Download 2009-IV CENTRAL BANK OF THE REPUBLIC OF TURKEY

CENTRAL BANK OF
THE REPUBLIC OF TURKEY
2009-IV
Central Bank of the Republic of Turkey
CONTENTS
1.
2.
3.
4.
5.
OVERVIEW
1
1.1. Inflation Developments
1
1.2. Monetary Policy
3
1.3.Inflation and Monetary Policy Outlook
4
1.4. Risk Factors and Monetary Policy
8
INTERNATIONAL ECONOMIC DEVELOPMENTS
11
2.1. Global Growth
12
2.2. Commodity Prices
15
2.3. Global Inflation
17
2.4. Financial Conditions and Risk Indicators
17
2.5.Global Monetary Policy Developments
20
INFLATION DEVELOPMENTS
29
3.1. Inflation
29
3.2. Expectations
37
SUPPLY AND DEMAND DEVELOPMENTS
41
4.1. Gross Domestic Product Developments and Domestic Demand
41
4.2. Foreign Demand
48
4.3. Output Gap
53
4.4. Labor Market
56
FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION
67
5.1 Financial Markets
67
5.2. Financial Intermediation and Loans
74
6. PUBLIC FINANCE
79
6.1. Budget Developments
81
6.2. Developments in Debt Stock
84
7. MEDIUM TERM PROJECTIONS
87
7.1. Current State of the Economy, Short-Term Outlook and Assumptions
87
7.2. Medium-Term Outlook
91
7.3. Risks and Monetary Policy Options
92
Inflation Report 2009-IV
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Central Bank of the Republic of Turkey
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Inflation Report 2009-IV
Central Bank of the Republic of Turkey
1. Overview
The global crisis which erupted in developed markets and then spread
across the world during the last quarter of 2008, has continued to affect the
economic outlook―albeit less forcefully―during the third quarter of 2009. In
this period, data releases on activity indicated that the recovery continues to
gain traction with growth forecasts being revised on the upside after a long
period of downward revisions (Graph 1.1.). However, improvements in many
leading indicators are still tentative, problems across credit markets linger, and
employment remains in a precarious state, all suggesting that the recovery will
likely be anemic and protracted.
Graph 1.1. GDP Forecasts in Advanced Economies
(Seasonally Adjusted, 2008Q2=100)
104
102
100
98
96
94
92
USA (September 09)
USA (June 09)
Euro Area (June 09)
Euro Area (September 09)
90
2
3
4
1
2
2008
3
2009
4
1
2
3
2010
4
1
2
2011
Source: Consensus Forecasts, June and September.
1.1. Inflation Developments
The crisis was characterized by a steep drop in economic activity, mainly
driven by shrinking external demand, tighter financial conditions, and rising
precautionary saving. The sharp contraction in economic activity and the
collapse of commodity prices have brought down inflation rates across the
world, including Turkey. In this respect, energy and processed food prices,
which are particularly sensitive to commodity price developments, have
displayed a sharp decline. Inflation in core goods and services has also slowed
down owing mainly to weak domestic demand (Graph 1.1.2). In the third
quarter, despite the partial withdrawal of tax cuts within the fiscal stimulus
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Central Bank of the Republic of Turkey
package, the underlying disinflation trend was strong enough to bring headline
inflation downwards. Accordingly, inflation came down to 5.27 percent in
September―5.9 percentage points lower than the figure recorded one year ago
(Graph 1.1.1).
Graph 1.1.1. Contribution of Certain Sub-categories to
Annual CPI Inflation
14
12
Graph 1.1.2. First 9-Month Cumulative Inflation
Food and Energy *
Tobacco ve Gold**
Services
Core Goods
25
2006-2007 Average
2008
20
10
2009
15
8
10
6
5
4
0
2
-5
* Food and Energy: Food, nonalcoholic beverages and energy
** Tobacco and Gold: Alcoholic beverages and tobacco and gold.
Source: TURKSTAT, CBRT.
0909
0609
0309
1208
0908
0608
0308
1207
0907
0607
0
Food
Energy
Tobacco
Core
and Gold** Goods***
Services
***Core Goods: Goods excluding food and nonalcoholic beverages, energy,
alcoholic beverages and tobacco and gold.
Source: TURKSTAT, CBRT.
Although the recovery in global economic activity is expected to be slow
and gradual, the perception that the worst part of the crisis is over has continued
to support optimism across financial markets and increased the appetite for risk
during the third quarter. In turn, this has triggered capital inflows to emerging
markets, including Turkey. As a consequence, the cost-push impact of rising
import prices was offset by the appreciation in the Turkish lira during the third
quarter, which has helped core inflation remain at low levels. As of September,
the annual rate of change in the core measure excluding unprocessed food,
energy, tobacco, alcohol, and gold items (Core index H) is at 2.44 percent.
Inflation measured by the I index, which further excludes processed food from
the H index, stands at 3.37 percent. Although low level of the core inflation
can be partly attributed to temporary tax adjustments, trend inflation
still continues to hover at low levels even when corrected for tax changes
(Graph 1.1.3 and 1.1.4).
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Graph 1.1.3. Core Inflation I
Graph 1.1.4. Core Inflation Indicators H and I**
(Annual Percentage Change)
(Seasonally Adjusted 2-Month Averages)
8
1.6
7
1.4
6
1.2
5
1.0
H
I
0.8
4
0.6
3
0.4
2
I
1
0.2
I*
0909
0509
0109
0908
0508
0108
0907
0507
0107
0906
0506
0905
0909
0609
0309
1208
0908
0608
0308
1207
0907
* Corrected for temporary tax effects.
Source: TURKSTAT, CBRT.
0106
0.0
0
** Both series are corrected for temporary tax effects.
Source: TURKSTAT, CBRT.
1.2. Monetary Policy
Anticipating that inflation would decrease sharply following the last
quarter of 2008, the Central Bank of the Republic of Turkey (CBRT) focused
on alleviating the potentially harsh impact of the global financial crisis on the
domestic economy. In this respect, the CBRT has delivered sizeable cuts in
policy rates, while providing liquidity support to facilitate the smooth operation
of credit markets. The Monetary Policy Committee (MPC) continued to cut
interest rates in the third quarter, bringing the cumulative rate cuts to 1000 basis
points since November 2008. Therefore, the CBRT lowered policy rates more
than any other emerging market central bank since the intensification of the
global crisis (Graph 1.2.1 and 1.1.2).
Graph 1.2.1. Policy Rates in Inflation-Targeting Emerging
Economies*
20
Emerging Econom ies
Turkey
Graph 1.2.2. Change in Policy Rates between September 2008 and
October 2009 in Emerging Markets*
(Basis points)
0
-200
17
-400
14
-600
-800
11
-1000
8
Russia
Hungary
Romania
Indonesia
Poland
Thailand
Mexico
Brazil
India
S.Africa
Peru
Colombia
Chile
0709
0109
0708
0108
0707
0107
0706
0106
Turkey
-1200
5
*As of 19 October 2009
Source: Bloomberg, CBRT calculations.
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Central Bank of the Republic of Turkey
Data releases on inflation and economic activity since the inception of the
rate cutting cycle have vindicated these preemptive monetary policy decisions,
and thereby strengthened the impact of the policy decisions on expectations, in
turn bringing government bond yields to historically low levels.
Government bond yields have further declined in the third quarter, along
with the policy rate cuts and decreasing risk premiums. Monetary policy
communication played a key role in bringing down longer-term rates, as the
downward trend accelerated after providing a medium-term policy perspective
in the July Inflation Report.
The cumulative policy rate cuts implemented since November 2008, and
the improvements in global risk perceptions have started to have favorable
effects on credit markets toward the last quarter. Consumer loan rates, which
were reacting rather sluggishly to the policy rate cuts, have displayed a
significant decline in this period. Moreover, the CBRT reduced Turkish lira
reserve requirements in order to further alleviate the tightness in credit
conditions, and thus enhance the effectiveness of the policy rate cuts. Taken
together, the recovery in credit markets is expected to continue throughout the
last quarter. However, the effectiveness of the credit channel in supporting the
economic activity is still partly restrained owing to the ongoing tightness in
lending standards for the small- and medium-sized enterprises.
In sum, referring to the partial improvements in labor and credit markets,
the MPC indicated after the October meeting that a slowdown in the pace of
rate cuts would be considered in the next meeting depending on the economic
data and developments. However, it was also noted that lingering problems
across the global economy were still a concern and that uncertainties regarding
the strength of the recovery remain. Taking these factors into account, the MPC
reiterated that it would be necessary for monetary policy to maintain an easing
bias for a long period of time.
1.3. Inflation and Monetary Policy Outlook
The second quarter gross domestic product (GDP) release was broadly in
line with the outlook presented in the July Inflation Report. GDP displayed a
significant upswing after four consecutive quarters of contraction, with
domestic consumption demand rising markedly during the second quarter,
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Inflation Report 2009-IV
Central Bank of the Republic of Turkey
mainly owing to the fiscal stimulus package. External demand, on the other
hand, remained weak. The rise in consumption demand did not exert
inflationary pressures as it was met by a run-down in inventories rather than an
increase in production, therefore keeping resource utilization at low levels.
Moreover, high unemployment rates have continued to suppress domestic
demand. Accordingly, aggregate demand conditions have continued to support
disinflation.
Data releases pertaining to the third quarter indicate that the expansionary
impact of the fiscal measures have been receding. In this respect, consumption
demand, after having increased markedly during the second quarter, has shifted
to a weaker course. Although private investment is expected to increase slightly
in the third quarter, low capacity utilization and high demand uncertainty is
expected to hold back the recovery in capital expenditures. Accordingly, final
domestic demand is expected to stay flat in the third quarter, after having
increased significantly in the second quarter.
Indicators such as capacity utilization rates and per capita hours worked
suggest that resource utilization remains low throughout the economy. Given
that ample slack would continue to be a drag on investment and employment,
recent signs of improvement in the employment data is not expected to turn into
a significant recovery, suggesting unemployment will likely remain elevated
for an extended period. Therefore, unit labor costs and domestic demand would
continue to support disinflation.
The tightness in credit conditions have been on an easing trend since the
July Inflation Report, with the improvement in global liquidity conditions and
the decline in risk premiums. Accordingly, the credit channel would begin to
support domestic economic activity during the fourth quarter of the year.
Furthermore, the impact of the cumulative rate cuts since November 2008 is
expected to be more visible in the medium term. However, the rising domestic
borrowing requirement of the government, ongoing problems in the global
economy, and elevated levels of unemployment would continue restrain credit
expansion.
Overall, economic activity is expected to recover gradually, with annual
growth rates posting positive figures starting in the last quarter. However,
resource utilization is anticipated to remain below the long-term average for
Inflation Report 2009-IV
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Central Bank of the Republic of Turkey
some time. In this context, our medium-term forecasts envisage that the output
gap—albeit closing faster than envisaged in the July Report—will remain
disinflationary until mid-2012.
Although global economic growth is expected to follow a gradual path,
commodity prices continued along a rising trend in the third quarter, with the
growing perception that the recovery is on the way. Accordingly, oil prices
were above our assumption of 60 USD per barrel in the third quarter.
Therefore, the oil price assumptions stated in the past Report are revised in line
with futures prices registered in the first half of October. In this context, the
previous assumption of end-year oil price levels are revised up from 60 USD
per barrel to 70 USD for 2009, from 70 USD to 75 USD for 2010, and from 70
USD to 80 USD for 2011 and thereafter. Moreover, in line with oil prices,
imported input prices are also assumed to increase gradually throughout the
forecast horizon in response to the slow recovery in the world economy.
The July Inflation Report envisaged food inflation to be 7.5 percent at the
end of 2009 and 6 percent for the following years. However, better than
expected outcomes regarding unprocessed food prices necessitated a downward
revision in food inflation to 5.8 percent for end-2009, while the projection of 6
percent was maintained for the following years.
In sum, our assumptions were revised upward for oil prices, but
downward for food prices. However, because food has a larger share in the CPI
basket, our short-term inflation forecast has been revised downward.
Accordingly, we now forecast end-year inflation to be 5.5 percent, down from
5.9 percent in the previous Report.
Furthermore, the revised forecasts envisage world interest rates to remain
low for an extended period of time. Regarding fiscal policy, it is assumed that
the consistent framework outlined in the Medium Term Program (MTP) will be
implemented and further enhanced by structural measures that would
strengthen fiscal discipline. In this respect, it is assumed that fiscal stance will
remain expansionary—but less so than in 2009—throughout 2010, and fiscal
tightening would be gradually adopted starting from 2011. Moreover, in line
with the MTP, it is envisaged that the rising debt-to-GDP ratios would reverse
course steadily starting from 2011, and hence the risk premium would not
display any significant changes throughout the forecast horizon.
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Against this background, assuming a limited amount of further easing
and constant policy rate until the end of 2010, the medium-term forecasts
suggest that, with 70 percent probability, inflation will be between 5.0 and 6.0
percent with a mid-point of 5.5 percent at end-2009, and between 3.9 and 6.9
percent with a mid-point of 5.4 percent by the end of 2010. Furthermore,
inflation is expected to decline to 4.9 percent by the end of 2011 and to 4.8
percent by the third quarter of 2012 (Graph 1.3.1).
Graph 1.3.1. Inflation Forecasts*
Forecast Range*
Uncertainty Band for 2009
Output Gap
End-Year Inflation Targets
13
Control Horizon
11
9
7
Percent
5
3
1
-1
-3
-5
-7
-9
2
3
2009
4
1
2
2010
3
4
1
2
3
2011
4
1
2
3
2012
*The shaded region indicates the 70 percent confidence interval for the forecast.
Overall, while the better than expected outcome in food prices has led to
a downward revision for the end-2009 inflation forecast, upward revisions in
the assumptions for world economic activity and oil prices has offset this
impact over the medium term. Taken together, there has been no significant
change in our inflation forecasts for end-2010 and end-2011.
The revised forecasts indicate that the output gap will not close soon,
supporting disinflation even when policy rates are kept at low levels for an
extended period. It is worthy to note that the sharp fall in inflation in the first
half of 2009 created significant base effects. This would, ceteris paribus, lead
to volatility and some mild increases in annual inflation rates until mid-2010
(Figure 5). Afterwards, as the impact of the tax hikes would gradually
disappear, inflation is expected to trend downwards starting from the second
half of 2010, stabilizing around 5 percent over the medium term. It is critical to
note that, inflation would be less persistent, and thus the economic recovery
Inflation Report 2009-IV
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Central Bank of the Republic of Turkey
much smoother, should economic agents take these forecasts as a benchmark in
their pricing decisions.
It should be emphasized that any new data or information regarding the
inflation outlook may lead to a change in the monetary policy stance.
Therefore, assumptions on the future policy rates underlying the inflation
forecast should not be perceived as a commitment on behalf of the CBRT.
1.4. Risk Factors and Monetary Policy
Although recent data releases indicate that the worst is likely to be over,
concerns regarding the health of the global economy remain. In particular,
ongoing problems in credit and labor markets pose downside risks for global
activity. Should the global conditions deteriorate again, and consequently delay
the domestic recovery, the CBRT would consider another cycle of rate cuts.
The fact that the crisis itself, and the policy responses in reaction to it, are
unprecedented in recent history, creates risks regarding the inflation and
monetary policy outlook. It is extremely difficult estimate with precision the
impact of the recent monetary policy measures taken at the global scale.
Although not having resorted to explicit quantitative easing eliminates some of
the risks for the Turkish case, it should still be noted that the full impact of the
cumulative easing of 1000 basis points since November 2008 would be seen
with a lag. In other words, although the baseline scenario does not envisage any
policy rate hikes for an extended period, it is important to monitor the impact of
the policies closely to ensure an appropriate timely response to any
development not envisaged in this Report.
Another possible scenario is a surge in capital inflows to emerging
markets owing to the relative improvement of credit risk across these countries.
Ample liquidity driven by the expansionary fiscal and monetary policies on a
worldwide scale, coupled with rising risk appetites, have led to large capital
inflows to emerging markets. The current output gap would imply that a fall in
the cost of imported inputs could be rapidly transmitted to consumer prices,
suggesting that a further acceleration in capital inflows may exacerbate
downward pressures on inflation. Realization of such a scenario could lead to
temporarily lower policy rates than envisaged in the baseline scenario.
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The CBRT will continue to monitor fiscal policy developments closely
while formulating monetary policy. Enhancing the framework set out in the
MTP through further structural adjustments that would strengthen fiscal
discipline, would support the improvement of Turkey’s sovereign risk. Should
the goals set out in the MTP be implemented, it would be possible to keep
policy rates at single digits throughout the forecast horizon.
Increasing budget deficits on a worldwide scale continue to pose risks on
inflation expectations and thus on global interest rates in the longer term. The
medium-term forecasts presented above envisage that the slow recovery in
global economic activity and rising saving rates will likely keep global interest
rates at low levels for an extended period. However, the lack of a clear exit
strategy from various fiscal stimulus packages creates upside risks regarding
global inflation rates and therefore longer-term global interest rates. In this
respect, countries with relatively sounder banking systems and prudent
fiscal policies would be more resilient against these risks. These issues once
again draw attention to the importance of fiscal discipline.
The course of oil and other commodity prices constitutes another
important risk. Ample liquidity driven by countercyclical policies on a global
scale creates speculative movements not only regarding emerging market
currencies, but also for commodity prices. Therefore, oil and other commodity
price developments warrant caution, even under a scenario of a gradual global
economic recovery. Nonetheless, weak domestic demand conditions would
limit the pass-through stemming from upside cost-push shocks. Therefore, the
CBRT will accommodate the short-term volatility in commodity prices,
especially when the resource utilization remains at depressed levels. However,
if an uptrend in commodity prices reflects a strong and durable rebound in
global activity that would in turn create inflationary pressures, then monetary
policy will react appropriately to keep inflation in line with medium-term
inflation targets.
The CBRT has been taking the necessary measures to contain the adverse
effects of the global financial turmoil on the domestic economy. However,
prudent monetary policy is necessary, but not sufficient to maintain the
resilience of the economy against the global crisis. Therefore, strengthening the
commitment to fiscal discipline and the structural reform agenda is also critical
for facilitating expectations management and thus for supporting the
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Central Bank of the Republic of Turkey
effectiveness of the monetary policy decisions. In this respect, timely
implementation of the structural reforms envisaged by the Medium Term
Program and European Union accession process remains to be of utmost
importance.
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2. International Economic Developments
Moving into the fourth quarter of 2009, it is becoming apparent that the
pressure from the gravest economic downturn since the Great Depression has
eased off and the world economy has headed towards a gradual recovery. The
stronger-than-expected second-quarter growth and promising third-quarter
indicators have strengthened the belief that the worst of the crisis is over, which
prompted an increase in risk appetite and provided a strong boost to financial
markets during the third quarter.
Leading indicators suggest that the world economy might have grown
again by mid-2009. However, it is not clear to what degree the economic
growth has resulted from transitory changes, such as inventory buildups and
fiscal stimulus packages, which raises questions about the durability of the
recovery and causes growth forecasts to differ significantly among economic
agents. International institutions, primarily the International Monetary Fund
(IMF), emphasize that recoveries from recessions associated with the collapse
of asset markets have been typically slower and more prolonged, and therefore
expect growth to remain sluggish for an extended period.1 As a matter of fact,
decrease in employment level and frictions in credit markets so far have
supported this view.
Having been the principal driver of global growth in recent years, US
consumption will have a certain impact on global growth if it returns to former
levels. Yet, the rise in US household debt before the outbreak of the crisis and
the uncertainty caused by labor markets are expected to boost precautionary
savings and continue to dampen consumption. Moreover, as banks have yet to
realize much of their losses and default rates on both household and corporate
debts are high, tight loan conditions fail to fully ease. Aside from the credit
constraints, high idle capacity also restrains investment spending. Thus, the US
economy appears to be unlikely to return to pre-crisis growth rates steadily for
the foreseeable future.
Downside risks to global growth remain, one of which, as highlighted at
the G-20 meetings, is the withdrawal of fiscal and monetary stimulus by
advanced economies before a broad-based recovery in private demand. The
1
IMF, World Economic Outlook, April.
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Central Bank of the Republic of Turkey
second risk relates to the prospects for commodity prices. Commodity prices,
especially crude oil prices, are expected to climb with the economic recovery.
The abundance of liquidity resulting from expansionary monetary measures in
the world and the likely entry of speculative capital, which seeks yield, into
futures markets are considered to be major risks that cause prices to fluctuate.
The materialization and persistence of this scenario may not only stifle growth
but also put pressure on global inflation.
In sum, global growth forecasts have been revised upwards since the
third quarter. Yet, many continue to have concerns about the sustainability of
growth and expect the world economy to recover only slowly and gradually.
Accordingly, we revised our projections for global economic activity offered in
the July Inflation Report slightly upwards and built our medium-term forecasts
in the final chapter of this Report on the assumption that foreign demand
remains weak for an extended period of time.
2.1. Global Growth
The weighted average of GDP growth rates in advanced economies fell
to –3.4 percent in the second quarter of 2009.2 In the same quarter, the
weighted average of GDP growth rates in emerging economies continued to
decline. Excluding both China and India, the GDP growth rate for emerging
economies became –0.8 percent during the second quarter (Graph 2.1.1).
Graph 2.1.1. Yearly Growth Rates in Advanced and Emerging
Economies (Percent)
Advanced Economies
10
Graph 2.1.2. Unemployment in Advanced Economies
(Percent)
11
USA
Emerging Economies
Euro Area
Emerging Economies (Exc. China and India)
8
9
6
4
7
2
0
5
-2
0108
0106
0104
0102
0309
0307
0305
0303
0301
0399
0397
Source: Bloomberg, CBRT.
0100
3
-4
Source: Bloomberg.
2
Growth rates are derived from four quarterly cumulative national accounts data. Calculated by the same method, Turkey’s GDP
has grown by –6.5 percent year-on-year as of end-Q2 2009.
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Based on a higher-frequency data analysis, the world economy appears to
have grown by 3.0 percent during the second quarter on a quarterly basis
following a 6.5 percent contraction in the first quarter.3 Although the world
economy is expected to grow at a high rate stimulated by the increased
government spending and stock buildups during the second half of the year,
there are major uncertainties regarding the sustainability of growth. Given the
expectation that domestic demand will remain weak especially in advanced
economies, it is unlikely to maintain a sustainable growth by only expanding
government spending. Moreover, increasing unemployment rates in both
advanced and emerging economies create doubts about the strength of the
growth potential for the world economy. Unemployment climbed to 9.8 percent
in the US during September, and to 9.6 percent in the Euro area during August
(Graph 2.1.2). The data for US weekly first-time unemployment claims
suggest that job losses may continue, albeit at a slower pace. The weakening
labor market prompts households to increase precautionary savings and to
delay consumption, and fuels worries about the speed of recovery.
The rate of decline in the industrial production index is observed to
decrease for advanced economies in August. The downturn in the industrial
production index for emerging economies has slowed at a more rapid pace,
pushing the annual change of the index up to –0.7 percent. However, excluding
China and India, the annual change totals to –8.5 percent (Graph 2.1.3).
Graph 2.1.3. Industrial Production Index in Advanced and
Emerging Economies
Graph 2.1.4. PMI
(Annual Percentage Change)
15
60
10
55
5
50
0
45
-5
40
Advanced Economies
35
0105
0109
0108
0107
0106
0105
0104
0103
0102
0101
Source: Bloomberg.
3
China
30
Emerging Economies (Exc. China and India)
-20
USA
0109
Emerging Economies
0106
-15
0108
Advanced Economies
0107
-10
Source: Bloomberg.
IMF, World Economic Outlook, October.
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After a sharp downtrend since early 2008, the Purchasing Managers
Index (PMI) for advanced economies accelerated to 51.4 points in September
2009, rising above the neutral level of 50 points. Having recovered earlier than
expected thanks to massive fiscal stimulus packages, the Chinese PMI
surpassed the neutral level in March and remained on the rebound since then
(Graph 2.1.4).
Meanwhile, US factory orders and retail sales have shown some signs of
recovery (Graph 2.1.5 and 2.1.6). Factory orders rose by 2.0 percent on average
in seasonally adjusted terms during July-August, compared with the second
quarter. Excluding transportation vehicles that are included in the stimulus
program, orders increased by 1.5 percent. Orders for durable goods and the
PMI new orders sub-index follow the same pattern, strengthening the growth
forecasts for the second half of 2009.
Graph 2.1.5 Factory Orders
Graph 2.1.6. Retail Sales
(Annual Percentage Change)
(Annual Percentage Change)
30
15
20
10
10
5
0
0
-10
-5
USA
Euro Area
Euro Area
0109
0108
0107
0106
0105
0104
0103
0102
0109
0108
0107
0106
0105
0104
0103
0102
0101
0100
0101
-15
-40
Source: Bloomberg.
USA
-10
-30
0100
-20
Source: Bloomberg.
Given the strong signs of economic recovery for the third quarter, both
the IMF and the Organization for Economic Co-operation and Development
(OECD) updated their growth forecasts upwards (Table 2.1.1). Accordingly,
the recovery in the Euro area is expected to be more limited and prolonged than
in the US. Despite those upward revisions, forecasts confirm the belief that the
world economy will recover slowly and gradually.
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Table 2.1.1. Annual Growth Forecasts
2009
IMF
World
Advanced Economies
United States
Euro Area
Emerging Economies
OECD
All OECD
United States
Euro Area
Consensus Economics
World
United States
Euro Area
2010
Previous
Revised
Previous
Revised
-1.4
-3.8
-2.6
-4.8
1.5
-1.1
-3.4
-2.7
-4.2
1.7
2.5
0.6
0.8
-0.3
4.7
3.1
1.3
1.5
0.3
5.1
-4.1
-2.8
-4.8
-3.7
-2.8
-3.9
0.7
0.9
0.0
-
-2.3
-2.6
-3.9
-2.3
-2.5
-3.9
2.6
2.4
1.0
2.7
2.6
1.1
Source: IMF World Economic Outlook, July and IMF World Economic Outlook October Update.
OECD Economic Outlook, June and OECD Economic Outlook, September.
Consensus Forecasts, September and October.
2.2. Commodity Prices
Expectations of global economic recovery, China’s demand for
commodities and the uncertainty over the US dollar continued to affect
commodity prices in the third quarter. Metal prices soared on China’s
continued stock buildup in early third quarter, but later dropped slightly amid
mounting hopes of a steady global recovery. After the pick-up in the second
quarter, grain prices fell in the third quarter on favorable harvest expectations.
Gold prices, on the other hand, are affected by the uncertainty surrounding both
the US dollar and the US inflation and soared to historic highs. Meanwhile,
despite lower demand and higher stock levels, oil prices rose modestly due to
weaker US dollar and OPEC’s (Organization of the Petroleum Exporting
Countries) output cut. Accordingly, the S&P Goldman Sachs (GS) Commodity
Index jumped by 9.2 percent quarter-on-quarter in the third quarter, but fell by
38.1 percent year-on-year due to the base effect. The GS energy, industrial
metals and precious metals indices rose by 12.5, 24.5 and 4.6 percent quarteron-quarter, respectively, while the GS agriculture index dropped by 5.9 percent
(Graph 2.2.1 and 2.2.2).
Inflation Report 2009-IV
15
Central Bank of the Republic of Turkey
Graph 2.2.1. S&P Goldman Sachs Commodity Indices*
Graph 2.2.2. Crude Oil (Brent) Prices
(USD/bbl)
Headline
Ind. Metal
Energy
Precious Metal
150
Agriculture
300
110
Source: Goldman Sachs.
*The average for January 2007 is assumed to be 100.
0109
0108
0107
0105
0709
0109
0708
30
0108
0
0707
70
0107
100
0106
200
Source: Bloomberg.
The oil volatility index flattened out during the third quarter and
remained quite unchanged from previous three months (Graph 2.2.3). The slope
of the yield curve hardly changed during the past three months, while prices
increased at every maturity in response to spot market developments (Graph
2.2.4). Thus, our forecasts in the final chapter of this Report are based on an
upward revision of the assumptions offered in the July Inflation Report.
Graph 2.2.3. Crude Oil Volatility Index (OVX)
(Percent)
100
Graph 2.2.4. Crude Oil (Brent) Yield Curve
(USD/bbl)
90
July, 01-15
October, 01-15
85
80
80
75
60
70
40
65
0813
0812
0811
0810
0509
1108
0508
1107
0507
Source: Bloomberg.
0809
60
20
Source: Bloomberg.
Although OPEC officials stated that the range of 70 to 80 US dollars per
barrel of crude oil is acceptable and the over-quota production of several OPEC
members put downward pressure on oil prices, there still remain substantial
risks. Data from the International Energy Agency (IEA) indicate that, if OPEC
leaves output quotas unchanged, the supply/demand ratio is likely to tilt in
favor of demand by the final quarter of 2009. Moreover, the fact that OPEC
holds two ordinary meetings a year and may delay its supply decisions can
trigger severe price movements. In addition, the re-entry of non-producing
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Inflation Report 2009-IV
Central Bank of the Republic of Turkey
investors into futures markets may stimulate the stocking behavior and cause
spot prices to reaccelerate. Therefore, despite strong hopes of a slow global
recovery, these risks require prudence against oil and other commodity prices.
2.3. Global Inflation
Having slumped due to the downward pressure caused by the demand
and cost conditions since mid-2008, global inflation rose slightly in August
2009 with the gradual removal of the high base effect from a year earlier
(Graph 2.3.1). In addition, core inflation figures point to a downtrend in the
underlying inflation in both advanced and emerging economies (Graph 2.3.2).
Recent monthly inflation data indicate that underlying inflation remains in the
positive zone despite fears of deflation fueled by the severe economic crisis
(Box 2.1). Moreover, both the inflation compensation data, which shows the
difference in yields between CPI inflation-indexed treasury bonds and nominal
bonds, and the Consensus Forecasts data suggest that inflation expectations are
well anchored.
Graph 2.3.1. CPI Inflation in Advanced and Emerging Economies
(Annual Percentage Change)
Advanced Economies
Graph 2.3.2. Core CPI Inflation in Advanced and Emerging
Economies
(Annual Percentage Change)
Advanced Economies
4
Emerging Economies
Emerging Economies (right axis)
5
8
4
7
6
3
3
5
2
4
1
3
0
2
2
Source: Bloomberg, CBRT.
0609
1208
0608
1207
0607
1206
0606
1
1205
0609
1208
0608
1207
0607
1206
0
0606
1
-2
1205
-1
Source: Bloomberg, CBRT.
2.4. Financial Conditions and Risk Indicators
The third quarter of 2009 was marked by a moderate decline in market
rates boosted by the improved investor sentiment amid expansionary monetary
measures, government guarantees and capital injections for troubled banks and
hopes of global economic recovery (Graph 2.4.1). Especially borrowing costs
for high-risk companies that rise rapidly amid crisis continued to fall in the
Inflation Report 2009-IV
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Central Bank of the Republic of Turkey
third quarter, while interest rates on the asset-based commercial paper market,
which lenders consider a safe way to lend, remained stable (Graph 2.4.2).
Graph 2.4.1. Money Market Rates
Graph 2.4.2. Corporate Borrowing Costs
(Percent)
(Basis Points)
Euro Area OIS Spread - 3 Month
4
USA OIS Spread - 3 Month
450
ABCP Rates
High Yield Index
2400
3
300
1600
150
800
2
1
Source: Bloomberg.
0609
1208
0608
0607
0
1207
0
0609
1208
0608
1207
0607
0
Source: Bloomberg.
Although market rates and investment costs dropped during the third
quarter, tight lending conditions and weaker loan demand still suppress a
potential credit expansion. In fact, credit volume in US is observed to continue
its contraction since the outburst of the crisis, while the credit volume in Euro
area has flattened out (Graph 2.4.3 and 2.4.4). It is very remarkable that change
in the total credit volume at US deposit banks has dipped to a historic low of
7.7 percent year-on-year as of September 30.
Graph 2.4.3. Loan Developments in the US
Graph 2.4.4. Loan Developments in the Euro Area
Credit Volume (billion US dollar)
Credit Volume (trillion euro)
8000
20
14
15
12
10
10
5
8
0
6
-5
4
-10
2
Annual Percentage Change (right axis)
7000
Annual Percentage Change
6000
5000
4000
3000
Source: Bloomberg.
0908
0906
0904
0902
0107
0104
0101
0198
0195
0192
0189
0186
0
0900
1000
0998
2000
Source: ECB.
The Federal Reserve’s (Fed) and the European Central Bank’s (ECB)
July 2009 surveys on bank lending reveal that loan conditions are expected to
remain tight despite some improvement in the previous quarter and loan
demand is likely to remain weak. Banks attributed the tight loan conditions to
the uncertain economic outlook and the lower loan demand to reduced funding
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Inflation Report 2009-IV
Central Bank of the Republic of Turkey
needs driven by falling inventory and capital investments of companies (Graph
2.4.5). Furthermore, according to the October 2009 release of the IMF’s Global
Financial Stability Report, following the writedowns of some 1.3 trillion US
dollars so far, banks, especially those in the US, Euro area and UK, are
expected to report additional writedowns of 1.5 trillion US dollars ahead. These
world’s major banks are expected to pay off their debt by selling assets in the
near future and create a deleverage effect, thereby leading to further tightening
in loan supply.
Graph 2.4.6. Global Risk Appetite
Graph 2.4.5. Bank Lending Conditions*
(Percent)
Credit Suisse Risk Appetite Index (inverted)
USA
100
80
Euro Area
15
Japan (Inverted-right axis)
10
VIX (right axis)
70
60
5
40
0
20
-5
0
-10
-20
-15
40
-2
-20
* Diffusion index – Percent of respondents describing lending standards as
tightening “somewhat” or “considerably” minus those indicating standards as
easing over the previous three months.
Source: IMF.
10
0109
-8
0108
2009
0107
2008
0106
2007
0105
2006
0104
2005
0103
2004
0102
2003
0101
1234123412341234123412341234
0100
-40
4
Source: Bloomberg.
Having improved during the second quarter with the faster-than-expected
recovery in economic activity and the growing sentiment that the worst of the
crisis has passed, the global risk sentiment continued to strengthen slightly in
the third quarter (Graph 2.4.6).
The massive amount of low-cost liquidity injected into markets as part of
monetary and fiscal stimulus packages, increased risk appetite and low yields in
government bonds of advanced economies boosted the demand for high-risk,
thus high-yield emerging-market securities (Graph 2.4.7).
Inflation Report 2009-IV
19
Central Bank of the Republic of Turkey
Graph 2.4.7. Global Stock Markets
Graph 2.4.8. Currency and Risk Premium Indicators for
Emerging Economies*
EMBI+ (basis point)
MSCI-Emerging
350
MSCI-Advanced
Currency Index (composite)/US dollar - (right axis)
900
140
600
120
300
100
250
150
0609
1208
0608
80
1207
0
0607
0909
0609
0309
1208
0908
0608
0308
1207
0907
0607
50
*The June 2007 simple average of the value of local currency against US dollar
equals to 100. The upward movement denotes an appreciation of the US dollar.
Source: Bloomberg.
Source: Bloomberg.
According to the IIF’s (Institute of International Finance) October 2009
Report, after having declined in the first quarter of 2009, net capital flows to
emerging market economies are projected to be 349 billion US dollars at end2009 and 672 billion US dollars in 2010, following the marked increase in risk
appetite since the second quarter (Box 2.2). In fact, emerging-market currencies
seem to have appreciated against the US dollar as capital flows turned positive
in the second quarter of 2009 (Graph 2.4.8).
In its October 2009 World Economic Outlook report, the IMF makes a
similar projection for 2010. Accordingly, after a severe contraction in 2009,
capital flows to emerging markets are expected to rebound in 2010 given the
improved global growth outlook. IMF also reports that any hiatus in global
growth may reverse the flow.
2.5.Global Monetary Policy Developments
The monetary easing in advanced economies slowed markedly during the
second quarter and came to a halt in the third quarter. The Fed and the Bank of
Japan (BoJ) were the first central banks among advanced economies to end the
monetary loosening by lowering policy rates for the last time in December
2008. Bank of England (BoE) halted monetary easing at the end of the first
quarter, while the ECB and the Bank of Canada continued to cut key rates in
the second quarter. None of the central banks in advanced economies eased
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Inflation Report 2009-IV
Central Bank of the Republic of Turkey
monetary policy during the third quarter except for the Swiss National Bank,
which lowered its policy rate by 25 basis points in July (Graph 2.5.1).
Graph 2.5.1. Policy Rate Changes in Advanced Economies*
Graph 2.5.2. Policy Rate Changes in Emerging Economies*
(Basis Points)
(Basis Points)
400
100
200
0
0
-100
-200
-200
-400
-300
-600
-400
-800
-500
July, 2009-October, 2009
-600
September, 2007-June, 2009
-700
July, 2009-October, 2009
-1000
September, 2007-June, 2009
Romania
Russia
Hungary
Poland
Indonesia
Brazil
Thailand
South Africa
Peru
Mexico
India
Chile
Colombia
Turkey
Japan
Sweden
Euro Zone
South Korea
Israel
Norway
Canada
Australia
US
UK
New Zealand
-1200
* As of October 19, 2009.
Source: Bloomberg, CBRT.
Despite the commitment of major central banks to leave policy rates
unchanged until the end of 2010, the Bank of Israel and the Reserve Bank of
Australia raised key interest rates by 25 basis points at their meetings on
August 24 and October 6, respectively (Graph 2.5.1). In its post-decision
statement, the Bank of Israel noted that the July CPI inflation came in above the
expected range of 0.8 – 0.9, the economic contraction bottomed out and the
economy resumed an upward growth path. Similarly, the Reserve Bank of
Australia stated that unemployment did not rise as far as had been expected and
growth prospects for Australia’s Asian trading partners appeared to be
noticeably better. Both central banks noted the 12-month ahead inflation
expectations that are now closer to the upper bound of their targets and the
upward revision to growth prospects, and signaled further increases in policy
rates.
Monetary policy practices were quite similar among advanced economies
during the past quarter, but varied across emerging economies. Fewer
emerging-market central banks continued to cut policy rates at a descending
pace in the third quarter to contain the impact of the global crisis on economic
activity. The mid-crisis financial market fragility offered little room for
monetary policy practices; countries such as Hungary, Romania and Russia
lowered policy rates delayed monetary easing (Graph 2.5.2). On the other hand,
countries such as Poland, Czech Republic and South Africa are likely to halt
Inflation Report 2009-IV
21
Central Bank of the Republic of Turkey
monetary loosening and raise key rates in 2010. Similarly, Brazil is another
country that is expected to tighten monetary policy by early 2010 depending on
its rate of recovery.
In view of these developments, the monetary easing in advanced
economies came to a halt in the previous quarter, leaving the composite policy
rate unchanged from the second quarter at 0.56 percent (Graph 2.5.3).
Meanwhile, emerging economies continued to cut policy rates, albeit at a
significantly slower pace, but did not end the easing cycle. In inflation-targeting
emerging economies, the composite index fell by 50 basis points from the
second quarter, lowering the composite rate to 5.89 percent (Graph 2.5.4).
Source: Bloomberg, CBRT.
Turkey
0109
0708
0107
0706
5
0106
0
0709
8
0109
1
0708
11
0108
2
0707
14
0107
3
0706
17
0106
4
Emerging Economies
0709
20
0108
5
Graph 2.5.4. Policy Rate in Inflation-Targeting Emerging Economies
0707
Graph 2.5.3. Policy Rate in Advanced Economies
Source: Bloomberg, CBRT.
In sum, although recent data regarding the world economy indicate that
the worst of the economic downturn is behind us, unresolved problems and
weak employment conditions raise doubts over the strength of recovery.
22
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Box
RISK OF DEFLATION IN THE US AND THE EURO AREA
2.1
The crisis-driven severe economic contraction and falling commodity prices have
led to a sharp plunge in inflation. The fact that annual CPI inflation of US and Euro
area reached negative values and its permanency (the US CPI has been
negative for 7 consecutive months, while the Euro area CPI has been negative for
4 consecutive months) brought the fears of deflation into stage. The resemblance
between the early conditions of deflation in Japan and those of the current crisis4
has fed the current worries. Therefore, this Box analyzes the risk of deflation in the
US and the Euro area by comparison to the Japanese experience.
Deflation
is simply defined as a “general” and “permanent” decline in prices.5
Especially in advanced economies with low inflation rates, prices of certain
categories of goods may drop due to several factors (productivity gains,
technological progress, falling costs, relatively weak demand). Yet, these sectorspecific price declines are not defined as deflation unless they spread across all
components and are permanent.
Based on the above definition, the Box employs indicators such as diffusion index,
core inflation and seasonally adjusted indices in order to analyze how much of
the decline in the US and Euro area CPI can be interpreted as deflation risk, and
compares the current state to the Japanese deflation experience.
To
measure the extent to which the CPI price decline has spread among sub-
components, and therefore, to extract information about the risk of deflation, we
firstly calculated the diffusion index by using sub-components of the US and Euro
area CPI.6 In addition, we compared the diffusion indices for the US and Euro area
to that for the Japan, who has been suffering from deflation for a long time
(Graph 1, Graph 2 and Graph 3).
4
The marked increase in Japanese real estate and stock prices during 1980 led to a sharp downturn in early 1990s. The banking
sector was severely affected by the deep correction, and the steep decline in total loans led to a slump in consumer and investment
spending. Accordingly, policy rates were lowered to and kept at zero for a long while.
5
For further information: Bernanke, B. 2002, "Deflation: Making Sure It Doesn't Happen Here", speech, The Federal Reserve
Board.
6
Diffusion index is calculated by dividing the prices of CPI goods that fall or remain flat by the total number of CPI goods. For
example, the index equals 10, if prices remain flat or go down year-on-year in 10% of all goods and up in the remaining 90%. The
index is based on 145 sub-components for Japan, 70 for the US and 91 for the Euro area.
Inflation Report 2009-IV
23
Central Bank of the Republic of Turkey
Accordingly,
although inflation in the US and the Euro area has recently been
negative, the diffusion index still appears to be very low. As compared to the
Japanese diffusion index, the decline in the CPI inflation of US and the Euro area is
confined to certain categories of goods and does not spread across all
components. In fact, the Japanese diffusion index had a range of 60-80 during
2000s, when deflation was at its worst, while the US diffusion index equals 30-40
despite the latest uptrend. The diffusion index is even lower for the Euro area.
Graph 1. US Diffusion Index and Annual CPI
Inflation (Percent)
37
4
Diffusion index
Graph 2. Euro Area Diffusion Index and Annual
CPI Inflation (Percent)
25
4
20
3
15
2
10
1
3
35
Inflation (right axis)
2
33
1
31
0
29
-1
Source: Bureau of Labor Statistics, CBRT calculations.
0
0909
0709
0509
0309
0109
1108
0908
0708
0508
-1
0308
0
0108
0909
0809
0709
0609
0509
0409
0309
-3
0209
25
0109
-2
Core
Dif f usion Index
Inf lation (right axis)
5
27
Source: Eurostat, CBRT calculations.
inflation indicators can also provide useful information about the risk of
deflation in terms of major trend in inflation. Although core inflation data, which
exclude transient factors that affect
0
40
-1
30
-2
0709
1008
0108
0407
-4
0706
-3
10
1005
20
0105
deflation for the US and the Euro area.
1
0404
data do not point to a recent risk of
2
50
0703
territory since 2000s. Thus, core inflation
3
60
1002
for Japan have been in the negative
4
0102
bound (Graph 4). Core inflation indices
Inflation (right axis)
70
0401
on the decline, it is well above the zero
Diffusion index
80
0700
inflation in the US and the Euro area is
1099
underlying
Graph 3. Japan’s Diffusion Index and Annual CPI Inflation
(Percent)
0199
the
energy
0498
that
and
0797
show
(food
1096
prices),
inflation
0196
overall
However, the permanent year-on-year
decline in core inflation requires an
Source: Statistics Bureau of Japan, CBRT calculations.
analysis of high-frequency data.
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Inflation Report 2009-IV
Central Bank of the Republic of Turkey
In this context, Graph 5 shows the monthly changes in seasonally adjusted core
inflation indices. Accordingly, while inflation in the US and the Euro area shows
downward trend in the short run, there is no evidence of a continuous decline in
the level of prices
Graph 4. Core Inflation
(Annual Percentage Change)
3
Graph 5. Seasonally-Adjusted Core Inflation
(Month-on-month Percentage Change)
1.0
0.8
2
USA
Euro Area
0.6
1
0.4
0.2
0
0.0
-1
-0.2
USA
Japan
Euro Area
-2
Source: Bureau of Labor Statistics, Eurostat, Statistics Bureau of Japan.
On
0100
0700
0101
0701
0102
0702
0103
0703
0104
0704
0105
0705
0106
0706
0107
0707
0108
0708
0109
0709
0197
0797
0198
0798
0199
0799
0100
0700
0101
0701
0102
0702
0103
0703
0104
0704
0105
0705
0106
0706
0107
0707
0108
0708
0109
0709
-0.4
Source: Bureau of Labor Statistics, Eurostat.
balance, there is no sufficient evidence that the US and the Euro area are
heading towards deflation. The timely and flexible monetary and fiscal policy
measures implemented by these countries and their attempts to take a globally
coordinated action have reduced the risk of deflation.
Inflation Report 2009-IV
25
Central Bank of the Republic of Turkey
Box
2.2
The
CAPITAL FLOWS TO EMERGING MARKETS:
IIF FORECASTS FOR 2009-2010
economic uncertainty created by the global financial crisis caused
international capital flows to weaken dramatically by the final quarter of 2008.
Recently, growing hopes that the worst of the crisis is over has spurred optimism in
global financial markets and increased risk appetite. The massive amount of lowcost liquidity injected into markets through global monetary and fiscal measures,
together with the increased risk appetite, boosted the demand for emergingmarket financial assets. Thus, capital flows to emerging market economies
resumed in the second quarter of 2009 and gathered pace in the third quarter.
Considering the coming outlook for inflation and monetary policy, the direction
and magnitude of capital flows will be a key indicator through the channel of
both imported input costs and risk premiums. The IIF’s (Institute of International
Finance) research note of October 3, 2009, “Capital Flows to Emerging Market
Economies”, discusses net flows to a sample of 30 key emerging market
economies (EMEs) in 2009 and forecasts for 2010. This Box gives a brief account of
the IIF’s research note.
The
direction of capital flows is synchronized with the economic growth cycle.
Interest rates in advanced economies hover around historic lows, global growth is
triggered by EMEs, and EMEs are now considered to be less risky than in previous
crisis episodes, which encourage capitals to flow towards EMEs. On balance,
private capital flows to EMEs are expected to fall from 649 billion US dollars in 2008
to 349 billion US dollars in 2009 and accelerate again to 672 billion US dollars in
2010 (Table 1.a). Official capital flows to EMEs (including IMF) are expected to rise
in 2009 to 64 billion US dollars.
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Inflation Report 2009-IV
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Table 1. Capital Flows to Emerging Market Economies
(US dollar, billions)
1.a. By Types
2007
Current Account
Balance
Private Inflows
Direct investment
Portfolio investment
Bank loans
Non-bank loans
Official Inflows
529.4
1252.2
499.8
102.1
431.4
218.8
42.9
2008
540.9
649.1
512.5
-81.7
102.7
115.6
55.5
1.b. By Regions
2009*
371.5
348.6
343.0
82.2
-82.7
6.2
63.6
2010*
334.3
671.8
459.4
74.1
48.5
89.7
43.4
Current Account
Balance
Private Inflows
Latin America
Emerging Europe
Africa/Middle East
Emerging Asia
Official Inflows
2007
2008
2009*
2010*
529.4
1252.2
228.9
445.7
155.4
422.2
42.9
540.9
649.1
132.4
270.1
75.3
171.2
55.5
371.5
348.6
99.8
20.4
37.4
191.1
63.6
334.3
671.8
150.9
179.3
68.7
272.9
43.4
*Forecast.
Source: IIF.
Similarly,
direct investments plummet during recessions. However, although the
global crisis that deepened during the final quarter of 2008 is regarded the worst
global recession in sixty years, data available for the first quarter of 2009 suggest
that the decline in direct investments has been relatively modest (Table 1.a).
Direct investments to EMEs are expected to drop from 513 billion US dollars in 2008
to 343 billion US dollars in 2009, but rise again to 459 billion US dollars in 2010. These
forecasts depend on the recovery in both profit rates and the propensity to invest
in EMEs, the driver of global growth.
Meanwhile, portfolio investments to EMEs are expected to turn around in 2009 as
a whole from the outflow of 82 billion US dollars in 2008. Portfolio inflows appear to
have turned positive in February and been on the rise throughout the year.
Bank
credits to EMEs are expected to be negative in net terms for 2009, while
non-bank lending is believed to have created some net capital inflow. Banks are
less eager to lend as they are in balance sheet retrenchment mode. In an
environment where there is a significant tightening in bank capital requirements,
banks are cautious about emerging market exposures. As non-bank lenders will
be under less of a capital constraint, they will be the net creditors for EMEs in 2009.
Inflation Report 2009-IV
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Central Bank of the Republic of Turkey
There are some divergences between regions regarding the pace of increase in
capital flows for 2009 and 2010 (Table 1.b). As total capital flows, particularly to
the emerging Europe, have generally been on the decline during 2009, those to
the emerging Asia have been on the rise, primarily due to the rapid recovery in
portfolio investments compared to 2008. In 2010, capital flows to the emerging
Europe will continue to improve but remain below the level in 2008, whereas the
emerging Asia will outpace the level in 2008 and receive the biggest share of
total capital flows.
The emerging Europe, including Turkey, remains the region most deeply affected
by the crisis. After having increased to 446 billion US dollars in 2007, net capital
flows fell as low as 20 billion US dollars in 2009 (Table 2). Accordingly, the region is
expected to account for about 39 billion US dollars of the 64 billion US dollars of
official flows in 2009.
Direct investments to the emerging Europe are forecast to have fallen from 133
billion US dollars in 2008 to 69 billion US
dollars in 2009, which matches the
Table 2. Capital Flows to Emerging Europe
(US dollar, billions)
pattern in Turkey. Directs investments to
region are expected to rise slightly to
102 billion US dollars in 2010. Having
partially improved after 2008, portfolio
investments are forecast to amount to
11 billion US dollars in 2010. In credit
side,
following
a
substantial
net
Current Account
Balance
Private Inflows
Direct investment
Portfolio investment
Bank loans
Non-bank loans
Official Inflows
2007
2008
2009*
2010*
-29.6
445.7
124.3
19.9
171.3
130.2
4.2
-26.5
270.1
133.2
-13.9
83.0
67.7
20.9
-2.7
20.4
68.9
5.9
-47.3
-7.2
39.4
-14.5
179.3
101.9
11.0
28.2
38.3
16.8
* Forecast.
Source: IIF.
repayment period in 2009, the region is likely to receive relatively small amounts of
net borrowing in 2010.
As a result, global capital flows to EMEs, including Turkey, are forecast to edge up
in coming months, but still remain below the level in 2007 for the foreseeable
future. Yet, countries with a well-established banking system and fiscal discipline
are likely to receive higher capital flows.
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3. Inflation Developments
3.1. Inflation
Consumer prices were up 0.34 percent in the third quarter of 2009,
while CPI inflation fell by 0.46 percentage points quarter-on-quarter to 5.27
percent year-on-year. Facing ongoing pressure from the economic
downturn, underlying inflation continued to ease.
During the third quarter, annual food inflation declined markedly,
while energy and services inflation continued to edge down year-on-year.
However, the contribution of durable goods, tobacco and gold to annual
inflation increased (Graph 3.1.1).
Graph 3.1.1. Contribution to Annual CPI Inflation
Graph 3.1.2. CPI by Categories
(Third-Quarter Percentage Change)
14
12
Food and Energy *
Tobacco ve Gold**
12
Services
Core Goods
10
2006-2007 Average
2008
8
10
2009
6
8
4
2
6
0
4
-2
2
-4
* Food and energy: Food, nonalcoholic beverages and energy.
** Tobacco and gold: Alcoholic beverages, tobacco and gold.
Source: TURKSTAT, CBRT.
0909
0609
0309
1208
0908
0608
0308
1207
0907
0607
0
-6
Food
Energy
Tobacco
and Gold*
Core
Goods**
Services
* Tobacco and gold: Alcoholic beverages, tobacco and gold.
** Core goods: Goods excluding food, energy, alcoholic beverages, tobacco
and gold.
Source: TURKSTAT, CBRT.
The third quarter was marked by the ongoing support of the economic
downturn for disinflation. Although tax hikes intended to improve fiscal
balance put upward pressure on prices, the annual rate of increase in
consumer prices continued to decelerate. Measures included hikes in the
lump sum tax on tobacco and fuel products and in the fees for some
financial services in July (Graph 3.1.2). These measures added a total of
about 0.9 percentage points to CPI inflation. Another highlight of the third
quarter was the gradual phase-out of the tax reductions on durable goods,
causing prices of core goods to decline less than in previous years
(Graph 3.1.2).
Inflation Report 2009-IV
29
Central Bank of the Republic of Turkey
Graph 3.1.3. Food Prices
Graph 3.1.4. Food Prices
(Seasonally Adjusted, 3-Month Moving Average)
(Annual Percentage Change)
2.5
2
27
P rocessed Food
24
Unprocessed Food
21
16.70
18
1.5
15
1
12
9
0.5
6
0
3
0
-0.5
-0.43
-3
0608
0708
0808
0908
1008
1108
1208
0109
0209
0309
0409
0509
0609
0709
0809
0909
0609
0209
1008
0608
0208
1007
0607
0207
1006
0606
0206
-1
Source: TURKSTAT, CBRT.
Source: TURKSTAT, CBRT.
Seasonally adjusted food prices dropped in the third quarter, unlike in
previous years (Graph 3.1.3), driving food inflation down by 2.89
percentage points quarter-on-quarter to 6.79 percent year-on-year. Despite
having increased remarkably during the first half of the year, unprocessed
food prices fell during the third quarter due to the larger-than-usual seasonal
drop in fruit and vegetable prices, becoming the key factor in bringing food
inflation down (Graph 3.1.4). Yet, skyrocketing meat prices put a constraint
on this downward movement.
Table 3.1.1. First Estimation of Crop Production in 2009
(Selected Goods)
Production (Tons)
2008
2009
1. Vegetables
2. Fruits
3. Cereals
Wheat
Maize
Barley
4. Oil seeds
Sunflower
5. Sugar beet
6. Cotton (raw)
27 214 317
15 681 566
29 287 281
17 782 000
4 274 000
5 923 000
1 233 992
992 000
15 488 332
1 820 000
26 908 299
15 644 889
33 380 279
20 520 000
4 250 000
7 200 000
1 349 667
1 050 000
16 400 000
1 884 039
Change
(Percent)
-1.1
-0.2
14.0
15.4
-0.6
21.6
9.4
5.8
5.9
3.5
Source: TURKSTAT.
According to TURKSTAT’s (Turkish Statistical Institute) first
estimation of crop production, vegetable production is expected to fall by
1.1 percent in 2009, while fruit production is likely to remain unchanged
from a year earlier (Table 3.1.1). Thus, fruit and vegetable supply faces a
gloomy outlook for 2009. Besides, the fact that the export quantity for fruits
and vegetables grew robustly from a year ago explains the concurrent, steep
increase in unprocessed food prices (Graph 3.1.5 and 3.1.6).
30
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Graph 3.1.5. Fruit and Vegetable Production and Prices
Graph 3.1.6 Export Quantity and Price Index for Fruits and
Vegetables
(Annual Percentage Change)
(Seasonally Adjusted, 3-Month Moving Average)
20
180
16.7
14.9
16.5*
15
160
10
140
7.0
5
120
-0.8
0
100
-2.6
-2.0
-5
-0.8
80
Fresh Fruit and Vegetable Price Index
-10
60
Total Fruit and Vegetable Production
Fruit and Vegetable Prices
-15
Fruit and Vegetable Export Volume Index
0109
0108
Source: TURKSTAT, CBRT.
* Annual inflation as of end-September 2009.
0107
2009
0106
2008
0105
2007
0103
2006
0104
40
Source: TURKSTAT, CBRT.
Processed food prices also presented a favorable outlook in the third
quarter. In this category, annual inflation continued to ease, while prices
went down year-on-year for the first time in the history of the CPI (Graph
3.1.4), as softening in the producer and import prices for cereals and oil
seeds, a key component in the processed food basket, had a considerable
role in this development (Table 3.1.1). In addition, changes in total demand
continued to help lower annual inflation. Annual processed food inflation is
likely to rise modestly in coming months owing to the base effect.
Table 3.1.2. Prices for Goods and Services
(Quarterly and Annual Percentage Change)
2008
III
IV
Annual
CPI
0.78
3.03
10.06
1. Goods
0.05
3.61
9.93
Energy
6.41
1.91
19.81
Unprocessed food
-0.29
12.45
7.87
Processed food
1.37
-0.20
15.46
Goods excl. energy and food
-3.52
3.04
3.75
Durable goods
Durable goods
I
1.05
1.22
-0.28
13.29
-0.93
-1.89
2009
II
0.77
0.60
-1.90
-3.68
0.09
4.21
III
0.34
-0.22
2.32
-4.90
0.61
0.17
-2.34
2.45
5.54
-0.27
-2.76
2.70
-1.80
0.61
3.19
-2.49
-2.23
2.83
Semi-durable goods
Non-durable goods
0.01
0.74
3.42
4.07
11.54
9.99
-3.46
5.21
4.55
-1.22
-1.65
0.04
2. Services
Rents
Restaurants and hotels
Transport
Other
2.94
3.58
2.77
4.35
2.29
1.39
2.25
2.34
1.54
0.49
10.46
11.85
13.44
16.89
6.40
0.53
1.51
1.88
-1.29
0.13
1.27
1.14
1.19
1.43
1.31
1.96
1.43
1.73
1.15
2.57
(excl. gold)
Source: TURKSTAT, CBRT.
Inflation Report 2009-IV
31
Central Bank of the Republic of Turkey
Energy prices increased by 2.32 percent during the third quarter
(Table 3.1.2). Tap water rates were up in most cities, while bottled gas
prices picked up substantially. Moreover, oil prices climbing to 70 USD/bbl
during the third quarter, after averaging around 60 USD/bbl in the second
quarter, and the July hike in the lump sum Special Consumption Tax (SCT)
on fuel products caused fuel prices to soar by 3.34 percent. Despite price
increases, annual energy inflation continued to fall on the back of the high
base effect from a year ago, down to 2.01 percent (Graph 3.1.7).
Graph 3.1.7. Energy Prices
(Annual Percentage Change)
40
Energy (general)
Housing
Fuel
30
20
10
0
-10
0909
0609
0309
1208
0908
0608
0308
1207
0907
0607
0307
1206
0906
-20
Source: TURKSTAT, CBRT.
The lump sum tax on tobacco was raised in July. Accordingly, prices
of alcoholic beverages and tobacco products jumped by 12.81 percent in the
third quarter, contributing by about 0.6 percentage points to annual CPI
inflation.
Annual inflation in core goods (excluding food, energy, alcoholic
beverages, tobacco and gold) increased on rising prices of durable goods
due to phased-out tax cuts. In this category, annual inflation is expected to
rise further on tax adjustments in the final quarter, but underlying prices are
not likely to pick up in response to any other change.
32
Inflation Report 2009-IV
Source: TURKSTAT, CBRT.
0809
0808
0208
0807
80
0207
0,8
0806
85
0804
0,9
0609
90
0608
95
1
0607
1,1
0606
100
0605
1,2
0604
105
0603
110
1,3
0602
1,4
0601
115
0600
1,5
0699
120
0698
1,6
0206
(Seasonally Adjusted Index)
0805
Graph 3.1.9. Export Quantity for Apparels
(Seasonally Adjusted, at 1998 Prices, Million TL)
0205
Graph 3.1.8. Domestic Consumption of Clothing and Footwear
0209
Central Bank of the Republic of Turkey
Source: TURKSTAT, CBRT.
Domestic consumption on clothing and footwear continued to weaken
in the second quarter (Graph 3.1.8). The export volume index for apparels
trended further down in the third quarter, suggesting that foreign demand
remains subdued (Graph 3.1.9). Under current total demand conditions,
clothing prices may put further downward pressure on CPI inflation.
Tax adjustments had a major impact on the prices of durable goods
during 2009 (Box 3.1). Prices of durable goods (excluding gold) eased with
the temporary SCT and VAT (Value Added Tax) cuts in the first quarter of
2009, yet accelerated by 2.83 percent following the termination of some tax
reductions in the third quarter (Table 3.1.3). Tax adjustments now appear to
have substantially passed through to prices of durable goods. Given the
expiry of the SCT and VAT cuts on October 1, prices of durable goods may
rise markedly in the fourth quarter.
Table 3.1.3. Prices of Durable Goods
(Quarterly and Annual Percentage Change)
2008
Annua
III
IV
l
Durable goods (excl. gold)
-1.80
0.61
3.19
Furniture
-1.27 -1.31
9.17
Electric and non-electric appliances
0.12
6.04
8.13
Automobiles
-3.63 -2.30
-2.56
Other
1.02
2.27
4.29
I
-2.49
-3.17
-4.26
-1.36
0.36
2009
II
-2.23
-7.61
-2.54
-0.11
0.20
III
2.83
1.03
3.53
3.20
1.81
Source: TURKSTAT, CBRT.
Inflation Report 2009-IV
33
Central Bank of the Republic of Turkey
Domestic demand for services remained sluggish during the first half
of the year (Graph 3.1.10). In line with this, due to the additional impact of
the gradual removal of the high base effect from last year’s supply
shortages, the annual rate of increase in prices of services continued to trend
down in the third quarter. Prices of services rose by a cumulative 3.81
percent in the first nine months, whereas services inflation fell by 5.21
percentage points from end-2008 to 5.26 percent year-on-year. The services
sector is expected to recover gradually during the final quarter, while the
rate of increase in prices of services are likely to moderate further.
Graph 3.1.10. Turnover Index for Services*
Graph 3.1.11. Prices of Services
(Annual Percentage Change, Nominal and Real)
(Seasonally Adjusted, 2-Month Averages)
20
2.0
15
1.8
1.6
10
1.4
5
1.2
0
1.0
-5
0.8
0.6
-10
-15
Real
0.4
Services
Nominal
0.2
Rent
0909
0509
0109
0908
0508
0108
0907
0507
0107
0906
0506
0106
0609
0309
1208
0908
0608
0308
1207
0907
0607
0307
1206
0906
0606
* TURKSTAT Short-Term Business Statistics, Trade and Services
Indicators.
Source: TURKSTAT, CBRT.
0905
0.0
-20
Source: TURKSTAT, CBRT.
Seasonally adjusted data suggest that underlying services inflation has
hit a historic low (Graph 3.1.11). The slowdown is evident across all major
subcategories, and prices appear to have increased at a lower rate than in
previous years as of the first nine months of 2009 (Graph 3.1.12, Graph
3.1.13). The seasonally adjusted monthly rate of increase in rents has
particularly been on a continuous downward spiral, pushing rental inflation
down to 6.48 percent year-on-year. Similarly, prices for restaurants and
hotels as well as transport services have also slowed down, and annual
inflation in both subcategories has plunged to the lowest level in the history
of the CPI as of the end of the third quarter.
34
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Graph 3.1.12. Prices of Services
Graph 3.1.13. Prices of Services
(Annual Percentage Change)
21
(9-Month Percentage Change)
Other Services
Transport Services
Rent
Restaurant Services
18
15
16
2006-2007 Average
14
2008
12
2009
10
12
8
9
6
6
4
3
2
0
Services
0909
0709
0509
0309
0109
1108
0908
0708
0508
0308
0108
1107
0907
0
Source: TURKSTAT, CBRT.
Other
Services
Transport
Services
Rent
Restaurant
and Hotels
Source: TURKSTAT, CBRT.
During third quarter, inflation in the core CPI index excluding energy,
unprocessed food, alcoholic beverages, tobacco and gold (SCA-H) rose to
2.44 percent year-on-year, while, with a further exclusion of processed food,
inflation in the CPI index (SCA-I) climbed to 3.37 percent year-on-year
(Graph 3.1.14), largely owing to the more modest seasonal discount on
clothing than a year ago and the termination of some tax incentives on
durable goods. However, data adjusted for tax changes and seasonality
suggest that underlying inflation remained on a downward track during the
third quarter (Graph 3.1.15). Yet, it should be noted that both indices may
rise, albeit modestly, in the upcoming period, given the expiry of the
temporary tax cuts.
Graph 3.1.14. Core CPI Measures I and I*
Graph 3.1.15. Core CPI Measures H and I**
(Annual Percentage Change)
(Seasonally Adjusted, 2-Month Averages)
8
1.6
7
1.4
6
1.2
5
1.0
4
0.8
3
0.6
H
I
0.4
2
I
I*
0.2
1
Inflation Report 2009-IV
0909
0509
0109
0908
0508
0108
0907
0507
0107
0906
0506
0106
0909
0709
0509
0309
0109
1108
0908
0708
0508
0308
0108
1107
0907
I*: SCA-I adjusted for tax changes.
Source: TURKSTAT, CBRT.
0905
0.0
0
** SCA-H and SCA-I adjusted for tax changes.
Source: TURKSTAT, CBRT.
35
Central Bank of the Republic of Turkey
Graph 3.1.16. Manufacturing Industry Prices
(Quarterly Percentage Change)
8
Manufacturing Industry ex. Petroleum and Base Metal
7
Base Metal Industry (right axis)
6
Petroleum Products Industry (right axis)
60
40
5
20
4
3
0
2
1
-20
0
4
-1
1
2
2006
3
4
1
2007
2
3
4
1
2
2008
3
-40
2009
Source: TURKSTAT, CBRT.
Producer prices increased by a mere 0.32 percent during the third
quarter. Prices for base metal production picked up on rising international
metal prices, whereas producer prices for petroleum products remained
quite unchanged quarter-on-quarter. Excluding oil and base metals,
manufacturing industry prices rallied amid soaring prices for food
production (Graph 3.1.16), which resulted from locally rising meat prices
and both locally and internationally rising sugar prices, driven by changes in
foreign demand and supply conditions.
Graph 3.1.17. Import Unit Value Index
Graph 3.1.18. Average Unit Cost* and Currency Basket
280
Currency Basket (0.5 USD + 0.5 Euro)
in TL
in Dollars
Average Unit Production Cost (last 3 months, right axis)
260
2.0
240
65
1.9
220
55
200
1.8
180
1.7
160
45
35
1.6
140
1.5
25
1.4
15
Source: TURKSTAT.
0809
0609
0409
0209
1208
1008
0808
0608
0408
0208
1207
0809
0509
0209
1108
0808
0508
0208
1107
0807
0507
0207
1106
0806
0506
0206
1105
0805
100
1007
120
* From the CBRT Business Tendency Survey.
Source: CBRT.
Import prices rose slightly in dollar terms but remained flat in Turkish
lira terms. Thus, import prices exerted no significant cost pressure (Graph
3.1.17). Accordingly, the average unit cost continued to hover around low
levels (Graph 3.1.18). All in all, although manufacturing industry prices
excluding petroleum products increased somewhat quarter-on-quarter, there
was no serious cost pressure from producer prices in the third quarter.
36
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
3.2. Expectations
Having flattened out during the second quarter, medium-term inflation
expectations were back on a downward slope in the third quarter. Inflation
expectations slipped down for all maturities, though the longer the maturity,
the more limited the decline and the more horizontal the expectations curve
(Graph 3.2.1 and Graph 3.2.2).
Graph 3.2.1. 12- and 24-Month Ahead CPI Expectations*
Graph 3.2.2. Inflation Expectations Curve*
(Annual Percentage Change)
(Annual Percentage Change)
8.0
10
7.5
12 Months
7.0
9
24 Months
6.5
8
6.0
5.5
7
6
6.23
5.0
6.18
4.5
October
4.0
5
July
3.5
4
Inflation Target
* CBRT Business Tendency Survey results from the second survey period.
Source: CBRT.
0112
1011
0711
0411
0111
1010
0710
0410
0110
1009
1009
0709
0409
0109
1008
0708
0408
0108
1007
0707
0407
0107
1006
0706
3.0
* Calculated using linear interpolation of several maturity yields in the CBRT
Expectations Survey. Yields are from the second survey period.
Source: CBRT.
Currently, expectations for end-2009 are anchored at 5.40 percent,
well below the target. The comparison between the inflation path consistent
with medium-term targets and the expectations curve reveals that the
average end-2010 inflation expectation falls below the target, while
expectations for 2011 appear to be above the target at 5.5 percent
(Graph 3.2.2). Meanwhile, participants’ expectations have remained
virtually uniform (Graph 3.2.3).
Inflation Report 2009-IV
37
Central Bank of the Republic of Turkey
Graph 3.2.3. Distribution of 12-Month Ahead CPI Inflation
Expectations*
Graph 3.2.4. 12-Month Ahead Inflation Expectations by Industries*
10
0.72
October
Real Sector
July
Financial Sector
9
0.63
0.54
8
0.45
7
0.36
0.27
6
0.18
5
0.09
* Horizontal axis shows inflation rate, vertical axis indicates Kernel forecast.
Source: CBRT.
0909
0609
0309
1208
0908
0608
14
0308
12
1207
10
0907
8
0607
6
0307
4
1206
2
0906
4
0.00
* CBRT Expectations Survey results from the second survey period.
Source: CBRT.
Lastly, on the financial and real sector front, expectations followed the
same trend in the third quarter and one-year ahead expectations continued to
fall (Graph 3.2.4).
38
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Box
3.1
THE COURSE OF DURABLE GOODS PRICES IN 2009: THE
IMPACT OF TAX ADJUSTMENTS
Temporary tax cuts have made an immediate impact on prices of durable goods
through 2009. In this Box, we analyze these tax adjustments and the resulting
fluctuations in prices of durable goods and core inflation measures.
With
the growing impact of the global crisis on domestic economic activity
during the last quarter of 2008, industries producing durable goods suffered a
severe contraction. The Turkish lira depreciated markedly, yet, the exchange rate
pass-through had been considerably lower than in previous quarters thanks to
falling import prices and the sharp decline in total demand. As a result, annual
inflation in durable consumer goods (excluding gold) rose slightly during the final
quarter of 2008 (Graph 1).
In order to stimulate domestic demand, the government adopted a package of
fiscal measures in March 2009. On March 16, the SCT on some durable goods was
1
temporarily lowered for a period of three months. The second tax adjustment
came on March 30, including a VAT cut on certain goods. The government
decided, on June 16, to roll back some of the tax cuts and to extend the rest until
September 30. Based on the renewed tax rates, we computed the weighted
average tax rate on durable goods in Graph 1.
2
Assuming that these tax adjustments have entirely passed through to prices, tax
changes appear to have driven prices of durable goods lower during March and
April and higher during June, July and October.
1
For further information on related tax adjustments see Inflation Report 2009 - III, Box 3.1.
Computations do not cover all durable goods in the CPI basket, and include only categories that benefited from tax incentives,
i.e. furniture, white goods and household appliances, audio-visual equipments, automobiles and computer/IT tools. These goods
account for a large proportion of durable goods. Computations are based on the assumption that tax adjustments are left intact and
fully pass through to prices. Actual realizations may vary depending on the rate of pass-through.
2
Inflation Report 2009-IV
39
Central Bank of the Republic of Turkey
Graph 1. Weighted Average Tax Rate on Durable Goods and Inflation Developments
(Percent)
Durable Goods Inflation (yearly)
Average Approximate Change in Prices Under Complete Pass-Through
Weighted Average Tax Rate (right axis)
43
4
41
2
39
8
Durable Goods Inflation (monthly)
6
4
37
1109
0909
0709
0509
0309
0109
1108
0908
0708
0508
1009
-8
0909
-6
25
0809
-4
27
0709
29
-6
-8
0
-2
0609
31
-4
2
0509
33
0409
35
-2
0309
0
Source: CBRT.
Graph 1 shows that tax changes have had a major impact on recent prices and
substantially passed through to prices of durable goods. Given the expiry of tax
incentives on October 1, annual inflation in durable goods may accelerate in the
fourth quarter. The rate of acceleration will depend on the demand for consumer
durables.
Since durable goods make up 19 percent of the (core) price index (SCA-I), the
core inflation measure may pick up in October due to tax adjustments. CBRT
estimations suggest that prices of durable goods will rise by 3.5 percent in
October, which individually is expected to add around 0.7 percentage points to
the monthly SCA-I index. In sum, to ensure a clear indication of the underlying
inflation trend, the October CPI figures should be adjusted for tax changes.
40
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
4. Supply and Demand Developments
The second-quarter national accounts data confirmed the outlook
presented in the July Inflation Report. Domestic demand picked up on the back
of fiscal measures, while foreign demand remained subdued. Accordingly,
GDP grew rapidly quarter-on-quarter, bringing an end to the economic
contraction that started in the second quarter of 2008. The spending
composition revealed that the demand for goods without tax incentives did not
recover markedly, substantiating previous observations that the rebound in
domestic demand would only manifest itself in certain categories of goods. The
continued destocking process had a dampening effect on production and
resource use, and therefore caused the rapid, quarterly growth to have less
impact on inflation. In addition, the absence of solid signs of recovery in the
labor market amplified the demand shortage. Thus, total demand conditions
continued to support disinflation.
Third-quarter data indicate that fiscal stimulus has a waning impact on
domestic demand and consumer demand has weakened following the notable
increase in the second quarter. Yet, the outlook for foreign demand has
improved somewhat since the release of the July Inflation Report. Moreover,
both the lagged impact of policy rate cuts and the relatively improved risk
sentiment in the world help to spur loan demand. However, the continued
moderation in the medium-term outlook for global economic growth adds to the
picture of slow and gradual recovery (Box 4.1). This outlook is likely to delay
the decline in unemployment and curb loan demand. Lower resource use may
weigh on investment and employment prospects, while total demand conditions
would continue to support the downtrend in inflation in the medium term.
4.1. Gross Domestic Product Developments and Domestic Demand
According to the national accounts data released by TURKSTAT, GDP
narrowed by 7 percent in the second quarter of 2009 from a year earlier
(Graph 4.1.1). With the release of the second-quarter data, Turkey’s GDP
growth is now revised down from 1.1 to 0.9 percent for 2008, and GDP
contraction is revised up from 13.8 to 14.3 percent for the first quarter of 2009.
Seasonally adjusted GDP recorded an impressive growth from the first quarter,
putting an end to the economic contraction that started in the second quarter of
2008 (Graph 4.1.2).
Inflation Report 2009-IV
41
Central Bank of the Republic of Turkey
Graph 4.1.1. Annual GDP Growth by Periods
Graph 4.1.2. GDP
(Percent)
(Seasonally Adjusted, at 1998 Prices, Billion TL)
27
15
10
6.2 5.3
9.4 8.4
6.9
5
7.2
4.7
2.8
0.9
1.0
24
0
-5
-10
-5.7
-6.5
-15
-7.0
21
-14.3
2009-2
2009-1
2008-4
2008-3
2008-2
2008
2008-1
2007
2006
2005
2004
2003
2002
2001
-20
Source: TURKSTAT.
18
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2003
2004
2005
2006
2007
2008 2009
Source: TURKSTAT, CBRT.
On the production side, non-farm value-added dropped year-on-year.
Although industrial production shrunk by 15.3 percent during the second
quarter, industrial value-added fell by only 8.7 percent. The sharp contraction
in wholesale/retail trade and transport/communication industries, which are
closely linked with the industrial sector, lowered services value-added by 6.3
percent. The services industry made a negative 3.1 percentage point
contribution to GDP. Among sub-categories, wholesale/retail trade and
transport/communication contributed by a total –3.8 percentage points to GDP.
In contrast, financial value-added added 0.7 percentage points to GDP and
continued to be the largest contributor of growth (Graph 4.1.3).
Graph 4.1.3. Contribution to Annual GDP Growth from Production
Graph 4.1.4. Contribution to Annual GDP Growth from Spending
(Percentage Points)
(Percentage Points)
0.5
6
0
-1
-0.5
2
0,1
-1.3
-2
0,2
0
-6
Source: TURKSTAT.
Tax
Services
Construction
Industry
Agriculture
-8
GDP
-7.0
-6,4
-8
Private
Consumption
-7
-3,6
-7.0
GDP
-6
-0,8
Net Exports
-5
-4
Stock Change
-2
-3.1
Public
Investment
-2.5
-4
Public
Consumption
-3
42
3,6
4
Private
Investment
1
Source: TURKSTAT.
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
On the spending side, private consumer demand made a significantly less
negative contribution to annual growth than in the past two quarters. Private
investment spending remained weak during the second quarter, and made the
biggest negative contribution to GDP. Meanwhile, the contribution from
government spending went down from the previous two quarters, while net
foreign demand continued to add to GDP growth, albeit slowly (Graph 4.1.4).
Among sub-categories of resident and nonresident household spending,
there has been a notable improvement in the annual change of tax-reduced
goods. After having fallen year-on-year for a long time, spending on furniture,
household appliances and care increased by 2.7 percent year-on-year during the
second quarter. The annual rate of decline in the expenditures for transport and
communication services, which, together with furniture, household appliances
and care, had been the key driver of the contraction in consumption during the
previous two quarters, amounted to 3 percent in the second quarter (Table
4.1.1).
Table 4.1.1. Resident and Nonresident Household Spending
(Annual Percentage Change)
2007
2008
2009
YoY
I
II
III
IV
YoY
I
II
6-month
Resident and nonresident household spending
3.9
6.5
1.4
-1.0
-3.8
0.6
-10.2
-0.6
-5.4
Food, liquor, tobacco
2.0
5.6
2.1
1.4
0.9
2.4
-3.6
2.9
-0.2
Clothing and footwear
-2.2
-0.3
-10.0
-7.3
-15.0
-7.6
-17.0
-7.1
-12.7
Furniture, household appliances and care
2.5
0.4
-4.4
-9.5
-16.5
-7.5
-23.4
2.7
-9.9
Transport/communication
2.8
22.3
10.0
3.5
-14.7
4.3
-21.0
-3.0
-11.9
Restaurants and hotels
2.1
2.2
1.5
-7.7
2.0
-2.3
3.0
1.9
2.5
Source: TURKSTAT, CBRT.
In seasonally adjusted terms, the main driver of GDP growth in the
second quarter was the private consumer demand that picked up sharply on
fiscal stimulus measures. On the other hand, private investment spending
continued to weaken, whereas the inventory change made a significant
contribution to quarterly GDP growth with the slowdown in destocking from a
quarter ago (Graph 4.1.5).
Inflation Report 2009-IV
43
Central Bank of the Republic of Turkey
Graph 4.1.5. Contribution to Quarterly GDP Growth from
Spending
Graph 4.1.6. Resident and Nonresident Household Spending
(Seasonally Adjusted, at 1998 Prices, Billion TL)
(Percentage Points)
8
19
7.1
14
7
5.9
6
13.5
18
5
13
3.8
4
3
12.5
17
2
12
1
0
16
-0.4
Source: TURKSTAT, CBRT.
Public Spending
Exports
Stock Change
Private
Consumption
GDP
-2
Private Investment
-1.0
-1.1
Imports
-0.1
-1
11.5
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2005
2006
2007
2008
2009
Consumption Expenditure
Consumption Expenditure excluding furniture, household
appliances and care and transport/communication
Source: TURKSTAT, CBRT.
The trend in categories of goods and related third-quarter indicators help
determine whether the second-quarter recovery in private consumer demand
develops into a durable one. The second-quarter national accounts data show
that the recovery in private consumer spending was largely boosted by the
increased demand for goods that benefited from fiscal stimulus packages. On
the other hand, the demand for categories that were not affected by tax
incentives remained virtually flat (Graph 4.1.6). Recent data releases suggest
that this trend is maintained during the third quarter. In fact, while fiscal
measures have a waning impact on related categories of goods, the demand for
semi and non-durable goods remains anemic.
Accordingly, the production and imports of consumer goods fell during
July-August from the second quarter in seasonally adjusted terms
(Graph 4.1.7). On the production side, the demand for durable goods has
jumped on tax incentives, whereas the demand for non-durable goods that is
highly susceptible to any contraction in employment and expendable income
has been on an uninterrupted decline for a year. That is, the July-August drop in
the production of consumer goods was largely driven by the non-durable goods
category (Graph 4.1.8). Sales of automobiles and white goods, which
accelerated quickly due to tax incentives and therefore gave a strong boost to
private consumer spending, declined quarter-on-quarter during the third quarter
with the expiry of tax cuts (Graph 4.1.9). All in all, third quarter indicators
44
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
suggest that the marked run-up in consumer demand during the second quarter
has moderated.
Graph 4.1.7. Production* and Import Quantity of Consumer Goods
Graph 4.1.8. Production of Durable and Nondurable Goods
(Seasonally Adjusted, 2005=100)
(Seasonally Adjusted, 2005=100)
114
150
120
110
112
140
115
108
110
130
108
120
106
110
104
100
102
Production
90
100
Imports (right axis)
80
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3**
110
106
105
104
100
102
95
Durables
100
90
Non-durables (right axis)
0809
0609
0409
0209
1208
98
1008
2009
0808
2008
0408
2007
0608
85
2006
* Aggregated based on the weight of production indices for durable and
nondurable goods in the industrial production index.
** July-August figures.
Source: TURKSTAT, CBRT.
Source: TURKSTAT, CBRT.
Graph 4.1.9. Domestic Sales of Automobiles and White Goods
(Seasonally Adjusted, Thousand)
40
500
35
460
30
420
Graph 4.1.10. Consumer Loans
(Deposit Banks, Weekly Percentage Change, 4-Week Moving Average)
1.0
Consumer
0.8
Housing
0.6
25
380
Automobiles
20
340
White Goods
(right axis)
3*
-0.4
1009
2
2009
0809
1
0609
4
0409
3
2008
0209
2
1208
1
1008
4
0808
3
2007
-0.2
300
0608
2
0.0
0408
1
0.2
0208
15
0.4
* July-August figures for sales of white goods.
Source: AMA, WGMA, CBRT.
Source: CBRT.
There are two channels with distinct functions that are going to affect
domestic demand in coming months. The first one is the historically high
unemployment that weighs on total expendable income and consumer demand.
Secondly, the monetary easing passes through to other borrowing costs,
developing conditions to boost loan demand. The credit market has started to
gain some ground thanks to policy rate cuts since November 2008 and
improved risk sentiment in the world. In fact, banks have recently become more
willing to lend, and the number of housing loans has been trending steadily
upwards (Graph 4.1.10). Although, the relatively improved global risk
sentiment is expected to drive the domestic supply of loans higher, loan
demand might be dragged down by weak employment conditions. Therefore,
Inflation Report 2009-IV
45
Central Bank of the Republic of Turkey
the pace and strength of the pass-through from the economic recovery into the
labor market will have a major impact on loan demand in the upcoming period.
Meanwhile, the production of capital goods, an indicator for investment
demand, increased quarter-on-quarter during July-August, whereas imports of
capital goods flattened out (Graph 4.1.11). Thus, during the third quarter,
private machinery and equipment investments are expected to shrink at a
slower year-on-year pace than in previous periods, and rise quarter-on-quarter,
after five straight quarters of decline (Graph 4.1.12).
Graph 4.1.11. Production and Import Quantity Indices for Capital
Goods
(Seasonally Adjusted)
Graph 4.1.12. Aggregate Index of Investment* and MachineryEquipment Investments
(Annual Percentage Change)
145
40
135
30
125
20
10
115
0
105
-10
Production
95
-20
Import
85
Machinery-Equipment Index
-30
Production (excluding automobiles)
Aggregate Index
-40
75
1
2
3
4
2006
1
2
3
2007
4
1
2
3
2008
4
1
2
2009
3*
1
2
3
4
2006
1
2
3
2007
4
1
2
3
2008
4
1
2 3**
2009
* Derived from data on production, exports and imports of investment goods.
** July-August figures.
* July-August figures.
Source: TURKSTAT, CBRT.
Source: TURKSTAT, CBRT.
Despite the impending quarterly increase in private machinery and
equipment investments for the third quarter, investor sentiment is still weak. In
fact, excluding the passenger cars industry that benefited from fiscal measures,
the production of capital goods was flat in the third quarter. The lack of solid
evidence of global recovery and the increased uncertainty about total demand
cause companies to operate at low capacity (Graph 4.1.13). In addition to low
capital utilization, per capita hours worked, a measure of labor utilization, also
hovers below pre-crisis levels (Graph 4.1.14). The sluggish resource use
enables companies to meet the growing demand without additional investment.
The idle capacity in the economy reduces the prospects for a rapid and robust
recovery in investments amid weaker demand conditions implied by the current
outlook for the global recovery.
46
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Graph 4.1.14. Per-Capita Hours Worked in the Industrial Sector
and Private Machinery-Equipment Investments
Graph 4.1.13. Capacity Utilization Rate
(Seasonally Adjusted, Percent)
4.0
101.0
85
83
100.5
81
3.5
79
100.0
77
Per-Capita Hours
Worked (annual moving
average, 2006=100)
99.5
75
73
3.0
99.0
71
69
Private MachineryEquipment Investment
(right axis, seasonally
adjusted)
98.5
67
2.5
98.0
65
2004
2005
2006
2007
2008
2
3 4
1
2006
2009
Source: TURKSTAT, CBRT.
2.0
1
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2
3
4
1
2007
2
3
2008
4 1
2
2009
Source: TURKSTAT, CBRT.
In sum, according to recent data releases, the fiscal stimulus-driven
recovery has been confined to certain goods and therefore has failed to affect
all categories of private spending. Although a recovery is expected in privatesector investments compared to the second quarter, the low resource use and
the high demand uncertainty is expected to further weigh on investments. On
balance, after a sharp increase in the second quarter, total final domestic
demand is likely to move in a more horizontal direction in the third quarter
(Graph 4.1.15).
Graph 4.1.15. Total Final Domestic Demand
(Seasonally Adjusted, at 1998 Prices, Billion TL)
28
26
24
22
20
18
16
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2003
2004
2005
2006
2007
2008
2009
* Forecast.
Source: TURKSTAT, CBRT.
Inflation Report 2009-IV
47
Central Bank of the Republic of Turkey
4.2. Foreign Demand
Exports and imports of goods and services dropped by 10.1 and 20.5
percent year-on-year, respectively, in the second quarter of 2009. Accordingly,
net exports added 3.6 percentage points to annual GDP growth, accounting for
–2.5 and 6.1 percentage points, respectively, of export and import growth
(Graph 4.2.1). Seasonally adjusted data are in line with the outlook presented in
the July Inflation Report. Accordingly, exports fell slightly quarter-on-quarter
and remained sluggish, while imports grew on the back of the fiscal stimulusdriven rise in domestic demand (Graph 4.2.2). Thus, net exports made a
negative contribution to the quarterly GDP growth (Graph 4.1.5).
Graph 4.2.1. Contribution to Annual GDP Growth from Exports,
Imports and Net Exports
Graph 4.2.2. Exports and Imports of Goods and Services
(Seasonally Adjusted, at 1998 Prices, Billion TL)
(Percentage Points)
9
12
10
Export
Export
Import
8
8
Import
6
Net Export
7
4
6
2
5
0
-2
4
-4
3
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
-6
08-1
08-2
Source: TURKSTAT.
08-3
08-4 2008 09-1
09-2
2003
2004
2005
2006
2007
2008
2009
Source: TURKSTAT, CBRT.
Recent data show signs of improvement in export prospects for the third
quarter. In fact, growth forecasts for advanced economies have been more
upbeat since September than in the July Inflation Report. The downward
revision to growth forecasts for the Euro area, Turkey’s greatest export
destination, has reversed in recent months, and Consensus Economics revised
its Euro area contraction forecast for 2009 downwards from 4.4 percent in the
July Survey to 3.9 percent in the September Survey, a forecast unchanged in
October. As forecast updates for the Euro area point to a more benign outlook
for foreign demand in the short term, expectations about the pace of mediumterm recovery have also improved (Graph 4.2.3).
48
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Graph 4.2.3. GDP Growth and Forecasts, Advanced Economies
(Seasonally Adjusted, 2008Q2=100)
104
102
100
98
96
USD (September 09)
USD (June 09)
Euro Aera (June 09)
94
92
Euro Area ( September 09)
90
2
3
4
2008
1
2
3
4
1
2
2009
3
4
2010
1
2
2011
Source: Consensus Forecasts, June and September.
Recent data on exports are consistent with the above outlook. The
quantity index for exports fell by 7.6 percent year-on-year during July-August,
yet posted a remarkable quarter-on-quarter gain in seasonally adjusted terms
(Graph 4.2.4). Given these changes in the exports of goods and the growth in
tourism revenues, exports of goods and services are expected to rise quarter-onquarter during the third quarter (Graph 4.2.5).
Graph 4.2.5. Exports of Goods and Services
Graph 4.2.4. Quantity Index for Exports
(Seasonally Adjusted, 2003=100)
(Seasonally Adjusted, at 1998 Prices, Billion TL)
180
8
170
7
160
150
6
140
5
130
120
Export
110
Export (excluding gold)
4
100
3
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2005
2006
* July-August figures.
Source: TURKSTAT, CBRT.
Inflation Report 2009-IV
2007
2008
2009
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2003
2004
2005
2006
2007
2008
2009
* Forecast.
Source: TURKSTAT, CBRT.
49
Central Bank of the Republic of Turkey
Latest data releases also point to an improvement in underlying exports
for the third quarter. However, taking into account previous episodes of strong
global growth, underlying exports still remain weak (Graph 4.2.4). Hence arise
two important questions: whether the third-quarter growth will continue into
the upcoming period, and therefore, how long it will take for the external
demand gap to narrow down; though the horizontal trend in the export orders
from the CBRT’s Business Tendency Survey (BTS) and the PMI index for new
export orders does not signal additional gains in exports for the final quarter
(Graph 4.2.6 and 4.2.7).
Graph 4.2.6. BTS Export Orders and 3-Month Ahead
Expectations (Up-Down, Percent)
Expectations for Export Orders Over the
Next Three Months
Export Orders Over the Last Three Months
60
Graph 4.2.7. PMI Index for Export Orders
60
55
40
50
20
45
0
Source: TURKSTAT, CBRT.
0709
0409
0109
1008
0708
0408
0108
1007
0707
0107
0909
0709
0509
0309
0109
1108
20
0908
-80
0708
25
0508
-60
0308
30
0108
35
-40
0407
40
-20
Source: CBRT.
The pace and timing of the global economic recovery will add valuable
insight to the looming foreign demand outlook. Forecasts imply that advanced
economies will start a slow and gradual recovery by the third quarter, and the
second-half growth will slow by early 2010 and bounce back in 2011, which
indicates that the continued pursuit of growth-boosting policies by advanced
countries, due to expire by the end of 2009, has a favorable effect on the shortterm outlook. Thus, exports are expected to grow further in the fourth quarter
on worldwide economic measures. However, the medium-term outlook for
global growth reveals that the GDP in advanced economies is unlikely to reach
pre-recession levels for quite some time. This outlook suggests that the pace of
decline in the output gap for advanced economies will be slow, confirming the
belief that exports are unlikely to return to previous levels soon. Therefore,
foreign demand is expected to further restrain total demand for an extended
period of time (Graph 4.2.8).
50
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Graph 4.2.8. Revision to GDP Forecasts, Advanced Economies
(Seasonally Adjusted, 2008Q2=100)
10 4
10 2
10 0
98
96
94
92
90
88
U SD
Euro A re a
Japan
Engla nd
86
2
3
4
2008
1
2
3
4
1
2009
2
3
4
2 01 0
1
2
20 11
Source: Consensus Forecasts, September.
The downtrend in imports ended with the recovery in domestic demand
during the second quarter. The quantity index for imports fell by 12.9 percent
year-on-year during July-August, running above its quarter-ago average in
seasonally adjusted terms. The fiscal stimulus-driven rebound across all subcategories of imports during the second quarter moderated in consumer and
investment goods during the third quarter. The quarterly rise in the total
quantity of imports was mainly attributable to intermediate goods (Graph 4.2.9
and 4.2.12).
Graph 4.2.9. Quantity Index for Imports
Graph 4.2.10. Quantity Index for Consumer Good Imports
(Seasonally Adjusted, 2003=100)
(Seasonally Adjusted, 2003=100)
180
240
170
220
160
200
150
180
140
160
130
140
120
120
110
100
100
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2005
2006
* July-August figures.
Source: TURKSTAT, CBRT.
Inflation Report 2009-IV
2007
2008
2009
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2005
2006
2007
2008
2009
* July-August figures.
Source: TURKSTAT, CBRT.
51
Central Bank of the Republic of Turkey
Graph 4.2.11. Quantity Index for Investment Good Imports
Graph 4.2.12. Quantity Index for Intermediate Good Imports
(Seasonally Adjusted, 2003=100)
(Seasonally Adjusted, 2003=100)
250
165
230
155
145
210
135
190
125
170
115
150
105
130
95
85
110
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 23*
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2005
2006
2007
2008
2003
2009
* July-August figures.
Source: TURKSTAT, CBRT.
2004
2005
2006
2007
2008 2009
* July-August figures.
Source: TURKSTAT, CBRT.
Total demand conditions will determine the upcoming direction of the
demand for imported goods. In coming months, the effects of fiscal measures
are expected to fade out, while the forwarded demand for automobiles and
durable goods that benefited from tax incentives are likely to put a constraint on
total final domestic demand. In view of the improved third-quarter outlook for
foreign demand and the indicators briefly discussed so far, imports of goods
and services are projected to rise quarter-on-quarter during the third quarter of
2009, though overall imports will likely remain below pre-recession levels for
some time (Graph 4.2.13). Yet, export and import forecasts indicate that net
foreign demand will continue to contribute positively to annual GDP growth,
albeit slowly, in the third quarter of 2009.
Graph 4.2.13. Imports of Goods and Services
(Seasonally Adjusted, at 1998 Prices, Billion TL)
9
8
7
6
5
4
3
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2003
2004
2005
2006
2007
2008
2009
* Forecast.
Source: TURKSTAT, CBRT.
52
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
4.3. Output Gap
The second-quarter national accounts data were consistent with
projections from the July Inflation Report. Turkey’s GDP continued to fall
year-on-year, but grew rapidly quarter-on-quarter in seasonally adjusted terms.
Accordingly, the economic contraction since the second quarter of 2008 has
ended. Among seasonally adjusted components of spending, domestic demand
recovered on private spending, while foreign demand remained subdued amid
ongoing problems in the global economy, causing exports to flatten.
The distribution of the robust quarter-on-quarter increase in domestic
demand across components of spending raises doubts about the sustainability of
this increase. Among sub-components of private consumer demand, there is a
rapid recovery in tax-reduced categories of goods, while the demand for other
categories of goods is nearly flat (Graph 4.1.6). Moreover, the shortage and
uncertainty of total demand remain severe, causing private investment demand
to soften and decline further quarter-on-quarter. These developments confirm
our observation that the revival in domestic demand has been confined to
certain categories of goods, and therefore is of a transitory rather than a
permanent nature.
Third-quarter indicators are also in line with the above outlook. In fact,
the production of consumer goods is down from the second quarter owing to
durable goods. The opposite trends in the demand for durable and nondurable
goods appear to remain virtually unchanged from the second quarter. Among
capital goods, the recovery is rather limited in industries excluding transport
vehicles (Graph 4.1.11). Thus, the strong third-quarter growth in the production
of capital goods has largely been the result of tax cuts, rather than a rebound in
investment sentiment. Developments in industries that were not affected by
fiscal measures confirm the weakening of total demand, while the continued
flattening of the production of intermediate goods indicates that the recent gain
in industrial production is not spread across a broad range of industries and is
consistent with the prospect of a slow economic recovery.
Inflation Report 2009-IV
53
Central Bank of the Republic of Turkey
Third-quarter indicators point to a further modest recovery in economic
activity. Despite having plunged by 7.7 percent year-on-year during JulyAugust, industrial production grew by 1.3 percent quarter-on-quarter in
seasonally adjusted terms. Although September data on capacity utilization
suggest that output continues to grow, according to latest developments, it is
still weaker than in periods of robust growth. Current trends in the output level
and the pace of recovery indicate that it will take much longer for the output
gap to close (Graph 4.3.1)
Graph 4.3.1. Industrial Production Index
(Seasonally Adjusted, 2005=100)
125
Average Quarterly
Growth: % 1.8
120
115
110
105
100
95
Average Quarterly
Growth: % 1.2
90
85
80
1
2
3
4
2005
1
2
3
2006
4
1
2
3
2007
4
1
2
3
2008
4
1
2 3*
2009
* July-August average.
Source: TURKSTAT, CBRT.
Latest inventory shifts suggest that demand uncertainty has a dampening
effect on production, and support the very prolonged recovery of the output
gap. Third-quarter indicators for production and demand point to a slower
destocking. In fact, the CBRT’s BTS index for finished goods inventory
continued to fall in the third quarter. Thus, the inventory change is forecast to
have made further negative contribution to annual growth and positive
contribution to quarterly growth in the third quarter (Graph 4.3.2).
54
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Graph 4.3.2. BTS Inventory of Finished Goods (Above normal/Below normal, Percent) and
Inventory Levels*(Seasonally Adjusted, at 1998 Prices, Billion TL)
20
0.5
15
0.0
10
-0.5
5
-1.0
0
-1.5
-5
-2.0
Inventory of Finished Goods
-10
-2.5
Inventory Level
-15
-3.0
1
2
3
4
1
2007
2
3
4
2008
1
2
3**
2009
* Inventory change, a national account component of spending, is adjusted for seasonal variations
and its starting point is set at zero to calculate cumulative inventory level. Therefore, it is the trend
that matters, not the level.
** Forecast for inventory level.
Source: TURKSTAT, CBRT.
In sum, recent data releases indicate that the slow and gradual economic
recovery continued into the third quarter of 2009. Fiscal measures had a waning
impact on domestic demand, while foreign demand improved somewhat.
Therefore, GDP is forecast to expand quarter-on-quarter during the third
quarter, albeit at a quite slower pace than in the second quarter, and contract
further year-on-year. On balance, total demand conditions are expected to
further support disinflation (Graph 4.3.3).1
Graph 4.3.3. Output Gap
(Percent)
8
6
4
2
0
-2
-4
-6
-8
-10
123412341234123412341234123412341234123
2000
2001
2002
2003
2004
2005
2006
2007
2008 2009
Source: CBRT.
1
Output gap forecasts for 2009 and onwards are presented in the final chapter of the Report.
Inflation Report 2009-IV
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4.4. Labor Market
The negative labor market outlook since the second quarter of 2008
worsened further in the second quarter of 2009, causing unemployment to rise
in seasonally adjusted terms. Total unemployment increased by 4.5 percentage
points to 13.6 percent year-on-year in the second quarter. The fall in
employment and the rise in labor participation accounted for 3.1 and 1.4
percentage points, respectively, of the annual rate of increase in unemployment
(Graph 4.4.1).
Graph 4.4.1. Composition of the Change in Unemployment
(Yearly Difference, Percentage Points)
Labor Force Participation Effect
5.0
Employment Effect
4.0
Yearly Difference in Unemployment Rate
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
1
2
3
2007
4
1
2
3
2008
4
1
2
2009
Source: TURKSTAT, CBRT.
The underlying unemployment trend continued to be downward during
the second quarter of 2009. Non-farm employment dropped by 2.8 percent
year-on-year and continued to fall in seasonally adjusted terms, though at a
slower pace (Graph 4.4.2). With the slowdown in employment and the steep
increase in labor participation, non-farm unemployment rose by 5.5 percentage
points year-on-year to 17 percent. In seasonally adjusted terms, non-farm
unemployment increased by 0.7 percentage points quarter-on-quarter during the
second quarter, up a cumulative 4.4 percentage points since the labor market
breakdown in the final quarter of 2008 (Graph 4.4.3).
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Graph 4.4.2. Non-Farm Employment
Graph 4.4.3. Non-Farm Unemployment Rate
(Seasonally Adjusted, Million)
(Seasonally Adjusted, Percent)
19
18
16
17
16
15
15
14
14
13
12
13
11
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2004
2005
2006
2007
2008
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2009
2004
Source: TURKSTAT, CBRT.
2005
2006
2007
2008
2009
Source: TURKSTAT, CBRT.
June-August data signal that the downtrend in non-farm employment
ended in the third quarter. Having contracted by 1.9 percent year-on-year, nonfarm employment moved upward in seasonally adjusted terms for the first time
since the second quarter of 2008 (Graph 4.4.4).
Graph 4.4.4. Non-Farm Employment
(Seasonally Adjusted, Million)
16.3
16.2
16.1
16.0
15.9
15.8
0709
0509
0309
0109
1108
0908
0708
0508
0308
0108
15.7
Source: TURKSTAT, CBRT.
Non-farm employment stopped falling with the growing employment in
industries of services and construction since May, and rose on the recent pickup in industrial employment, a trend that continues into the fourth quarter, as
suggested by leading indicators (Graph 4.4.5 and 4.4.6). In seasonally adjusted
terms, both services and construction employment recovered to their pre-crisis
levels, whereas industrial employment continued to hover around low levels
due to weak foreign demand (Graph 4.4.7 and 4.4.8).
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Central Bank of the Republic of Turkey
Graph 4.4.6. Manufacturing Industry Employment Index
(Quarterly Percentage Change) and PMI Employment Index
Graph 4.4.5. Industrial Employment (Million) and Production (2005=100)
(Seasonally Adjusted)
4.6
125
4
60
4.5
120
2
55
4.4
115
0
50
4.3
110
-2
45
4.2
105
-4
Source: TURKSTAT, CBRT.
35
0509
1108
0505
30
0508
-8
1107
95
0709
0409
0109
1008
0708
0408
0108
1007
0707
0407
0107
4.0
0507
-6
1106
100
Production (right axis)
0506
4.1
40
Manufacturing Industry
Employment
PMI (right axis)
1105
Employment
Source: TURKSTAT, CBRT, Markit.
Graph 4.4.7. Construction Employment
Graph 4.4.8. Services Employment
(Seasonally Adjusted, Million)
(Seasonally Adjusted, Million)
1.30
10,7
10,6
1.25
10,5
1.20
10,4
1.15
Source: TURKSTAT, CBRT.
0709
0509
0309
0109
1108
0908
0708
0508
0308
0108
0709
0509
0309
0109
1108
0908
0708
0508
0308
0108
10,3
Source: TURKSTAT, CBRT.
Recently, the improvement in employment prospects has helped reverse
the run-up in unemployment. June-August data indicate that unemployment
grew year-on-year, but fell quarter-on-quarter in seasonally adjusted terms.
Major drivers of the labor market recovery have been the slowing rise in nonfarm labor participation, the upward shift in non-farm employment and the
increase in farm employment (Graph 4.4.9 and 4.4.10).
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Graph 4.4.9. Unemployment
Graph 4.4.10. Change in Net Unemployment
(Seasonally Adjusted, Percent)
(Yearly Difference, Million)
2.5
19
Labor Force Participation
Non-Farm
Unemployment Rate
2.0
Non-Farm Employment Loss
Farm Employment Loss
1.5
Net Change in Unemployment
Unemployment Rate
17
15
1.0
0.5
13
0.0
11
-0.5
Source: TURKSTAT, CBRT.
0907
0905
0903
0901
0811
0809
0807
0805
0803
0709
0409
0109
1008
0708
0408
0108
1007
0707
0407
0107
0801
-1.0
9
Source: TURKSTAT, CBRT.
Problems in the labor market continued to put downward pressure on
total wages across the whole economy during the second quarter. With the
reduction in employment losses, the quarterly decline in total real wages has
slowed down, which is significantly evident in the manufacturing and
trade/services industries. Meanwhile, real wages in building construction
continued to decline rapidly, whereas those in non-building construction
remained nearly flat (Graph 4.4.11 and 4.4.14).
Graph 4.4.11. Real Unit Wages in Manufacturing Industry
Graph 4.4.12. Real Unit Wages in Trade-Services Industry
(Seasonally Adjusted, 2005=100)
(Seasonally Adjusted, 2005=100)
122
115
117
110
112
107
105
102
100
97
92
95
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2005
2006
Source: TURKSTAT, CBRT.
Inflation Report 2009-IV
2007
2008
2009
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2005
2006
2007
2008
2009
Source: TURKSTAT, CBRT.
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Central Bank of the Republic of Turkey
Graph 4.4.13. Real Wages in Building Construction Industry
Graph 4.4.14. Real Wages in Non-Building Construction Industry
(Seasonally Adjusted, 2005=100)
(Seasonally Adjusted, 2005=100)
125
130
125
120
120
115
115
110
110
105
100
105
95
90
100
85
80
95
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2005
2006
2007
2008
2009
2005
Source: TURKSTAT, CBRT.
2006
2007
2008
2009
Source: TURKSTAT, CBRT.
The upcoming trend in employment will depend on the speed and timing
of the economic recovery. In view of the near-term outlook briefly discussed so
far, economic activity may continue to increase in non-farm industries during
the third quarter, while non-farm employment is expected to start growing
again (Graph 4.4.15).
Graph 4.4.15. Value-Added and Employment in Non-Farm Industry
(Seasonally Adjusted)
1998 Price,
Billion TL
Million Employees
22
16.5
21
16.0
20
15.5
19
18
Non-Farm Value Added (left axis)
17
Non-Farm Employment
15.0
14.5
16
14.0
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2005
2006
2007
2008
2009
* Forecast.
Source: TURKSTAT, CBRT.
In sum, the modest global growth allows the economy to recover only
slowly and gradually, while indicators for capacity utilization and per-capita
hours worked point to lower resource use. Based on the assumption that idle
capacity will weigh further on investment and employment prospects, the labor
market is unlikely to see a strong rebound in the near term and unemployment
will continue to hover around record highs for quite some time. On balance, the
outlook for unit labor cost and domestic demand is expected to bring inflation
further down.
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Box
4.1
FINANCIAL STRESS AND ECONOMIC ACTIVITY
recovery
in
many
0
-5
-5
-10
-10
-15
continued
and
weakness
the
across
global labor and credit markets
indicate that downside risks to
-15
Emerging economies (EM)
-20
-20
EM excluding China and India
-25
-25
Turkey
-30
-30
0307
indicators
0107
leading
Advanced economies
0709
sluggish
the
0509
However,
5
0
0309
1).
10
5
0109
(Graph
15
10
1108
recession since World War II
20
15
0908
heading out of the deepest
25
20
0708
finally
25
0508
is
the
0308
economy
that
0108
global
indicate
1107
to
Graph 1. Industrial Production Indices
(Annual Percentage Change)
releases
0907
seem
data
0707
quarter
0507
Third
Source: Bloomberg.
a robust recovery remain.
With
the worst of the crisis seems to be over, the focus has shifted from crisis
management to fostering a self-sustaining global economic recovery. In this
regard, recent studies show that synchronized recessions associated with financial
stress tend to be deeper and longer than other types of recessions.2 According to
these studies, impairment of core financial intermediaries usually tend to be
characterized by more anemic and protracted recoveries. Based on these
studies, it seems it will take quite a while for the global economy to return to precrisis growth rates.
2
See, Cardarelli, Elekdağ and Lall, (2009), “Financial Stress, Downturns, and Recoveries,” IMF Working Paper 09/100; Terrones,
Scott and Kannan, (2009), World Economic Outlook (April); Balakrishnan, Koeva Brooks, Leigh, Tytell and Abiad, (2009), World
Economic Outlook (October).
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While
these studies are very useful, they tend to primarily focus on advanced
economies. Those concentrating on the emerging economies are less common
and not very comprehensive. In this context, this Box focuses on Turkey and other
emerging economies with the goal of analyzing the link between financial stress
and economic activity. To this end, the Box will first define financial stress, then
discuss how an index could be used to measure financial stress, and finally
investigate the historical relationship between financial stress and economic
activity.
Financial Stress and Measurement
Financial
stress, broadly defined is when financial markets are under strain or
financial intermediation is impaired. Although historical episodes of financial stress
are associated with differing characteristics, common features exist, which
include an increase in risk and uncertainty, abrupt and large shifts in asset prices,
global liquidity squeezes, and pervasive strains affecting financial intermediation.
There are many dimensions through which a country’s financial system could be
subject to financial strains. Therefore, to summarize these various financial
developments, it would be useful to consider a single composite index that allows
a consistent comparison of financial stress across both time and countries. A
recent index is the financial stress index (FSI) developed by Cardarelli et al (2008)
for advanced economies. Build on this study, Danninger et al (2009)3 propose a
FSI for emerging economies which is composed of five subcomponents. These
components broadly attempt to measure exchange market pressures, countryspecific credit risk, banking-related financial strains, stress stemming from the stock
market, and uncertainty.
3
Lall, Cardarelli, and Elekdağ (2008); World Economic Outlook (October); and Balakrishnan, Danninger, Elekdağ, and Tytell
(2009), World Economic Outlook (April).
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It would be useful to discuss the five subcomponents of the FSI in further detail. The
first subcomponent of the FSI is itself an index, namely, an Exchange Market
Pressure Index (EMPI), which serves to signal stress originating from exchange
markets. The EMPI comprises changes in exchange rates and central bank
reserves, whereby an exchange rate depreciation or a sharp drawdown in
reserves corresponds to higher exchange market pressures. The second
component attempts to gauge country-specific credit risk and is based on JP
Morgan’s EMBI Global spread: higher spreads imply heightened financial stress.
The third component comprises stock market returns whereby a decline in equity
prices corresponds to increased securities market-related stress. The fourth
component captures financial market uncertainty, and is based on time-varying
stock market return volatilities. The five and final subcomponent of the FSI is the
banking-sector beta, which is a refined version of the Capital Asset Pricing Model
(CAPM) beta. When the stock market is down, a beta greater than 1 (indicating
that banking stocks have fallen faster than the overall index) would indicated that
the banking sector-related stress have increased. All these subcomponents are
standardized and summed to form the FSI.
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Central Bank of the Republic of Turkey
The
FSI for Turkey, as well as
the
aggregated
Emerging economies
Advanced economies
Turkey
advanced
4.0
economies, respectively, are
3.0
shown in Graph 2.4 As seen
2.0
from the graph, financial stress
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
global
financial
turmoil,
4.0
3.0
2009m1
2.0
2008m5
2007m9
2007m1
Lehman
Brothers
bankruptcy
2006m5
2005m9
2005m1
Second
Iraq
war
2004m5
2003m9
2003m1
Enron and
WorldCom
scandals
2002m5
economies during episodes of
2001m9
advanced
2001m1
to
Turkish
banking
crisis
2000m5
contrasted
when
1999m9
economies
across
1999m1
emerging
higher
1998m5
been
Russian
crisis
LTCM
collapse
Asian
crisis
1997m9
has
and
Graph 2. Financial Stress Indices
for
1997m1
emerging
FSIs
Source: Balakrishnan, Danninger, Elekdağ, and Tytell (2009).
especially because emerging economies were relatively more vulnerable to
shocks. In fact, except for the latest crisis, many of the recessions across emerging
economies during this sample were caused or exacerbated because of shocks
originating from emerging economies . From this perspective, the recent financial
crisis differs because it erupted initially in advanced economies. As a result, during
the crisis, the financial stress in emerging economies increased much later and by
a lesser degree than in advanced economies.
The
FSI for Turkey, on the other hand, shows that the financial stress in Turkey
exceeded the emerging economy average during the previous episodes of
global stress, which is markedly evident during Turkey’s banking crisis in 2001 and
the second Iraq War in 2003. Recently, the outlook for Turkey’s financial stress
index is more promising than other emerging economies. The FSI for Turkey has
increased more slowly and declined more rapidly than the emerging economy
average, which is mainly attributable to the low levels of risk and high capital
adequacy ratios of the Turkish banking system. Taken together, the financial stress
from banking sector vulnerabilities has been very significant in most countries, but
relatively more modest in Turkey.
4
Indices on the graph are standardized using 3-month moving averages. In other words, a value of 2 means the index exceeds 2
standard deviation above its long-term mean.
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The Relationship Between Financial Stress and Economic Activity in Turkey
The global economic downturn calls for a better understanding of the interaction
between financial strains and economic activity. Thus, the CBRT developed an
econometric model to analyze this interaction. The model makes use of monthly
data, whereby the FSI would identify financial market developments, whereas the
industrial production (IP) index would capture economic fluctuations.5 The model
includes a foreign block6, and therefore is intended to explore the effects of both
domestic and external financial stress shocks on Turkey’s economic activity. By
estimating the model over the period from December 1996 through April 2009, we
consider two experiments.
First,
we analyze the response
of IP to a domestic financial
stress
shock
calibrated
to
match the recent financial
crisis, which was about two
standard deviations based on
Turkey’s FSI (Graph
3).7
As
depicted by the graph, the
Graph 3. Industrial Production Index’s Response to Financial Stress
(With a 95 Percent Uncertainty Band)
2.0%
1.0%
0.0%
-1.0%
Emerging economies
average
-2.0%
-3.0%
Turkey
-4.0%
-5.0%
-6.0%
-7.0%
financial
shock
affects
economic
activity
quickly,
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Source: CBRT.
and at the trough, drags IP
below trend by 3 percent. However, considering the lower end of the 95 percent
confidence band, the shock can actually pull IP below trend by more than 6
percent. When contrasted to the average emerging economy response, while
Turkey seems to be more severely affected, it also shows a tendency to recovery
from the shock more quickly.8
5
Seasonally adjusted IPI as deviation from linear trend.
See, Elekdağ, Samancıoğlu, and Sarıkaya, “Financial Stress and Economic Downturns in Emerging Markets,” CBRT Working
Paper, awaiting publication.
7
The simulation has a monthly shock with a standard deviation of 2.5.
8
Due to limited data, the sample of emerging economies includes Argentina, Brazil, South Africa, Korea, Hungary, Malaysia,
Mexico, Poland, Taiwan and Chile.
6
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Central Bank of the Republic of Turkey
Second,
we
analyze
IP’s
Graph 4. Industrial Production Index’s Response to Financial Stress in Turkey
(With a 95 Percent Uncertainty Band)
response to an external FSI
4.0%
shock. Graph 4 shows the
2.0%
response of IP to both a
0.0%
domestic FSI shock (previously
-2.0%
discussed) and an external FSI
-4.0%
shock. As seen from the graph,
Impact of a domestic
financial stress shock
Impact of an external
financial stress shock
-6.0%
it seems that the external FSI
shock has a more durable
impact on economic activity.
-8.0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Source: CBRT.
It should be noted that the
simulation considers only a one-period shock. Intuitively, if a more persistent shock
were to be simulated (closer to the reality of the recent crisis), the cumulative
impact on economic activity would have been deeper and longer.
In sum, these simulations seem to be in line with the view that economic activity
could remain suppressed for an extended period. In this context, the mediumterm forecasts in this Report assume that economic activity would recover
gradually.
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5. Financial Markets and Financial Intermediation
5.1. Financial Markets
The crisis that first erupted in advanced financial markets and spread
globally by deepening further starting from the fourth quarter of 2008
continued to affect financial markets during the third quarter of 2009, albeit to a
lesser extent. Recent data releases on the financial system and the global
economic activity indicate that the world economy has moved into recovery
thanks to remedy actions taken by government authorities, providing further
grounds for a guarded optimism in financial markets in the third quarter. Yet,
the slow and unstable improvement in key indicators of global economy
suggests that the post-crisis recovery is likely to be slow and gradual.
Although concerns about global financial fragility have waned, the
massive loss encountered by financial institutions, their need to raise capital
and failure to completely remove distressed assets off balance sheets continue
to restrict loanable funds. Moreover, the still-elevated perception of credit risk,
driven by high unemployment, curbs banks’ appetite for lending and blocks the
easing of financial conditions.
The financial crisis has not only affected financial markets but also
depleted household assets in advanced countries, which, coupled with the
uncertainty over the future, has boosted precautionary savings and put
downward pressure on consumer spending in advanced economies. In addition,
low capacity utilization in advanced economies has caused investor sentiment
to drop dramatically. Therefore, the world economy seems unlikely to catch up
the pre-crisis strong growth path in the near term.
By contrast, when compared with advanced countries, emerging market
economies have shown signs of a more rapid recovery, which is also confirmed
by third-quarter data. Yet, the ongoing weakening in foreign demand and the
shortage of funds needed to finance the economic recovery continue to pose
risk on the rate of recovery in these countries.
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Central Bank of the Republic of Turkey
Although the world economy is expected to recover slowly and
gradually, the perception that the worst of the crisis is over gained ground
thereby boosting optimism in financial markets and promoting further bias
towards riskier assets during the third quarter. Accordingly, capital flows have
been experienced in the third quarter into emerging markets through portfolio
movements, as in the second quarter. Meanwhile, emerging market currencies
appreciated and stock exchanges moved up at a faster pace than those in
advanced economies. In addition, risk premiums for emerging economies
continued to fall, even below the pre-crisis levels in most countries
(Graph 5.1.1).
Graph 5.1.1. Risk Premium Indicators
5-Year CDS Rate Changes with Base August 2008
(equals 1 on August 29, 2008)
Turkey
Brasil
S.Africa
Hungary
S.Korea
5,5
4,5
900
800
EMBI+ Turkey
700
EMBI+
600
500
3,5
400
2,5
300
1,5
200
1009
0609
0209
1008
0608
0208
0809
0609
0409
0209
1208
1008
0808
1007
100
0,5
Source: Bloomberg, CBRT.
The financial crisis has not only revealed the fragility of the financial
markets and the advanced economies, which traditionally are assumed to be a
safe haven, but also shown that most emerging economies, which were
previously seen as a danger zone, are not as risky as once believed. Thus, many
emerging economies with strong growth potential and a sound economic base
are expected to have better global risk ratings, resulting in a stronger position in
global financial markets and an easier access to global capital. As such, Turkey
ranks among the top emerging economies. The credit-rating agencies’ optimism
about Turkey and Turkey’s lower risk premium than in other emerging
economies during the third quarter and throughout the crisis indicates Turkey’s
declining riskiness (Graph 5.1.1).
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Turkey has stood out from other emerging economies during the crisis,
thanks to the sound banking system and the relatively less deteriorated risk
premium. With greater room for monetary maneuver, the CBRT has lowered
policy rates aggressively to alleviate the effects of the global crisis on economic
activity and assumed a leading role among emerging economies. Accordingly,
in view of the weakening in aggregate demand, the ongoing tightening in credit
conditions and the improved outlook for inflation, the CBRT continued to cut
policy rates in the third quarter, totaling 1000 basis points as of October 2009
(Graph 5.1.2). Not only the data on economic activity and inflation but also the
risk premium indicators have justified the accuracy of the CBRT’s policy
decisions.
Graph 5.1.2. Policy Rate Changes in Emerging Economies
Policy Rate Changes
(Percent; September 1, 2008 - October 10, 2009)
Policy Rates in Inflaton Targeting
Emerging Economies and Turkey
18
0
-1
16
-2
14
-3
-4
12
-5
-6
10
-7
8
6.75
Emerging Economies
6
Turkey
0509
1208
0708
0208
0907
1106
0606
4
0106
Russia
Hungary
Czech Rep.
Romania
China
Ukraine
Malesia
Indonesia
Taiwan
Poland
Thailand
Israel
S.Korea
Peru
Brasil
Mexico
Colombia
S.Africa
Turkey
Chile
-10
0407
-9
1009
-8
Source: Bloomberg, CBRT.
Market rates continued to trend downward in the third quarter, owing to
the monetary easing and the improved risk premium. As the third-quarter data
on inflation and economic activity substantiated CBRT’s strategy of rapid rate
cuts, policy rates had a greater effect on market rates. In addition to policy rate
cuts, CBRT’s effective communication policy and its expectations management
helped reduce market rates. In particular, the well-established medium-term
perspective on monetary policy presented in the July Inflation Report
accelerated the downtrend in market rates. Furthermore, the improved risk
perception during the third quarter and the growing market consensus that the
medium-term program launched in September has been consistent and realistic
added to the decline in market rates (Graph 5.1.3).
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Central Bank of the Republic of Turkey
Graph 5.1.3. Changes in Interest Rates
(Percent)
26
21
16
0909
0709
0509
0309
0109
1108
0908
0708
0308
6
0108
11
0508
ISE Bills and Bonds Market
Interest Rate (Benchmark,
Compounded)
CBRT Overnight Interest Rate
(Compounded)
Source: ISE, CBRT.
Market rates fell across all maturities. In fact, government bond yields on
October 1, 2009 were down from those on July 28, 2009 in every maturity
range. The decline in long-term yields has been more pronounced than in shortterm yields, flattening the yield curve (Graph 5.1.4). The change in the yield
curve is largely attributable to CBRT’s well-established perspective on future
monetary policy. In the July Inflation Report, the CBRT stated that, if fiscal
discipline is restored, policy rates could remain at single-digit levels over the
forecast horizon. This statement helped narrow the gap between long-term and
short-term yields. The subsequent data on inflation and economic activity
supported CBRT’s projection and consequently, market expectations for future
policy rates converged towards CBRT’s perspective and the yield curve
flattened more significantly. This change in the yield curve shows the increased
impact of CBRT’s monetary policy on expectations and transmission
mechanisms.
Graph 5.1.4. Maturities of Market Rates
Spread Between Long-Term and Short-Term Interest
Rate**
Yield Curve*
10
15
July 28, 2009
9
October 1, 2009
8
13
Issue of the July
Inflation Report
Yield
7
6
11
5
9
4
3
7
1009
0909
0809
2
0709
4
0609
3.5
0509
3
0409
2
2.5
Maturity
0309
1.5
0209
1
0109
0.5
* Calculated from the compound return on bonds from the ISE Bonds and Bills Market, by using the Extended Nelson-Siegel method.
**The spread between the 4-year and 6-month yields, 5-day moving average.
Source: CBRT.
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The downtrend in market rates has passed through to medium-term real
interest rates, while real market rates went further down from the second
quarter and continued to hover around historic lows. The fall of real rates in
well-functioning economies during times of recession, which, however, is quite
unprecedented for Turkey. In this regard, the current level of real rates is an
indicator for the improved effectiveness of monetary policy. Nevertheless,
credit risk perceptions are still above acceptable levels causing credit conditions
to continue to be tight, albeit at a slower pace, and the effect of falling market
rates on economic activity to remain restricted. Yet, financial conditions eased
during the third quarter with the decline in credit risk perceptions and more
primarily due to CBRT’s policy rate cuts, although measures of financial
tightening are still running above pre-crisis levels (Graph 5.1.5).
Graph 5.1.5 Medium-Term Real Interest Rates from the Yield on Government Securities* and Indicators for Tightened
Business Loan Standards
(Percent)
Real Interest Rates
17
15
6
Business Loan Rate-Benchmark
Government Security Interest
Rate
4
Business Loan Rate -Interest rate
on Treasury Bond with 6-Month
Maturity
13
11
2
9
0
7
5
-2
3
0609
0209
1008
0608
0208
1007
0607
0207
1006
0606
-4
0206
0809
0609
0409
0209
1208
1008
0808
0608
0408
1
* 2-year real interest rates, calculated using 2-year nominal interest rates from the yield curve and inflation expectations from CBRT’s Expectations Survey.
Source: ISE, CBRT.
Despite the continued optimism surrounding financial markets, the sense
of uncertainty, a key measure of investment sentiment in economic agents,
failed to return to the pre-crisis level in the third quarter. Consequently, the
propensity of economic agents to hold relatively low-risk assets and cash
continued, albeit to a lesser extent. On the other hand, although the currency in
circulation dropped year-on-year in real terms during September, monetary
base saw a rapid real growth, owing to the elevated risk-aversion of households
and financial institutions during the outburst of the crisis in September 2008.
Moreover, the fact that the last days of September in 2008 was marked by the
Ramadan holiday increased the demand for cash, creating a base effect that
would contribute to the real contraction in the currency in circulation during
Inflation Report 2009-IV
71
Central Bank of the Republic of Turkey
September 2009. As a result, despite weak economic activity, monetary base
continued to grow year-on-year in real terms (Graph 5.1.6).
Graph 5.1.6. Annual Real Growth of Monetary Base
(Percent)
60
Net Impact of the Changes in Currency in Circulation
Net Impact of the Changes in Commerical Banks' Deposits
45
Annual Real Growth Rate of the Monetary Base
30
15
0
0909
0709
0509
0309
0109
1108
0908
0708
0508
0308
0108
1107
0907
0707
0507
0307
0107
1106
0906
0706
0506
0306
0106
-15
Source: CBRT.
The improved perception of global risk helps emerging market currencies
appreciate. In terms of changes in currency values, the Turkish lira did not
significantly differ from other emerging market currencies in the third quarter.
Despite having been volatile at historically high levels and extremely sensitive
to global risk appetite, the Turkish lira continued to be relatively less volatile in
the third quarter, when country-specific conditions began to unfold following
the worst period of the crisis (Graph 5.1.7). As has been the case in previous
quarters, the monetary policy decisions of central banks in emerging economies
had a very limited short-term effect on their currencies in the third quarter, and
the value of these currencies were mainly determined by global risk appetite.
Graph 5.1.7. Exchange Rate Changes
TL/Currency
Basket (0.5
Euro+0.5 US
Dollar)
2.1
2
1000
Brasil
Chile
Czech Rep.
Hungary
Mexico
N. Zealand
Poland
S.Africa
S.Korea
Turkey
900
800
EMBI+Turkey
(right axis)
1.9
Exchange Rate Volatility*
0.04
0.03
700
1.8
600
1.7
500
0.02
400
1.6
300
1.5
0.01
200
0909
0509
0109
0908
0508
0108
0907
0507
0107
0906
0506
0
0106
0909
0609
0309
1208
0908
0608
0308
1207
0907
100
0607
1.4
* 50-day moving standard deviation of exchange rate changes per day.
Source: CBRT.
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Inflation Report 2009-IV
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With the easing of the global liquidity shortage and the restored stability
in foreign exchange markets, the CBRT resumed the foreign exchange buying
auctions that were suspended in October 2008 on August 4, 2009, aiming to
secure a strong foreign exchange position as a general strategy. Accordingly, as
of October 9, the Bank has bought 2.13 billion US dollars and injected a total of
3.17 billion Turkish liras into the market.
Despite CBRT’s liquidity injections through foreign exchange buying
auctions, the liquidity shortage in the overnight market during the second
quarter of 2009 continued into the third quarter at a more marked pace (Graph
5.1.8). The continued liquidity squeeze has been predominantly caused by new
borrowing of Treasury exceeding its redemption, thereby adding to Treasury’s
account at the CBRT. During the third quarter, the CBRT provided liquidity
through regular 1-week and 3-month repo auctions.
Graph 5.1.8. Excess TL Liquidity
(Monthly Averages, Billion TL)
7
2
-3
-8
0909
0809
0709
0609
0509
0409
0309
0209
0109
1208
1108
1008
0908
0808
0708
0608
0508
0408
0308
-13
Source: CBRT.
In addition to the measures taken in the last twelve months to minimize
the adverse impact of the crisis on financial markets and economic activity, the
CBRT lowered the Turkish lira reserve requirement ratio by 1 percentage
points to 5 percent on October 16. Accordingly, a permanent liquidity injection
of 3.3 billion Turkish liras has been provided to the banking system. The
reduction in Turkish lira reserve requirement ratio is expected to help ease
credit conditions and support the increase in TL denominated loans. In
upcoming months, the Bank may either lower or raise reserve requirements, if
necessary, in order to improve liquidity conditions and help ensure the smooth
functioning of the credit market, and additionally, consider purchasing
government bonds, yet avoiding the risk of market volatility.
Inflation Report 2009-IV
73
Central Bank of the Republic of Turkey
To sum up, policy rate cuts continued to have a major impact on money
and credit markets and tightness in financial conditions started to ease during
the third quarter. CBRT’s monetary policy measures are expected to have a
more pronounced impact on economic activity in the medium term.
Notwithstanding its primary objective of maintaining the price stability, the
CBRT will continue to take necessary measures in order to restrict the impacts
of the global crisis on economic activity and to help the economy during the
exit from the crisis.
5.2. Financial Intermediation and Loans
The slight rise in the ratio of business loans to GDP in the second quarter
continued into the third quarter (Graph 5.2.1), largely on account of consumer
loans. Corporate loans, on the other hand, remained nearly unchanged during
the third quarter. The corporate sector continued to be a net re-payer of foreign
debt in the first two months of the third quarter.
Graph 5.2.1. Real Sector Loans / GDP*
(Percent)
30
26
22
18
14
10
123412341234123412341234123412341234123
2000
2001
2002
2003
2004
2005
2006
2007
2008 2009
* Real sector loans are composed of household loans and domestic business loans. Estimated figures for
2009Q3 GDP.
Source: CBRT.
Having continued its weak trend during July and August, consumer loans
recovered noticeably in September across all subcategories. However, with the
expiration of SCT cuts, the rate of increase in automobile and other loans
started to decline again by end-September, while housing loans continued to
recover (Graph 5.2.2).
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Central Bank of the Republic of Turkey
Graph 5.2.2. Subcategories of Consumer Loans
(Moving Average of Weekly Changes, Percent)
1.5
Housing
Automobile
Other
0.5
-0.5
0909
0809
0709
0609
0509
0409
0309
0209
0109
1208
1108
1008
0908
0808
0708
-1.5
Source: CBRT.
Both consumer and business loan rates plunged during the third quarter
(Graph 5.2.3). Unlike the second quarter, consumer loan rates declined at a
faster pace than business loan rates in the third quarter, mainly due to CBRT’s
monetary stance in the July Inflation Report, hinting that short-term interest
rates would remain low for a long time. As a matter of fact, the downward trend
in loan rates has been stronger following the issue of the July Inflation Report
(Graph 5.2.3). Moreover, the launch of 3-month repo auctions in late second
quarter seems to have partially contributed to the easing of tight credit
conditions.
Graph 5.2.3. Loan Rates*
(Percent)
25
2,4
Issue of the July
Inflation Report
2,2
20
2,0
15
1,8
1,6
10
1,4
5
1,2
Automobile
Other
Business (right axis)
0
0206
0406
0606
0806
1006
1206
0207
0407
0607
0807
1007
1207
0208
0408
0608
0808
1008
1208
0209
0409
0609
0809
1,0
Housing
* Monthly interest rate on consumer loans, yearly interest rates on business loans.
Source: CBRT.
Inflation Report 2009-IV
75
Central Bank of the Republic of Turkey
The spread between loan rates and deposit rates narrowed for all types of
loans during the third quarter, indicating that credit conditions began to ease
(Graph 5.2.4). The credit loosening in the face of a poor overdue debt
performance implies an improvement in overall risk perception of the banking
sector.
Graph 5.2.4. Spread Between Loan Rates and Deposit Rates
(Compound, Percent)
Housing Loan Rate-Deposit Rate
18
Automobile Loan Rate-Deposit Rate
16
Consumer Loan Rate-Deposit Rate
Business Loan Rate-Deposit Rate
14
12
10
8
6
4
2
0206
0406
0606
0806
1006
1206
0207
0407
0607
0807
1007
1207
0208
0408
0608
0808
1008
1208
0209
0409
0609
0809
0
-2
Source: CBRT.
In sum, the credit market shows progress towards recovery thanks to the
monetary easing since November 2008 and the improved global risk
perception. Heading into the final quarter of the year, the economic climate
improves, though slightly, on the back of monetary and fiscal measures,
feeding optimism in expectations. Changes in credit conditions are expected to
further contribute to the economic recovery in the upcoming period. Yet, the
weak appetite for investment and the absence of a significant improvement in
employment prospects indicate that the recovery in loans would be gradual.
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Inflation Report 2009-IV
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BOX
5.1
Banks'
BANKS' LOANS TENDENCY SURVEY AND CHANGES IN
LOANS
Loans Tendency Survey that is conducted quarterly among major banks
contains material information regarding the credit market. The latest survey
reflects views on second-quarter developments and expectations regarding the
third quarter. Survey data show
Graph 1. Factors Affecting Business Loan Supply*
that competition has helped to
ease loan standards for the first
Liquidity and Capital Position
time since the outbreak of the
Expectations Regarding General Economic Activity and Industry/Firm
Specific Outlook
75
25
loan
0
crisis is likely to abate gradually
-75
0609
0309
1208
0908
0308
0608
-100
1207
extreme cautiousness during the
-50
0907
quarter, which indicates that the
-25
0607
standards during the second
1206
0307
on
less
0906
had
50
0606
impact
overall
0306
negative
outlook
the
1205
economic
about
0604
concerns
0605
0905
Meanwhile,
0305
1).
1204
(Graph
0904
crisis
Pressure from Competition
100
* Positive/negative values denote easing/tightening in loan supply.
Source: CBRT.
amid growing signs of exit from
the crisis. In fact, again as suggested by the Survey, for the first time in a long time,
loan standards are expected to loosen, rather than tighten, in the upcoming
period.
The
lending survey also reports fund shortages that may, in addition to risk
perception and competition, affect banks’ loan supply. According to the survey
results, limited access to funds has not been among the major factors adversely
affecting credit expansion during the first two quarters of 2009 (Graph 1). The
rapid adjustment of loan rates and government bond rates to policy rates during
the third quarter indicates that the shortage of funds continued to place no
constraint on credit expansion in the third quarter.
Inflation Report 2009-IV
77
Central Bank of the Republic of Turkey
Changes
in credit volume are
determined not only by banks’
attitudes and constraints, but also
by the demand for business loans.
Graph 2. Factors Affecting Business Loan Demand*
100
75
50
25
Current data signal that the crisis
0
has started to pave the way for a
-25
the low capacity utilization rate in
the current circumstances, a weak
recovery is unlikely to spur the
-50
Fixed Investment
-75
Debt Restructuring
Inventories and Working Capital
-100
0604
0904
1204
0305
0605
0905
1205
0306
0606
0906
1206
0307
0607
0907
1207
0308
0608
0908
1208
0309
0609
recovery albeit very slowly. Given
*Positive/negative values denote easing/tightening in loan demand.
Source: CBRT.
demand for investment in the short
run. A remarkable bounce-back in the economy may increase the need for
working capital due to low inventory levels, thus resulting in an increase in loan
demand.
The Lending Survey results about the demand for corporate loans are consistent
with the above projections. The survey shows that participants expect a slight
increase in the demand for corporate loans, particularly for short-term loans. The
survey also reveals that the demand for corporate loans was increasingly driven
by debt restructuring and financing of working capital rather than investment
during the second quarter (Graph 2).
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6. Public Finance
Fiscal stimulus measures designed to limit the damage of the global
recession continued to drive up budget deficits in both advanced and emerging
economies. In addition, the contraction-driven drop in tax revenues accelerated
the deterioration of fiscal balances. Accordingly, Turkey’s budget deficit grew
substantially over 2009 (Graph 6.1).
Graph 6.1. General Budget Deficit
(in percent of GDP)
Average of Selected Countries**
9
Turkey
6
3
0
2007
2008
2009*
2010*
*Forecast.
**United States, UK, Germany, France, Spain, Ireland, Iceland, Japan, Portugal, Israel, Greece, Italy,
Austria, New Zealand and South Korea.
Source: IMF, World Economic Outlook database, October 2009, Turkey data from the Medium-Term
Program (2010-2012) and the 2009 Annual Program.
In order to reduce the adverse effects of the fiscal imbalance on
expectations and to guide economic agents, Turkey launched a Medium Term
Program (MTP) in September, featuring updates of the general macroeconomic
climate and budget aggregates. The Program aims to bring the public deficit
and debt gradually down to reasonable levels by allowing the government to
have a smaller share of resources, which is the key objective of the fiscal policy
for 2010/2012. The government is planning to introduce a fiscal rule by 2011 to
ensure fiscal discipline, restrict the public debt-to-GDP ratio over the medium
term and strengthen the institutional framework. According to the MTP, the
legal framework for the fiscal rule would be completed until the end of the first
quarter of 2010. These legal measures are intended to ensure a better
management of expectations by enhancing the institutional framework of fiscal
policy and its medium-to-long term predictability. Meanwhile, the fiscal rule
aims to secure that the public sector budget deficit-to-GDP ratio is consistent
with a sustainable public debt path over the medium-to-long term. In coming
Inflation Report 2009-IV
79
Central Bank of the Republic of Turkey
months, the government will direct spending to priority areas in order to
maximize the productivity gains from public spending, and help State Owned
Enterprises (SOEs) become more transparent and accountable by strengthening
their institutional framework.
According to the MTP that covers the 2010-2012 period, the cost of
fiscal packages that incorporate several revenue and spending measures
designed to ease the economic contraction is forecasted to be 2.1 and 1.6
percentage points of GDP for 2009 and 2010, respectively. The government
plans to cut non-interest expenditures gradually by 2011 and increase tax
revenues through improved auditing and compliance. Given the drop in interest
rates during 2009, interest expenditures are also expected to edge down. With
the steady reduction in budget deficits, the debt-to-GDP ratio is likely to
stabilize by 2011 and then start to decline (Table 6.1 and Table 6.2).
Table 6.1. Central Government Budget Performance and Targets
(in percent of GDP)
Budget expenditures
Non-interest
expenditures
Interest expenditures
Budget revenues
Tax revenues
Budget balance
Primary balance
2007
2008
2009*
2010**
2011**
2012**
24.2
23.8
28.2
27.9
26.7
25.6
18.4
5.8
22.6
18.1
-1.6
4.2
18.5
5.3
22.0
17.7
-1.8
3.5
22.3
5.9
21.5
17.3
-6.6
-0.8
22.4
5.5
23.0
18.8
-4.9
0.7
21.8
4.9
22.6
18.8
-4.0
0.9
21.1
4.5
22.4
18.7
-3.2
1.3
* Forecast
** Target
Source: Medium-Term Program (2010-2012), Medium-Term Fiscal Plan (2010-2012), Central Government Budget
Performance and Expectations Report for 2009, September 2009.
Since the budget deficit has widened above expectations during 2009, the
MTP’s objective is to maximize productivity gains from government spending
and cut some expenditures. Therefore, the program assumes that there would be
no public-sector wage hike for 2010 in real terms. Meanwhile, the patient share
was renewed in October 2009 to limit healthcare expenditures, aiming to enable
more healthcare providers to operate under a global budget for direct services.
In addition, the program envisages that the measures to help restrain
unregistered economy and expand the tax base will boost revenues.
Table 6.2. EU-Defined Central Government Nominal Debt Stock Performance and Targets
(in percent of GDP)
2007
2008
EU-defined central govt. nominal debt stock
39.4
39.5
2009*
2010**
2011**
2012**
47.3
49.0
48.8
47.8
* Forecast, ** Target.
Source: Medium-Term Program (2010-2012), Medium-Term Fiscal Plan (2010-2012), Treasury.
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Inflation Report 2009-IV
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6.1. Budget Developments
Central government non-interest expenditures continued to rise during
the first nine months of 2009, while the budget performance worsened further
due to tax revenue shortfalls. The central government primary balance
delivered a surplus of 4.7 billion Turkish liras, while the fiscal balance
produced a deficit of 40.8 billion Turkish liras during the first three quarters
(Table 6.1.1).
Table 6.1.1. Central Government Budget Aggregates
(Billion TL)
Central government expenditures
Interest expenditures
Non-interest expenditures
Central government revenues
I. Tax revenues
II. Non-tax revenues
Budget balance
Primary balance
Jan-Sep 2008
165.5
41.3
124.1
160.7
127.3
28.8
-4.8
36.5
Jan-Sep 2009
197.2
45.5
151.7
156.4
125.3
26.3
-40.8
4.7
Rate of increase
(Percent)
19.2
10.1
22.2
-2.7
-1.5
-8.6
-
Performance/Target
(Percent)
76.1
79.2
75.2
62.9
62.0
64.4
10.0
Source: Ministry of Finance.
Non-interest expenditures rose by 22.2 percent year-on-year during
January-September amid soaring current transfers (up 33.7 percent), which
account for the largest portion of non-interest expenditures (Table 6.1.2). The
rise in current transfers for health, pension and social benefits during the first
nine months account for 54.5 percent of the total increase in non-interest
expenditures. The sharp rise in these expenditures was largely driven by the
social security reform that was launched in late 2008 and the employment
package that offers budget transfers to the Social Security Agency (SSA).
Furthermore, funds appropriated to finance the SSA’s deficit resulting from
falling premium revenues have boosted the spending on health, pension and
social benefits.
Table 6.1.2. Non-Interest Expenditures
(Billion TL)
Non-interest expenditures
1. Personnel expenditures
2. Purchase of goods and services
a) Defense-security
b) Healthcare expenditures
3. Current transfers
a) Duty losses
b) Health, pension, social benefits
c) Agricultural support
d) Shares reserved from revenues
4. Capital expenditures
5. Capital transfers
Jan-Sep 2008
124.14
37.15
15.07
4.72
4.83
52.51
1.34
26.25
5.18
14.89
9.83
2.05
Jan-Sep 2009
151.66
42.60
17.33
5.69
5.15
70.21
2.81
41.26
3.84
16.13
10.29
2.19
Change
(Percent)
22.2
14.7
15.0
20.5
6.5
33.7
110.6
57.1
-25.7
8.3
4.8
6.9
Share of change
(Percent)
100.0
19.8
8.2
3.5
1.1
64.3
5.4
54.5
-4.8
4.5
1.7
0.5
Source: Ministry of Finance.
Inflation Report 2009-IV
81
Central Bank of the Republic of Turkey
Central government budget revenues dropped by 2.9 percent year-onyear during January-September 2009. Non-tax revenues and tax revenues fell
by 31.8 and 1.5 percent, respectively. The severe drop in non-tax revenues was
mainly attributable to the base effect-driven plunge in capital revenues. The
base effect stemmed from transfers of a privatization fund cash surplus of TL
5.0 billion and port privatization receipts totaling TL 1.0 billion into the general
budget during July-August 2008. The VAT on imports declined by 20.3 percent
year-on-year during the first nine months of 2009 due to the downturn in
imports. Domestic VAT, on the other hand, increased by 19.5 percent owing to
the renewed VAT rates on certain goods and services and the relative recovery
in domestic demand. Moreover, the reduction in VAT refunds and the VAT
revenue from the 3G license auction in April have also added to the marked
increase in domestic VAT. With the economic slowdown, income tax, SCT and
corporate tax revenues remained stable during the first nine months. However,
SCT revenues rebounded somewhat in the third quarter due to the increased
lump sum SCT on oil and tobacco (Table 6.1.3).
Table 6.1.3. General Budget Revenues
(Billion TL)
General budget revenues
I-Tax revenues
Income tax
Corporate tax
Domestic VAT
Special consumption tax
VAT on import
II-Non-tax revenues
Enterprise and property income
Capital revenues
Jan-Sep 2008
156.36
127.28
27.99
12.38
12.72
31.75
23.32
14.62
6.36
8.26
Jan-Sep 2009
151.88
125.33
28.50
12.05
15.20
31.66
18.60
9.97
8.52
1.45
Rate of increase
(Percent)
-2.9
-1.5
1.8
-2.7
19.5
-0.3
-20.3
-31.8
33.9
-82.4
Performance/Target
(Percent)
62.5
62.0
63.0
59.8
76.1
64.1
48.3
48.6
115.7
11.0
Source: Ministry of Finance.
In real terms, the contraction in tax revenues that started in the third
quarter of 2008 has lost pace by the second quarter of 2009 with the recovery in
private consumer demand. The VAT and SCT cut on certain goods and services
during the second quarter of 2009 has helped VAT revenues recover
(Graph 6.1.1).
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Inflation Report 2009-IV
Central Bank of the Republic of Turkey
Graph 6.1.1. Real Tax Revenues
Real Tax Revenues
Real VAT and SCT Revenues
(Annual Percentage Change)
(Annual Percentage Change)
15
10
30
Special Consumption Tax
25
Domestic Value Added Tax
26.0
20
5
15
10
0
5
-1.4
0
-5
-5
-2.0
-10
-10
-15
-12.6
-20
-15
1
2
3
4
1
2
2007
3
4
1
2008
2
1
3
2
3
4
1
2007
2009
2
3
4
1
2008
2
3
2009
Source: Ministry of Finance.
Source: Ministry of Finance.
The public-sector primary surplus performance has been weakening
considerably since September 2008 (Graph 6.1.2). In annualized terms, the
program-defined central government primary surplus and the consolidated
public-sector primary surplus have fallen to their lowest levels in recent years.
As the central government primary balance worsens, the primary surplus of
extra-budgetary funds and the Social Security Fund narrows, while that of
SMEs and social security institutions displays a relatively positive performance
(Graph 6.1.2). All in all, the program-defined central government budget and
the consolidated public-sector budget are expected to run a primary deficit by
the end of the year.
Graph 6.1.2. Primary Surplus
Program-Defined Primary Surplus
Program-Defined Primary Surplus
(Annualized, Billion TL)
(Annualized, Billion TL)
4
Central Government Primary Surplus
Consolidated Public Sector Primary Surplus
2008Q4
45
3
35
2
25
1
15
0
3.0
5
-5
-9.4
Source: Treasury.
Inflation Report 2009-IV
0709
0509
0309
0109
1108
0908
0708
0508
0308
0108
1107
0907
0707
0507
0307
0107
-15
2009Q1
2009Q2
-1
-2
Extra
Budgetary
Funds
SMEs
Social Sec.
Institutions
Unemployment
Fund
Source: Treasury.
83
Central Bank of the Republic of Turkey
With the acceleration in central government primary budget expenditures
since the third quarter of 2008, public investments and public spending made
positive contribution to GDP growth during the first half of 2009. According to
the MTP, primary budget expenditures are expected to be gradually less
contributive to GDP growth. Yet, the cumulative post-crisis measures are
forecast to further stimulate the economy in the remainder of 2009 and in 2010,
though to a lesser extent. Thus, medium-term forecasts presented in the final
chapter of this Report are built on the projection that public spending would
continue to support economic activity in the rest of 2009 and in 2010, albeit
less strongly, and become neutral by 2011.
6.2. Developments in Debt Stock
The prudent fiscal framework maintained over the past few years reduced
the debt burden rapidly and improved the maturity and currency composition of
public debt stock to a large extent. However, the sharp drop in total public
primary surplus since the final quarter of 2008 pushed the government’s
borrowing requirement higher. Despite the record-high debt rollover ratio, the
robust demand of commercial banks for government papers balanced public
borrowing costs against any strains. The MTP aims to contain the rise in the
government debt-to-GDP ratio over the next three years.
The central government debt stock increased by 13.4 percent to TL 431.1
billion in September 2009, mainly on account of net domestic debt growth and
slightly due to net foreign debt growth. Meanwhile, the ratios of net total public
debt stock and EU-defined central government nominal debt stock to GDP
climbed to 30.5 and 43.2 percent, respectively, during the first half of 2009
(Graph 6.2.1). Anticipating that the public sector will fail to register a primary
surplus and the economy will contract in 2009, public debt stock ratios are
likely to rise further in the remainder of 2009.
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Graph 6.2.1. Public Debt Stock Indicators
Public Debt Stock Indicators
Decomposition of the Change in Central Govt. Debt Stock
90
74
500
431.1
80
450
49
Billion TL
400
70
350
60
300
50
43.2
250
30.5
40
0
200
30
-25
150
20
100
10
50
-49
0
0
2001
2003
2005
2007
25
2009/06
Total Public Net Debt Stock/GDP
2006
2007
2008
Parity Effect**
3.2
3.4
-1.0
2009/09*
1.2
Tot. Exc. Rate Effect***
6.4
-21.2
29.9
-2.1
Net External Borrowing
-0.5
-2.6
4.0
6.2
Net Domestic Borrowing
4.5
8.9
13.9
45.7
Gen. Gov. Nom. Debt Stock Defined by EU Standards/GDP
Central Government Total Debt Stock (Billion TL, Right Axis)
* Changes
compared to end-2008.
Changes arising from movements in USD/EUR and USD/SDR parities.
Changes arising from movements in the TL/USD parity.
Note: Changes in net debt denotes the change adjusted for the exchange
rate and parity effect.
Source: Treasury, CBRT.
**
***
Source: Treasury, CBRT.
With the debt and risk management policies in place since 2003 as part of
the strategic criteria and the macroeconomic stability maintained so far, the
sensitivity of the public debt portfolio to risks of liquidity, interest rate and
exchange rate has decreased considerably. Recently, the share of fixed-rate
instruments and exchange-rate sensitive (FX-denominated and FX-indexed)
instruments in central government debt stock has declined, while the share of
floating-rate instruments has increased (Graph 6.2.2). The increase in the share
of floating-rate instruments has been largely driven by the issue of CPI-indexed
bonds with a relatively longer maturity.
Graph 6.2.2. Structure of Central Government Debt Stock
Composition of Central Government Debt Stock
(Percent)
Vulnerability Indicators for Central Government Debt Stock
(Percent)
60
80
30.0
70
90
33.8
100
226.0
250
200
50
70
150
40
50
37.4
33.0
60
40
30
100
20
50
30
33.2
10
32.5
10
20
0
0
2001
0
2003
2005
2007
2009/09
Public Deposit/Avg. Debt Service per Month (right axis)
2001
Fixed Rate
2003
Floating Rate
2005
2007
2009/09
FX Denominated/FX Indexed
Share of Debt Susceptible to Interest Rate Fluctuations*
Share of Debt Susceptible to Exc. Rate Fluctuations**
* Debt stock sensitive to interest rates contains discounted securities with a maturity less than 1 year and government securities with flexible interest rates.
** Debt stock sensitive to exchange rates contains foreign debt stock and FX-denominated and FX-indexed domestic debt stock.
Source: Treasury, CBRT.
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Following the financing strategy intended for reducing the liquidity risk,
the ratio of public deposits to average monthly debt service ended September
2009 at 226.0 percent (Graph 6.2.2). The average maturity of domestic cash
borrowing was longer from the 2008 average, causing the average maturity of
total domestic debt stock to climb to 24.2 months in September 2009. In
addition, bond issues yielded a USD 3.8 billion worth of long-term foreign debt
during January-September 2009 with an average maturity of 9.1 years
(Graph 6.2.3).
Graph 6.2.3. Maturity of Borrowing from Domestic and Foreign Markets
Domestic Cash Borrowing and Maturity of Domestic Debt Stock
(Month)
45
40
34 .2
35
30
2 4.2
25
20
15
Borrowing by Issuing Bonds
35
7
30
6
25
5
20
4
15
3
10
2
5
1
10
5
0
0
0
2 001
2 003
2 005
2 007
200 9/09
2001
2003
2005
2007
2009/09
Avg. Maturity of Tota l Domestic Debt Stock
External Borrowing (Right Axis, Billion USD)
Avg. Maturity of Domestic Cash Borr owing
Avg. Maturity of External Borrowing (Year)
Max. Maturity of External Borrowing (Year)
Source: Treasury, CBRT.
In sum, the worsening budget performance and the reduced net foreign
debt in 2009 led to a significant rise in the government’s domestic borrowing
requirement. In order to allow the public sector to employ private-sector
resources and to maximize the effects of monetary policy decisions in coming
months, it is very important to bring the rate of increase in the debt rollover
ratio down to reasonable levels, as projected in the MTP.
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7. Medium-Term Projections
This chapter summarizes the assumptions underlying forecasts, and
presents relating medium-term inflation and output gap forecasts and the
monetary policy outlook over a three-year horizon.
7.1. Current State of the Economy, Short-Term Outlook and
Assumptions
Economic activity data were consistent with the outlook presented in the
2009 July Inflation Report during the third quarter, while inflation continued to
edge lower. Although rising oil prices and measures to restore fiscal balance
put upward pressure on prices, the faster-than-expected decline in annual food
inflation led to a downward revision of short-term forecasts.
During the second quarter of 2009, domestic demand recovered through
fiscal measures, whereas foreign demand remained weak. Despite the marked
increase in total consumer demand owing to monetary easing and fiscal
measures, the demand for goods that were left out of tax incentives saw no
serious recovery. The increased demand was largely met by destocking, placing
a drag on production and resource use. Moreover, the labor market failed to
show clear signs of recovery, causing the demand uncertainty to grow.
Therefore, aggregate demand conditions continued to support disinflation.
Since all these changes are in line with the framework offered in the 2009 July
Inflation Report, second and third-quarter output gap forecasts, which lay the
grounds of our medium-term forecasts, are left unchanged (Table 7.1.1).
Food inflation plunged remarkably during the third quarter of 2009,
running well below the projections for the first nine months. Unlike previous
years, food prices remained on a downtrend in seasonally adjusted terms. The
rate of increase in unprocessed food prices fell at a faster-than-expected pace,
while processed food prices declined at an anticipated rate. Thus, our
assumption for food inflation is revised downward from 7.5 to 5.8 percent for
end-2009 (Table 7.1.1). In addition, in view of the recent changes in oil prices,
we revised our assumption for Brent crude oil upwards from USD 60 to 70 for
end-2009 (Table 7.1.1).
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Table 7.1.1. Revisions to the Assumptions in 2009 July Inflation Report
2009 July Inflation Report
2009 October Inflation Report
2009 Q2 :-8.2
Output gap
Unchanged
2009 Q3 :-8.1
Food prices
Oil prices
2009: 7.5%
2010: 6%
2011: 6%
2009: 5.8%
2010: 6%
2011: 6%
$60 during 2009
$70 afterwards
2009 Q4: $70
2010: $75
2011: $80
2009
Euro area growth
forecasts1
1
2
3
2010
2009
2010
CF 2
WEO 3
CF
WEO
CF
WEO
CF
WEO
-4.4
-4.8
0.4
-0.3
-3.9
-4.2
1.1
0.3
Consensus Forecasts (CF), July 2009 and October 2009 Bulletins; World Economic Outlook (WEO), July 2009 and October 2009 Bulletins.
CF.
WEO, IMF.
In sum, the starting point of our medium-term forecasts has been duly
revised down. Below are the assumptions on domestic economic activity,
global growth, commodity prices, financial markets and fiscal policy, which
help build medium-term forecasts.
Third-quarter data indicate that the revival in consumer demand during
the second quarter has been confined to goods that benefited from fiscal
measures, and therefore is not of a durable and strong nature. Similarly, the
current idle capacity and high demand uncertainty imply that investments are
very unlikely to recover rapidly and robustly. Thus, the sluggish resource use is
expected to have a dampening effect on investment and employment prospects
in coming months, while the record-high unemployment is likely to curb
demand. The recently improved global risk sentiment and the ongoing drop in
loan rates bolster borrowing. Yet, the pace and scale of the pass-through of
economic recovery to labor market, which will depend on the global growth
outlook, is expected to be a key factor to affect loan demand. On balance, we
expect aggregate demand conditions and high unemployment to further support
disinflation in the upcoming period.
The complete expiry of SCT cuts and the impending hike in electricity
tariffs are likely to put upward pressure on inflation in coming months. Yet,
annual inflation is forecasted to keep hovering around low levels. Furthermore,
it should be noted that the base effects from tax and price adjustments to
enhance fiscal balance in 2009 will cause inflation to remain volatile over 2010.
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Our assumptions regarding food prices for 2010 and 2011 are based on
the baseline scenario offered in the July 2009 Inflation Report. Accordingly,
our assumption for food inflation is maintained at 6 percent for both 2010 and
2011 (Table 7.1.1).
Having stabilized around USD 60 per barrel in the second quarter, Brent
crude oil prices averaged USD 70 per barrel during the third quarter. Changes
in spot prices caused oil prices to rally at every maturity. Despite heightened
concerns over a slow global recovery, OPEC’s ability to delay output decisions
results in abrupt prices changes, while the rush of non-producing investors
towards commodity futures promotes stock building, leading to an upsurge in
spot prices. Therefore, we revised our oil price assumptions in the past Report
upwards to USD 70 for the last quarter of 2009 and to USD 75 and 80 for 2010
and 2011, respectively (Table 7.1.1).
Given the current economic climate, assumptions on global economic
activity remain increasingly important in building medium-term forecasts.
Therefore, we have incorporated the revised growth forecasts of international
institutions released within three months after the July 2009 Report into our
medium-term forecasts.
Third-quarter data on the world economy cite a gradual rebound. Not
only the stronger-than-expected growth rates in the second quarter but also the
ongoing recovery in leading indicators for global economic activity during the
third quarter raised perceptions that the worst part of the crisis is over.
With the mounting signs of global economic recovery, international
institutions have revised their global growth forecasts upwards. Consensus
Economics revised its global contraction forecast for 2009 downwards from 2.6
percent in June to 2.3 percent in October. Similarly, in its World Economic
Outlook report, the IMF lowered its forecast for global contraction from 1.4
percent in June to 1.1 percent in October (Graph 7.1.1).
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Central Bank of the Republic of Turkey
Graph 7.1.1. Growth Forecasts for 2009
Consensus Forecasts
WEO
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
Euro Area
1009
0909
0809
0709
0609
0509
0409
0309
0209
0109
0109
-6
-5
World
USA
1009
USA
0609
World
0409
Euro Area
Source: Consensus Forecasts January 2009 to October 2009 Bulletins; IMF World Economic Outlook January 2009, April 2009, July 2009 and October 2009
Bulletins.
In October, both Consensus Economics and IMF revised their global
growth forecast for 2010 up to 2.7 and 3.1 percent, respectively (Graph 7.1.2).
Among regions, the end-2010 growth forecasts for the US and Euro area are
revised upwards, with IMF projecting the first positive Euro area growth in a
long time.
Graph 7.1.2.Growth Forecasts for 2010
Consensus Forecasts
WEO
3
4
Euro Area
World
USA
Euro Area
World
USA
3
2
2
1
1
0
1009
0909
0809
0709
0609
0509
0409
0309
0209
0109
0
-1
0109
0409
0609
1009
Source: Consensus Forecasts January 2009 to October 2009 Bulletins; IMF World Economic Outlook January 2009, April 2009, July 2009 and October 2009
Bulletins.
Accordingly, in developing our medium-term forecasts, we have revised
our assumptions for the global economy slightly upwards from the previous
report, though foreign demand is projected to remain weak for an extended
period of time.
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With the acceleration in central government primary budget expenditures
since the third quarter of 2008, public investments and public consumption
spending made positive contribution to GDP growth during the first half of
2009. According to the MTP, primary budget expenditures are expected to be
gradually less contributive to GDP growth. Yet, the cumulative post-crisis
measures are forecasted to further stimulate the economy in the remainder of
2009 and in 2010, though to a lesser extent. Thus, our medium-term forecasts
are built on the projection that public spending would continue to support
economic activity in the rest of 2009 and in 2010, albeit less strongly, and
become neutral by 2011.
In view of the deepening and widening of the global crisis, the CBRT had
adopted an aggressive rate cut strategy in the final quarter of 2008. The
monetary easing continued into the third quarter of 2009. Accordingly, the
Bank cut policy rates by 150 basis points from August to October, totaling a
reduction of 1000 basis points since November 2008.
The consistency between the data on economic activity and inflation and
CBRT’s projections as well as the Bank’s effective communication policy have
strengthened the impact of monetary decisions on market rates. Moreover, the
recently improved risk sentiment has encouraged banks to lend and consumers
to borrow. However, financial tightening measures still run above pre-crisis
levels. Therefore, we have built our medium-term forecasts on the assumption
that the tightening in credit conditions continues, albeit to a lesser extent
compared to the previous reporting period.
7.2. Medium-Term Outlook
This part presents our inflation and output gap forecasts and the monetary
policy outlook built on the baseline scenario that is developed within the
framework of the abovementioned short-term assumptions and projections.
Accordingly, assuming a limited amount of further easing and constant
policy rate until the end of 2010, the medium-term forecasts suggest that, with
70 percent probability, inflation will be between 5.0 and 6.0 percent with a
mid-point of 5.5 percent at end-2009, and between 3.9 and 6.9 percent with a
mid-point of 5.4 percent by the end of 2010. Furthermore, inflation is expected
to decline to 4.9 percent by the end of 2011 and to 4.8 percent by the third
quarter of 2012 (Graph 7.2.1).
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Central Bank of the Republic of Turkey
Graph 7.2.1. Inflation and Output Gap Forecasts
Forecast Range*
Uncertainty Band for 2009
Output Gap
End-Year Inflation Targets
13
Control Horizon
11
9
7
Percent
5
3
1
-1
-3
-5
-7
-9
2
3
2009
4
1
2
3
4
2010
1
2
2011
3
4
1
2
3
2012
*Indicates a 70-percent confidence interval for the forecast.
Our output gap forecasts based on the above assumptions are shown in
Graph 7.2.1. Accordingly, the output gap is likely to close at a slightly more
rapid pace than in the 2009 July Inflation Report. The revised forecasts indicate
that aggregate demand conditions would continue to support disinflation even
when policy rates are kept at low levels for an extended period. It is worthy to
note that the sharp fall in inflation in the first half of 2009 created significant
base effects. This would, ceteris paribus, lead to volatility and some mild
increases in annual inflation rates until mid-2010 (Graph 7.2.1). Afterwards, as
the impact of tax hikes would gradually disappear, inflation is expected to trend
downwards starting from the second half of 2010, stabilizing around 5 percent
over the medium term. It is critical to note that, inflation would be less
persistent, and thus the economic recovery much smoother, should economic
agents take these forecasts as a benchmark in their pricing decisions.
It should be emphasized that any new data or information regarding the
inflation outlook may lead to a change in the monetary policy stance.
Therefore, assumptions on the future policy rates underlying the inflation
forecast should not be perceived as a commitment on behalf of the CBRT.
7.3. Risks and Monetary Policy
Although recent data releases indicate that the worst is likely to be over,
concerns regarding the health of the global economy remain. In particular,
ongoing problems in credit and labor markets pose downside risks for global
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activity. Should the global conditions deteriorate again, and consequently delay
the domestic recovery, the CBRT would consider another cycle of rate cuts.
The fact that the crisis itself, and the policy responses in reaction to it, are
unprecedented in recent history, creates risks regarding the inflation and
monetary policy outlook. It is extremely difficult to estimate with precision the
impact of the recent monetary policy measures taken at the global scale.
Although not having resorted to explicit quantitative easing eliminates some of
the risks for the Turkish case, it should still be noted that the full impact of the
cumulative easing of 1000 basis points since November 2008 would be seen
with a lag. In other words, although the baseline scenario does not envisage any
policy rate hikes for an extended period, it is important to monitor the impact of
the policies closely to ensure an appropriate timely response to any
development not envisaged in this Report.
Another possible scenario is a surge in capital inflows to emerging
markets owing to the relative improvement of credit risk across these countries.
Ample liquidity driven by the expansionary fiscal and monetary policies on a
worldwide scale, coupled with rising risk appetites, have led to large capital
inflows to emerging markets. The current output gap would imply that a fall in
the cost of imported inputs could be rapidly transmitted to consumer prices,
suggesting that a further acceleration in capital inflows may exacerbate
downward pressures on inflation. Materialization of such a scenario could lead
to temporarily lower policy rates than envisaged in the baseline scenario.
The CBRT will continue to monitor fiscal policy developments closely
while formulating monetary policy. Enhancing the framework set out in the
MTP through further structural adjustments that would strengthen fiscal
discipline would support the improvement of Turkey’s sovereign risk. Should
the goals set out in the MTP be implemented, it would be possible to keep
policy rates at single digits throughout the forecast horizon.
Increasing budget deficits on a worldwide scale continue to pose risks on
inflation expectations and thus on global interest rates in the longer term. The
medium-term forecasts presented above envisage that the slow recovery in
global economic activity and rising saving rates will likely keep global interest
rates at low levels for an extended period. However, the lack of a clear exit
strategy from various fiscal stimulus packages creates upside risks regarding
Inflation Report 2009-IV
93
Central Bank of the Republic of Turkey
global inflation rates and therefore longer-term global interest rates. In this
respect, countries with relatively sounder banking systems and prudent fiscal
policies would be more resilient against these risks. These issues once again
draw attention to the importance of fiscal discipline
The course of oil and other commodity prices constitutes another
important risk. Ample liquidity driven by countercyclical policies on a global
scale creates speculative movements not only regarding emerging market
currencies, but also for commodity prices. Therefore, oil and other commodity
price developments warrant caution, even under a scenario of a gradual global
economic recovery. Nonetheless, weak domestic demand conditions would
limit the pass-through stemming from upside cost-push shocks. Therefore, the
CBRT will accommodate the short-term volatility in commodity prices,
especially when the resource utilization remains at depressed levels. However,
if an uptrend in commodity prices reflects a strong and durable rebound in
global activity that would in turn create inflationary pressures, then monetary
policy will react appropriately to keep inflation in line with medium-term
inflation targets.
The CBRT has been taking the necessary measures to contain the adverse
effects of the global financial turmoil on the domestic economy. However,
prudent monetary policy is necessary, but not sufficient to maintain the
resilience of the economy against the global crisis. Therefore, strengthening the
commitment to fiscal discipline and the structural reform agenda is also critical
for facilitating expectations management and thus for supporting the
effectiveness of the monetary policy decisions. In this respect, the timely
implementation of the structural reforms envisaged by the Medium Term
Program and the European Union accession process remains to be of utmost
importance.
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GRAPHS
1. OVERVIEW
Graph 1.1. GDP Forecasts in Advanced Economies
1
Graph 1.1.1. Contribution of Certain Sub-categories to Annual CPI Inflation
2
Graph 1.1.2. First 9-Month Cumulative Inflation
2
Graph 1.1.3. Core Inflation I
3
Graph 1.1.4. Core Inflation Indicators H and I
3
Graph 1.2.1. Policy Rates in Inflation-Targeting Emerging Economies
3
Graph 1.2.2. Change in Policy Rates between September 2008 and
October 2009 in Emerging Markets
3
7
Graph 1.3.1. Inflation Forecasts
2.
INTERNATIONAL ECONOMIC DEVELOPMENTS
Graph 2.1.1. Yearly Growth Rates in Advanced and Emerging Economies
Graph 2.1.2. Unemployment in Advanced Economies
Graph 2.1.3. Industrial Production Index in Advanced and Emerging Economies
Graph 2.1.4. PMI
Graph 2.1.5. Factory Orders
Graph 2.1.6. Retail Sales
Graph 2.2.1. S&P Goldman Sachs Commodity Indices
Graph 2.2.2. Crude Oil (Brent) Prices
Graph 2.2.3. Crude Oil Volatility Index (OVX)
Graph 2.2.4. Crude Oil (Brent) Yield Curve
Graph 2.3.1. CPI Inflation in Advanced and Emerging Economies
Graph 2.3.2. Core CPI Inflation in Advanced and Emerging Economies
Graph 2.4.1. Money Market Rates
Graph 2.4.2. Corporate Borrowing Costs
Graph 2.4.3. Loan Developments in the US
Graph 2.4.4. Loan Developments in the Euro Area
Graph 2.4.5. Bank Lending Conditions
Graph 2.4.6. Global Risk Appetite
Graph 2.4.7. Global Stock Markets
Graph 2.4.8. Currency and Risk Premium Indicators for Emerging Economies
Graph 2.5.1. Policy Rate Changes in Advanced Economies
Graph 2.5.2. Policy Rate Changes in Emerging Economies
Graph 2.5.3. Policy Rate in Advanced Economies
Graph 2.5.4. Policy Rate in Inflation-Targeting Emerging Economies
3.
12
12
13
13
14
14
16
16
16
16
17
17
18
18
18
18
19
19
20
20
21
21
22
22
INFLATION DEVELOPMENTS
29
29
30
30
31
31
32
33
33
34
34
35
35
Graph 3.1.1. Contribution to Annual CPI Inflation
Graph 3.1.2. CPI by Categories
Graph 3.1.3. Food Prices
Graph 3.1.4. Food Prices
Graph 3.1.5. Fruit and Vegetable Production and Prices
Graph 3.1.6 Export Quantity and Price Index for Fruits and Vegetables
Graph 3.1.7. Energy Prices
Graph 3.1.8. Domestic Consumption of Clothing and Footwear
Graph 3.1.9. Export Quantity for Apparels
Graph 3.1.10. Turnover Index for Services
Graph 3.1.11. Prices of Services
Graph 3.1.12. Prices of Services
Graph 3.1.13. Prices of Services
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Central Bank of the Republic of Turkey
Graph 3.1.14. Core CPI Measures I and I*
Graph 3.1.15. Core CPI Measures H and I
Graph 3.1.16. Manufacturing Industry Prices
Graph 3.1.17. Import Unit Value Index
Graph 3.1.18. Average Unit Cost and Currency Basket
Graph 3.2.1. 12- and 24-Month Ahead CPI Expectations
Graph 3.2.2. Inflation Expectations Curve
Graph 3.2.3. Distribution of 12-Month Ahead CPI Inflation Expectations
Graph 3.2.4. 12-Month Ahead Inflation Expectations by Industries
4.
35
35
36
36
36
37
37
38
38
SUPPLY AND DEMAND DEVELOPMENTS
Graph 4.1.1. Annual GDP Growth by Periods
Graph 4.1.2. GDP
Graph 4.1.3. Contribution to Annual GDP Growth from Production
Graph 4.1.4. Contribution to Annual GDP Growth from Spending
Graph 4.1.5. Contribution to Quarterly GDP Growth from Spending
Graph 4.1.6. Resident and Nonresident Household Spending
Graph 4.1.7. Production and Import Quantity of Consumer Goods
Graph 4.1.8. Production of Durable and Nondurable Goods
Graph 4.1.9. Domestic Sales of Automobiles and White Goods
Graph 4.1.10. Consumer Loans
Graph 4.1.11. Production and Import Quantity Indices for Capital Goods
Graph 4.1.12. Aggregate Index of Investment and Machinery-Equipment Investments
Graph 4.1.13. Capacity Utilization Rate
Graph 4.1.14. Per-Capita Hours Worked in the Industrial Sector and Private Machinery-Equipment
Investments
Graph 4.1.15. Total Final Domestic Demand
Graph 4.2.1. Contribution to Annual GDP Growth from Exports, Imports and Net Exports
Graph 4.2.2. Exports and Imports of Goods and Services
Graph 4.2.3. GDP Growth and Forecasts, Advanced Economies
Graph 4.2.4. Quantity Index for Exports
Graph 4.2.5. Exports of Goods and Services
Graph 4.2.6. BTS Export Orders and 3-Month Ahead Expectations
Graph 4.2.7. PMI Index for Export Orders
Graph 4.2.8. Revision to GDP Forecasts, Advanced Economies
Graph 4.2.9. Quantity Index for Imports
Graph 4.2.10. Quantity Index for Consumer Good Imports
Graph 4.2.11. Quantity Index for Investment Good Imports
Graph 4.2.12. Quantity Index for Intermediate Good Imports
Graph 4.2.13. Imports of Goods and Services
Graph 4.3.1. Industrial Production Index
Graph 4.3.2. BTS Inventory of Finished Goods (Above normal/Below normal, Percent)
and Inventory Levels
Graph 4.3.3. Output Gap
Graph 4.4.1. Composition of the Change in Unemployment
Graph 4.4.2. Non-Farm Employment
Graph 4.4.3. Non-Farm Unemployment Rate
Graph 4.4.4. Non-Farm Employment
Graph 4.4.5. Industrial Employment (Million) and Production (2005=100)
Graph 4.4.6. Manufacturing Industry Employment Index
Graph 4.4.7. Construction Employment
Graph 4.4.8. Services Employment
Graph 4.4.9. Unemployment
Graph 4.4.10. Change in Net Unemployment
Graph 4.4.11. Real Unit Wages in Manufacturing Industry
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Inflation Report 2009-IV
42
42
42
42
44
44
45
45
45
45
46
46
47
47
47
48
48
49
49
49
50
50
51
51
51
52
52
52
54
55
55
56
57
57
57
58
58
58
58
59
59
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Central Bank of the Republic of Turkey
Graph 4.4.12. Real Unit Wages in Trade-Services Industry
Graph 4.4.13. Real Wages in Building Construction Industry
Graph 4.4.14. Real Wages in Non-Building Construction Industry
Graph 4.4.15. Value-Added and Employment in Non-Farm Industry
59
60
60
60
5. FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION
Graph 5.1.1. Risk Premium Indicators
Graph 5.1.2. Policy Rate Changes in Emerging Economies
Graph 5.1.3. Changes in Interest Rates
Graph 5.1.4. Maturities of Market Rates
Graph 5.1.5 Medium-Term Real Interest Rates from the Yield on Government Securities and Indicators
for Tightened Business Loan Standards
Graph 5.1.6. Annual Real Growth of Monetary Base
Graph 5.1.7. Exchange Rate Changes
Graph 5.1.8. Excess TL Liquidity
Graph 5.2.1. Real Sector Loans / GDP
Graph 5.2.2. Subcategories of Consumer Loans
Graph 5.2.3. Loan Rates
Graph 5.2.4. Spread Between Loan Rates and Deposit Rates
6.
71
72
72
73
74
75
75
76
PUBLIC FINANCE
79
83
83
85
85
86
Graph 6.1. General Budget Deficit
Graph 6.1.1. Real Tax Revenues
Graph 6.1.2. Primary Surplus
Graph 6.2.1. Public Debt Stock Indicators
Graph 6.2.2. Structure of Central Government Debt Stock
Graph 6.2.3. Maturity of Borrowing from Domestic and Foreign Markets
7.
68
69
70
70
MEDIUM TERM PROJECTIONS
90
90
92
Graph 7.1.1. Growth Forecasts for 2009
Graph 7.1.2. Growth Forecasts for 2010
Graph 7.2.1. Inflation and Output Gap Forecasts
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TABLES
2.
INTERNATIONAL ECONOMIC DEVELOPMENTS
15
Table 2.1.1. Annual Growth Forecasts
3.
INFLATION DEVELOPMENTS
30
31
33
Table 3.1.1. First Estimation of Crop Production in 2009
Table 3.1.2. Prices for Goods and Services
Table 3.1.3. Prices of Durable Goods
4.
SUPPLY AND DEMAND DEVELOPMENTS
43
Table 4.1.1. Resident and Nonresident Household Spending
6.
PUBLIC FINANCE
Table 6.1. Central Government Budget Performance and Targets
Table 6.2. EU-Defined Central Government Nominal Debt Stock Performance and Targets
Table 6.1.1. Central Government Budget Aggregates
Table 6.1.2. Non-Interest Expenditures
Table 6.1.3. General Budget Revenues
7.
98
MEDIUM TERM PROJECTIONS
Table 7.1.1. Revisions to the Assumptions in 2009 July Inflation Report
80
80
81
81
82
88
Inflation Report 2009-IV
Central Bank of the Republic of Turkey
ABBREVIATIONS
BoJ
Bank of Japan
BTS
Business Tendency Survey
BoE
Bank of England
CBRT
Central Bank of the Republic of Turkey
CDS
Credit Default Swap
CPI
Consumer Prices Index
ECB
European Central Bank
EMBI
Emerging Markets Bonds Index
EU
European Union
Fed
Federal Reserve
GDP
Gross Domestic Product
GS
Goldman Sachs
IEA
International Energy Agency
IIF
Institute of International Finance
IMF
International Money Fund
ISE
Istanbul Stock Exchange
MPC
Monetary Policy Committee
MTP
Medium Term Program
OECD
Organization for Economic Co-operation and Development
OPEC
Organization of the Petroleum Exporting Countries
PMI
Purchasing Managers Index
SCT
Special Consumption Taxes
SSA
Social Security Agency
TL
Turkish lira
TURKSTAT
Turkish Statistical Institution
USA
United States of America
VAT
Value Added Taxes
WEO
World Economic Outlook
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