07-87
01-88
07-88
01-89
07-89
01-90
07-90
01-91
01-85
2
01-89
07-88
01-88
2
07-87
01-87
Monetary Policy for Price Stability
Examples of Monetary Tightening Against High Inflation
Holland
14
Policy rate
8
6
4
4
0
Inflation
Japan
8
Policy rate
4
4
2
0
Inflation
83
VII. Markets
84
Interest Rates
 Recent rise in interest rates in market can mostly be attributed to the reflections of global risks
on the domestic environment.
 In line with deterioration in risk perceptions, interest rates started rising particularly as of endFebruary and stayed above policy rates.
 Most recently, the difference between policy rates and the benchmark interest rates has
reached to 280 basis points.
CBT Policy Rates and Benchmark Government
Securities Interest Rate
(1 January 2006 – 22 May 2008, compound, percent)
24
Real Interest Rate of 2-Year Government Bonds
and 3-Year CDS Rate
(1 October 2008 – 23 May 2008, compound, percent)
13
250
23
22
Source: CBT.
100
2-Year Real Interest
Rate (left scale)
50
Source: Bloomberg, CBT.
05-08
9
04-08
04-08
01-08
10-07
07-07
04-07
01-07
10-06
07-06
04-06
01-06
12
10
03-08
Benchmark Govt. Sec.
Interest Rate
14
13
150
02-08
15
11
01-08
17
16
200
3-Year CDS (right scale)
12-07
18
12
11-07
Policy Rate
20
19
10-07
21
85
Interest Rate Developments
Real Borrowing Interest Rate
 Thanks to the achievements in
macroeconomic stability, nominal
(January 2002 – April 2008, compound, percent)
14
35
13
interest rates and real interest rates
have substantially declined from 2002
onwards.
12
30
11
10
9
25
8
in the 20-30% interval in early 2002,
03-08
01-08
11-07
09-07
07-07
05-07
03-07
01-07
11-06
07-06
09-06
05-06
20
03-06
 Real interest rates, which fluctuated
01-06
7
15
dropped to 9.8% at the end of 2007.
10
 In early 2008, real interest rates rose
to 10.8% due to financial turbulences.
**
01-02
04-02
07-02
10-02
01-03
04-03
07-03
10-03
01-04
04-04
07-04
10-04
01-05
04-05
07-05
10-05
01-06
04-06
07-06
10-06
01-07
04-07
07-07
10-07
01-08
04-08
5
* Based on the interest rates accepted in the Treasury’s domestic borrowing
auctions and the 12-month inflation forecasts of the Expectations Survey.
Source: Undersecretariat of Treasury and CBT.
86
Interest Rate Developments

Nominal interest rate is determined by three variables:
Nominal Interest Rate= Real Interest Rate + Inf. Expectations+ Inf. Risk Premium

Real interest rate is determined by real variables such as the marginal efficiency of
capital and the savings rate.

The level of inflation compensation, which is the sum of inflation expectations and the
inflation risk premium, will be lower in an environment where price stability is
achieved.

A fall in both inflation expectations and the risk premium leads to a decline in nominal
interest rates.

It is not possible to bring interest rates down by artificial cuts in policy rates and
below the level required to sustain the disinflation process.

On the contrary, such a move would lead to higher medium and long-term interest
rates since it would deteriorate inflation expectations and risk perceptions.
87
Policy Rate - Market Rate Relationship

Policy rate cuts are not sufficient to reduce the financial costs of commercial
enterprises and consumers, which are set in free market environment.

For instance, despite the monetary loosening being implemented by the Federal
Reserve since September 2007, cost of financing for housing and commercial sector
follow an upward trend, contrary to the decline in policy rates, chiefly owing to the
deterioration in risk perceptions.
Difference Between the Overall Level of Interest
Rates and Policy Rates in the US Economy
Interest Rates in the US Economy
(January 2006 – April 2008, percent)
Fed’s rate cut
process
8
7
(April 2006 – April 2008, percent)
6
5
6
4
5
2
Fed Funds Target Rate
Yields on Corporate Bonds (AAA Rating)
Yields on Corporate Bonds (BBB Rating)
Fixed Rate Conventional Mortgage Rates
Fixed Rate Conventional Mortgage Rates
2
1
0
01-06
02-06
03-06
04-06
05-06
06-06
07-06
08-06
09-06
10-06
11-06
12-06
01-07
02-07
03-07
04-07
05-07
06-07
07-07
08-07
09-07
10-07
11-07
12-07
01-08
02-08
03-08
04-08
1
Source: FED
01-06
02-06
03-06
04-06
05-06
06-06
07-06
08-06
09-06
10-06
11-06
12-06
01-07
02-07
03-07
04-07
05-07
06-07
07-07
08-07
09-07
10-07
11-07
12-07
01-08
02-08
03-08
04-08
3
Yields on Corporate Bonds (AAA Rating)
Yields on Corporate Bonds (BBB Rating)
3
4
Fed’s rate cut
process
Source: FED
88
Exchange Rate – Interest Rate Relationship
Floating Exchange Rate Regime
Real Borrowing Interest Rate (percent) and
Real Exchange Rate (CPI-based, January 2003 –
April 2008)
34
200
 The exchange rates is determined
under market conditions and reflects all
economic and political policy
CPI-based Real
Exchange Rate
(right scale)
29
implementations, macroeconomic
variables, as well as expectations.
 The Central Bank does not follow a
180
24
160
19
140
14
120
policy of “high interest rate - low exchange
Real Interest
Rate (left scale)
9
interest rates and the value of the Turkish
rate policy needed for low inflation”.
* Based on the interest rates accepted in the Treasury’s domestic borrowing
auctions and the 12-month inflation forecasts of the Expectations Survey.
Source: CBT, Undersecretariat of Treasury.
01-08
07-07
01-07
07-06
01-06
07-05
80
01-05
The Central Bank’s follows “the interest
100
4
01-03
currency have moved in opposite direction.
07-04
 The post-2001 period shows that real
01-04
not an objective, but a consequence.
07-03
rate”. The value of the Turkish currency is
89
Exchange Rate – Interest Rate Relationship
The relationship between Central Bank policy rates and the
exchange rates is complex and multidimensional.

Policy rate cuts would set off two mechanisms that work in opposite directions:
1.
Primary effect: The yield of the YTL-denominated assets would decline,
demand for foreign exchange would increase, Turkish currency would come
under pressure for depreciation.
2.
Expectation Channel: A positive signal would be given about the economic
outlook, confidence would increase, reverse currency substitution would
strengthen, appreciation pressure would mount on Turkish currency.

In addition, exchange rate may move independently from economic fundamentals
and policy rates due to liquidity conditions, investor sentiment and changes in
expectations.

The immediate market conditions would determine which of these channels will
prevail to what extent.
90
VIII. Economic Outlook
91
Economic Growth

The contribution of domestic demand to economic growth increased in the second half
of 2007 due to the pick-up in private consumption demand, while that of the net
external demand stayed negative.

Effects of the supply-side shock originating from the agricultural sector and the
unfavourable developments in the global credit markets were the leading factors to
decelerate economic growth in the second half of 2007.
Growth Components
Growth Components
(2006 Q1 – 2007 Q4, year-on-year contribution, percent)
12
10
GDP
9.7
8
6
Final Domestic
Consumption
(2006 Q1 – 2007 Q4, year-on-year contribution, percent)
10
Construction
8
Services
7.6
6.3
5.9
Industry
6
5.7
4.0
4
3,4
3,4
2
4
2
0
Net Exports
-2
0
Agriculture
-4
06 Q1
06 Q2
06 Q3
Source: TURKSTAT
06 Q4
07 Q1
07 Q2
07 Q3
07 Q4
-2
06 Q1
06 Q2
06 Q3
Source: TURKSTAT
06 Q4
07 Q1
07 Q2
07 Q3
07 Q4
92
Production

Data pertaining to the first months of 2008 indicate the moderate growth in economy
continues, albeit with slight slowdown.

Accumulation of problems in the international credit markets has increased the
downside risks in economic activities in the upcoming period.
165
displayed a flat course in
160
the first quarter of 2008.
155
Capacity utilization rate
145
82
150
81
140
Industrial Production
135
despite recently decreasing
130
figures.
125
80
(3-month moving averages, left scale)
79
Industrial Production
Index (Left scale)
120
* Seasonally adjusted
Source: TURKSTAT,,CBT
04-08
01-08
10-07
07-07
04-07
01-07
10-06
07-06
04-06
01-06
10-05
07-05
78
04-05
115
01-05
maintains its high level
Capacity Utlization Rate
(3-month moving averages, right scale)
10-04

83
07-04
industrial production index
170
04-04
Seasonally adjusted
01-04

Industrial Production Index* and Capacity Utilization
Rate* (January 2006 – April 2008, percent)
93
Investment Demand

Indicators of investment demand, such as production and import of investment
goods, sales of commercial vehicles do not point to an increase in investments in
the first quarter of 2008.
Investment Demand Indicators*
(2006 Q1 – 2008 Q1 year-on-year change, percent)
15
10
5
0
-5
Production of Capital Goods**
-10
Import of Capital Goods (real)
-15
Domestic Sales of Commercial Vehicles
-20
-25
2006 Q1
2006 Q2
2006 Q3
2006 Q4
2007 Q1
2007 Q2
2007 Q3
2007 Q4
2008 Q1
* Seasonally adjusted
** Average of the production indices of Machinery-Equipment and Electrical Machinery and Appliances
Source: TURKSTAT, AMA, CBT
94
Commercial Activities
Ratio of Bad Checks to the Total Amount of Checks
Submitted to the Clearing House (2003-2008*, percent)
 Parallel to the economic activities that
7
6.8
gained pace between 2002 and 2007, the
number of bad checks increased in line with
6.0
6
5.6
the number of bank checks used.
 The ratio of the amount of bad checks to
5.5
5.2
5.1
5
the total checks submitted to the clearing
house, which was 6.8% in 2003, declined to
4
2003
5.5% in 2007. This ratio stood at 5.1% in
2004
2005
2006
2007
2008*
* January-April average
Source:CBT, ICHC
the first 4 months of 2008.
12
Ratio of the amount of Protested Bills to (12month rolling, real), percent Total Commercial Loans
(January 1999 – April 2008, real, percent)
10
 Likewise, the ratio of protested bills to
commercial loans (an indicator of
commercial activities) declined to 3.3% in
April 2008 after reaching 11% in 2002.
8
6
4
2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source:CBT
95
Private Consumption

There are signs of moderate recovery in consumption expenditures since the last
quarter of 2006.

The CBT Private Consumption Index points to a moderate pick-up in private final
consumption expenditures in the first quarter of 2008.
Private Consumption Index(2004 Q1 –2008 Q1) and Resident
Household Consumption Expenditures (2004 Q1– 2007 Q4
constant prices, seasonally adjusted)
19000
101.4
Private Consumption Index
(right scale)
18000
101.2
101.0
17000
100.8
100.6
16000
100.4
Resident Household Consumption
Expenditures (left scale)
15000
100.2
2008 Q1
2007 Q4
2007 Q3
2007 Q2
2007 Q1
2006 Q4
2006 Q3
2006 Q2
2006 Q1
2005 Q4
2005 Q3
2005 Q2
2005 Q1
2004 Q4
2004 Q3
2004 Q2
100.0
2004 Q1
14000
Series making up Private Consumption Index: Seasonally adjusted imports of consumption goods,
seasonally adjusted real domestic taxes on goods and services, seasonally adjusted total domestic sales of
white goods, seasonally adjusted domestic sales of automobiles.
Source: TURKSTAT, CBT
96
Bank Credits
Although both commercial and consumer loans have continued to rise, a
slowdown is expected in the lending tendeny of the banks in the upcoming period
due to the deterioration in the international liquidity conditions and global risk
appetite.
Commercial Loans and Household Loans
90
(1 January 2006 – 9 May 2008, year-on-year change, percent)
80
Household Loans
70
60
50
40
Commercial
Loans
30
20
10
Source: CBT
05-08
04-08
02-08
03-08
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
0
01-06

97
Domestic Demand

Sales of white goods and automobiles, indicators of the economic activities in the
domestic market, maintained their current levels.
Domestic White Goods Sales
Domestic Auto Sales
(2005 Q1 – 2008 Q2*, seasonally adjusted,
monthly averages, in thousands)
(2005 Q1 – 2008 Q2*, seasonally adjusted,
monthly averages, in thousands)
45
470
40
450
Trend
35
Trend
430
30
410
25
* April 2008
Source: AMA,CBT
* April 2008
Source: AMA,CBT
08 Q2*
08 Q1
07 Q4
07 Q3
07 Q2
07 Q1
06 Q4
06 Q3
06 Q2
06 Q1
05 Q4
05 Q3
05 Q2
20
05 Q1
08 Q2*
08 Q1
07 Q4
07 Q3
07 Q2
07 Q1
06 Q4
06 Q3
06 Q2
06 Q1
05 Q4
05 Q3
05 Q2
05 Q1
390
98
Domestic Demand
Sub-components of Imports
The Rate of Increase in Imports
(January 2005 – March 2008, 12-month rolling, year-onyear change, percent)
60
50
 Squeeze in credits accompanied with
recent developments in exchange rates
increases the possibility of slowdown in
imports.
 Imports of consumption goods has been
following an upward trend since July 2007.
30
20
10
01-08
10-07
07-07
04-07
01-07
10-06
07-06
04-06
10-05
07-05
01-06
Capital Goods
0
04-05
 Total growth of imports has outpaced that
of the imports of capital goods since May
2006.
40
01-05
 The pace of imports, which slowed down
since mid-2006 due to the weakening
domestic demand, has been rising since
July 2007.
Intermediate Goods
Consumption goods
Source: TURKSTAT
Sub-components of Consumption Imports
(January 2005 – March 2008, 12-month rolling, year-onyear change, percent)
100
80
Durable Goods
60
40
20
0
-20
Source: TURKSTAT
01-08
10-07
07-07
04-07
01-07
10-06
07-06
04-06
01-06
10-05
04-05
07-05
Passenger Car Imports
-40
01-05
 Year-on-year increases in imports of
durable goods and passenger cars are
particularly strong
99
Public Finance
Central Government Primary Balance
In the first quarter of 2008, budget
realizations were more favourable
compared to the previous year.
(Program defined, quarterly total, 2006 Q1 - 2008 Q1, YTL billion)
16
2007
14
12
2008
2006
10
8
6
4
2
0
Q1
government budget accounts, primary
surplus stood at YTL 8.3 billion in the first
30
 Quarterly rate of increase in tax
25
revenues has outpaced that of the
15
Primary
Expenditures
Tax Revenues
20
10
5
Source: Ministry of Fİnance
04-2008
03-2008
02-2008
01-2008
12-2007
11-2007
10-2007
09-2007
08-2007
07-2007
06-2007
05-2007
0
04-2007
quarter of 2007.
Q4
month moving average, percent)
40
35
primary expenditures since the last
Q3
General Budget Primary Expenditures and Tax
Revenues (March 2007 – April 2008, year-on-year change, -3-
quarter of 2008, increasing by 34%
compared to the same period of 2007.
Q2
Source: Undersecreteriat of Treasury
03-2007
 According to program-defined central
100
Productivity and Wages
Productivity and Wages
Productivity, Real Wages and Real Unit Wages
Index in the Manufacturing Industry
(1998 Q4 – 2007 Q4, per hour worked,
4-quarter moving average)
 In the manufacturing industry;
170
maintains its high level despite its
deceleration in the second quarter of
2007.
- Real wages have displayed a moderate
increase since mid-2003 following the
150
130
- Due to the increase in productivity
110
100
wages index calculated by dividing real
decreasing.
95
85
rapid decline in the post-2001 crisis era.
wages by the productivity index keeps
105
140
120
above the rises in real wages, real unit
Productivity Index
(left scale)
160
Real Wages Index
(right scale)
75
65
Real Unit Wages Index
(right scale)
90
55
45
1998 Q4
1999 Q2
1999 Q4
2000 Q2
2000 Q4
2001 Q2
2001 Q4
2002 Q2
2002 Q4
2003 Q2
2003 Q4
2004 Q2
2004 Q4
2005 Q2
2005 Q4
2006 Q2
2006 Q4
2007 Q2
2007 Q4
- The rate of increase in productivity
115
Source: TURKSTAT, CBT
101
Employment
Unemployment and Non-Agricultural Unemployment Rates
Labor Market
(2000 Q4 – 2008 Q1, 4-quarter moving average, percent)
15
14
Non-Agricultural
Unemployment
13
12
Total Unemployment
11
of in February 2008, 2 points higher than
compared to the same month of last
year. Non-agricultural unemployment
rate was unchanged at 14.2%.
10
9
8
7
6
2000 Ç4
2001 Ç1
2001 Ç2
2001 Ç3
2001 Ç4
2002 Ç1
2002 Ç2
2002 Ç3
2002 Ç4
2003 Ç1
2003 Ç2
2003 Ç3
2003 Ç4
2004 Ç1
2004 Ç2
2004 Ç3
2004 Ç4
2005 Ç1
2005 Ç2
2005 Ç3
2005 Ç4
2006 Ç1
2006 Ç2
2006 Ç3
2006 Ç4
2007 Ç1
2007 Ç2
2007 Ç3
2007 Ç4
2008 Ç1
 Unemployment rate stood at 11.6% as
Ratio of the Non-Agricultural Employment to the
Population Aged 15 and Above
 The employment in non-agricultural
economic activities comprising industrial,
construction and services decelerated in
the second half of 2007.
32.0
(2000 Q4 – 2008 Q1, 4-quarter moving average, percent)
31.5
31.0
30.5
30.0
29.5
in the non-agricultural sectors in the last
12 months as of February 2008.
29.0
28.5
28.0
2000 Ç4
2001 Ç1
2001 Ç2
2001 Ç3
2001 Ç4
2002 Ç1
2002 Ç2
2002 Ç3
2002 Ç4
2003 Ç1
2003 Ç2
2003 Ç3
2003 Ç4
2004 Ç1
2004 Ç2
2004 Ç3
2004 Ç4
2005 Ç1
2005 Ç2
2005 Ç3
2005 Ç4
2006 Ç1
2006 Ç2
2006 Ç3
2006 Ç4
2007 Ç1
2007 Ç2
2007 Ç3
2007 Ç4
2008 Ç1
 355 thousand new jobs were created
Source: TURKSTAT, CBT
102
Foreign Trade Developments
The openness of the Turkish
economy has increased since 2001
and foreign trade has posted high
growth rates.
180
Real Imports and Real Exports
(1982 – 2007, 2003 = 100)
160
140
120
100
Imports
80
60
exports and real imports have grown
Exports
20
0
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
 Contrary to the 1995-2000 period, real
40
parallel to one another.
Imports and Exports (January 2006 – March 2008,
12-month rolling, percentage change)
30
30.0% increase over the last 12 months,
26
while that of imports stood at 26.6%.
22
 The expected slowdown in developed
18
economies poses a downside risk in
14
export performance in the upcoming
10
period.
Exports
Imports
01-06
02-06
03-06
04-06
05-06
06-06
07-06
08-06
09-06
10-06
11-06
12-06
01-07
02-07
03-07
04-07
05-07
06-07
07-07
08-07
09-07
10-07
11-07
12-07
01-08
02-08
03-08
 As of March 2008 exports posted a
Source:TURKSTAT
103
Balance of Payments – Current Account
 Current account deficit in 2007 rose by
Current Account Balance and The Effect of Energy
Prices on the Current Account Deficit*
(2002 – 2007, ratio to GDP, percent)
18.0% compared to 2006 and reached
USD 38 billion.
2002
2003
 In 2007, the ratio of current account
deficit to GDP declined by 0.4 points
-2
compared to 2006 and stood at 5.7%.
-3
-0.7
-2.5
-2.4
-2.9
2007
-3.7
-5
continues.
-6
 High energy prices contributed around
-7
-2.7
-2.5
 The adverse effect of high energy
current account deficit to GDP in 2007.
2006
Current Account Deficit
Excluding the Effect of
Energy Prices/ GDP
-1.8
-4
3 percentage points to the of ratio
2005
0
-1
prices on current account deficit
2004
-4.6
Current Account Deficit /
GDP
-5.7
-6.1
•The effect of energy price increases on the current account in the 2003-2007 period was
calculated by keeping the prices of 2002 contant. Energy Sub-items: Stone coal and
lignite, crude oil and natural gas under the mining and quarrying sector, and coke coal,
refined petroleum products and nuclear fuels under the manufacturing industry.
Source: TURKSTAT, CBT
104
Balance of Payments – Current Account
 There is a direct and strong relationship
between current account deficit and economic
growth rates.
Domestic Savings and Investments
(2001-2007, ratio to GNP, percent)
30
Investments
 The high increase in investments is the primary
reason of the current account deficit .
23.8
20.0
20
19.2
investment demand. The structural characteristics
intermediate goods in order to meet the increase
supply and demand-side macro and micro
policies with a medium and long-term
perspective.
19.3
20.2
18.2
17.5
15
17.3
16.0
15.1
Savings
in production.
 Current account deficit should be controlled via
24.4
22.6
lead to an increase in consumption and
of the economy necessitate the imports of
24.9
25
 Current account deficit is a structural problem.
Macroeconomic stability and falling interest rates
25.4
10
2001
2002
2003
2004
2005
2006
2007
*1987 based series
Source: : SPO Program for 2008, CBT
105
Capital Flows
Capital Flows
Ratio of the Financing Items of the Current Account
Deficit to Current Account Deficit (2000 – 2007, percent)
100
 Long-term credits, along with foreign
80
Short Term
Capital 1
direct investments, are crucial for the
financing quality of current account
Long Term
Capital 2
Direct
Investment 3
60
deficit as well as for reducing fragility of
the economy to external shocks.
 Short-term capital and portfolio
40
Portfolio
Investments 4
20
inflows have substantially declined in
2007.
 In this period, current account deficit
has been financed via long-term credits
and foreign direct investments.
0
2000
2003
2004
2005
2006
2007
-20
1
Short Term Capital: Net short term loans borrowed by overseas banks, the real
sector and the public sector besides the deposits possessed by the residents abroad in
the banks
2
Long Term Capital : Net long term loans borrowed by overseas banks, the real
sector and the public sector besides the deposits possessed by the residents abroad in
the banks
3
Direct Investment: Direct Domestic Investment Inflow
4
Portfolio Investment: Equities and Securities purchases of residents abroad
Source: CBT
106
Capital Flows
Capital Flows
Ratio of the Financing Items of the Current Account
Deficit to Current Account Deficit (2000 –2007, percent)
80
 The ratio of foreign direct
Non-Banking
Sector Credits 2
60
Direct
Investment 3
investment and long-term capital to
GDP, which was 7.5% in 2006, fell to
Portfolio
Investments 4
40
3.4% in 2007.
 The ratio of portfolio investments
20
and short-term capital to GDP
Bank Credits 1
declined from 3.3% to 1.3%.
0
2000
2003
2004
2005
2006
2007
1
Bank Credits: Short and Long Term Credit Utilization of the Banking Sector abroad
Non-Banking Sector Credits : Short and Long Term Credit Utilization of the NonBanking Sector abroad
3
Direct Investment: Direct Domestic Investment Inflow
4
Portfolio Investment: Equities and Securities purchases of residents abroad
2
Source: CBT
107
CENTRAL BANK OF THE
REPUBLIC OF TURKEY
PRESENTATION BEFORE THE COUNCIL OF
MINISTERS, AND
THE PLANNING AND BUDGET COMMISSION OF
THE GREAT NATIONAL ASSEMBLY OF TURKEY
Durmuş YILMAZ
Governor
May 2008
108