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Contents
1.
2.
3.
4.
5.
6.
OVERVIEW
1.1. Monetary Policy Developments and Monetary Conditions
1
1.2. Macroeconomic Developments and Main Assumptions
4
1.3. Inflation and Monetary Policy Outlook
7
1.4. Risks and Monetary Policy
8
INTERNATIONAL ECONOMIC DEVELOPMENTS
11
2.1. Global Growth
12
2.2. Commodity Prices
14
2.3. Global Inflation
17
2.4. Financial Conditions and Risk Indicators
18
2.5. Global Monetary Policy Developments
22
INFLATION DEVELOPMENTS
31
3.1. Inflation
31
3.2. Expectations
39
SUPPLY AND DEMAND DEVELOPMENTS
47
4.1. Gross Domestic Product Developments and Domestic Demand
48
4.2. External Demand
51
4.3. Labor Market
55
FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION
73
5.1. Financial Markets
73
5.2. Financial Intermediation and Loans
80
PUBLIC FINANCE
6.1. Budget Developments
6.2. Developments in the Debt Stock
7.
1
MEDIUM-TERM PROJECTIONS
99
99
102
111
7.1. Recent Monetary Policy Decisions
111
7.2. Current State of the Economy, Short-Term Outlook and Assumptions
112
7.3. Medium-Term Outlook
116
7.4. Risks and Monetary Policy
119
BOXES
Box 2.1. Portfolio Flows to Emerging Economies
26
Box 3.1. Findings on Price Rigidity Based on Micro Data
41
Box 3.2. The Effect of Inflation Surprises on Expectations
44
Box 4.1. Prices of Investment Goods and Investment Spending
58
Box 4.2. Data on Wages and Earnings
60
Box 4.3. What the Economic Clock Says About Current Economic Activity
65
Box 4.4. Fixed Capital Growth Loss during the Recent Crises and Its Impact on the
Potential GDP
69
Box 5.1. Possible Effects of the Amendments to BRSA Regulations
86
Box 5.2. Credit Rating Upgrade to “Investment Grade”
91
Box 5.3. Monetary Analysis at the CBRT
95
Box 6.1. Structural Budget Balance and Fiscal Stance
106
Central Bank of the Republic of Turkey
1. Overview
The global economic growth slowed down in the second quarter of 2011,
while advanced and emerging economies continued to grow at different
paces. Mounting concerns regarding sovereign debt sustainability problems
across the euro area, especially in Greece, and the slower-than-expected
recovery in the U.S. labor market has intensified the downside risks regarding the
global
economic
normalization
of
activity.
the
Accordingly,
monetary
policy
expectations
in
advanced
for
a
delay
economies
in
were
heightened. Meanwhile, emerging economies, faced with inflationary pressures
arising from strong domestic demand and elevated commodity prices,
continue to tighten monetary policy while resorting to macroprudential
measures to contain the adverse effects of the global imbalances on their
domestic markets.
1.1. Monetary
Conditions
Policy
Developments
and
Monetary
In order to restrain macro financial risks in the domestic economy posed
by rapid credit growth and widening current account deficit due to short-term
capital inflows, the Central Bank of the Republic of Turkey (CBRT) designed and
launched a new policy strategy by the end of 2010. The new policy approach
preserves the priority for price stability, while also observing financial stability as
a supporting objective. In this context, in addition to the policy rates,
complementary tools such as reserve requirement ratios and the interest rate
corridor are jointly utilized.
In order to contain risks associated with diverging domestic and external
demand and short-term capital inflows, the CBRT has kept the policy rates at
low levels, while resorting to monetary tightening through reserve requirement
hikes since the last quarter of 2010. This strategy aims to rebalance economic
growth without hampering the medium-term inflation outlook. Accordingly,
weighted average reserve requirement ratio was raised significantly and
monetary policy assumed a more cautious stance (Chart 1.1.1).
Inflation Report 2011-III
1
Central Bank of the Republic of Turkey
Chart 1.1.1. CBRT Policy Mix
CBRT Policy Rates
TL Required Reserve Ratios
O/N Lending - Borrowing Interest Rate Corridor
Maximum and Minimum Reserve Requirement Ratios
Weighted Average Reserve Requirement Ratio
1-week Repo Rate
25
18
16
20
14
Adoption of 1-week repo
rate as the policy rate
12
15
10
8
10
6
4
5
2
Source: CBRT.
0511
0311
0111
1110
0910
0710
0510
0310
0110
1109
0909
0
0709
0711
0411
0111
1010
0710
0410
0110
1009
0709
0409
0109
1008
0708
0408
0108
0
Source: CBRT.
The measures taken by the Banking Regulation and Supervision Agency
(BRSA) regarding the loan-to-value ratios, loan-loss provisions, and capital
adequacy, as well as the tight fiscal stance supported the policy mix
implemented by the CBRT, and contributed to the rebalancing of domestic and
external demand. In this respect, the impact of the policy mix has become
more evident in the second quarter.
The Monetary Policy Committee (MPC), observing the moderating
domestic economic activity and mounting uncertainties regarding the global
economy, kept the policy rate and Turkish lira reserve requirements constant
since the publication of the April Inflation Report. Moreover, in the July meeting,
the MPC, by putting an increased emphasis on global risks, stated that all policy
instruments may be eased should global economic problems intensify and lead
to a contraction in the domestic economic activity.
As a consequence of the policies implemented by the CBRT, the Turkish
lira continued to favorably diverge from currencies of peer emerging
economies (Chart 1.1.2). This development, coupled with the coordinated
measures implemented by other institutions, contributed to the rebalancing of
domestic and external demand. In fact, recent data suggest that, in real terms,
the upsurge in imports has stopped while exports continued to grow
(Chart 1.1.3).
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 1.1.2.
Chart 1.1.3.
TL and Emerging Market Currencies*
Exports and Imports of Goods and Services
(October 2010 =1)
(Seasonally Adjusted, 1998 Prices, Billion TL)
Turkey
Emerging Economies
Exports
1.16
9
1.13
8.5
1.1
8
1.07
7.5
1.04
7
1.01
6.5
0611
0511
0411
0311
0211
5
0111
0.92
1210
5.5
1110
6
0.95
1010
0.98
Imports
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*
2005
* Average of emerging market currencies including Brazil, Chile,
Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia,
South Korea and Colombia, against USD.
Source: Bloomberg, CBRT.
2006
2007
2008
2009
2010 2011
* Estimate.
Source: TurkStat, CBRT.
Credit conditions continued to tighten in the second quarter due to
measures taken both by the CBRT and the BRSA (Chart 1.1.4). Although credit
growth rate has yet to decline to levels compatible with financial stability, it is
expected to slow down further in the second half of the year on lagged effects
of the ongoing tightening. In fact, consumer loan rates have displayed a
significant rise recently (Chart 1.1.5).
Chart 1.1.4.
Chart 1.1.5.
TL Business Loan Rates
TL Loan Rates
(4-Week Average, Percent)
(Percent)
Business Loan Rate - Deposit Rate
Business Loan Rate (right axis)
Automobile
Business
12
25
Housing
Personal
20
23
10
21
19
8
15
17
6
15
13
4
11
10
9
2
7
Source: CBRT.
Inflation Report 2011-III
5
0110
0210
0310
0410
0510
0610
0710
0810
0910
1010
1110
1210
0111
0211
0311
0411
0511
0611
0711
0211
0611
0210
0610
1010
1009
0209
0609
1008
0208
0608
0607
1007
0207
0606
1006
5
0206
0
Source: CBRT.
3
Central Bank of the Republic of Turkey
1.2.
Macroeconomic
Assumptions
Developments
and
Main
Inflation
Annual inflation, by following an upward trend, increased to 6.24 percent
in the second quarter on the accumulated impact of import prices, rising food
prices and base effects. Although inflation displayed a more volatile path than
expected due to excessive volatility in unprocessed food prices, the endquarter realization was close to the forecast presented in the April Inflation
Report (Chart 1.2.1).
Chart 1.2.1.
April 2011 Inflation Forecasts and Realizations
12
Forecast Range*
Uncertainty Band
Year-End Inflation Targets
Actual Inflation
10
Percent
8
6
4
2
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0610
0310
0
* Shaded region indicates the 70 percent confidence interval for the forecast.
Higher commodity prices and the depreciation of the Turkish lira
continued to weigh on core prices during the second quarter. Yet, the second
round effects were contained at this stage. Although annual core inflation
increased, seasonally adjusted data signal a recently declining trend
(Chart 1.2.2). Moreover, services inflation also hover around at historic lows
recently (Chart 1.2.3).
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 1.2.2.
Chart 1.2.3.
Core Inflation Indicators SCA-H and SCA- I
Prices of Services
(Seasonally Adjusted, 3-Month Average, Annual Percent
Change)
(Seasonally Adjusted, 3-Month Average, Annual
Percent Change)
SCA-H
SCA-I
20
16
14
15
12
10
10
8
6
5
4
0
2
-5
-2
Source: TurkStat, CBRT.
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0308
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0
Source: TurkStat, CBRT.
Supply and Demand Developments
The first-quarter GDP data are consistent with the outlook presented in the
April Inflation Report. Economic activity remained robust, albeit having a slower
rate of growth than in the first quarter, while the main driver of growth was
private sector demand. Meanwhile, exports remained weak and imports
continued to accelerate, causing net external demand to make a negative
contribution to growth. The divergence between domestic and external
demand growth continued during this period, vindicating a new policy mix.
Economic activity slowed down due to the lagged effects of the
tightening policies and the weak external demand. During this period, industrial
production and capacity utilization rates declined on a quarterly basis after a
long time. Therefore, our output gap estimates for the second quarter are
revised slightly downward compared to the previous reporting period.
Revisions to Other Assumptions
Although
downside
risks
to
global
economic
growth
increased,
downward revisions to global growth forecasts remained limited at this stage
(Chart 1.2.4). Accordingly, projections for Turkey's export-weighted growth index
remained broadly unchanged. Therefore, assumptions regarding external
demand conditions were not subject to any major revisions that may affect
inflation forecasts.
Inflation Report 2011-III
5
Central Bank of the Republic of Turkey
Chart 1.2.4.
Export-Weighted Global Economic Activity Index*
(2009Q1=100)
111
April 2011
July 2011
109
107
105
103
101
99
1
2
3
4
1
2008
2
3
4
2009
1
2
3
4
1
2010
2
3
4
1
2011
2
3
4
2012
* For methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”.
Source: Bloomberg, Consensus Forecasts, CBRT.
Assumptions about oil prices for 2011 and onward were kept at 115
USD/bbl, and there has been no significant revision for import price projections,
which are constructed by future commodity prices (Chart 1.2.5). Moreover,
assumption for food inflation was maintained at 7.5 percent for end-2011 and
thereafter.
Chart 1.2.5.
Revisions to Oil and Import Price Assumptions
Oil Prices(USD/bbl)
April 2011
Import Prices (2003=100)
April 2011
July 2011
135
210
125
200
115
190
105
July 2011
180
95
170
85
160
75
150
65
Source: Bloomberg, CBRT.
0713
0113
0712
0112
0711
0111
0710
0110
0709
0109
0708
0108
0107
0713
0113
0712
0112
0711
0111
0710
0110
0709
0109
0708
120
0108
35
0707
130
0107
45
0707
140
55
Source: TurkStat, CBRT.
In sum, there has been no revision for end-2011 inflation forecast as the
outlook for factors affecting inflation remained broadly unchanged.
Fiscal Policy
Inflation forecasts are based on the assumption that the additional
revenues incurred via the restructuring of tax claims would be used to reduce
public debt, and hence, fiscal policy would tighten. It is also assumed that the
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
ratio of primary expenditures to GDP would slightly decline, the debt-to-GDP
ratio would continue to fall, and the risk premium would remain broadly
unchanged over the forecast horizon. Furthermore, tax adjustments are
assumed to be consistent with inflation targets and automatic pricing
mechanisms.
1.3. Inflation and Monetary Policy Outlook
Under the current economic climate, slowing down credit growth is not
only critical for controlling domestic demand, and therefore to contain
inflationary pressures, but also for preventing excessive borrowing, and hence,
to restrain macro financial risks. Moreover, in an environment where multiple
policy tools are jointly utilized, credit growth deserves particular emphasis with
regard to the communication of the monetary and financial conditions that
underlie our forecasts. Therefore, in addition to inflation forecasts, our
assumptions for the annual rate of credit growth will be publicly shared in this
Report.
Against this background, assuming that annual rate of credit growth
declines to 25 percent by the end of 2011, and policy rate remains constant
until the end of 2011, inflation is expected to be, with 70 percent probability,
between 5.9 and 7.9 percent with a mid-point of 6.9 percent at the end of 2011,
and between 3.5 and 6.9 percent with a mid-point of 5.2 percent at the end of
2012. Inflation is expected to stabilize around 5 percent in the medium term
(Chart 1.3.1).
Chart 1.3.1.
Inflation and Output Gap Forecasts
Forecast Range*
Year-End Inflation Targets
Uncertainty Band
Output Gap
12
10
Control
Horizon
8
Percent
6
4
2
0
-2
-4
0614
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0610
-6
* Shaded region indicates the 70 percent confidence interval for the forecast.
Inflation Report 2011-III
7
Central Bank of the Republic of Turkey
In sum, inflation forecast path remains broadly unchanged as there has
been no significant revision to our underlying assumptions compared since the
previous reporting period.
The revised forecasts suggest that credit growth should grow at a
controlled and healthy pace to keep inflation in line with the medium-term
targets. Although the rate of credit growth has not declined to desirable levels
in the second quarter, the credit growth is expected to slow down markedly
over the coming period given the lagged effects of the adopted measures by
the CBRT, as well as the measures taken by the BRSA regarding consumer
credits.
Over the second half of the year, inflation is expected to display
significant fluctuations mainly due to base effects driven by food prices. Annual
food inflation is expected to decline in the third quarter and increase in the last
quarter. As shown in Chart 1.3.1, these fluctuations will largely determine the
course of inflation.
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 regarding the monetary policy outlook underlying the
inflation forecast should not be perceived as a commitment on behalf of the
CBRT.
1.4. Risks and Monetary Policy
Under current circumstances, risk factors and the associated monetary
policy measures are assessed within a framework where both price stability and
financial stability are observed. Accordingly, risk factors are not only assessed
with respect to their impact on the level; but also, on the composition of the
aggregate demand since the level of the aggregate demand is related to
price stability, while its composition is directly related to financial stability.
Hence, risk factors regarding global economy are also evaluated against this
backdrop.
The baseline scenario, and hence, our inflation forecasts are built on the
assumption that the second-quarter slowdown in global economic activity will
mainly be temporary, given the forecasts by international institutions. However,
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
developments since the previous reporting period have intensified downside
risks regarding the global economy.
Problems in credit, real estate and labor markets in advanced economies
are yet to be fully solved. Moreover, concerns on fiscal dynamics in these
economies still persist. In particular, mounting problems regarding sovereign
debt in the euro area peripheral economies have intensified downside risks to
the global economy. Should the sovereign debt problems regarding some
European economies and the concerns on global growth continue to have
adverse impact on the risk appetite, the interest rate corridor may be narrowed
gradually. Moreover, an outcome whereby global economic problems intensify
and domestic economic activity contracts may require an easing in all policy
instruments.
Even if debt problems in the euro area are resolved before they turn into
a global crisis, it is still likely to experience a prolonged period of weak
economic activity in advanced economies coupled with continued economic
growth in emerging markets driven by domestic demand. In such a case, there
may be a resurge in short-term speculative capital inflows to emerging markets
which may render itself as weak external demand and elevated commodity
prices with rising capital inflows, feeding into macro financial risks for the
domestic economy. Should this scenario materialize, the policy mix of low policy
rates and high reserve requirements may be implemented for a long period, in
order to contain risks to price stability and financial stability.
Developments in exchange rates and import prices have been adversely
affecting core inflation since the last quarter of 2010. The additional tariffs on
fabrics and apparels are another leading factor that may lift up core inflation
indicators in the coming period. Under current circumstances, the increase in
core inflation reflects only the relative price movements while the current level
of aggregate demand contains the second round effects of these price
movements. However, core inflation is expected to increase in the forthcoming
period, posing upside risks to inflation expectations and price-setting behavior.
Should such a risk materialize and hamper the attainment of medium-term
inflation targets, the CBRT will not hesitate to tighten monetary policy. In such a
case, the mix of policy tools to be used for tightening will depend on
developments regarding domestic demand, capital flows, current account and
credit growth.
Inflation Report 2011-III
9
Central Bank of the Republic of Turkey
The impact of the ongoing tightening measures on credit volume and
domestic demand is expected to be more significant during the second half of
the year. However, the extent and the timing of the impact may vary
depending on the developments beyond the control of monetary policy. The
lagged effects of the policy measures on price stability and financial stability will
be closely monitored, and further measures will be taken if deemed necessary.
The CBRT will continue to monitor fiscal policy developments closely while
formulating monetary policy. Sustaining the fiscal discipline under current
circumstances is essential to limit risks posed by the current account deficit
driven by the divergence between domestic and external demand. Saving the
additional tax revenues acquired both within the law on restructuring of public
claims and also owing to strong economic activity would not only reduce risks
to price stability and financial stability, but also increase the effectiveness of the
new policy mix. In this respect, our forecasts presented in the baseline scenario
assume that the additional budget revenues will be saved to a large extent. A
revision in the monetary policy stance may be considered should the fiscal
stance deviate significantly from this framework, and consequently, have an
adverse effect on the medium-term inflation outlook.
In the period ahead, monetary policy will continue to focus on achieving
price stability on a permanent basis, while observing financial stability. To this
end, the impact of the macroprudential measures taken by the CBRT and other
relevant institutions on the inflation outlook will be assessed carefully. Fulfillment
of the commitments to fiscal discipline in the medium term and strengthening
the structural reform agenda will contribute to the improvement of Turkey’s
sovereign risk, thereby supporting macroeconomic stability and price stability.
Sustaining the fiscal discipline will also provide room for monetary policy
maneuver, and support the social
welfare by keeping interest rates
permanently at low levels. In this respect, timely implementation of the structural
reforms envisaged by the MTP and the European Union acquis communautaire
remains to be of utmost importance.
10
Inflation Report 2011-III
Central Bank of the Republic of Turkey
2. International Economic Developments
Global economic growth continued to slow down in the second quarter.
However, global growth forecasts by international institutions remained currently
unchanged for 2011 and 2012. Despite the weak course of growth in advanced
economies, emerging economies continued to grow rapidly on domestic
demand driven by credit expansion amid capital flows.
Mounting concerns regarding sovereign debt sustainability in some euro
area countries and the slower-than-expected recovery in the U.S. labor market
have intensified downside risks to global economic activity in the interreporting
period. The recent package of measures on restructuring Greek debt and
enhancing financial stability in the euro area greatly diminished the risk of
disorderly debt restructuring for Greece. Measures to increase the flexibility of
the European Financial Stability Fund (EFSF) and to lower the borrowing costs of
other peripheral countries that are in trouble were welcome by the market.
Nevertheless, problems regarding the sustainability of sovereign debt of Greece
and the access of some peripheral countries to market funds still partially persist.
In this context, sovereign debt problems in the euro area may continue to
occupy the agenda for a while.
The U.S. growth experienced a significant quarter-on-quarter decline in
the first quarter of 2011. Leading indicators for the second quarter imply an
anemic growth for this quarter as well. Soaring inflation amid slowing
employment growth and rising commodity prices causes consumption
expenditures to stagnate. The U.S. Federal Reserve Bank mentioned a third
round of easing in the context of risk scenarios while terminating the second
round of quantitative easing, and reiterated that the low interest rate policy
would be maintained for an extended period. The euro area saw a high-rated
growth in the first quarter of 2011 owing to the favorable performance of the
core countries. The contribution of private consumption expenditures to
economic growth remained unhanged in this quarter, whereas, that of fixed
investment expenditures increased considerably. Similar to U.S., leading
indicators for the euro area imply a slightly slower growth in the second quarter.
In emerging economies, short-term capital flows and rapid credit growth
feed macro financial risks. Growth remained robust in the last quarter in these
countries, while inflationary pressures became more pronounced and the tight
Inflation Report 2011-III
11
Central Bank of the Republic of Turkey
monetary policies were maintained. The major risk factor for emerging
economies is the macroeconomic imbalances driven by rapid capital inflows.
Central
banks
of
emerging
economies
continued
to
implement
macroprudential measures to contain the potential adverse effects of capital
flows.
Having declined slightly in the last quarter, commodity prices remain a
major risk factor. The geopolitical unrest in oil-producing countries, concerns
over the sovereign debt crisis in some European countries and fears for the
pace of global economic recovery cause the oil price uncertainty to persist.
Meanwhile, unlike the previous year, supply-side problems in agricultural
products are expected to moderate. However, this development is unlikely to
fully end the crunch in physical markets.
2.1. Global Growth
Global economic recovery continued in the first quarter, albeit having
slowed down slightly. In advanced economies with highly varying growth rates,
economic activity is expected to outpace its pre-crisis level in the current
quarter. Likewise, the export-weighted global production index is expected to
have surpassed its pre-crisis level in the second quarter of 2011. Meanwhile,
despite the adopted tightening measures in emerging economies, economic
activity continues to grow robustly on the back of domestic demand
(Charts 2.1.1 and 2.1.2).
Chart 2.1.1.
Chart 2.1.2.
Aggregated Growth Rates*
Export- and GDP-Weighted Global Production
Indices
(Annual Percent Change)
(1996Q1=100)
Advanced Economies
GDP-Weighted Global
Export-Weighted Global
GDP-Weighted Advanced
Emerging Economies
10
156
8
152
6
148
4
144
2
140
0
136
-2
132
-4
-6
128
1234123412341234123412341234123412341
2002 2003 2004 2005 2006 2007 2008 2009 20102011
* Weighted by each country’s share in global GDP.
Source: Bloomberg, CBRT.
12
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2006
2007
2008
2009
2010
2011
Source: Bloomberg, CBRT.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Due to the instability of employment gains in advanced economies,
unemployment rates remain elevated above pre-crisis levels and continue to
pose a risk to growth (Chart 2.1.3). Having displayed a slightly downward course
between November and March, the U.S. unemployment rates bounced back in
the subsequent quarter following the slowdown in employment gains.
Meanwhile, the downtrend in the real estate prices for the U.S. remained intact
due to ongoing problems in the market (Chart 2.1.4).
Chart 2.1.3.
Chart 2.1.4.
Unemployment in Advanced Economies
Real Estate Prices for the U.S.
(Percent)
U.S.A.
Euro Area
S&P Case Schiller
FHFA
Moody's Commercial Property
U.K.
11
225
9
200
175
7
150
5
125
Source: Bloomberg.
2011
2010
2009
2008
2007
2006
2005
2004
2003
100
2002
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
3
Source: Bloomberg.
JP Morgan Global PMI indices, the most current data for the second
quarter of 2011, remained above the neutral level, albeit a quarter-on-quarter
decline (Chart 2.1.5). The recently ongoing downtrend of PMI indices for the
U.S., euro area and China indicate a continuing slow down in global economic
growth (Chart 2.1.6).
Chart 2.1.5.
Chart 2.1.6.
JP Morgan Global PMI Indices
Manufacturing
PMI Indices
Services
U.S.A.
Euro Area
China
65
65
60
60
55
55
50
Source: Bloomberg.
Inflation Report 2011-III
2011
2010
2009
2008
2006
2011
2010
30
2009
30
2008
35
2007
40
35
2006
45
40
2007
50
45
Source: Bloomberg.
13
Central Bank of the Republic of Turkey
Consensus Economics growth forecasts for end-2011 were recently
revised downwards, especially for the U.S. and the Asia-Pacific region over the
interreporting period. The Japanese growth forecast for 2011 was revised
significantly downwards due to the earthquake, while the expectation for 2012
was revised upwards. The sizeable upward revision to 2011 growth forecast for
the euro area core economies, in particular Germany, France and Netherlands,
brought about an increase in growth expectations for the euro area
(Table 2.1.1).
As a result, compared to the April Inflation Report, despite the upward
revision of the growth expectations for the euro area countries, accounting for
a major share in Turkey’s exports, baseline scenario assumptions presented in
the final part of the Report remained unchanged for external demand outlook
due to downward revision of growth forecasts for the U.S. and the Asia-Pacific
region. However, it should be underlined that downside risks to global growth
went up.
Table 2.1.1.
Growth Forecasts
(Annual Percent Change)
2011
2012
April
July
April
July
World
U.S.A.
Euro Area
Germany
3.3
2.9
1.7
2.7
3.2
2.5
2.0
3.4
3.7
3.3
1.7
1.9
France
Netherlands
Spain
Japan
1.7
1.8
0.7
0.3
2.0
2.1
0.7
-0.7
1.7
1.7
1.3
2.7
3.6
3.0
1.6
1.9
1.7
China
Eastern Europe
Latin America
Asia-Pacific
9.3
4.1
4.2
4.8
9.2
4.3
4.5
4.4
8.9
4.3
4.2
5.7
1.6
1.3
3.1
8.8
4.3
4.2
5.7
Source: Consensus Forecasts.
2.2. Commodity Prices
Global commodity prices displayed a downtrend in the second quarter,
mainly driven by energy and agricultural prices. The decline in the commodity
prices in this period was attributable to supply-side developments as well as
demand conditions. The fall in industrial metal prices was driven by the
slowdown in the economy due to measures enforced by the Chinese
government to tighten lending conditions amid rising inflation. Precious metal
prices, which saw historical peaks at the start of the second quarter especially
due to euro area debt crisis, followed a volatile course amid the developments
14
Inflation Report 2011-III
Central Bank of the Republic of Turkey
in the risk appetite before slightly dropping upon the approval of the Greek
austerity package (Charts 2.2.1 and 2.2.2).
Chart 2.2.1.
Chart 2.2.2.
S&P Goldman Sachs Commodity Prices
Crude Oil (Brent) Prices
(January 2008=100)
(USD/bbl)
Headline
Industrial Metals
Precious Metals
Energy
Agriculture
Spot
Futures (1-8 April, 2011)
Futures (1-15 July, 2011)
200
140
120
160
100
120
80
80
60
0712
0112
0711
0111
0710
0110
0109
Source: Bloomberg.
0709
40
0711
0111
0710
0110
0709
0109
0708
0108
40
Source: Bloomberg.
The failure of OPEC countries to reach an agreement on raising quotas at
the June 8, 2011 meeting put an upward pressure on crude oil prices. However,
the expectation of a unilateral production increase by Saudi Arabia, Kuwait
and the United Arab Emirates, which hold a major part of OPEC’s idle capacity,
against OPEC decisions alleviates
the upward pressure on oil prices
(Chart 2.2.3 and Table 2.2.1).
Chart 2.2.3.
OPEC Capacity, Quota and Production
(Million Barrel)
Capacity
34
Quota
Production
32
30
28
26
24
0111
0710
0110
0709
0109
0708
0108
0707
0107
0706
0106
0705
0105
0704
0104
22
Source: Bloomberg.
Meanwhile, as a precaution against the disruptions in oil supply amid the
political unrest in Libya, the International Energy Agency announced on June
23, 2011 that strategic oil reserves would be used during July, and further
Inflation Report 2011-III
15
Central Bank of the Republic of Turkey
decisions on the use of these reserves might be taken if deemed necessary. This
announcement led to a fall in oil prices. The geopolitical problems in oilproducing countries, the ongoing concerns over the debt crisis in Europe
coupled with the fears for the pace of global economic recovery cause the
uncertainty regarding oil prices to persist.
Table 2.2.1.
Idle Capacity in OPEC Countries
(Million Barrel)
2011
2010
Algeria
Angola
Ecuador
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
OPEC
Q3
Q4
0.15
0.36
0.03
0.27
0.10
0.36
0.23
0.48
0.07
3.25
0.34
0.21
5.89
0.14
0.35
0.03
0.30
0.11
0.35
0.20
0.28
0.08
3.25
0.34
0.21
Q1
0.14
0.30
0.03
0.30
0.00
0.24
0.58
0.08
3.00
0.14
0.18
Q2
0.14
0.52
0.03
0.35
0.00
0.16
0.37
0.09
2.29
0.15
0.17
5.65
5.00
4.30
Source: Bloomberg.
Agricultural prices saw a rapid decline over the last quarter, mainly owing
to the alleviation of supply-side problems. The partial ending of drought
effective in Western Europe and in the U.S., and the withdrawal of export quota
restrictions implemented by Ukraine and Russia since the previous year are
among
featuring
developments.
However,
even
with
these
favorable
developments on the supply side, fragilities are yet to fully disappear (Table
2.2.2).
Table 2.2.2.
Production, Consumption and Inventory Forecasts for Agricultural Commodities
2009/2010
2010/2011
2011/2012
Initial Inventory
166.5
198.3
189.9
Production
684.3
648.2
662.4
Consumption
652.5
656.6
670.2
Period-end Inventory
198.3
189.9
182.2
Initial Inventory
147.2
143.6
120.9
Production
812.9
820.0
872.4
Consumption
816.6
842.8
877.6
Period-end Inventory
143.6
120.9
115.7
WHEAT (million tons)
CORN (million tons)
COTTON (million bales)
Initial Inventory
60.5
44.3
44.4
Production
101.4
114.6
123.8
Consumption
118.4
114.9
118.9
44.3
44.4
48.3
Period-end Inventory
Source: U.S. Department of Agriculture.
16
Inflation Report 2011-III
Central Bank of the Republic of Turkey
2.3. Global Inflation
In the second quarter of 2011, year-on-year inflation rates continued to
soar in both advanced and emerging economies (Charts 2.3.1 and 2.3.2).
However, seasonally adjusted monthly inflation figures for both consumer and
core prices declined amid the slowing economic activity in advanced
economies (Charts 2.3.3 and 2.3.4). Meanwhile, emerging economies, where
food and oil products have a major share in consumption, saw ongoing
inflationary pressures driven by vigorous domestic demand as well as high
commodity prices.
Chart 2.3.1.
Chart 2.3.2.
Annual CPI Inflation in Advanced and Emerging
Economies (Percent)
Annual Core CPI Inflation in Advanced and
Emerging Economies (Percent)
Advanced Economies
Emerging Economies
10
Advanced Economies
Emerging Economies
10.0
8
8.0
6
Source: Bloomberg, CBRT.
Source: Bloomberg, Datastream, CBRT.
Chart 2.3.3.
Chart 2.3.4.
0111
0710
0110
0709
0109
0708
0108
0107
0111
0710
-2.0
0110
-2
0709
0.0
0109
0
0708
2.0
0108
2
0707
4.0
0107
4
0707
6.0
Monthly CPI Inflation in Advanced and Emerging
Monthly Monthly Core CPI Inflation in Advanced and
Economies (Seasonally Adjusted, Percent)
Emerging Economies (Seasonally Adjusted, Percent)
Advanced Economies
Emerging Economies
Advanced Economies
Emerging Economies
1.0
1.5
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
0111
0710
0110
0709
0109
0708
0108
0707
0111
0710
0110
0709
0109
0708
0108
0707
0107
Source: Bloomberg, CBRT.
0107
-1.0
-1.0
Source: Bloomberg, Datastream, CBRT.
Inflation compensation hit the recent years’ high in the second quarter,
bearing expectations for an earlier-than-expected tightening in advanced
Inflation Report 2011-III
17
Central Bank of the Republic of Turkey
economies. In the subsequent period, inflation compensations eased slightly on
the back of data pointing to a slowdown in global growth (Charts 2.3.5
Source: Bloomberg.
0711
0111
0110
0.0
0709
0.0
0109
0.5
0107
0.5
0711
1.0
0111
1.0
0710
1.5
0110
1.5
0709
2.0
0109
2.0
0708
2.5
0108
2.5
0707
3.0
0107
3.0
0708
Euro Area Inflation Compensation
0108
Chart 2.3.6.
U.S. Inflation Compensation
0707
Chart 2.3.5.
0710
and 2.3.6).
Source: Bloomberg.
In July, inflation expectations for end-2011 were revised upwards at a
global scale relative to the previous reporting period (Table 2.3.1). These
revisions were mainly attributed to higher-than-expected inflation realizations,
particularly in the first half of the year, driven by increases in commodity prices.
On the other hand, revisions to inflation expectations for end-2012 remained
subdued.
Table 2.3.1.
Inflation Forecasts
(Annual Percent Change)
2011
World
U.S.A.
Euro Area
Emerging Economies
Eastern Europe
Latin America
Asia-Pacific
2012
April
July
April
July
3.4
2.7
2.4
3.7
3.1
2.6
2.9
2.1
3.0
2.1
1.8
1.9
6.3
7.5
3.3
6.6
7.5
3.4
5.7
7.0
5.8
7.1
2.7
2.8
Source: Consensus Forecasts.
2.4. Financial Conditions and Risk Indicators
Euro area debt crisis and the developments regarding global economic
activity were mainly influential on financial markets in the previous quarter.
Financial markets displayed a favorable course in the beginning of the quarter,
amid the global growth outlook. However, in the subsequent period, financial
markets were adversely affected by the release of the data indicating a
18
Inflation Report 2011-III
Central Bank of the Republic of Turkey
slowdown in the global growth as well as the aggravation of the debt crisis in
Greece.
Global risk appetite went down as of May, but displayed a slight recovery
as of end-June following the steps to resolve the debt crisis in Greece
(Chart 2.4.1). Even though concerns for a possible default in Greece were alive
throughout the second quarter, the introduction of a new package of
measures by the Greek government brought some relief to markets. Although
the consideration of a second aid plan for Greece and the voluntary bond
rollover talks led by French banks were favorable developments, markets
remained cautious against Greece. Amid the approval of the last bailout
package to restore financial stability in Europe, the unrest in financial markets
was partially settled (Chart 2.4.2).
Chart 2.4.1.
Chart 2.4.2.
Global Risk Appetite
CDS Rates in Selected Countries
(Points)
(5-year, Basis Points)
Credit Suisse Risk Appetite Index
VIX (inverted, right axis)
10
0
Greece
Portugal
Ireland
Spain
3000
8
2500
6
15
4
2000
2
30
0
-2
1500
1000
45
-4
500
Source: Bloomberg, Credit Suisse.
0711
0411
0111
1010
0710
0410
0
0110
0411
1210
0810
0410
1209
0809
60
0409
-8
1009
-6
Source: Bloomberg.
Ongoing sovereign debt problems in Greece also had an adverse impact
on the banking sector. Deposit outflows, coupled with the almost completely
closed access to market financing, leave the European Central Bank (ECB)
funds as the sole source of liquidity. Another economy experiencing large
deposit outflows due to setbacks in the banking sector is Ireland (Charts 2.4.3
and 2.4.4).
Inflation Report 2011-III
19
Central Bank of the Republic of Turkey
Chart 2.4.3.
Chart 2.4.4.
Banking Sector Deposits (Excluding Central
Government, 2003=100)
Share of Eurosystem Liquidity in Banking Sector
Liabilities
(Percent)
Greece
Portugal
Ireland
Spain
5
25
Spain (left axis)
275
Greece
Portugal
4
20
Ireland
225
3
15
2
10
1
5
0
0
Source: Relevant central bank websites.
0111
0110
0109
0108
0107
0106
0111
0110
0109
0108
0107
0106
0105
0104
75
0105
125
0104
175
Source: Relevant central bank websites.
The spillover of the debt crisis to Italy became more likely at the end of
the second quarter. Accordingly, the CDS rates on Italian bonds increased,
while the Italian/German bond yield spread widened remarkably, going
beyond three points. After the second bailout package, the increase in returns
was slightly offset (Chart 2.4.5). These developments are attributable to Italy
being the second most indebted country in the euro area (Chart 2.4.6). In
addition, the tension between the coalition government and the opposition
party has shaken the confidence of financial markets in the country. These
developments in the third largest economy in the euro area cause global debt
contagion concerns to persist.
Chart 2.4.5.
Chart 2.4.6.
CDS Rates on Italian Bonds (5 Year, Basis Points) and
German/Italian Bond Yield Spread
Public Debt Stock to GDP Ratio in Italy
(Percent)
(10 Year, Points)
CDS
Yield Spread (right axis)
350
3.5
125
300
3
120
250
2.5
200
2
150
1.5
100
1
115
110
Source: Bloomberg.
20
0111
0110
0109
0108
0107
0106
0105
0104
95
0103
0711
0111
0710
0110
0709
0
0109
0
100
0102
0.5
0101
50
105
Source: Bloomberg.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Parallel to the developments in risk appetite, risk premiums for emerging
countries have increased. Meanwhile, exchange rates in these countries
depreciated slightly (Chart 2.4.7). Stock markets displayed an increase at the
start of the quarter, but wekaned later and closed the quarter with a limited
decline (Chart 2.4.8).
Chart 2.4.7.
Chart 2.4.8.
Exchange Rate* and Risk Premium Indicators for
Emerging Economies
Developments in Global Stock Markets
Currency Basket (1 USD+1 euro)
EMBI (basis points, right axis)
115
350
(December 2007r=100. Points)
MSCI - Emerging Economies
120
MSCI - Advanced Economies
325
90
112
300
275
109
60
250
*Arithmetical average of the exchange rates of emerging market
currencies against the currency basket of 1 USD and 1 euro. Equals
100 on June 2007, and an upward movement denotes a depreciation
in emerging market currencies.
Source: Bloomberg.
0711
0111
0710
0110
0709
0109
0708
0108
30
0711
0411
0111
1010
0710
0410
225
0110
106
Source: Bloomberg.
Results of the Fed’s Lending Survey suggest that the rise in credit demand
and the easing in lending conditions in the U.S. still continue for large and
middle market firms as well as small firms (Chart 2.4.9). The ECB’s Lending Survey,
on the other hand, exhibits a limited tightening in lending conditions in the euro
area, with an ongoing rise in credit demand, albeit at a slower pace
(Chart 2.4.10).
Chart 2.4.9.
Chart 2.4.10.
U.S. Lending Survey*
Euro Area Lending Survey*
(Percent)
(Percent)
Loan Standards (Large and Middle-Market Firms)
Loan Standards (Small Firms)
Loan Demand (Large and Middle-Market Firms)
Loan Demand (Small Firms)
90
Loan Standards (SME)
Loan Standards (Large Firms)
Loan Demand (SME)
Loan Demand (Large Firms)
70
70
50
50
30
30
10
10
-10
-30
-10
-50
-30
* Upward movements indicate tightening in credit conditions.
Source: Fed.
Inflation Report 2011-III
2011
2010
2009
2008
2007
2006
2005
-50
2004
2011
2010
2009
2008
2007
2006
2005
2004
2003
-90
2003
-70
Source: ECB.
21
Central Bank of the Republic of Turkey
2.5. Global Monetary Policy Developments
Global monetary policy exhibited a very limited quarter-on-quarter
tightening in the previous quarter. Central banks of some advanced economies
excluding G4 countries opted for monetary tightening by raising policy rates,
while emerging economies adopted a tighter monetary policy stance by both
raising policy rates and further implementing macroprudential measures.
Despite the normalization of policy rates in some advanced economies
experiencing post-crisis recovery, aggregated indices suggest that the upward
movement in composite policy rates for advanced economies remained fairly
limited in the second quarter (Charts 2.5.1 and 2.5.2). Due to absence of a
stable economic recovery in the U.S., U.K. and Japan, the implementation of
loose monetary policy is still maintained in G4 countries, by keeping policy rates
low. Meanwhile, with a view to containing high inflation in the euro area, the
ECB raised policy rates by 25 basis points each in April and in June. In addition
to keeping policy rates low, the quantitative easing process that was launched
in 2008 is still maintained in G4 countries. While the ECB continues with bond
purchases to overcome the debt crisis in peripheral countries, the Bank of
Japan went on implementing expansionary monetary policies to compensate
for the devastating effects of the earthquake. In the U.S., monetary conditions
are still loose even after the end of second round of quantitative easing in July.
In sum, given the limited normalization in policy rates and the ongoing
quantitative easing in G4 countries, monetary policies of advanced economies
are loose as of the third quarter of the year.
Chart 2.5.1.
Chart 2.5.2.
Policy Rate Changes in Advanced Economies
from Sept. 2007 to Jun. 2011 (Basis Points)
Policy Rates in Advanced Economies
Sept. 2007 - Mar. 2011
(Percent)
Apr. 2011 - Jun. 2011
100
4.5
0
4.0
-100
3.5
-200
3.0
-300
2.5
-400
2.0
-500
1.5
-600
1.0
0.5
0611
0211
1010
0610
0210
1009
0609
0209
1008
0608
0208
1007
0607
0207
1006
0606
0.0
0206
Israel
Japan
Sweden
Australia
S. Korea
Norway
Czech Rep.
Canada
Euro Area
U.K.
U.S.A.
N. Zealand
-700
Source: Bloomberg, CBRT staff calculations.
22
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Policy rates in emerging economies saw further hikes in the second
quarter as a result of increased inflationary pressures (Chart 2.5.3). In fact,
aggregated indices suggest that composite policy rates for emerging
economies went up by 0.3 percentage points quarter-on-quarter to 6.6 percent
at the end of June (Chart 2.5.4). Moreover, emerging economies facing
massive capital inflows continued to heavily employ macroprudential measures
in order to contain the possible impacts on their economies. Accordingly, due
to their potential to pose risks to macroeconomic and financial stability, capital
flows came to the forefront as a major factor in shaping monetary policy in
these economies in the second quarter as well.
Chart 2.5.3.
Chart 2.5.4.
Policy Rate Changes in Emerging Economies
from Sept. 2007 to Jun. 2011
(Basis Points)
Policy Rates in Inflation-Targeting Emerging
Economies
Sept. 2007 - Mar. 2011
(Percent)
Emerging Economies
Apr. 2011 - Jun. 2011
200
20
0
18
-200
16
-400
14
-600
12
-800
Turkey
10
-1000
8
-1200
6
0611
0211
1010
0610
0210
1009
0609
0209
1008
0608
0208
1007
0607
0207
1006
0606
4
0206
Thailand
Malaysia
Indonesia
Peru
Russia
Poland
Romania
Mexico
Hungary
Chile
S. Africa
Brazil
Turkey
Colombia
-1400
Source: Bloomberg, CBRT staff calculations.
For the upcoming period, the expectation for normalization of policy
rates is postponed in advanced economies, especially in G4 countries. For
instance, amid the release of the second-quarter data indicating a slowdown in
U.S. economic growth, policy rate expectations saw a remarkable quarter-onquarter decline in July (Chart 2.5.5). Aside from the low policy rate regime, the
second round of quantitative easing that ended as of end-June had relatively
limited effects on the U.S. economic activity, and a third round of quantitative
easing was mentioned within the context of a risk scenario. In other advanced
economies such as Japan, euro area, the U.K. and Canada, normalization of
policy rates is postponed, and year-end expectations for 2011 remain either
subdued or revised downwards (Chart 2.5.6). In sum, policy rates in advanced
economies are expected to remain low and monetary conditions will generally
be loose in the forthcoming period.
Inflation Report 2011-III
23
Central Bank of the Republic of Turkey
Chart 2.5.5.
Chart 2.5.6.
FOMC Policy Rate Expectations
Year-End Policy Rate Expectations
(Basis Points)
(Basis Points)
April 5, 2011
January 28, 2011
April 29, 2011
July 15, 2011
2.5
July 18, 2011
2
2.0
1.5
1.5
1
1.0
0.5
0.5
Canada
U.K.
Japan
0413
0113
1012
0712
0412
0112
1011
0711
0.0
Euro Area
0
Source: Bloomberg.
The possible course of monetary policy in emerging economies suggests
that capital flows to these countries will follow a similar course in the upcoming
period due to the divergence between recovery rates in advanced and
emerging countries as well as the currently wide policy rate gap between these
two groups (Box 2.1). Accordingly, the course of monetary policy in these
countries will continue to be determined mainly by capital flows. Therefore, in
line with expectations of a delay in policy rate hikes in advanced economies,
the policy rate gap between these two groups will widen further and may result
in some emerging economies to adopt a more cautious stance in policy rate
hikes in order to prevent increased capital inflows. Nevertheless, many Latin
American and Asia-Pacific countries are expected to continue with policy rate
hikes in order to control their high-rated inflation fuelled by the overheating in
their economies (Chart 2.5.7). In this context, emerging countries are expected
to increase control on capital flows in the upcoming period in order to lessen
financial system fragilities, and to focus on the use of alternative policy tools in
order to prevent possible instability stemming from massive capital inflows.
24
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 2.5.7.
Year-End Policy Rate Expectations in Emerging Economies (Basis Points)
20
18
Latin America
Asia-Pacific
CEEMEA
16
14
12
10
8
6
4
2
April 5, 2011
Turkey
Poland
S. Africa
Czech Rep.
Thailand
Philippines
Indonesia
India
China
Chile
Peru
Mexico
Colombia
Brazil
0
July 18, 2011
Source: Bloomberg.
Inflation Report 2011-III
25
Central Bank of the Republic of Turkey
Box
2.1
Emerging
Portfolio Flows to Emerging Economies
economies have opted for policy rate hikes due to inflationary
pressures since the onset of 2011, while advanced economies kept policy rates
low, which led a widening gap in policy rates between the two groups. In
addition, expansionary policies implemented in advanced economies brought
about ample global liquidity and relatively improved risk perceptions about
emerging economies, which narrowed the risk differential between the two
groups, driving massive capital flows to high-yield emerging economies.
Depending on the appreciation in exchange rates, massive capital inflows can
adversely affect emerging economies through various channels like reducing
competitiveness, deteriorating foreign trade balance and current account
balance amid increased demand for imported goods as well as leading to
uncontrolled credit growth and asset bubbles. Meanwhile, the possibility of a
sudden-stop in capital inflows stands as a risk factor against financial stability. In
fact, in emerging economies where various measures to limit capital inflows were
enforced against these risks in the post-crisis period, monetary policy stance was
largely determined by capital flows. Capital flows are expected to be further
influential throughout 2011 given the expected policy rate gap.
The
extreme sensitivity of capital inflows in the form of short-term portfolio
investments, so-called hot money, to the volatility of risk perceptions warrants a
close monitoring of this item. This Box analyzes recent developments in portfolio
flows across bonds and equities and each country’s share in the surge of capital
flows to emerging economies.
Between 2005 and 2011, investors heavily preferred equity markets of emerging
economies (Charts 1 and 2). Adjusted for exchange rate and price effects,
emerging economy bond funds went down during the global crisis, but this trend
reversed in the post-crisis period with a rapid increase. Meanwhile, the sharp
decline in equity funds during the crisis was mostly driven by the price effect, and
therefore, when adjusted for exchange rate and price effects, outflows from
equity funds remained limited.
26
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 1. Emerging Market Bond Funds
Chart 2. Emerging Market Equity Funds
(Billion USD)
(Billion USD)
Contribution of Price Changes
Contribution of Price Changes
Contribution of Exchange Rate Changes
Contribution of Exchange Rate Changes
Total Assets (adjusted for price and exchange rate)
Total Assets (adjusted for price and exchange rate)
Total Assets
Total Assets
140
800
700
120
600
100
500
80
400
60
300
40
200
20
2005
2006
2007
2008
2009
2010
2011
Source: EPFR.
Weekly
100
2005
2006
2007
2008
2009
2010
2011
Source: EPFR.
fund flows have recently moved in line with the global risk appetite.
Parallel to the decline in the risk appetite in the first quarter of 2011, equity funds
of emerging economies saw some outflows, while outflows from bond funds
remained limited (Charts 3 and 4). Stable inflows to bond funds continued in the
second quarter. Despite an inflow trend of equity funds in April, outflows started in
the second half of May amid the deterioration in the risk appetite. Capital inflows
to emerging economies continued in the first two weeks of July via both bond
and equity funds.
Chart 3. Emerging Market Bond Fund Flows
Chart 4. Emerging Market Equity Fund Flows
(Billion USD)
(Billion USD)
Weekly Fund Flows (right axis)
40
2.0
40
35
1.5
35
30
1.0
30
25
0.5
25
20
0.0
20
15
-0.5
15
10
-1.0
10
VIX Index
Weekly Fund Flows (right axis)
VIX Index
8
6
4
2
0
-2
Source: EPFR, Bloomberg.
Inflation Report 2011-III
-6
0711
0511
0311
0111
1110
0910
0710
0510
0310
-8
0110
0711
0511
0311
0111
1110
0910
0710
0510
0310
0110
-4
Source: EPFR, Bloomberg.
27
Central Bank of the Republic of Turkey
Country
shares in emerging market funds are given in Table 1. Accordingly,
countries with relatively higher yield receive a larger share of bond funds, while
the share in equity funds seems to be mostly associated with strong and stable
growth performance and financial deepening. For instance, Brazil is the highest
yielding economy among emerging economies and has a favorable economic
climate, and therefore, is among the highest ranking countries in equity as well as
in bond fund share. High interest rates in Brazil are believed to limit the
effectiveness of macroprudential measures and capital controls implemented
since 2010 against massive and short-term capital inflows, thereby attracting
investors. The relative position of Turkey among emerging economies indicates
that Turkey ranks among the first five countries preferred by investors for bond
funds in the first half of 2011, but holds a relatively smaller share of equity funds.
Table1. Country Shares in Emerging Market Fund Flows
(Percent)
BOND FUNDS
2007
2008
2009
2010
January February
2011
March
April
May
21.8
22.2
22.4
22.0
20.8
11.9
12.3
8.5
6.6
7.3
6.5
6.8
6.0
3.3
5.5
2.1
3.3
3.7
3.3
2.9
3.0
4.3
3.2
2.7
2.7
2.1
2.1
3.1
2.6
2.5
2.4
1.7
2.3
2.5
2.5
19.7
13.9
EQUITY FUNDS
12.3
7.0
7.0
5.9
5.8
3.1
3.2
2.8
3.0
2.8
1.9
2.5
2.3
2.2
2.2
13.7
13.2
7.7
6.9
7.2
6.5
3.7
3.1
2.8
2.7
2.8
2.4
2.4
2.2
2.1
2.0
9.8
12.9
7.6
6.9
7.5
6.6
3.9
3.1
3.0
2.6
2.7
2.5
2.3
1.9
2.2
1.9
10.3
13.2
7.2
7.0
6.9
6.8
4.5
3.3
2.9
2.6
2.6
2.5
2.2
2.2
2.1
1.9
11.5
2011
March
14.4
April
14.3
May
14.6
14.4
11.0
7.9
8.8
7.2
6.8
5.1
3.0
2.5
2.3
2.3
14.3
14.0
11.3
8.2
8.5
7.3
6.5
5.0
3.0
2.6
2.3
2.3
14.6
14.2
11.3
8.6
8.4
7.0
6.3
4.8
3.1
2.6
2.3
2.1
14.8
Brazil
15.5
15.8
13.9
14.9
Mexico
Russia
Indonesia
Turkey
South Africa
Malaysia
Colombia
Poland
Philippines
Kazakhstan
Hungary
Venezuela
Peru
Thailand
Argentina
Other*
7.0
12.4
5.6
5.3
0.7
1.0
3.0
1.3
5.3
0.9
0.8
8.0
2.1
0.5
8.8
21.7
6.9
13.4
4.5
5.8
0.9
0.9
3.9
1.8
5.6
1.3
0.6
4.4
2.2
1.0
5.4
25.6
9.7
11.4
6.7
6.2
1.9
0.9
3.8
1.9
6.0
2.5
1.3
3.2
2.8
1.7
2.6
23.6
2007
2008
2009
2010
China
11.2
12.2
16.0
15.2
Brazil
South Korea
Taiwan
India
South Africa
Russia
Mexico
Indonesia
Thailand
Malaysia
Turkey
Other*
12.6
13.1
9.7
6.3
7.8
8.4
5.9
2.3
1.9
2.4
3.0
15.3
14.1
10.4
8.6
7.0
7.3
8.9
5.9
2.2
1.9
1.9
2.4
17.1
14.3
10.3
8.6
7.8
7.9
6.1
5.5
2.4
1.8
1.5
2.3
15.5
14.8
10.4
8.1
9.0
7.2
6.2
5.1
3.1
2.1
1.9
2.6
14.3
January February
14.6
14.2
14.3
11.4
9.0
8.1
6.8
6.6
5.2
2.7
2.1
2.3
2.3
14.5
14.7
10.7
8.3
8.3
7.4
6.9
5.4
2.8
2.4
2.3
2.2
14.4
* Countries with less than 2 percent share as of the first five months of 2011.
Source: EPFR.
28
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Emerging economies are likely to attract more capital in the forthcoming period
due to the divergence between recovery rates of advanced and emerging
economies as well as an expectation of a further widening in policy rate
differential between the two groups. In this context, given their potential to pose
risks against macroeconomic and financial stability, portfolio flows will remain a
major factor in shaping monetary policy in emerging economies. Nevertheless, to
discourage further capital inflows, emerging economies may act more cautiously
in raising policy rates in the forthcoming period. Accordingly, emerging
economies are expected to enforce further capital control in order to reduce
financial system fragilities, and use alternative policy tools to eliminate the
possible adverse effects of massive short-term capital inflows on economic
stability.
Inflation Report 2011-III
29
Central Bank of the Republic of Turkey
30
Inflation Report 2011-III
Central Bank of the Republic of Turkey
3. Inflation Developments
3.1. Inflation
Consumer prices increased by 1.83 percent in the second quarter of 2011,
while annual inflation rose to 6.24 percent from as low as 3.99 percent at the
end of the first quarter. The waning base effects from 2010 tax adjustments,
coupled with food inflation reaching historic lows, caused annual inflation to fall
steeply in the first quarter. Amid pick-up in food inflation, lagged effects of the
cumulative increases in TL import prices and base effects, inflation gained
momentum in the second quarter. Producer prices pressure remained strong,
yet cumulative cost increases put less pressure on consumer prices in the
second quarter compared to earlier periods, confirming that the economy is
currently not overheating. Core inflation indicators posted a higher annual rate
of increase, but slowed down in seasonally adjusted terms.
Across subcategories, the quarterly rate of change in food and core
goods was up from the average of previous years (Chart 3.1.1). Despite rising
mainly on base effects from communication services, annual services inflation
remained relatively moderate on a quarterly basis. Energy prices soared in the
second quarter due to exchange rate developments even though international
oil prices were flat compared with the end of the first quarter. High international
commodity prices and the depreciation of the Turkish lira continued to affect
prices of core goods. After a moderate first quarter, unprocessed food prices
decreased at a pace below historical averages in the second quarter, pushing
food inflation higher. Accordingly, food and core goods accounted for 1.71
percentage points of the 2.25 percentage point increase in annual consumer
inflation (Chart 3.1.2).
Inflation Report 2011-III
31
Central Bank of the Republic of Turkey
Chart 3.1.1.
Chart 3.1.2.
CPI by Subcategories
Contribution to Annual CPI Inflation
(Second-Quarter Percent Change)
2006-2010 Average
Core Goods**
Tobacco and Gold*
2011
10
14
8
12
6
10
4
8
2
6
0
4
-2
Services
Food and Energy***
2
-4
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0
CPI
0308
Energy Tobacco Core Services
and Goods**
Gold*
1207
Food
* Tobacco and Gold: Alcoholic beverages, tobacco and gold.
** Core Goods: Goods excluding food, energy, alcoholic beverages, tobacco and gold.
*** Food and Energy: Food, non-alcoholic beverages and energy.
Source: TurkStat, CBRT.
After falling sharply in the first quarter, food inflation rose by 4.66
percentage points to 8.13 percent in the second quarter. This quarter-onquarter increase, as anticipated in the April Inflation Report, was largely driven
by rising unprocessed food inflation (Chart 3.1.3). Prices were up across all
unprocessed food items, particularly fresh fruits and vegetables (Chart 3.1.4).
After entering May's price index at very high prices due to supply-side factors,
cherry and plum prices were corrected downward in June as expected,
causing food and consumer price inflation to fluctuate dramatically. It should
be noted food prices and thus overall consumer price index may exhibit
fluctuations due to supply-side related temporary and extreme price
movements especially in the second quarter when summer fruits are included in
the CPI basket.
Chart 3.1.3.
Chart 3.1.4.
Unprocessed Food and Consumer Prices
Subcategories of Unprocessed Food and
Consumer Prices
(Index, Seasonally Adjusted)
(Index, Seasonally Adjusted)
Unprocessed Food Prices
Consumer Prices
Fresh Fruit-Vegetable Prices
240
240
220
220
200
200
Consumer Prices
180
180
160
160
140
140
Source: TurkStat, CBRT.
32
0611
1210
0610
1209
0609
1208
0608
1207
0607
1206
0606
0605
0611
1210
0610
1209
0609
1208
0608
1207
0607
1206
0606
1205
80
0605
100
100
1205
120
120
Source: TurkStat, CBRT.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
After rising at a faster pace in the first quarter amid higher international
food prices, processed food prices slowed during the second quarter despite
negative effects due to the recently depreciated Turkish lira (Table 3.1.1). Prices
of oils and fats continued to increase, albeit more slowly. On the other hand,
ongoing decreases in meat and dairy prices and the slowdown in prices of
bread and cereals following the temporary suspension of tariffs on wheat
imports restrained price hikes in processed food (Chart 3.1.6).
Chart 3.1.5.
Chart 3.1.6.
Food Prices
Selected Processed Food Prices
(Annual Percent Change)
(Index, 2003=100)
Processed Food
Processed Meat and Milk Products
Bread and Cereals
Solid and Liquid Fats
Unprocessed Food
200
35
190
30
180
25
170
20
160
15
150
Source: TurkStat, CBRT.
0307
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610
0910
1210
0311
0611
0611
0311
1210
0910
0610
0310
1209
110
0909
-5
0609
120
0309
130
0
1208
140
5
0908
10
Source: TurkStat, CBRT.
Energy prices increased by 1.37 percent during the second quarter
(Table 3.1.1). Although international oil prices were stable compared to the end
of the first quarter, the weak Turkish lira caused domestic fuel prices to increase
(Chart 3.1.7). Among home utilities, solid fuel prices declined slightly, while
bottled gas prices and water tariffs rose. Accordingly, annual energy price
inflation ended June at 8.25 percent. Despite sharp increases in TLdenominated oil prices, natural gas and electricity prices have yet to rise,
adding to upside risks to energy prices for the second half of 2011 (Chart 3.1.8).
Inflation Report 2011-III
33
Central Bank of the Republic of Turkey
Chart 3.1.7.
Chart 3.1.8.
Energy Prices
Energy and TL Oil Prices
(Index, 2003=100)
Home Utilities*
(Index, January 2003 =100)
Fuel
Brent (TL)
Energy
240
Energy (right axis)
400
250
350
220
225
300
200
200
250
180
200
160
150
175
150
100
140
125
50
0
100
1202
0603
1203
0604
1204
0605
1205
0606
1206
0607
1207
0608
1208
0609
1209
0610
1210
0611
0611
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610
0910
1210
0311
120
* Home utilities include electricity, water, natural gas, bottled gas and
solid fuel.
Source: TurkStat, CBRT.
Source: TurkStat, Bloomberg, CBRT.
Table 3.1.1.
Prices of Goods and Services
(Quarterly and Annual Percent Change)
CPI
1. Goods
Energy
Food and Non-Alcoholic Beverages
Unprocessed Food
Processed Food
Goods excl. Food and Energy
Core Goods
Durable Goods excl. Gold
Alcoholic Beverages, Tobacco and Gold
2. Services
Rents
Restaurants and Hotels
Transport
Communication
Other*
II
III
2010
IV
Annual
I
2011
II
-0.33
-0.38
0.21
-6.66
-12.76
-0.62
5.07
6.16
0.36
1.48
-0.17
0.65
2.28
1.32
-6.11
0.27
1.15
1.29
0.43
7.02
13.16
1.69
-2.96
-3.45
-0.34
-1.27
0.73
1.30
1.56
1.83
-2.90
1.19
1.55
1.64
3.98
-0.18
-3.05
2.59
2.21
2.59
-1.06
0.93
1.31
0.98
2.30
1.28
2.23
0.30
6.40
7.18
9.96
7.02
8.52
5.68
6.09
1.70
0.26
24.61
4.24
3.96
9.76
7.04
-3.51
3.57
1.57
1.53
2.27
3.77
5.08
2.61
-0.68
-1.08
4.26
0.81
1.67
1.08
1.65
2.28
1.96
1.61
1.83
2.05
1.37
-2.46
-5.79
0.57
6.32
7.73
1.85
1.05
1.22
0.99
1.80
2.10
-1.71
2.14
* Services excluding rents, restaurants and hotels, transport and communication.
Source: TurkStat, CBRT.
Trending upward since the last months of 2010, annual core goods
inflation rose by 1.55 percentage points in the second quarter to 5.56 percent.
This increase reflects the depreciation of the Turkish lira and changes in import
prices, as in the previous quarter, and is evident across all subcategories of core
goods,
particularly
durable
goods
excluding
gold
and
white
goods
(Chart 3.1.9). Yet, seasonally adjusted data point to a slackening in the rate of
increase in prices of core goods (Chart 3.1.10). Meanwhile, the annual rate of
increase in clothing prices continued to rise. As also stated in the April Inflation
Report, the most significant risk to prices of core goods over the upcoming
period will be the impact of the Council of Ministers' decision to raise tariffs on
fabrics and apparels on clothing inflation.
34
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Table 3.1.2.
Prices of Core Goods
(Quarterly and Annual Percent Change)
II
6.16
23.73
0.36
3.76
-1.01
-0.11
2.17
0.11
Core Goods
Clothing and Footwear
Durable Goods excl. Gold
Furniture
Electrical and Non-Electrical Appliances
Automobiles
Other Durable Goods
Other
2010
IV
2.59
9.94
-1.06
-1.06
-0.23
-1.67
0.90
1.18
III
-3.45
-11.90
-0.34
1.77
-0.85
-0.61
-1.81
0.58
2011
I
II
-1.08
7.73
-12.04
25.08
4.26
1.85
0.75
5.04
2.87
-1.26
6.31
2.29
2.15
2.71
1.82
2.09
Annual
1.70
4.72
0.26
5.94
-2.23
-0.26
1.79
0.91
Source: TurkStat, CBRT.
Chart 3.1.9.
Chart 3.1.10.
Prices of Core Goods
Prices of Core Goods
(Annual Percent Change)
(Seasonally Adjusted, 3-Month Average, Annual Percent
Change)
Core Goods (excl. durable goods and clothing)
Durable Goods (excl. gold)
Clothing
15
12
10
10
8
6
5
4
2
0
0
-2
-5
-4
-6
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0308
0611
0311
1210
0910
0610
0310
1209
0909
0609
Source: TurkStat, CBRT.
1207
-10
-8
Source: TurkStat, CBRT.
Prices of services were up 1.22 percent in the second quarter, a rate
below historical averages (Chart 3.1.11). However, as noted in April Inflation
Report, annual inflation in prices of services rose to 5.02 percent, mainly due to
base effects from communication services. It is worth remembering that prices
of communication services had dropped sharply amid falling mobile call rates a
year earlier, bringing services inflation down by about 1 percentage point.
Among subcategories, rents continued to rise moderately, while the rate of
increase in prices of restaurants and hotels slowed down compared to the
same period of previous years. On the other hand, prices of transport services
increased at a rate close to historical averages due to cumulative effects of
rising domestic fuel prices. Meanwhile, prices for communication services
continued to be well below last year's levels amid intense competition and
rapid technological development (Chart 3.1.12).
Inflation Report 2011-III
35
Central Bank of the Republic of Turkey
Chart 3.1.11.
Chart 3.1.12.
Prices of Services by Subcategories
Prices of Services by Subcategories
(Second-Quarter Percent Change)
(Annual Percent Change)
2006-2010 Average
Other*
Transport
Restaurants and Hotels
2011
4
Communication
Rent
16
3
2
12
1
8
0
4
-1
0
Other*
Communication
-4
* Services excluding rents, restaurants and hotels, transport and
communication.
Source: TurkStat, CBRT.
0611
0311
1210
0910
0610
0310
1209
0909
0609
-8
0309
Restaurants-Hotels
Transport
Rent
Services
-2
Source: TurkStat, CBRT.
Seasonally adjusted indicators point to a relative slowdown in the
underlying trend of services price inflation in this period (Chart 3.1.13). The
diffusion index showing the percentage of items with increasing and decreasing
prices to overall items in this subcategory, reflects a similar trend, but points to a
much smaller slowdown (Chart 3.1.14).
Chart 3.1.13.
Chart 3.1.14.
Prices of Services
Diffusion Index of Services Prices*
(Seasonally Adjusted, 3-Month Average, Annual Percent
Change)
(Seasonally Adjusted, 3-Month Average)
16
0.7
14
0.6
12
10
0.5
8
6
0.4
4
2
0.3
0
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0308
0307
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610
0910
1210
0311
0611
0.2
-2
* Diffusion Index: The diffusion index is calculated as the ratio of the number of items with increasing prices minus the number of items with
decreasing prices to total number of items.
Source: TurkStat, CBRT.
The annual rate of increase in core inflation indicators SCA-H and SCA-I
accelerated in the second quarter amid higher core goods inflation
(Chart 3.1.15). As is known, the annual rate of increase in core measures is not
necessarily indicative of the underlying inflation due to base effects. Therefore,
seasonally adjusted series provide more concrete information about the
36
Inflation Report 2011-III
Central Bank of the Republic of Turkey
underlying trend. Based on this evidence, the underlying trend of these
indicators appears to have declined in the second quarter, while increasing
year-on-year (Chart 1.3.16).
Chart 3.1.15.
Graph 3.1.16.
Core Inflation Indicators SCA-H and SCA-I
Core Inflation Indicators SCA-H and SCA-I
(Annual Percent Change)
(Seasonally Adjusted, 3-Month Average, Annual Percent
Change)
SCA-H
SCA-H
SCA-I
7
SCA-I
20
6
15
5
10
4
3
5
2
0
Source: TurkStat, CBRT.
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
-5
0908
0611
0411
0211
1210
1010
0810
0610
0410
0210
1209
1009
0809
0609
0
0608
1
Source: TurkStat, CBRT.
Diffusion indices point to a similar, albeit more limited slowdown in core
inflation (Chart 3.1.17). Indeed, the prevalent upward trend in these indicators
since mid-2010 paused in the second quarter. The alternative core inflation
measures monitored by the CBRT were also slightly down during this period
(Chart 3.1.18).
Chart 3.1.17.
Chart 3.1.18.
CPI and SCA-H Diffusion Indices
Core Inflation Indicators SATRIM and FCORE*
(Seasonally Adjusted, 3-Month Average)
(3-Month Average)
CPI
SATRIM
H
FCORE
1.0
0.6
0.8
0.5
0.6
0.4
0.4
0.3
0.2
0.2
0.0
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
Source: TurkStat, CBRT.
0608
-0.2
0.1
* SATRIM: Seasonally adjusted trimmed mean inflation.
FCORE: Factor model based core inflation indicator.
(See Inflation Report 2011-I, Box 3.2).
Source: CBRT.
An accurate analysis of inflation dynamics is key to monitoring the
underlying inflation. As price indices are composed of heterogeneous products
Inflation Report 2011-III
37
Central Bank of the Republic of Turkey
with varying pricing behaviors, micro-level analyses are informative about
inflation dynamics. Due to this heterogeneous structure, micro-based measures
incorporating the frequency, distribution and synchronization of price changes
of goods and services can provide valuable insight into inflation dynamics.
Using a detailed set of product prices, such analyses can also help infer the
degree of price stickiness. In this context, Box 3.1 provides an analysis for Turkey
based on micro prices.
Producer prices increased relatively below the recent underlying trend by
0.77 percent in the second quarter, mainly owing to lower agricultural prices
driven by falling fruit and vegetable prices (Chart 3.1.19). Having tumbled on
falling wheat prices amid new import measures, cotton prices accounted for
1.73 percent of the decline in agricultural prices. Meanwhile, sunflower prices
continued to trend upward, weighing further on consumer prices through
processed food prices.
Chart 3.1.19.
Chart 3.1.20.
Agricultural Prices
Manufacturing Industry and PMI Output Prices
(Second-Quarter Percent Change)
2006-2010 Average
Manufacturing Industry Prices (excl. petroleum
products)
PMI Output Prices (right axis)
2011
6
5
3.0
4
2.5
3
65
60
2.0
2
1
1.5
0
1.0
-1
0.5
-2
55
50
45
0.0
-3
40
-0.5
Source: TurkStat.
0611
0311
1210
0910
0610
0310
1209
0909
35
0609
-1.0
0309
Agricultural
Products
1208
Livestock and
Products
0908
Crops, Fruits and
Vegetables
0608
-4
Source: TurkStat, Markit, CBRT.
With metal prices on the rise for the second consecutive quarter,
manufacturing industry prices increased by 1.98 percent quarter-on-quarter
(Table 3.1.3). Despite losing momentum of the first quarter, producer prices for
base metals, metal products and electric machinery rose dramatically in the
second quarter. Similarly, producer prices for furniture continued to climb in the
second quarter. Producer prices for textiles were up only slightly, while the sharp
increase in producer prices for apparels and leather goods suggests that
cumulative cost effects continue to pose pressure on clothing prices. As a result,
despite the recent depreciation of the Turkish lira, the rate of increase in
manufacturing industry prices dropped significantly quarter-on-quarter amid
38
Inflation Report 2011-III
Central Bank of the Republic of Turkey
falling
international
commodity
prices
and
weak
external
demand
(Chart 1.3.20).
Table 3.1.3.
PPI and Subcategories
(Quarterly and Annual Percent Change)
PPI
Agriculture
Crops, Fruits and Vegetables
Livestock and Animal Products
Industry
Mining
Manufacturing
Manufacturing excl. Petroleum
Manufacturing excl. Petroleum and
Base Metals
Electricity, Gas and Water
II
0.67
2.41
2.03
0.29
0.29
1.26
0.10
0.24
2010
III
1.51
1.71
2.78
6.23
1.46
3.75
0.99
1.09
IV
2.21
0.26
-3.17
8.21
2.64
0.95
2.86
2.20
Annual
8.87
14.52
9.20
29.85
7.71
7.11
6.62
5.92
2011
I
5.40
5.84
6.81
-1.26
5.31
9.70
6.27
5.55
2011
II
0.77
-1.73
-2.67
-0.39
1.30
1.08
1.98
1.95
0.14
1.66
0.72
5.07
1.90
1.32
3.98
18.68
4.85
-4.08
1.53
-4.73
Source: TurkStat, CBRT.
3.2. Expectations
After rising modestly during the first quarter of 2011, inflation expectations
remained virtually unchanged in the second quarter (Chart 3.2.1). Although
annual inflation in core indicators continued to rise and inflation was extremely
volatile, inflation expectations remained stable in the second quarter (Box 3.2).
Inflation expectations for both near and medium-term were slightly up quarteron-quarter (Chart 3.2.2). Currently, inflation expectations continue to hover
above the year-end targets of 5.5 and 5 percent for 2011 and 2012,
respectively.
Chart 3.2.1.
Chart 3.2.2.
12- and 24-Month Ahead CPI Expectations*
Inflation Expectations Curve*
(Annual Percent Change)
(Annual Percent Change)
12-Month
July 2011
Inflation Target
24-Month
10
April 2011
Uncertainty Band
10
9
9
8
8
7
7
6
5
6
4
5
3
Inflation Report 2011-III
0713
0513
0313
0113
1112
0912
0712
0512
0312
0112
1111
0911
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0308
* CBRT Survey of Expectations, second survey period results.
Source: CBRT.
0711
2
4
* Calculated by linear interpolation of expectations for different time
spans using the CBRT Survey of Expectations, second survey period
results.
Source: CBRT.
39
Central Bank of the Republic of Turkey
The
distribution
of
survey
respondents'
12-month
ahead
inflation
expectations remains largely unchanged from April, whereas survey responds
for 24-month ahead inflation expectations have significantly converged in July
(Charts 3.2.3 and 3.2.4).
Chart 3.2.3.
Chart 3.2.4.
Distribution of 12-Month Ahead Inflation
Expectations*
Distribution of 24-Month Ahead Inflation
Expectations*
April 2011
April 2011
July 2011
July 2011
0.72
0.72
0.63
0.63
0.54
0.54
0.45
0.45
0.36
0.36
0.27
0.27
0.18
0.18
0.09
0.09
0.00
0.00
2
4
6
8
10
12
* CBRT Survey of Expectations, second survey period results.
Source: CBRT.
40
14
2
4
6
8
10
12
14
* CBRT Survey of Expectations, second survey period results.
Source: CBRT.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Box
3.1
Inflation
Findings on Price Rigidity Based on Micro Data
is an indicator denoting the rate of change in product prices
aggregated by indexation. A monetary policy strategy focusing on price stability
aims at containing inflation which provides a measure for the average rate of
change in prices. Macro price indicators and their derivatives (special
aggregates, subcategory price indices etc.) are quite functional in monitoring
whether monetary policy has attained its goals, and also for implementing active
communication policies in the meantime. However, it is not possible to obtain all
the information needed to determine and analyze inflation dynamics from macro
price indicators. For example, the information on the average period for prices to
remain unchanged is essential for a sound analysis of inflation dynamics. Central
banks place special emphasis on knowing the degree of price rigidity as it is one
of the factors affecting the lag of the monetary policy transmission. With a view to
filling this information gap, this Box presents the results of this lag analysis that may
provide insight into price rigidity in Turkey by using micro data on prices of goods
and services compiled at the CBRT over the October 2006-January 2011 period.
Distribution of Price Changes
The
distribution of price changes in subcategories over the analyzed period is
given in Chart 1. Price decreases are as commonly observed as price increases in
Turkey. An analysis based on macro inflation observations may lead to consider
that there is usually a downward rigidity in prices. However, our analyses reveal
that even prices of services that do not decrease at the macro level can
frequently decrease at the micro level. The distribution of price changes is bimodal in food and services and more symmetric in energy and in goods
excluding food and energy. Price changes for food and services in the vicinity of
zero are rare, implying that price revisions for small changes may not be optimal
for firms, and thus, state-dependent pricing is prevalent.
Inflation Report 2011-III
41
Central Bank of the Republic of Turkey
Direction and Size of Price Changes
When
prices change at the item level, the probability for this change to be
upward is almost equal to the one to be downward. The probability for the whole
sample to change in an upward direction is calculated as 56 percent. The energy
group displays the highest probability for an increase with 63 percent. As for the
average size of price changes, absolute increases are slightly higher than
absolute decreases, while the size of price changes is quite large in both
directions (Table 1).
Frequency of Price Changes: Descriptive Statistics and Duration Analysis
Chart
2 presents for how long prices in the sample remained unchanged. As
illustrated, the number of unchanged prices decrease in absolute terms over
time. 90 percent of the general prices change within the first 4 months. It is seen
that 90 percent of prices in the food group change within 3 months, while that in
non-food products change in 6 months.1
The average duration for general prices and subcategories is presented in Table
2.2 Accordingly, the average duration for consumer prices is between 1.6 and 1.9
months. The duration goes down to 1.3 months for the food category, which is
quite sensitive to seasonal shocks. It is noteworthy that prices of services is the
category that increases consumer price rigidity mostly. Hazard function, which
shows the probability of a price change in a given period, exhibits a decreasing
and then a flat course for all subcategories (Chart 3). Jumps in the probability of
change in periods corresponding to one year point to the presence of a timedependent pricing in Turkey.
Average
duration for general prices is compared for different countries in
Chart 4. Turkey is among countries with high price flexibility, and also, prices in
Turkey are almost as rigid as in Latin American countries.
1
The main factor behind frequent changes in food prices is unprocessed food prices. In fact, processed food prices remain
unchanged for 2.5 months on average, while unprocessed food prices change every month on average.
2 Average period for prices to remain unchanged can be calculated by two methods. The first one is directly observing and
recording the duration. The second one is calculating the duration series by using the frequency obtained as the ratio of the
number of price changes in a product to the total number of periods. For more information please refer to Özmen and Sevinç
(2011).
42
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 1. Distribution of Prices Changes Across
Subcategories
3000
60
Food
Chart 2. Frequency of Price Durations (General
Prices)*
Energy
50
40
1000
20
0
40
30
0
-100
1500
-50
0
50
100
Goods (excl. food and
energy)
-30
0
150
1000
100
500
50
0
0
30
Percent
2000
20
Services
10
0
-100
-50
0
50
100
1
-100
-50
0
50
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Duration
100
* Unit duration is 2 weeks.
Chart 4. Average Price Duration in Various
Countries (Month)*
0.7
10
9
8
7
6
5
4
3
2
1
0
Services
Energy
0.6
Goods (excl. food and energy)
0.5
Unprocessed Food
Processed Food
0.4
0.3
0.2
Sierra Leone
Chile
Turkey
Brazil
Slovakia
Mexico
Israel
Japan
Portugal
Norway
U.S.A.
France
Denmark
Luxembourg
Belgium
Finland
Holland
S. Africa
Austria
Euro Area
Hungary
Spain
U.K.
Germany
Italy
Chart 3. Hazard Function Estimations
0.1
0
0
10
20
30
40
50
* Hazard functions are estimated by a non-parametric complementary
logarithmic model. Unit duration is 2 weeks. The results are displayed
for 2 years.
* The values in the table are calculated by using the data from Özmen and
Sevinç (2011) for Turkey, and Klenow and Malin (2010) for other countries
(Table 1, page 236) .
Table 1. Average Size of Price Changes (Percent)
CPI
Food
Unprocessed Food
Processed Food
Services
Energy
Goods excl. Food and Energy
Price Increases
Number of
Observations
Average
68180
18.06
50959
19.20
23699
23.12
27260
15.79
1292
12.80
218
5.09
15711
14.98
Price Decreases
Number of
Observations
Average
52887
-16.78
40514
-17.75
21200
-20.98
19314
-14.19
888
-11.32
129
-2.80
11356
-13.90
Table 2. Average Duration of Prices (Month)
Observed Duration (Direct)
Implied Duration (Indirect)
1.9
1.6
2.3
2.6
3.6
1.6
1.3
2.0
2.4
3.4
CPI
Food
Energy
Goods excl. Food and Energy
Services
Source: Özmen and Sevinç (2011), Klenow and Malin (2010).
REFERENCES
Özmen, M. U. and O. Sevinç, 2011, Price Rigidity in Turkey: Evidence from Micro
Data, CBRT Working Paper (forthcoming).
Klenow, P. J. and B. A. Malin, 2010, Microeconomic evidence on price setting,
Handbook of Monetary Economics, 3: 231-284.
Inflation Report 2011-III
43
Central Bank of the Republic of Turkey
Box
The Effect of Inflation Surprises on Expectations
3.2
This Box analyzes the sensitivity of medium-term inflation expectations of the CBRT
Survey of Expectations respondents to monthly inflation surprises. Whether inflation
realizations cause revisions in inflation expectations between two survey periods is
crucial for the design of the communication policy, and monitoring the evolution
of this sensitivity over time provides feedback regarding the effectiveness of the
communication policy.
In
this Box, inflation surprise is defined as the difference between the current
month’s inflation expectation as reported by the survey and the inflation
realization of that month. In order to minimize the effects of other factors
influencing inflation expectations and to better measure the effect of the surprise,
data from the survey period closest to the announcement of inflation rates were
used in the analysis. Therefore, inflation surprise is measured as the difference
between monthly inflation expectations and inflation realizations in the second
survey period for the respective month, while the change in medium-term
expectations is measured as the difference between 12-month ahead inflation
expectations of the second survey, which is before the announcement of inflation
rates and of the first survey following the announcement of inflation rates.
Firstly,
monthly inflation surprises are analyzed graphically, where data for the
same months of different years are displayed together in order to reveal the
seasonal trend (Chart 1). The red series is the average value for the respective
month. Accordingly, monthly averages of inflation surprises appear to be higher in
some months and lower in others. In other words, inflation surprises exhibit a
seasonal pattern. For example, in June, inflation surprises get negative values
each year over the sampling period, which means inflation expectations for June
were constantly higher than inflation realizations. This indicates that participants
failed to fully consider the seasonal effects and develop a rational perspective
while constructing current month’s inflation expectations.
Secondly,
the effects of inflation surprises on the level of expectations are
analyzed. Accordingly, whether inflation surprises led to revisions in 12-month
ahead inflation expectations between two survey periods is analyzed by
estimating the following equation:
44
Inflation Report 2011-III
Central Bank of the Republic of Turkey
11
Etπ t +12 − Et −1π t +12 = ∆ Etπ t +12 = β 0 + β1π tsurprise + ∑ M i
(1)
i =1
The change in 12-month ahead inflation expectations are explained by inflation
surprises, and considering the seasonal pattern of inflation surprises, seasonal
dummy variables ( M i ) are included in the equation based on their statistical
significance. Inflation surprise coefficient
β1
is estimated using 36-month moving
windows for the January 2002-July 2011 sample period (Chart 2). The periods
when this variable is significant at 5 percent are highlighted in blue. Accordingly,
the sensitivity of 12-month ahead inflation expectations to inflation surprises is
significant across the sample. This finding is consistent with the former studies
conducted at the CBRT which also stated that past inflation realizations are
important determinants of inflation expectations.3 The sensitivity of inflation
expectations to inflation surprises decreases significantly in the pre-crisis period,
but increases during the global crisis period when inflation assumes a steady
downtrend and negative surprises occur. In the recent period where fluctuations
in inflation are mainly driven by transitory effects like unprocessed food prices, the
effect of inflation surprises on changes in expectations has declined back to precrisis levels (Chart 2). In fact, although inflation went far beyond expectations
mainly due to unprocessed food prices in May, 12-month ahead inflation
expectations remained subdued.
Chart 2. Sensitivity of 12-Month Ahead Inflation
Expectations to Inflation Surprises
2
1
1.5
0.9
0411
1110
0610
0110
0809
0309
1008
0508
1207
0707
0207
0906
0406
1105
0
0605
December
October
November
September
0.1
July
0.2
-2.5
August
0.3
-2
May
0.4
-1.5
June
0.5
-1
April
0.6
-0.5
March
0.7
0
January
0.8
February
1
0.5
0105
Chart 1. Monthly Inflation Surprises
Source: TurkStat, CBRT.
3
Başkaya et al. (2008).
Inflation Report 2011-III
45
Central Bank of the Republic of Turkey
Another
significant point regarding inflation expectations is whether these
unexpected changes in inflation affect the distribution of inflation expectations. In
this respect, as the final step, we examined whether inflation surprises led to a
remarkable divergence among 12-month ahead inflation expectations of survey
participants and to an increased perception of inflation uncertainty. Here, two
different criteria were used for the distribution of expectations: standard deviation
of expectations and the coefficient of variation. The following equation is
estimated for both variables:4
11
∆σ t +12 = β 0 + β1π tsurprise + ∑ M i
(2)
i =1
Coefficient β1
is firstly estimated for the case that the dependent variable is the
standard deviation of expectations (Chart 3). The coefficient gets positive values
in periods when it is statistically significant, in other words, inflation surprises and
the consistency in expectations move in the same direction. However, this
correlation gets steadily weaker over time. As for recent times, the coefficient of
inflation surprises is not significant in explaining the developments in the
consistency of expectations. A similar result is obtained when the coefficient of
variation is used as an indicator of inconsistency (Chart 4). In sum, the effect of
inflation surprises on the consistency of expectations has faded over time,
becoming statistically insignificant.
Chart 3. Sensitivity of the Consistency in 12Month Ahead Inflation Expectations to Inflation
Surprises (Standard Deviation)
Chart 4. Sensitivity of the Consistency in 12-Month
Ahead Inflation Expectations to Inflation Surprises
(Coefficient of Variation)
0.5
5
0.4
4
0.3
3
0.2
2
0.1
1
0
0
-0.1
0411
0610
1110
0809
0110
0309
0508
1008
1207
0207
0707
0406
0906
1105
0105
0605
0105
0605
1105
0406
0906
0207
0707
1207
0508
1008
0309
0809
0110
0610
1110
0411
-1
-0.2
As a result, the findings suggest that, with the adoption of the inflation targeting
regime, the effect of short-term inflation surprises on medium-term inflation
expectations has gradually decreased, albeit displaying occasional fluctuations.
REFERENCES
Başkaya, S., H. Kara and D. Mutluer-Kurul, 2008, Expectations, Communication
and Monetary Policy in Turkey, CBRT Working Paper No. 08/01.
4
Coefficient of variation=standard deviation/average.
46
Inflation Report 2011-III
Central Bank of the Republic of Turkey
4. Supply and Demand Developments
The first-quarter national accounts data are consistent with the outlook
presented in the April Inflation Report. Economic activity remained robust, albeit
having a slower rate of growth than in the first quarter, while the main driver of
growth was domestic demand, primarily of the private sector. Meanwhile,
exports remained weak and imports continued to accelerate, causing net
external demand to make a negative contribution to growth. Thus, the
divergence between domestic and external demand growth displayed during
the exit phase has become more pronounced, and the foreign trade deficit
widened further.
Second-quarter data indicate a quarter-on-quarter weakening in
economic activity. Seasonally adjusted data showed that industrial production
has contracted for four consecutive months since February, and domestic
demand indicators also confirmed the slowdown. A featured question while
heading into the second half of the year is whether this trend will be permanent
or not. Leading indicators signal that the slowdown in the second quarter will
not turn into a long-term recession. However, given the lagged effects of the
policy measures and the pace of slowdown at the global scale, domestic
demand is expected to settle into a milder path of growth.
Under the current outlook with receding unit labor costs owing to
productivity gains and low levels of capacity utilization rates due to weak
external demand, aggregate demand conditions are not expected to exert an
upward pressure on inflation. However, both the high levels of energy and other
commodity prices as well as the developments that weaken external demand
will delay the recovery of the current account balance.
Inflation Report 2011-III
47
Central Bank of the Republic of Turkey
4.1. Gross Domestic Product Developments and Domestic
Demand
According to the national accounts data released by TurkStat, GDP
increased by 11.0 percent year-on-year during the first quarter of 2011. The
largest contributor
to
annual
growth
was
private
demand,
for
both
consumption and investment. Due to relatively weak exports and strong import
demand, net external demand made a negative contribution to annual growth
(Chart 4.1.1).
The seasonally adjusted GDP expanded by 1.4 percent in the first quarter,
slowing down slightly. Having maintained its strong pace during this period, final
domestic demand was the main driver of the quarterly growth (Chart 4.1.2).
Meanwhile, external demand remained relatively weak, and hence, external
and domestic demand diverged further.
Chart 4.1.1.
Chart 4.1.2.
Contribution to GDP Growth by Demand
Components
GDP and the Final Domestic Demand
(Seasonally Adjusted, 2008 Q1=100)
(Percent)
15
GDP
11.0
10
8.7
Final Domestic Demand
115
7.2
5
0.2
110
1.8
105
0
0.7
-0.3
100
-5
95
GDP
Inventories
Exports
Public Investment
Public Consumption
Private Investment
Private Consumption
Source: TurkStat.
Imports
-7.4
-10
90
85
80
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
2005
2006
2007
2008
2009
2010 2011
Source: TurkStat, CBRT.
The second-quarter data point to a slowdown of the robust growth in
private sector demand. Production and imports of consumption goods, which
are among private consumption demand indicators, remained below the firstquarter averages in the April-May period (Chart 4.1.3). Automobile and white
goods sales also displayed a quarter-on-quarter decline in the second quarter
(Chart 4.1.4). Consumer confidence indicators indicated a moderate pace for
consumption demand as well (Chart 4.1.5).
48
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 4.1.3.
Chart 4.1.4.
Production and Import Quantity Indices of
Consumption Goods (Seasonally Adjusted, 2005=100)
Domestic Sales of Automobiles and White Goods
Production
(Thousand, Seasonally Adjusted)
120
230
115
110
105
55
190
50
170
45
150
40
130
35
90
100
70
50
95
60
210
110
30
2006
2007
2008
2009
600
550
500
450
30
400
25
350
20
15
300
12341234123412341234123412
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*
2005
Automobiles
White Goods (right axis)
Imports (right axis)
2005
2010 2011
2006
2007
* As of May.
Source: TurkStat, CNBC-e, CBRT.
Source: AMA,WGIA, CBRT.
Chart 4.1.5.
Chart 4.1.6.
Consumer Confidence
Weekly Consumer Loans
2008
2009
2010 2011
(Weekly Nominal Percent Change, 13-Week Average)
CNBC-e
CBRT (right axis)
Total
Other
1.5
120
100
110
95
100
90
90
85
80
80
70
75
-0.5
60
70
-1.0
Housing
Automobile
1.0
0.5
Source: TurkStat, CNBC-e, CBRT.
0108
0308
0508
0708
0908
1108
0109
0309
0509
0709
0909
1109
0110
0310
0510
0710
0910
1110
0111
0311
0511
0711
0711
0511
0311
0111
1110
0910
0710
0510
0310
0110
1109
0909
0709
0509
0309
0.0
Source: CBRT.
Investment demand indicators also signal a slowdown in economic
activity in the second quarter. The downward trend in capacity utilization rates
in this period partially reduced the need for investments. Imports of investment
goods continued to rise while the production of investments goods declined in
the April-May period compared to the first quarter (Chart 4.1.7). Relative price
movements are considered to account for the post-crisis divergence between
imports and the production of investment goods (Box 4.1). Domestic sales of
light and heavy commercial vehicles remained below the first-quarter averages
(Chart 4.1.8).
Inflation Report 2011-III
49
Central Bank of the Republic of Turkey
Chart 4.1.7.
Chart 4.1.8.
Production and Import Quantity Indices of
Capital Goods (Seasonally Adjusted, 2005=100)
Domestic Sales of Commercial Vehicles
(Thousand, Seasonally Adjusted)
Production
Imports
Production (excl. motor vehicles)
Imports (excl. transport)
220
Light Commercial
Heavy Commercial (right axis)
30
5.0
4.5
200
25
4.0
180
3.5
20
160
3.0
140
15
120
100
2.5
2.0
10
1.5
80
5
60
2006
2007
2008
2009
2010
1.0
1234123412341234123412341234123412
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 20102011
2011
* As of May.
Source: TurkStat, CBRT.
Source: AMA, CBRT.
A featured question at this point is whether the second quarter slowdown
in domestic demand indicators will become permanent or not. The slowdown in
the second quarter is attributed to the recently adopted policy measures as
well as the general election process and the deteriorating global growth
outlook. The ongoing increase in consumer loans during the first two weeks of
June, albeit a slight slowdown, indicates that the credit channel continues to
support growth (Chart 4.1.6). Having stabilized at high levels since the onset of
2011, 12-month-ahead investment expectations maintained this trend also in
June, signaling that the investment propensity remains strong (Chart 4.1.9). As of
May, the composite index constructed by aggregating selected leading
economic indicators hardly contains signals for a permanent slowdown
(Chart 4.1.10).
Chart 4.1.9.
Chart 4.1.10.
12-Month Ahead BTS Expectations for Investment
Leading Indicators Index
(Up-Down, Seasonally Adjusted)
(Seasonally Adjusted)
40
104
30
102
20
10
100
0
98
-10
96
-20
-30
94
-40
92
-50
50
0611
0311
1210
0610
0910
1209
0310
0909
0309
0609
0608
0908
1208
1207
0308
0307
0607
0907
Source: CBRT.
0597
0198
0998
0599
0100
0900
0501
0102
0902
0503
0104
0904
0505
0106
0906
0507
0108
0908
0509
0110
0910
0511
90
-60
Source: TurkStat, CBRT.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
In sum, given the recently released data, it is estimated that the domestic
demand declined in the second quarter (Chart 4.1.11). However, both the
general election process and the escalating global problems in the said period
complicates to monitor the underlying trend in domestic demand and to
identify the effects of the policy measures. Current indicators signal that the
contraction in the second quarter is not permanent. However, given the lagged
effects of the policy measures and the global slowdown, domestic demand is
expected to follow a milder path of growth in the second quarter.
Chart 4.1.11.
Final Domestic Demand
(Seasonally Adjusted, 2008Q1=100)
115
110
105
100
95
90
85
80
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*
2005
2006
2007
2008
2009
2010
2011
* Estimate.
Source: TurkStat, CBRT.
4.2. External Demand
The first-quarter outlook for external demand was broadly consistent with
the April Inflation Report forecasts. While exports of goods and services
increased by 7.7 percent year-on-year, imports of goods and services were up
27.0 percent in this quarter, resulting in a further negative contribution of net
external demand to annual growth (Chart 4.2.1). In seasonally adjusted terms,
exports followed almost a horizontal course, and remained below pre-crisis
levels. Meanwhile, imports displayed a robust quarter-on-quarter increase.
Reflecting the divergence between demand components, this situation has led
to a deterioration in foreign trade balance (Chart 4.2.2.)
Inflation Report 2011-III
51
Central Bank of the Republic of Turkey
Chart 4.2.1.
Chart 4.2.2.
Contribution of Net External Demand to Annual
GDP Growth
Exports and Imports of Goods and Services
(Seasonally Adjusted, 1998 Prices, Billion TL)
(Percent)
6
Exports
Imports
Net Exports
Exports
Imports
9
4
8.5
8
2
7.5
0
7
-2
6.5
-4
6
-6
5.5
-8
5
1
2009 2010
2
3
2010
4
1
2*
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*
2011
* Estimate.
Source: TurkStat, CBRT.
2005
2006
2007
2008
2009
2010 2011
* Estimate.
Source: TurkStat, CBRT.
The seasonally adjusted quantity index excluding gold, one of the key
indicators of exports, maintained its gradual increase in the second quarter of
2011 (Chart 4.2.3). Compared to the pre-crisis period, exports still display a
weaker pace of recovery and continue to dampen aggregate demand. Given
the recently released data, exports of goods and services are estimated to
have increased at a modest pace in the second quarter (Chart 4.2.2).
Chart 4.2.3.
Chart 4.2.4.
Quantity Index for Exports Excluding Gold
Imports and Industrial Production Indices for the
Global Economy
(Seasonally Adjusted, 2003=100)
(Seasonally Adjusted, 2005=100)
Imports
190
Industrial Production
125
120
170
115
150
110
105
130
100
110
95
90
90
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 4 1 2 3 4 12*
2003 2004 2005 2006 2007 2008 2009 20102011
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*
2005
2006
2007
2008
2009
2010 2011
* As of May.
* As of May.
Source: TurkStat, CBRT.
Source: Netherlands Bureau for Economic Policy Analysis.
Recent developments in international markets have increased downside
risks to global growth. The possible spillover of the Greek debt crisis into other
52
Inflation Report 2011-III
Central Bank of the Republic of Turkey
European countries, the slowing pace of recovery in the U.S. and the weak
Japanese economy following the earthquake led the economic activity to slow
down on a global scale (Chart 4.2.4). Accordingly, growth forecasts were
revised downwards especially for the U.S. and the indebted Greek, Portuguese
and Irish economies, compared to the previous reporting period (Chart 4.2.5).
The global manufacturing and services PMI indices suggest that the slowdown
in economic activity may continue into the third quarter of the year
(Chart 4.2.6). Meanwhile, growth forecasts for the euro area, our main trading
partner, remained virtually unchanged, barring a remarkable revision to the
external demand outlook. As a result, the prediction that the recovery in exports
will be slow and gradual parallel to the economic developments in the external
markets is maintained in this reporting period as well.
Chart 4.2.5.
Chart 4.2.6.
GDP-Weighted Global Production Index
Global PMI Indices
(Seasonally Adjusted, 2009Q1=100)
(Seasonally Adjusted)
April 2011
Manufacturing
July 2011
115
Services
65
60
110
55
50
105
45
40
100
35
95
Source: Bloomberg, CBRT.
1
2
3
2012
4
0611
2011
4
1110
3
0410
2
0909
1
0209
2010
4
0708
3
1207
2009
2
0507
1
1006
4
0306
3
0805
2
0105
30
1
Source: Bloomberg.
Due to the robust course of domestic demand in the first quarter of
2011, imports increased sharply. Second-quarter indicators point to a weaker
course for domestic demand and imports compared to the previous quarter. In
fact, the seasonally adjusted import quantity index remained below the firstquarter average in the April-May period (Chart 4.2.7). In this scope, imports of
goods and services are estimated to have decreased in the second quarter on
a quarterly basis (Chart 4.2.2). An analysis of main industrial groups suggests that
imports of consumption and investment goods are well above pre-crisis levels
parallel to the domestic demand, while imports of intermediate goods remain
limited in line with the weak course of external demand. This observation is
another indicator of the divergence between domestic and external demand
components (Chart 4.2.8).
Inflation Report 2011-III
53
Central Bank of the Republic of Turkey
Chart 4.2.7.
Chart 4.2.8.
Quantity Index for Imports
Quantity Indices for Imports by Subcategories
(Seasonally Adjusted, 2003=100)
(Seasonally Adjusted, 2008Q1=100)
Investment Goods
Intermediate Goods
Consumption Goods
200
150
190
135
180
120
170
105
160
90
150
75
140
130
60
120
45
110
30
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*
2005
2006
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*
2010 2011
* As of May.
Source: TurkStat, CBRT.
2005
2006
2007
2008
2009
2010 2011
* As of May.
Source: TurkStat, CBRT.
In sum, parallel to the mild recovery in exports and the slowdown in the
demand for imported goods, the negative contribution of net external demand
to growth is expected to have declined in the second quarter of the year
(Chart 4.2.1). However, high energy and other commodity prices coupled with
developments weakening external demand delay the recovery of the current
account balance. In fact, the recently released data suggest that the
deterioration in the foreign trade balance still persists in the second quarter of
2011, albeit at a slower pace (Chart 4.2.9). Given the current global outlook of
weak external demand conditions, containing domestic demand is still critical
with respect to both inflation outlook and financial stability.
Chart 4.2.9.
Current Account Balance
(Seasonally Adjusted, Billion USD)
Current Account (excl. energy)
10
Current Account
5
0
-5
-10
-15
-20
-25
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 4 1 2 3 4 1 2*
2003
2004
2005
2006
2007
2008
2009
2010 2011
* Estimate for June.
Source: TurkStat, CBRT.
54
Inflation Report 2011-III
Central Bank of the Republic of Turkey
4.3. Labor Market
First-quarter employment developments turned out to be more favorable
than the outlook presented in the April Inflation Report. The ongoing uptrend in
non-farm employment since the last quarter of 2010 was maintained in the
January-April period. Farm employment, which displayed a similar course to
non-farm employment up to April, slowed down in this period (Chart 4.3.1). With
the sharp increase in employment, the unemployment rate has fallen back to its
pre-crisis levels as of the first quarter of 2011 (Chart 4.3.2).
Chart 4.3.1.
Chart 4.3.2.
Farm and Non-Farm Employment
Unemployment
(Seasonally Adjusted, Million)
(Seasonally Adjusted, Percent)
Labor Force Participation Rate (right axis)
Unemployment Rate
Non-Farm Unemployment Rate
Non-Farm Employment
Farm Employment (right axis)
18.0
8.0
17.5
7.5
17.0
7.0
16.5
6.5
16.0
20
51
5.5
12
47
15.0
5.0
10
46
14.5
4.5
14.0
4.0
8
45
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2*
0411
1010
15.5
0410
48
1009
14
0409
6.0
1008
49
0408
16
1007
50
0407
18
2007
2008
2009
2010
2011
* As of April.
Source: TurkStat, CBRT.
Source: TurkStat, CBRT.
The increase in non-farm employment in the first quarter of 2011 was
provided through the contribution by all main sectors, primarily the services and
the industrial sector (Charts 4.3.3 and 4.3.4). However, in April, the services
sector continued to support non-farm employment growth, while the robust rate
of increase in the industrial sector slowed down.
Chart 4.3.3.
Chart 4.3.4.
Industrial Employment and Production
Services and Construction Sector Employment
(Seasonally Adjusted)
(Seasonally Adjusted, Million)
Industrial Employment
Industrial Production (right axis)
Million
Construction
Source: TurkStat, CBRT.
Inflation Report 2011-III
10.2
95
1.2
10.0
90
1.0
9.8
Thousands
1.4
0411
10.4
100
1210
1.6
0810
10.6
105
0410
1.8
1209
10.8
110
0809
2.0
0409
0511
0111
0910
0510
0110
0909
0509
0109
0908
0508
0108
0907
3.8
11.0
115
1208
4.0
2.2
0808
4.2
11.2
120
0408
4.4
11.4
2.4
1207
4.6
2.6
125
0807
4.8
130
0407
5.0
0507
Services (right axis)
2005=100
Source: TurkStat, CBRT.
55
Central Bank of the Republic of Turkey
Recent developments suggest that the rate of increase in industrial
employment may decelerate on the back of the slowdown in economic
activity. Industrial production contracted for four consecutive months in the
February-May period, while the PMI employment index, a leading indicator for
employment developments, maintains its low level compared to the first
quarter, albeit having increased slightly in June. (Chart 4.3.5). These indicators
point that employment conditions in the industrial sector may deteriorate as of
May.
The recovery in employment conditions in the first quarter of 2011
continued to support domestic demand (Chart 4.3.6). Despite going down to
pre-crisis levels, unemployment rates are unlikely to have exerted remarkable
pressure on wages in the said period. In fact, no significant upward movement
was observed on labor costs in the first quarter of 2011, and the real wage index
reflecting developments in average hourly wages remained flat (Chart 4.3.7).
On an annual basis, productivity gains exceeded the increase in real wage
index, and thus, real unit wages fell back to pre-crisis levels (Chart 6, Box 4.2).
However, the fact that the current data on average wage developments
reflecting labor costs are also influenced by the employment composition and
the lack of a wage index for showing only wage movements, obstructs a sound
analysis on wages (Box 4.2).
Chart 4.3.5.
Chart 4.3.6.
Manufacturing Industry Employment
(Quarterly Percent Change) and PMI Employment
Index
Household Spending and Real Wage Payments*
(Seasonally Adjusted, 2007=100)
(Seasonally Adjusted)
Real Wage Payments-Short-Term Labor Statistics
Manufacturing Industry Employment Index (ILII)
Consumption Spending (excl. furniture, household appliances and
maintenance, transport and communication)
PMI (right axis)
6
65
110
4
60
105
2
55
0
50
-2
45
-4
40
-6
35
85
-8
30
80
100
0611
1210
0610
1209
0609
1208
0608
1207
0607
95
90
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
2005
2006
2007
2008
2009
2010 2011
* Calculated by the weighted average of total wages paid in industrial,
construction, trade, accommodation-catering services, transportwarehousing sectors. Deflated by CPI.
Source: TurkStat, Markit, CBRT.
56
Source: TurkStat, CBRT.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
To sum up, non-farm employment maintained its uptrend, while industrial
employment displayed a slight decline as of April 2011. Leading indicators
suggest that employment conditions in the industrial sector may deteriorate
starting from May (Chart 4.3.8). In addition, both the stabilizing policy measures
as well the envisioned milder course of aggregate demand conditions in the
second quarter on the back of the recently escalating global problems are
expected to slow down the rate of employment growth compared to the past
two quarters.
Chart 4.3.7.
Chart 4.3.8.
Hourly Labor Cost
Non-Farm Value Added and Employment
(Seasonally Adjusted, 2008=100)
(Seasonally Adjusted)
Labor Earnings (annual percent change, right axis)
Labor Earnings
Real Labor Earnings*
130
125
120
115
110
105
100
95
90
85
80
2007
2008
Inflation Report 2011-III
2009
2010
2011
1998 Prices
Billion TL
Million
26
18.0
12
25
17.5
24
17.0
23
8
22
6
21
4
* Deflated by CPI.
Source: TurkStat, CBRT.
Employment (right axis)
14
10
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
Value Added
16.5
16.0
15.5
20
19
15.0
2
18
14.5
0
17
14.0
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 12*
2005
2006
2007
2008
2009
2010 2011
* Estimate.
Source: TurkStat, CBRT.
57
Central Bank of the Republic of Turkey
Box
Prices of Investment Goods and Investment Spending
4.1
Displaying
a rapid recovery in the post-crisis period, private sector machinery
and equipment investments gained momentum in the last quarter of 2010, and
also continued to rise in the first quarter of 2011. Thus, private sector machinery
and equipment investments played a great role in the robust recovery of the
domestic demand during the post-crisis period (Chart 1). The strong course of
private sector machinery and equipment investments is attributed to favorable
demand expectations and better financing conditions as well as the relatively
lower prices for investment goods. In fact, an analysis of the relative prices
obtained from dividing the investment goods deflator by the GDP deflator
suggests that the relative price of investment goods trended downwards in the
post-2003 period (Charts 2 and 3). Meanwhile, the decline in the relative prices of
investment goods causes the share of private sector machinery and equipment
investments within GDP to vary at constant and current prices (Chart 4). This
divergence became more pronounced after end-2003, when relative prices
started to decline. Prices of investment goods that increased more moderately
than general prices indicate that more physical value can be obtained by
allocating a lower share of the GDP. In fact, in terms of the share within GDP,
machinery and equipment investments, which approached pre-crisis levels at
current prices in the first quarter of 2011, realized well above pre-crisis levels at
constant prices.
Chart 1. Contribution of Private Sector
Machinery/Equipment Investments to Annual
Growth and GDP Growth (Percent)
(Seasonally Adjusted)
GDP Deflator
Contribution of Private Mach.Eq.Inv.
GDP Growth
14
Chart 2. Private Sector Machinery/Equipment
Investments and GDP Deflators
12
Private Mach.Eq. Inv. Deflator
12
11
10
10
8
6
9
4
2
8
0
7
-2
6
-4
5
Source: TurkStat.
58
2011-1
2010-4
2010-3
2010-2
2010-1
2010
2009
2008
2007
2006
2005
2004
-6
123412341234123412341234123412341
2003 2004 2005 2006 2007 2008 2009 20102011
Source: TurkStat, CBRT.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 3. Relative Prices of Investment Goods
and the Share of Private Sector
Machinery/Equipment Investments within GDP
Chart 4. The Share of Private Sector
Machinery/Equipment Investments within GDP
(Seasonally Adjusted)
(Seasonally Adjusted)
Private Mach.Eq. Inv./GDP (constant prices)
Private Mach.Eq. Inv. Deflator/GDP Deflator
Private Mach.Eq. Inv./GDP (constant prices,
right axis)
19
1.2
19
Private Mach.Eq. Inv./GDP (current prices)
17
17
Source: TurkStat, CBRT.
The
2011-1
2010-2
2009-3
2008-4
2008-1
2007-2
2006-3
2005-4
2005-1
2004-2
2003-3
2002-4
2011-1
2009-3
2010-2
2008-4
2007-2
2008-1
2005-4
2006-3
2004-2
2005-1
2002-4
2003-3
5
2001-2
2002-1
7
5
2000-3
7
0.6
1999-1
1999-4
9
1998-2
9
0.7
2002-1
11
2001-2
11
2000-3
0.8
13
1999-4
13
0.9
15
1999-1
15
1.0
1998-2
1.1
Source: TurkStat, CBRT.
fall in the relative prices of imported investment goods is also believed to
have an impact on the relative cheapening of investment goods. In fact, prices
of imported investment goods diverged from overall import prices to a great
extent after 2003 (Chart 5). In this respect, it would be helpful to consider that,
among other factors, the price advantage has also contributed to the increase in
imports of investment goods (Chart 6).
Chart 5. Imports Unit Value Indices
(2003=100)
Chart 6. Investment Goods Imports
(Billion USD)
Unit Value of Capital Goods Imports
205
Unit Value of Overall Imports
Parts of Capital Goods
Capital Goods
50
45
185
40
165
35
30
145
25
20
125
15
105
10
5
85
123412341234123412341234123412341
2003 2004 2005 2006 2007 2008 2009 20102011
Source: TurkStat.
0
2004 2005 2006 2007 2008 2009 2010 2011*
* Estimate by compiling 2010 June- 2011 May data.
Source: TurkStat.
In sum, the decline in relative prices of investment goods in recent years caused
the relative cost of investments to fall, and supported the growth of private sector
machinery and equipment investments amid rising investment appetite and
favorable financing conditions. The surge in investments fed into macro financial
risks in the short term as it deteriorates the current account balance; however, it
will positively contribute to both inflation and potential production by expanding
the productive capacity of the economy in the medium term.
Inflation Report 2011-III
59
Central Bank of the Republic of Turkey
Box
Data on Wages and Earnings
4.2
Developments on wages and productivity as well as the labor market structure
are significant factors affecting inflation through both demand and cost
channels. In periods when aggregate demand remarkably exceeds the potential
output (periods of overheating in the economy), wages may be subject to
pressure and the medium-term inflation outlook may deteriorate. Thus, the course
of wages is critical to central banks and financial markets. Several wage series
based on various methods and criteria are present for Turkey. In order to be able
to interpret these series from an economic perspective, understanding how these
series are derived is crucial. This Box analyzes various data on wages and earnings
published by different sources. Moreover, these indicators are compared on a
sectoral basis to reveal their similarities and differences.1
Sources
regarding wage series can be classified under four main categories:
hourly costs and earnings indices published under Labor Cost Indices, wages per
hour worked indices calculated indirectly from Short-Term Business Statistics, Labor
Cost Index published under Building Construction Cost Indices, and average daily
earnings obtained from SSI bulletins. The first three of these series are announced
by TurkStat on a quarterly basis, while the last one is a monthly publication by the
SSI.2
The Labor Cost Index, which has been
published since July 2010, measures
the nominal hourly cost of employing
Chart 1. Non-Farm Costs and Earnings
(Real, 2008=100, Seasonally Adjusted)
110
Cost
108
Earnings
106
a wage earner. The main components
104
102
of this index are divided into two as
earnings
(the
changes
in
indicator
regular
or
of
hourly
irregular
payments made to wage earners)
and
non-earnings
(social
security,
severance and termination payments
100
98
96
94
92
90
I
II III IV I
II III IV I
II III IV I
II III IV I
2007
2008
2009
2010
2011
Source: TurkStat Labor Cost Index, CBRT.
by the employer). The difference between the two series, which move in parallel,
1
All data, excluding those from the SSI, are seasonally adjusted. Data are deflated by CPI.
the rest of the Box, hourly wages calculated from Short-Term Business Statistics will be referred to as wages per hour worked
to avoid confusion with those from the Labor Cost Index.
2 In
60
Inflation Report 2011-III
Central Bank of the Republic of Turkey
is affected by legal arrangements that are reflected on costs. In fact, the
difference between costs and earnings indices grew stronger due to legal
arrangements on premium payments of employers introduced at end-2008
(Chart 1).3
Another series to monitor sectoral average wage developments is the Short-Term
Business Statistics published by the TurkStat. This dataset has been published since
2005 on a quarterly basis for the industrial, construction and services sectors
compiling employment, hours worked and gross wages-salaries indices.
Short-Term
Business Statistics and Labor Cost Indices have been published since
2005 and 2007, respectively. Although the data sources of Short-Term Business
Statistics and Labor Cost Indices are mostly similar, differences exists with respect
to calculation of these indicators. Main differences can be listed as follows:4 Firstly,
there are no hourly wage series directly published under Short-Term Business
Statistics. For each main sector, the gross salaries index that reflects total wage
payments is divided by hours worked in order to calculate the wage per hour
worked. In the Labor Cost Index on the other hand, hourly wage data are directly
published by main sectors and sub-sectors (sections).5
Another difference is in weighting.
While constructing indices for main sectors,
sub-indices are aggregated by using the sectoral weights obtained from the base
year values of the respective variable. The base years used for sectoral weight
calculations of these indices differ. The base years for the indices published under
Short-Term Business Statistics and Labor Cost Indices are 2005 and 2008,
respectively. Moreover, gross wages-salaries and hours worked indices, which are
components of the wage per hours worked index, are aggregated by their own
weights, while the hourly labor cost calculated at sectional level is aggregated by
weights of gross wages. 6
3
As per the Law on Amendment to the Labor Act No 763 and Some Acts, private sector employers who employ workers were
provided with incentives. Accordingly, 5 points of the employers’ share in insurance premiums shall be covered by the Treasury.
This amendment was put into effect on October 1, 2008.
4 These differences are compiled by the announcements of the TurkStat.
5 The Statistical Classification of Economic Activities in the European Community (NACE), which serves as a basis for TurkStat’s
data, runs from general to specific as Section, Division, Group and Class. For example, the NACE Rev2 classification is
composed of 21 Sections, 88 Divisions, 272 Groups and 615 Classes.
6 Hourly wage indices are calculated under the labor cost indices on a sectional basis. Then, aggregation is made by using
base year weights obtained from gross wage-salary values. Under Short-Term Business Statistics, employment, hours worked
and gross salaries-wages indices calculated at class or group levels are aggregated by main sectors using base year weights
of these variables.
Inflation Report 2011-III
61
Central Bank of the Republic of Turkey
In addition, differences between these indices also exist in terms of scope. In the
calculation of Labor Cost Indices, data obtained from enterprises with twenty or
more employees in industrial and construction sectors are adjusted to cover
enterprises with one or more employees by using the coefficients from Annual
Labor Statistics. Gross salary-wage and hours worked indices published under the
Short-Term Business Statistics are not adjusted as above.
Another
difference regarding the coverage is the exclusion of finance and
insurance activities from the services sector compiled under Short-Term Business
Statistics. The said sub-sector is included in the Labor Cost Index by using data
obtained from the BRSA.
To sum up, hourly cost and earnings indices are considered to be more reliable
than wage per hours worked indices as they are computed at a more
disaggregated level.
Hourly
cost and earnings indices and wages per hour worked indices are
consistent in general across sectors (Charts 2-4). As the gross wage-salary index
under the Short-Term Business Statistics does not include the insurance premium of
the employee paid by the employer, the level of the wage per hour index is
closer to that of the hourly earnings index. The difference between these indices is
more evident for the services sector (Chart 2). It is believed that differences arising
from the above-mentioned aggregation are most prominent in the services sector
due to higher number of sub-items in this sector.
Another
data for monitoring average wage developments are found in the
Insured Person Statistics Bulletin published by the SSI. These data are calculated by
the reported daily earnings applicable to employer-sponsored insurance
premiums. Although, the availability of these data on monthly frequency and
sectoral basis is an advantage, the irregular publication of SSI bulletins and the
high volatility of daily average earnings limit the use of the data. Due to this
volatility, converting the data to a quarterly series by taking 3-month averages
enhances the informative value. The graphical representation of this series with
labor earnings and average wage per hours worked indices displays a similar
pattern, notwithstanding the absence of a one-to-one relation (Charts 2-4).
Moreover, SSI earnings data are also parallel with minimum wage, which sets a
lower bound to wages (Chart 5).
62
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 2. Services Wage Indices
Chart 3. Construction Wage Indices
(Real, 2008=100, Seasonally-Adjusted)
(Real, 2008=100, Seasonally-Adjusted)
Cost
Wage/Hour
Earnings
SSI Earnings
115
Cost
Wage/Hour
Building Construction Cost Index
Earnings
SSI Earnings
120
115
110
110
105
105
100
100
95
95
90
I II III IV I II III IV I II III IV I II III IV I
2007
2008
2009
2010
I II III IV I II III IV I II III IV I II III IV I II
2011
2007
2008
2009
2010
2011
Source: TurkStat, SSI, CBRT.
Source: TurkStat, SSI, CBRT.
Chart 4. Industrial Wage Indices
Chart 5. Average Daily Earnings and Minimum
Wages in Non-Farm Sectors
(Real, 2008=100, Seasonally Adjusted)
(Real, 2008=100)
Cost
Wage/Hour
Earnings
SSI Earnings
110
Minimum Wage
110
SSI Earnings
108
105
106
104
100
102
100
95
98
90
The
0211
1010
0610
0210
1009
0609
0209
1008
2011
0608
2010
0208
2009
1007
2008
0607
2007
Source: TurkStat, SSI, CBRT.
0207
96
I II III IV I II III IV I II III IV I II III IV I
Source: SSI, CBRT, Ministry of Labor and Social Security.
wage indices mentioned so far reflect average wage developments. An
important point to underline at this point is that the change in indices is driven by
both wage movements and changes in the labor composition. A bias resulting
from aggregation weakens the indices’ performance to denote wage levels.
Therefore, in order to monitor solely the wage developments, a wage index
measuring the value of a basket comprising well-defined components over time,
such as a price index, is needed. The Building Construction Cost Index, which is
released as a set of two indices for the construction sector, one for material costs
and the other for labor costs, is a good example to address this need. This index is
a price index that measures the changes in construction input costs by periods.
The labor cost index, which is constructed by aggregating the wages paid for
twelve labor items, is calculated by using 2005 weights. Average wage indices
displayed an increase with the crisis, whereas building labor costs exhibited a
decline (Chart 3). This outlook supports the idea that the increase in average
wages is driven by the change in the distribution of employees rather than the
wage developments.
Inflation Report 2011-III
63
Central Bank of the Republic of Turkey
An analysis of general trends in wage indicators demonstrates that average real
wages in industrial and construction sectors decreased over 2009 following the
crisis, before increasing again in 2010. In the services sector, which was relatively
less affected by global problems as it is less sensitive to external conditions, real
wages kept increasing at a limited rate in the crisis period and at a faster pace
since the second half of 2010.
Driven
by domestic demand, the robust trend of growth in Turkey since the
second quarter of 2009 highlights concerns over “overheating”. Real earnings and
labor cost indices show no evidence of an overheating economy. What is more,
wage developments should be examined together with the productivity
developments in this perspective.
When
productivity
outpaces/lags
Chart 6. Unit Wages
(Wage per Hour Worked/ Productivity)
(Real, 2008=100, Seasonally Adjusted)
Industrial
behind wages, unit wage costs may
decrease/increase. In an economy
110
with high productivity gains, rapid
100
growth can be sustained without
leading to inflationary pressures. An
analysis of unit wages calculated by
Short-Term Business Statistics indicates
that productivity increased across all
main types of business activity and
contributed to disinflation in the post-
Construction
Services*
115
105
95
90
85
80
75
I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I
2005
2006
2007
2008
2009
2010 2011
*In the services sector, real unit wages are calculated by
dividing total wage payments by turnover. In industrial and
construction sectors, total wage payments are divided by
output and CPI.
Source: TurkStat Short-Term Business Statistics, CBRT.
crisis period. The ongoing downtrend in unit wages as of the first quarter of 2011
indicates that wage developments do not imply overheating (Chart 6).
64
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Box
4.3
What the Economic Clock Says About Current Economic Activity
Identifying the current state of the economy and estimating its future course is
crucial for decision-making process of the economic agents. Leading indicators
constructed by macroeconomic data are among the most influential tools in the
economic literature in order to determine the turning points in the economy.
This
Box integrates the economic clock approach to coincident and leading
indicators index for the Turkish economy constructed by using the OECD-CACIS
method7, and thereby provides information about current economic activity and
its possible future course.
Economic
clock is used in order to analyze the state and the course of the
economy, where the horizontal axis shows the standardized level8 of the index
while the vertical axis denotes its month-on-month change (Figure 1). Different
states of the economy correspond to different quadrants in the economic clock.
In the first quadrant, the standardized level is below zero, indicating a month-onmonth increase. This may imply that the economy is coming out of the bottom. In
the second quadrant, the level is above the value implied by its long-term trend
and continues to rise month-on-month, pointing to an economic growth. In the
third quadrant, the level is above zero, but shows a monthly decline, indicating a
slowdown (below-average growth) in economic activity. Lastly, in the fourth
quadrant, both the level and the monthly growth rate are below zero, which
denotes that economic activity remains below the potential implied by its longterm trend and grows less than the average. As illustrated by the figure, the
economic clock is supposed to move clockwise.
7
Leading indicators are constructed by using the “Cyclical Analysis and Composite Indicators System (CACIS)” program that
facilitates the development of cyclical analysis and leading indicators by the OECD. For more information on the method used
by the OECD, please refer to http://www.oecd.org/dataoecd/37/42/42495745.pdf.
8
Standardized level is obtained by dividing the long-term average of x minus x (̅ ) to its standard deviation: ̅ ⁄
Inflation Report 2011-III
65
Central Bank of the Republic of Turkey
Figure 1. Economic Clock
In
constructing coincident and leading indicators, approximately 175 series
consisting
of
up-to-date,
economically
and
statistically
significant
price,
production, consumption, money-banking, foreign trade, balance of payments
and survey data that would serve as an indicator of economic activity were
analyzed. As an indicator for the general economic activity, industrial production
index was selected as the reference series. These series were classified as leading,
coincident and lagging by statistical analysis including their cross correlation with
industrial production and peak-trough analysis.
By
merging the different series presented in Table 1, several coincident and
leading indicator indices were constructed. Statistically best-performing indices of
coincident
and
leading
indicators
according
to
cross
correlation
and
peak/trough analysis are shown in Chart 1. The selected index of coincident
indicators is composed of capacity utilization rate, transport vehicles, electricity,
raw steel production and CNBC-e consumption index. The series constructing the
index of leading indicators are OECD’s leading indicators for member countries,
auction rates on GDBS (compound), 3-month ahead orders from BTS, Real Sector
Confidence Index and import quantity index for intermediate goods.
66
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Table 1. Classification of Indicators
Lagging Indicators
Coincident indicators
(PMI) Input inventory
CPI
CPI-based real effective
exchange rate (2003=100)
CPI Emerging Economiesbased real effective exchange
rate (2003=100)
CPI Advanced economiesbased real effective exchange
rate (2003=100)
(PMI) Input prices
(PMI) Output prices
(PMI) Delivery times
(PMI) Output Inventory
Use of credit cards
Total exports
Consumer loans
Consumption index
(credit/debit card
transactions index, real,
excluding food)
Consumption index
(credit/debit card
transactions index, real,
total)
Domestic loan utilization
Leading Indicators
(CNBC-e) Consumer Expectation, Tendency and
Confidence Indices
(PMI) Work backlogs
(PMI) Export orders
(PMI) Employment
(PMI) Quantity of purchases
(PMI) Production
SCA-H
(PMI) New orders
SCA-I
Foreign exchange basket
Electricity production
Raw steel production
Services prices
Total number of liquidated firms
Capacity utilization rate
Automobile production
Imports of capital goods
Production of commercial
vehicles
TEA Export figures
(CBRT) Expectations Survey Questions
(CBRT) Business Tendency Survey Questions
(CBRT) Reel Sector Confidence Index
(CBRT) Consumer Confidence Index
PMI Index
Export quantity index
Import quantity index
Imports of intermediate goods
Import quantity index for intermediate goods
Number of TIR transit permits
Number of TIR carnets
Total imports
(CNBC-e) Consumption Index
Chart 1. Cyclical Components of Coincident
and Leading Indicators
Coincident Indicators Index
103
Import quantity index for capital goods
Import quantity index for consumption goods
Domestic tax on goods and services (Nominal and
Real)
VAT on imports (Nominal and Real)
GDBS rate (Simple and compound)
Global industrial production index
ISE National Services Index
ISE National Industrial Index
ISE National 100 Index
ISE National Financial index
ISE National Technology Index
OECD Composite Leading Indicators
US Composite Leading Indicators
Balance of Payments, total commercial loans
Balance of Payments, commercial loans to banks
Domestic sales of white goods, exports and
production
Domestic sales and exports of automobiles
Domestic sales and exports of commercial vehicles
Number of new firms
PPI
PPI Energy
PPI Manufacturing
PPI Oil
Chart 2. Economic Clock for Economic Activity
I
Recovery
II
Growth
Leading Indicators Index
102
Standardized Level
101
100
99
98
-4
97
96
95
-2
0194
1294
1195
1096
0997
0898
0799
0600
0501
0402
0303
0204
0105
1205
1106
1007
0908
0809
0710
0611
94
Source: CBRT
Inflation Report 2011-III
0
2
May 2011
IV
Recession
January
2009
III
Slowdown
Monthly Change
Source: CBRT.
67
Central Bank of the Republic of Turkey
The
economic clock for the economic activity constructed by using industrial
production index cycle is shown in Chart 2. According to the economic clock, the
growth pace that started in June 2010 lost momentum in March 2011.
Chart 3. Economic Clock for Coincident
Indicators
-3
II
Growth
-2
-1
0
1
Monthly Change
Source: CBRT
Economic
-6
June
2011
January
2009
IV
Recession
2
I
Recovery
Standardized Level
Standardized Level
I
Recovery
Chart 4. Economic Clock for Leading Indicators
III
Slowdown
IV
Recession
II
Growth
-4
-2
0
January
2009
Monthly Change
2
June 2011
III
Slowdown
Source: CBRT.
clocks for coincident and leading indicators are shown in Charts 3
and 4, respectively. The economic clock constructed for leading indicators signals
signs of economic growth in February 2010, while the economic clock
constructed for coincident indicators points to August 2010 as the start of the
economic growth cycle, as expected by the methodology. Similarly, the
economic clock for leading indicators points to January 2011, whereas the
economic clock for coincident indicators indicates March 2011 as the start of the
slowdown in economic activity. The coincident indicators index, as expected,
monitors the changes in the economy contemporaneously, while leading
indicators index helps to foresee the developments in the economy.
Recent
observations as of June 2011 reveal that the economic clock for the
coincident indicators index points to a more pronounced deceleration in
economic activity in the second quarter. The economic clock constructed for the
leading indicators index exhibits a pattern of converging points in the third
quadrant in the recent months, which indicates that economic growth will remain
below average for a while.
68
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Box
Fixed Capital Growth Loss during the Recent Crises and Its
4.4
Impact on the Potential GDP
The question of overheating in the economy has recently been a top agenda
item. “Overheating” of an economy occurs when aggregate demand
remarkably exceeds the productive capacity and upward pressures on inflation
become more pronounced. For a sound analysis, a careful analysis of supply and
demand dynamics of the economy is required. In this context, a close scrutiny of
the dynamics regarding fixed capital investments (machinery and equipment
investments and construction investments), which are major contributors to
productive capacity, is significant in elucidating these discussions.
Past international experiences show that deep financial crises may bring about
persistent negative impacts on productive capacity.9 If a crisis leads to a
significant loss in productive capacity, the post-crisis recovery in demand would
pose risks to price stability by stretching the limits of the productive capacity and
require central banks to tighten their monetary policies. In this context, the impact
of the last global crisis on productive capacity is an agenda item of the CBRT as
well as many central banks around the world.
one of the significant impacts of crises on productive capacity is through slowing
down the capital growth.10 In economic crises, workplaces and manufacturing
facilities become idle, leading to a slowdown in existing or planned investments,
which has an adverse effect on the future productive capacity of the national
economy. For instance, vacant hotels in the crisis period cause existing or
planned hotel investments to lose pace, which in turn would reduce future
lodging capacity. This loss in capacity would not be significant during the crisis as
the operating hotels are also less occupied. However, as the economy rebounds,
occupancy rates may surge more rapidly due to the said capacity loss. Therefore,
this capacity loss may give way to upward pressures on accommodation prices
during economic recovery.
9
Furceri and Mourougene (2009), Cerra and Saxena (2008).
“Recessions typically have little effect on potential output beyond the direct effect of lower investment on capital
accumulation, and that effect tends to diminish in the long run when investment recovers to normal levels.” U.S. Congressional
Budget Office, The Budget And Economic Outlook: Fiscal Years 2010 To 2020, p.38. In addition to the capital effect, the global
crisis may have slowed down the potential growth by creating adverse and lasting effect on the financial system and the
labor markets in some countries (e.g. in the U.S.). However, these effects are believed to be relatively limited in the Turkish case.
10
Inflation Report 2011-III
69
Central Bank of the Republic of Turkey
Slowdown of investment during 2001 and 2009 crises in Turkey are illustrated in
Chart 1. Although investments fell drastically both during the 2001 crisis and the
recent one, the fall in the latter crisis is more limited and short-lived than in the
former one. The capital growth is shown in Chart 2. The annual average capital
growth, which was 5 percent in the 1987-2010 period, went remarkably below this
average during both crises; however, the fall in the 2001 crisis was more acute
and long-lasting. The amount of cumulative capital loss due to these belowaverage growth rates is illustrated separately for both crises in Chart 3 as a
function of the time passed since the onset of the crisis. Capital loss reached
nearly 11 percent in the 2001 crisis, but remained around 4 percent in the last
crisis.
By multiplying the capital losses in Chart 3 by 0.5, the estimated value for the
capital income share for Turkey, potential GDP effects for these losses can be
roughly estimated. This estimation shows that potential GDP loss reached 5.5
percent in the 2001 crisis (11%*0.5=5.5%), and hovered around 2 percent in the
last crisis (4%*0.5=2%).
How large and long-lasting the capital loss (and the resulting potential GDP loss)
can be is shown in Chart 3 for the 2001 crisis. The capital loss, which led to a GDP
loss of 5.5 percent in the 2001 crisis, was recovered only roughly by 2008. In
contrast, the potential GDP loss incurred by the capital loss in the last crisis led to a
potential GDP loss of only 2 percent and has already been recovered by around
40 percent so far on the back of the rapid recovery in investments. In other words,
the remaining potential GDP loss is around 1 percent as of mid-2011.
In short, the capital loss that occurred in the last crisis (and the resulting
potential
GDP loss) remained more limited than in the 2001 crisis and this loss was largely
compensated thanks to the rapid recovery in investments. This caused the
capacity loss in the economy to remain fairly limited in the last crisis, and played
an important role in preventing capacity utilization rates from reaching levels that
would create inflationary pressures (i.e. “overheating”), despite the robust
economic recovery following the crisis.
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 1. Fixed Investments
Chart 2. Fixed Capital Index Growth*
(Percent of GDP, Seasonally-Adjusted)
(Annual Percent Change, Seasonally-Adjusted)
26
10
24
8
22
6
20
4
18
2
0
16
-2
1998Q1
1998Q4
1999Q3
2000Q2
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
2010Q4
14
1987
1988
1989
1991
1992
1993
1994
1996
1997
1998
1999
2001
2002
2003
2004
2006
2007
2008
2009
2011
-4
* Figures for after 2011Q1 are CBRT estimates. The dashed line shows
the sampling average.
Source: Demiroğlu (2011), TurkStat, CBRT.
Source: TurkStat, CBRT.
Chart 3. Effects of 2001 and 2009 Crises on Capital Index*
(Deviation of Index Level from Average Growth Trend in Percent)
Percent
0.0
2009 crisis
2008Q2 = 0
-2.5
2008Q2=-1.7
2011Q2=-2.6
-4%
-5.0
2001 crisis
2000Q3 = 0
-7.5
-10.0
-11%
Quarter
-12.5
0
2
4
6
8
10 12 14 16 18 20 22 24 26 28 30
* The horizontal axis shows the quarter following the crisis.
2011 figures are estimates. Capital share is assumed to be 50 percent.
Source: Demiroğlu (2011), TurkStat, CBRT.
REFERENCES
Cerra, V. and S. Saxena, 2008, Growth Dynamics: The Myth of Economic
Recovery, American Economic Review, 98(1): 439-57.
Demiroğlu, U., 2011, Losses in Fixed Capital Growth of Turkey in Recent Crises and
the Impact of these Losses on the Potential GDP, CBRT Economic Note
(forthcoming).
Furceri, D. and A. Mourougane, 2009, The Effect Of Financial Crises On Potential
Output: New Empirical Evidence From OECD Countries, OECD Economics
Department Working Paper No. 669.
Inflation Report 2011-III
71
Central Bank of the Republic of Turkey
72
Inflation Report 2011-III
Central Bank of the Republic of Turkey
5. Financial Markets and Financial
Intermediation
5.1. Financial Markets
The second-quarter data indicate that the global economy continues to
recover, albeit at a slower pace. Mounting concerns over sovereign debt
problems in the euro area, especially in Greece, coupled with soaring energy
prices and the natural disaster in Japan, increased downside risks to global
economy. Moreover, the recovery of employment in advanced economies has
yet to reach the desired level. Amid the recent decline in commodity prices, all
these invigorated the perceptions that the normalization of monetary policy in
advanced economies may be delayed. Meanwhile, domestic demand
continues to stimulate economic growth in emerging economies. Monetary
tightening lingers on in many emerging economies in order to contain upside
risks to inflation owing to robust domestic demand and soaring commodity
prices (Chart 5.1.2). Accordingly, short-term interest rates are raised on one
hand, and macroprudential measures are employed to limit risks against
financial stability, on the other. Amid expectations of a delay in policy rate hikes
in advanced economies, central banks of emerging economies are expected
to further enforce macroprudential measures in the upcoming period.
Chart 5.1.1.
Chart 5.1.2.
Growth Rates in Advanced and Emerging
Economies*
Policy Rates in Advanced and Emerging
Economies*
(Percent, GDP-Weighted)
(Percent, GDP-Weighted)
Advanced Economies
Advanced Economies
10
Emerging Economies
10
Emerging Economies
9
8
8
6
7
6
4
5
2
4
3
0
2006
2007
2008
-2
2009
2010
2011
2012
2
1
-4
0206
0606
1006
0207
0607
1007
0208
0608
1008
0209
0609
1009
0210
0610
1010
0211
0611
1011
0
-6
*Advanced Economies: U.S.A., EU, Japan. Emerging Economies: China, India, Brazil, South Korea, Mexico, Russia, Turkey, Poland, Indonesia, South
Africa, Thailand, Malaysia, Israel, Czech Republic, Hungary, Colombia, Philippines.
Source: Consensus Forecasts, Bloomberg, CBRT.
Heightening concerns over sovereign debt crisis in Europe coupled with
the apparent downside risks to global economy caused deterioration in global
risk perceptions, leading to surge in risk premium indicators in emerging
Inflation Report 2011-III
73
Central Bank of the Republic of Turkey
economies (Charts 5.1.3 and 5.1.4). Owing mainly to escalated concerns over
current account deficit and the quality of the financing of this deficit, the risk
premium increase in Turkey was above the average in this period. In addition,
the expectations for a delay in the upgrade of Turkey’s sovereign rating to
investment grade also fed into the soaring risk premium.
Chart 5.1.3.
Chart 5.1.4.
EMBI
Regional CDS Indices*
EMBI+Turkey
EMBI+
900
Turkey
Latin America
Asia
Europe
300
800
250
700
600
200
500
150
400
300
100
200
0711
0411
0111
1010
0710
0110
0410
50
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
100
* Latin America: Peru, Colombia, Mexico, Brazil, Chile.
Asia: Indonesia, Thailand, South Korea, Malaysia, Philippines.
Europe: Romania, Poland, Hungary, Czech Republic, Bulgaria.
Source: Bloomberg, CBRT.
Source: Bloomberg.
The unfavorable course of global risk perceptions was also influential on
portfolio flows to emerging economies, and foreign portfolio investments to
these countries lost pace (Chart 5.1.5). A similar trend was also observed in
Turkey and net capital inflows slowed down, especially after more-thanexpected widening of current account deficit in May (Chart 5.1.6).
Chart 5.1.5.
Chart 5.1.6.
Portfolio Flows to Emerging Economies*
Net Portfolio Flows of Non-Residents*
(Million USD)
(Million USD)
Net Flows of Public Securities
0611
0411
0211
1210
1010
0810
0610
0410
0210
1209
1009
0809
0609
0209
0611
0411
0211
1210
-2500
1010
-20000
0810
-1500
0610
-12500
0410
-500
0210
-5000
1209
500
1009
2500
0809
1500
0609
10000
0409
2500
0209
17500
* Adjusted for index and interest rate effect.
Source: EPFR.
Stocks
3500
0409
25000
74
GDBS
Net Flows of Stocks
* Adjusted for index and interest rate effect.
Source: CBRT.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Amid the deterioration in global risk perceptions and the monetary
tightening implemented by the CBRT, market interest rates went up and
benchmark bond rate recorded the 1-year high in the second quarter
(Chart 5.1.7). Consequently, market interest rates increased slightly above other
emerging economies (Chart 5.1.8).
Chart 5.1.7.
Chart 5.1.8.
Yields on GDBS
Second-Quarter Changes in 2-year Market Rates
Benchmark Interest Rate (compounded,
percent)
400
EMBI+Turkey (right axis)
11
350
10
0.8
0.6
0.4
0.2
300
0
9
250
8
-0.2
-0.4
200
-0.6
150
100
0110
0210
0310
0410
0510
0610
0710
0810
0910
1010
1110
1210
0111
0211
0311
0411
0511
0611
6
-0.8
India
Thailand
China
Turkey
Israel
Peru
Romania
Malaysia
Hungary
Chile
Colombia
Poland
S. Korea
Brazil
S. Africa
Indonesia
Philippines
Czech Rep.
Mexico
7
Source: ISE, Bloomberg.
Source: Bloomberg, CBRT.
Inflation and policy rate expectations remained subdued in the second
quarter, indicating that the rise in market interest rates mainly stems from
monetary tightening (Charts 5.1.9 and 5.1.10).
Chart 5.1.9.
Chart 5.1.10.
12-Month Ahead CPI Inflation Expectations*
12-Month Ahead Policy Rate Expectations *
July 2011
July 2011
April 2011
0.8
0.9
0.7
0.8
April 2011
0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0
0
3
5
7
9
5
6
7
8
9
10
* Calculated by non-parametric Kernel estimation.
Source: CBRT.
Market interest rates went up across all maturities with the slope of the
yield curve remaining unchanged, and indicating that the monetary tightening
and the deterioration in risk perceptions were influential across all maturities
(Charts 5.1.11 and 5.1.12).
Inflation Report 2011-III
75
Central Bank of the Republic of Turkey
Chart 5.1.11.
Chart 5.1.12.
Yield Curve*
Interest Rate Spread *
July 20, 2011
3.8
April 29, 2011
9.5
3.4
April Inflation
Report
3.0
Yield (Percent)
9
2.6
2.2
8.5
1.8
1.4
8
1.0
0.6
0.2
Maturity(year)
* Calculated from the compounded returns on bonds quoted in ISE
Bonds and Bills Market by using Extended Nelson Siegel (ENS) method.
Source: ISE, CBRT.
0611
4
0411
3.5
0211
3
1210
2.5
1010
2
0810
1.5
0610
1
0410
0.5
0210
7.5
* Spread between 4-year and 6-month yields derived from the ENS yield
curve, 5-day moving average.
Source: ISE, CBRT.
Having increased slightly amid the rise in market interest rates, the real
rates remained essentially unchanged quarter-on-quarter with real interest rates
remaining
higher
in
Turkey
compared
to
other
emerging
economies
(Charts 5.1.13 and 5.1.14).
Chart 5.1.13.
Chart 5.1.14.
2-Year Real Interest Rates for Turkey*
2-Year Real Interest Rates*
(Percent)
(Percent)
8
4.0
7
3.5
6
3.0
5
2.5
4
3
2.0
2
1.5
1
0
1.0
0110
0210
0310
0410
0510
0610
0710
0810
0910
1010
1110
1210
0111
0211
0311
0411
0511
0611
0711
0.0
* Calculated as the 2-year discounted bond returns derived from the
yield curve, minus the 24-month ahead inflation expectations from the
CBRT's Survey of Expectations.
Source: ISE, CBRT.
Brazil
Turkey
Hungary
Colombia
Peru
Romania
Chile
Poland
South Africa
Mexico
India
Israel
Malaysia
S. Korea
Philippines
Indonesia
Thailand
Czech Rep.
-1
0.5
* Calculated as the 2-year government bond returns of countries minus
the 2-year ahead inflation expectation from the Consensus Forecasts.
Source: Bloomberg, Consensus Forecasts, CBRT.
CBRT’s monetary tightening is also manifested on deposit rates. In fact,
the yield curve of TL savings deposits steepened further, and similarly, the
average maturity of TL deposits maintained its uptrend in the second quarter
(Charts 5.1.15 and 5.1.16).
76
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 5.1.15.
Chart 5.1.16.
Yields on TL Savings Deposits
Average Maturity of TL Deposits
7
April 1, 2011
67
July 8, 2011
6.9
62
6.8
December 2010
Decision on Required
Reserves
6.7
57
6.6
6.5
52
6.4
6.3
47
6.2
6.1
Source: CBRT.
0611
0511
0411
0311
0211
0111
1210
1110
1010
12 ay
0910
6 ay
0810
3 ay
0610
1 ay
0710
42
6
Source: CBRT.
The divergence between TL and other emerging market currencies
since the launch of the new monetary policy mix by the CBRT was also
maintained in the second quarter, and the Turkish lira depreciated further
(Chart 5.1.17). This divergence was not only driven by the CBRT’s policies, but
also by the deterioration in the risk premium due to decline in the global risk
appetite (Chart 5.1.18).
Chart 5.1.17.
Chart 5.1.18.
TL and Emerging Market Currencies*
TL Currency Basket and Risk Premium Indicators
(October 2010=1)
(Percent)
Turkey
Currency Basket (0.5 USD+0.5 euro)
Emerging Economies
1.16
2.1
1.13
2
EMBI+Turkey (right axis)
1000
900
800
1.1
1.9
700
1.07
1.8
600
1.01
1.7
500
0.98
1.6
1.04
400
300
0.95
1.5
200
* Average of emerging market currencies including Brazil, Chile, Czech
Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea
and Colombia, against USD.
Source: Bloomberg, CBRT.
0411
0111
1010
0710
0410
0110
1009
0709
0409
0109
1008
0708
100
0408
1.4
0108
0611
0511
0411
0311
0211
0111
1210
1110
1010
0.92
Source: Bloomberg, CBRT.
Besides the recent depreciation, the implied volatility of TL increased
remarkably across short-term maturities in comparison to other emerging market
currencies (Chart 5.1.19). This increase is attributed to the launch of the policy
mix as well as the deterioration in risk perceptions. Meanwhile, 12-month ahead
implied volatility of TL remained virtually unchanged (Chart 5.1.20).
Inflation Report 2011-III
77
Central Bank of the Republic of Turkey
Chart 5.1.19.
Chart 5.1.20.
Implied Volatility of Exchange Rates*
Implied Volatility of Exchange Rates*
(1-Month Ahead)
(12-Month Ahead)
35
25
Emerging
Economies
ı
30
Emerging
Economies
23
Turkey
21
Turkey
25
19
17
20
15
15
13
10
0611
0411
0211
1210
1010
0810
0610
0210
0611
0411
0211
1210
1010
0810
0610
7
0410
0
0210
9
0410
11
5
* Emerging economies include Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea and Colombia.
Source: Bloomberg, CBRT.
Amid the ongoing volatility in financial markets, domestic and external
economic climate also started to weigh on monetary indicators. In fact,
balance sheet decomposition of M3, the broad measure of money supply,
reveals a limited slowdown in the strong pace of Claims on Private Sector,
mostly consisting of bank loans extended to non-financial private individuals
and institutions. Meanwhile, the negative contribution of Claims on Public
Sector to M3 growth continues since bank resources are channeled as loans
rather than being invested on government bills with low returns. Net External
Assets continue to fall mainly owing to the increase in commercial banks'
external borrowing, albeit slowly quarter-on-quarter. Lastly, the negative
contribution of the item Other, i.e. the monetary sector's non-deposit resources,
to the M3 growth has slightly decreased amid reduced bank profitability
(Chart 5.1.21).
Chart 5.1.21.
Balance Sheet Decomposition of M3
(Contributions to Annual M3 Growth)
4.Other
3.Claims on Private Sector
2.Claims on Public Sector
1.Net External Assets
1+2+3+4=M3 (Annual Percent Change)
50
40
30
20
10
0
-10
0411
0111
1010
0710
0410
0110
1009
0709
0409
0109
1008
0708
0408
0108
1007
0707
0407
0107
-20
Source: CBRT.
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The monetary base continued to expand in real terms in the second
quarter amid the economic growth. The expansion in the monetary base was
largely driven by soaring banks' deposits at the CBRT (Chart 5.1.22). Meanwhile,
the growth of the currency in circulation slowed down slightly as the economic
activity, which was robust in the first quarter on the back of the strong domestic
demand, started to lose pace in the second quarter.
Chart 5.1.22.
Annual Growth of the Real Monetary Base
(Percent)
Net Impact of the Changes in Currency in Circulation
100
Net Impact of the Changes in Banks' Deposits
90
Annual Growth Rate of the Real Monetary Base
80
70
60
50
40
30
20
10
0
0511
0211
1110
0810
0510
0210
1109
0809
0509
0209
1108
0808
0508
0208
1107
0807
0507
0207
1106
0806
0506
-10
Source: CBRT.
Due to the slowdown in portfolio flows in the second quarter, the daily
amount to be purchased via FX auctions was reduced from USD 50 million to
USD 40 million and USD 30 million, subsequently. Towards the end of July, FX
buying auctions were suspended in order to monitor the effects of the new
decisions taken by the EU to solve sovereign debt problems. The amount of FX
withdrawn from the market through buying auctions dropped to USD 2.9 billion
with a limited quarter-on-quarter decline, and around TL 4.5 billion liquidity was
injected to the market in return. While FX buying auctions narrowed the TL
liquidity deficit in the Interbank Money Market, the substantial increase in the
amount set aside by the banks for required reserves led to a quarter-on-quarter
widening in the net liquidity deficit (Chart 5.1.23). Moreover, the Treasury's
average account balance at the CBRT increased quarter-on-quarter, feeding
into the widening of the liquidity deficit.
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Central Bank of the Republic of Turkey
Chart 5.1.23.
Market Liquidity
(Billion TL)
Interbank Money Market and Reverse Repo
1-Week Repo
3-Month Repo
Net Liquidity
65
55
45
35
25
15
5
-5
-15
0611
0311
1210
0910
0610
0310
1209
0909
0609
-25
Source: CBRT.
5.2. Financial Intermediation and Loans
Real sector loans by domestic banks continued to grow in the second
quarter, while the growth rates diverged notably across sub-items (Chart 5.2.1).
In annualized terms, business loans making up around two thirds of the real
sector loans went up by 31 percent, consumer loans recorded an increase of 51
percent and total real sector loans grew by 37 percent in this period. Loans-toGDP ratio also remained on the rise in the second quarter amid the ongoing
rapid growth in loans (Chart 5.2.2).
Chart 5.2.1.
Chart 5.2.2.
Loan Growth Rates*
Loans to GDP*
(13-Week Average, Annual Percent Change)
(Percent)
60
Business Loans (including foreign branches)
Consumer Loans
Real Sector Loans
55
50
Household Loans
Business Loans
50
40
30
45
40
20
35
10
30
25
0
-10
20
15
-20
10
5
0708
0908
1108
0109
0309
0509
0709
0909
1109
0110
0310
0510
0710
0910
1110
0111
0311
0511
-30
* Adjusted for exchange rate effect.
Source: BRSA, CBRT.
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2007
2008
2009
2010
2011
* Reel sector loans are composed of household loans and business
loans. Second-quarter GDP is estimate.
Source: BRSA, CBRT.
In addition to robust growth of the domestic loans, the mild course of
growth in loans extended by external institutions and organizations has been
maintained since the third quarter of 2010. In fact, these loans, a major source
of funding for non-financial institutions, grew by a year-on-year 26 percent in the
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Central Bank of the Republic of Turkey
first two months of the second quarter, despite the contraction in May
(Chart 5.2.3).
Chart 5.2.3.
Chart 5.2.4.
Financing of Non-Financial Institutions
Weekly Growth of TL and FX Business Loans*
(Billion USD)
(13-Week Average, Annual Percent Change)
FX Business Loans by Domestic Banks
170
TL Business Loans
External Business Loans (excluding foreign
branches)
FX Business Loans (including foreign branches)
100
150
80
130
60
40
110
20
90
0
70
-20
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2007
2008
Source: CBRT.
2009
2010
2011
-40
0107
0407
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410
0710
1010
0111
0411
0711
50
* Adjusted for exchange rate effect.
Source: BRSA.
An analysis of business loans by currency denomination indicates a
significant divergence between TL and FX loans in terms of growth rates. Hence,
unlike the first quarter, TL-denominated loans recorded a higher increase
compared to FX-denominated loans in the second quarter, owing to various
factors (Chart 5.2.4). Firstly, soaring current account deficit feeding into
mounting concerns over exchange rate risk is likely to have compelled
enterprises to opt for TL-denominated loans in order to avoid costs stemming
from a possible FX volatility. Moreover, demanding loans to benefit from the tax
amnesty is another factor that may have contributed to the rise in TL loans.1
Lastly, the slowdown in investment demand in the second quarter may have
restricted the increase in FX loans, since a majority of the loans extended for
investment purposes are FX-denominated loans. In the meantime, banks’
access to external funding to finance FX-denominated loans was not subject to
any tightening in this period, and the rate hikes were more notable for TLdenominated business loans than FX-denominated business loans. Hence, there
is no concrete evidence explaining the role of bank’s preferences on the higher
growth of TL-denominated loans compared to FX loans.
Business loans by scale reveal that following a boost in the post-crisis
period, the first-quarter slowdown in SME loans is stronger. Accordingly, after an
extended period, SME loans recorded a slower rate of growth than loans to
1
Tax collection in May and June 2011 within tax amnesty amounted to TL 7.9 billon, and TL 5.4 billion of this amount was paid in
full as announced by the respective institutions. A part of this lump payment is believed to have been financed by loans.
Inflation Report 2011-III
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Central Bank of the Republic of Turkey
large-scale enterprises. In fact, the slowdown in FX loans is driven by the
slowdown in FX loans extended to SMEs, where FX loans to large-scale
enterprises remained unchanged in effect (Charts 5.2.5 and 5.2.6).
Chart 5.2.5.
Chart 5.2.6.
Business Loan Growth by Scale*
FX Business Loans by Scale*
(Nominal, 3-Month Average, Annual Percent Change)
Large-Scale Enterprises
(Nominal, January 2007=100)
SME
-40
80
Large
Micro
Small
Medium
0311
0107
0407
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410
0710
1010
0111
0411
130
1210
-20
0910
180
0610
0
0310
230
1209
280
20
0909
40
0609
330
0309
60
1208
380
0908
80
0608
430
0308
100
*Adjusted for exchange rate effect.
Source: BRSA.
While loans continue with high-rated increases, rapid rate hikes were
observed in both FX and TL-denominated business loans (Charts 5.2.7 and 5.2.8).
Consequently, the spread between business loan and deposit rates increased
far above the costs brought about by the arrangements on required reserve
ratios in this period. Moreover, a divergence is also evident between TL business
loan rates and yields on GDBS with similar maturities. This surge in interest rate
margin, which is more evident in TL business loans, is attributable to the
contraction in banks’ funding sources as well as the deterioration in liquidity
positions.
Chart 5.2.7.
Chart 5.2.8.
TL Business Loan Rates
(4-Week Average, Percent)
FX Business Loan Rates
(4-Week Average, Percent)
Business Loan Rate - Deposit Rate
FX Business Loan Rate (right axis)
Business Loan Rate (right axis)
12
25
23
10
FX Busines Loan Rate - FX Deposit Rate
12
10
21
19
8
8
17
6
15
13
4
6
4
11
9
2
2
7
0511
0111
0910
0510
0110
0909
0509
0109
0908
0508
0
0108
0211
0611
0209
0609
1009
0210
0610
1010
5
0206
0606
1006
0207
0607
1007
0208
0608
1008
0
Source: CBRT.
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The robust growth was maintained in consumer loans in the second
quarter, while the growth rates by sub-items notably diverged. The sub-item
Other, making up half of consumer loans, increased by a year-on-year 70
percent, driving the rise in consumer loans in this period (Chart 5.2.9). Housing
and automobile loans registered a year-on-year increase by 40 percent and 51
percent, respectively. Credit cards with installments, which are not classified
under consumer loans, yet functioning as a consumer loan, recorded a nearly
60 percent increase on an annualized basis.
Chart 5.2.9.
Weekly Growth Rates of Consumer Loans*
(13-Week Average, Annual Percent Change)
Housing
Automobile
Other
120
100
80
60
40
20
0
-20
0611
0411
0211
1210
1010
0810
0610
0410
0210
1209
1009
0809
0609
0409
0209
1208
1008
0808
0608
-40
* Including automobile loans extended by consumer financing firms.
Source: CBRT.
Domestic demand continues to grow robustly in the post-crisis period,
leading to a stable increase in employment and high consumer confidence,
which feed into higher demand for consumer loans, and thus, growth of loans.
However, soaring consumer loans are not only driven by demand but also by
supply-side factors. In fact, the sub-item Other, which is considered to have the
lowest interest rate elasticity and the highest sensitivity to loan standards and
conditions recorded the fastest growing, pointing to the presence of supply-side
factors. Under current economic conditions with intense competition and
escalated loan costs, banks willing to maintain their profits opt for other loans
with high profit margins in order to ease loan standards and conditions. Another
factor to be underlined is the possibility that payments within the tax amnesty
having been financed by other loans, composing a certain portion of the
increased demand for this sub-item. In fact, stock figures for other loans soared
in May and June, during tax payment period.
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With the objective to maintain a sustainable robust growth for consumer
loans, on June 20, 2011, the BRSA introduced regulations on risk weights
underlying general provision and capital adequacy estimations for consumer
loans excluding housing and automobile loans (Box 5.1). As a result, the
practically flat course of consumer loan rates in the first quarter was replaced
by a strong uptrend, which is more pronounced for personal loans.
Chart 5.2.10.
TL Loan Rates
(Flow, Percent)
Personal
Automobile
Housing
Business
20
15
10
0711
0611
0511
0411
0311
0211
0111
1210
1110
1010
0910
0810
0710
0610
0510
0410
0310
0210
0110
5
Source: CBRT.
Bank assets continued to grow steadily in the second quarter on the back
of loans. On the liabilities side, despite the ongoing decline in the share of
deposits, the major source, banks’ loan to deposit ratio displayed a quarter-onquarter increase (Table 5.2.1). Meanwhile, non-residents remain significant for
the financing of loans. Nevertheless, in contrast to previous periods, external
financing obtained from repo were on the rise in this period. The increase in
required reserve ratios was mostly covered by the liquidity provided by the
CBRT. Consequently, the ratio of banks’ short-term liabilities to balance sheet
size posted a noteworthy increase.
Table 5.2.1.
Changes in Main Balance Sheet Items
(Million TL)
2011 Q1
Assets
Liabilities
Cash+Required Reserves+Claims from the CBRT
Claims on Banks
Securities
Loans
Total Assets
Deposits (Participation Funds)
Payables to Banks
Funds Raised by Repo Transactions
Securities Issued (Net)
Total Equity
Total Liabilities
TL
16232
892
-7089
24375
27723
5608
2306
6137
2598
827
19629
FX
692
-461
-2208
14077
12024
6696
7460
2330
1443
-355
20118
2011/03 – 2011/05
TL
23502
-2357
-909
24032
45109
11220
-4632
31212
2455
2701
42358
FX
9183
1142
1969
10086
23689
3549
14292
6943
2203
-106
26593
Source: BRSA.
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In sum, no significant slowdown was recorded in loan growth in the
second quarter of the year (Chart 5.2.11). While the policy measures had an
impact on loan rates in this period, the low interest rate elasticity of loan
demand restricted the effectiveness of these measures. Due to intense
competition, the liquidity and interest rate risk due to adopted measures were
reflected on rates rather than on the quantity of loans. Moreover, the
continuing easy access to external financing, a major factor in banks’ ability to
generate loans, was influential in limiting the effectiveness of the measures on
loan growth. However, lagged effects of the measures taken by the CBRT as
well as the BRSA are expected to be more pronounced in the second half of
the year, and loan growth will significantly slow down in the coming period.
Inflation Report 2011-III
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Central Bank of the Republic of Turkey
Box
5.1
Possible Effects of the Amendments to BRSA Regulations
This Box discusses the possible effects of the recent amendments by the BRSA to
general provisions and capital adequacy regulation, on the banking sector and
loans. Underscoring the potential risks associated with the rapid expansion of
consumer loans excluding automobile and housing loans (other consumer loans)
on household indebtedness and the banks granting these loans, the BRSA
introduced amendments on the regulations for the calculation of provisions to
apply to these loans and the capital adequacies of banks.2 Accordingly, to be
effective for loans to be extended as of June 18, 2011;
•
The banks with a ratio of consumer loans to total loans above 20 percent
and/or banks with a non-performing loan ratio for consumer loans
excluding automobile and housing loans above 8 percent shall apply the
general provisions for consumer loans excluding automobile and housing
loans as 4 percent for those monitored in the first group, and as 8 percent
for those monitored in the second group.
•
Risk weights for other consumer loans, which were previously applied as
100 percent in capital adequacy calculations irrespective of the
maturities, were diversified by maturities. In this context, the risk weight for
other consumer loans with maturities between 1 to 2 years will be 150
percent, while that for maturities with more than 2 years will be 200
percent.
•
General
provision of minimum 10 percent will apply to loans, the
contract conditions of which will be changed by the extension of the
initial payment plan.
Currently, a large number of banks extending consumer loans are affected by
the amendment to the regulation on general provisions, and the amendment to
the capital adequacy affects all banks. A ceteris paribus amendment to general
provisions decrease the marginal contribution of the newly-extended other
consumer loans to balance sheet net profit. Meanwhile, the amendment on
capital adequacy elevates the minimum capital requirement for long-term
consumer loans, and in turn, increases the weighted average capital cost.
2
BRSA Press Releases dated June 20, 2011.
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The
increase in the general provisions for other consumer loans creates an
equivalent effect to the increase in marginal costs of bank loans that are
classified under this group as per their effects on the banks’ profits. Therefore, they
are supposed to create an upside effect on the rates of the said loans. To what
extent the banks will reflect the increasing costs on interest rates will mainly be
determined by the current profit margin, competition in the sector, interest rate
elasticity of the loan demand and the level of free reserves.
Historically,
the interest rate on other consumer loans has been above the
housing and automobile loan rates (Chart 5.2.10). It is difficult to explain the
spread between other consumer loans and housing and automobile loans rates
by the differences between credit risks of these loans. In fact, the deviation
between non-performing loan rate and the loss-given default rate can fail to fully
explain this spread. This indicates that profit margins in other consumer loans are
relatively higher and supports the assertion that banks have a higher market
power in this loan type. The relatively higher profit margins mean that banks may
not be required to reflect all costs stemming from amendments to interest rates. In
that case, interest elasticity of the loan demand shall also be influential on the
extent to which other consumer loans rates are affected by the increasing costs.
The assertion that interest rate elasticity of demand for consumer loans excluding
housing and automobile loans are lower than that of other loan types is a
commonly shared view among sector representatives.3 Sector representatives
believe that for consumer loans, rather than the interest rate, other factors that
affect the affordability of the loan is important for the client. Maturity conditions
are the leading factors on the supply side. Maturity conditions determine the
extent of the liquidity constraint which is binding for inter-period income
substitutability. The low amount of other consumer loans and the availability for
long-term borrowing restrict the effect of interest rate increases on loan
installment amounts, in other words, limits the effects through the affordability of
the loan as is the case in all consumer loans. Table 1 illustrates this situation with a
numerical example. The table shows the monthly payments for a sample loan of
TL 10,000, an average amount for personal loans representing a majority of other
consumer loans that is paid in 36 months, the average maturity for personal loans.
Accordingly, a rise of 300 basis points in interest rates to compensate for the
whole cost of the amendment leads to an increase of 13 TL in the monthly
installments. This increase in the monthly installments creates a limited change on
the borrower’s payment capacity.
3
Alper et al. (2011).
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The above-mentioned information indicates that banks may reflect a great part
of the cost stemming from the amendments on other consumer loan rates.
Table 1. Increase in Loan Rates and Loan Installments
Kredi Taksitleri
Amount (TL)
10,000
10,000
Maturity (Month)
Interest Rate (Percent)
36
36
13.23
16.23
1.04
1.26
334
347
Monthly Interest Rate
(Percent)
Monthly Installments (TL)
Free reserves that are set aside by banks against potential future risks can play a
restrictive role on the increase in general provisions. Banks can limit the effects of
higher general provisions on their profitability to a certain extent by using free
reserves that they keep without being subject to any legal requirement on
provisions as provisions to be set aside for other consumer loans. In fact, banks
have historically resorted to free reserves in times of low profits (Chart 1).
Chart 1. Profitability and Free Reserves
(Percent)
Asset Profitability
Free Reserves/Assets (right axis)
2.8
0.35
2.6
0.3
2.4
0.25
2.2
0.2
2
0.15
1.8
0.1
01.01.2008
01.03.2008
01.05.2008
01.07.2008
01.09.2008
01.11.2008
01.01.2009
01.03.2009
01.05.2009
01.07.2009
01.09.2009
01.11.2009
01.01.2010
01.03.2010
01.05.2010
01.07.2010
01.09.2010
01.11.2010
01.01.2011
01.03.2011
01.05.2011
1.6
Source: CBRT.
Meanwhile, by its nature, the amendment on capital adequacy regulation has
the potential to play a restrictive role on the growth of consumer loans excluding
automobile and housing loans. As per the new risk weights determined by the
amendments, for each unit of extended other consumer loan, depending on the
maturity of the loan, keeping 1.5 or 2 times more equity capital is required
compared to the former formulation.
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The equity capital being relatively costly compared to other liabilities and/or the
relative difficulty of raising equity capital compared to raising other funding
resources will require interest rates on consumer loans to be subject to the
regulation to be higher in proportion to these costs. Nevertheless, capital
adequacy ratios of banks are currently far above the minimum legal ratios and
the new risk weights will apply to loans to be extended after the publication of the
regulation. Therefore, these measures may not immediately cause banks to
change attitudes regarding the loan maturities.4 However, as the stock of other
consumer loans get renewed over time, the effects of the amendments will be
felt more deeply and urge banks to consider costs emanating from the additional
capital requirements while extending other consumer loans. In fact, under the
assumption that the current loan composition is maintained, when the other
consumer loans stock is completely renewed, capital adequacy ratio is estimated
to go down by 1.5 points.
The
date of the amendment is too recent to infer clear-cut judgments on its
effects. Nevertheless, preliminary data suggest that, as envisioned by the above
analysis, banks have largely reflected the increasing cost in other consumer loans
on loan rates since the amendment in the regulation (Chart 2) and the loan type
subject to the regulation has showed a remarkable slowdown (Chart 3).5
Chart 2.
Personal Loan Rates ( Percent)
Chart 3.
Other Consumer Loan Growth
(4-Week Average, Annualized Percent)
12-Month
24-Month
36-Month
48-Month
2010
08.07.2011
24.06.2011
10.06.2011
27.05.2011
13.05.2011
29.04.2011
15.04.2011
01.04.2011
18.03.2011
04.03.2011
07.01.2011
0
15.07.2011
10
18.0
08.07.2011
20
18.2
01.07.2011
30
18.4
24.06.2011
40
18.6
17.06.2011
50
18.8
10.06.2011
60
19.0
03.06.2011
70
19.2
Source: CBRT.
2007-2010 Average
80
19.4
18.02.2011
19.6
2011
90
04.02.2011
19.8
21.01.2011
20.0
Source: CBRT.
4 If there is an implicit return on the portion of the capital adequacy ratio that is kept above the legal limits for the bank, the
regulation on the risk weight is supposed to be effective in a shorter time.
5 In deciding for the effects of the regulation, it should be considered that the payments within tax amnesty were due at the
end of June and that for some portion of the payments to be made by the corporate sector within tax amnesty, other
consumer loans may have been utilized.
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Central Bank of the Republic of Turkey
To sum up, the amendments introduced by the BRSA to the regulations on the
calculation of general provisions and capital adequacy, with a view to
containing the risks against financial stability are expected to be effective on
loans in the upcoming period. The extent of the effect shall largely be determined
by the interest rate elasticity of the loan demand in the short term. Over time, the
amendments to capital adequacy calculations are expected to become more
binding, and therefore, affect the supply side through the volume and maturity
structure of the loans subject to regulations. The slowdown in loans, which play a
great role on the vigorous course of domestic demand and imports will support
the policy mix implemented by the CBRT and contribute to the rebalancing of the
domestic and external demand. Consequently, the decisions taken by the BRSA
are crucial in mitigating the risks against financial and macroeconomic stability.
REFERENCES
Alper, K., D. Mutluer-Kurul, R. Karaşahin and H. Atasoy, 2011, Bankacılık Kesimi
Kredi Davranışı Anketi (in Turkish), CBRT Working Paper (forthcoming).
www.bddk.gov.tr.
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Box
Credit Rating Upgrade to “Investment Grade”
5.2
Credit
ratings determined by rating agencies are indicators representing the
capacity of the countries to fulfill their financial liabilities, in other words, their
credit riskiness. Therefore, with a credit rating upgrade, a country is expected to
increase its access to ample, cheap and long-term foreign financing. “Investment
grade” is a significant threshold for countries to be able to have access to foreign
financing.6 This is because countries with “investment grade” and countries with
below grades are perceived and treated as different risk groups in global
financial markets. In addition, the laws and regulations they are subject to allow
many long-term funds like pension and insurance funds to invest only in countries
with investment grades.
Despite
upgrades in the post-crisis period, Turkey’s credit rating is below the
investment grade. Nevertheless, the improved risk perceptions for Turkey following
the global crisis are likely to reflect on credit ratings by an upgrade to investment
grade in the upcoming period. Within this context, this Box focuses on the preand post-upgrade trends of selected financial and macro variables in emerging
economies, whose credit ratings were upgraded to investment grade in the last
twenty years and remained at that level for a plausible period.7
The upgrade of the credit rating to investment grade is expected to bear a direct
effect on portfolio flows. In this context, the average “relative” change in foreign
capital in the form of portfolio investments in countries with upgrades is depicted
in Chart 1. The illustrated time period is one year before and after the upgrade. At
this point, it should be underlined that financial indicators focus on the “relative”
change rather than the “nominal” change in comparison with the reference
country group average.8 For example, Chart 1 shows the extent of divergence
between portfolio flows in countries with upgrades to investment grade and the
average of the reference group countries. As seen in this chart, the change in the
ratio of foreign portfolio investments to GDP in countries with upgrades both
before and after the upgrade is remarkably above that of reference country
group average.
6 According to leading credit rating agencies S&P and Fitch, BBB- and above; while for Moody’s, Baa3 and above is
considered as the “investment grade”.
7 Analyzed number of cases is 20. Data constraints led to exclusion of some cases of upgrades from the analysis.
8 Reference country group is selected according to the geographical location of these countries. Accordingly, reference
country groups are emerging economies in the continent of America, East Europe, Asia and the Middle East. South Africa and
Russia are included in the Eastern Europe group. Reference group selection also considers the size of the GDP, free movement
of capital and the foreign exchange rate policy.
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A
similar trend is observed in the exchange rate where the “relative”
appreciation prior to upgrades continues in the aftermath of the upgrade
(Chart 2).
Chart 1. Relative Portfolio Flows
Chart 2. Relative Performance of the
Exchange Rate (Percent, Against USD)
(Percent of GDP)
Quarterly Change
Cumulative Change (right axis)
0.5
4
2.6
3
2.1
0.4
1.6
2
0.3
1.1
1
0.2
0.6
0.1
0.1
0.0
-0.4
4
2
Upgrade
2
4
Quarters Quarters
Quarters Quarters
Before
Before
After
After
Source: IMF, CBRT staff calculations.
0
-1
6 - 12
3-6
3
3
3-6
6 - 12
Months Months Months Months Months Months
Before Before Before After
After
After
Source: Bloomberg, CBRT staff calculations.
In line with the course of portfolio investments and the exchange rate, prior to the
upgrade, stock indices of the countries with upgrades perform well above the
reference group (Chart 3). Similarly, risk premium indicators of these countries,
which are priced in financial markets, follow a relatively downward course
(Chart 4). It is noteworthy that the favorable outlook observed in the stock index
and the risk premium prior to the upgrade disappears following the upgrade, and
these variables follow a path consistent with the general outlook. In other words,
the effect of the upgrades on stock indices and risk premium indicators are mainly
apparent in the period before the upgrade.
Chart 3. Relative Performance of the Stock
Market
(Percent)
Chart 4. Relative Performance of the Bond
Market
(Basis Points)
10
16
5
12
0
8
-5
4
-10
0
-15
-4
-20
-8
-25
6 - 12
3-6
3
3
3-6
6 - 12
Months Months Months Months Months Months
Before Before Before After
After
After
Source: Bloomberg, CBRT staff calculations.
92
6 - 12
3-6
3
3
3-6
6 - 12
Months Months Months Months Months Months
Before Before Before After
After
After
Source: Bloomberg, CBRT staff calculations.
Inflation Report 2011-III
Central Bank of the Republic of Turkey
The effects of the credit rating upgrade to investment grade are expected to be
observed not only on financial variables, but also on macroeconomic variables. A
longer time interval should be included in the analysis in order to observe the
effects on macroeconomic variables in a holistic view. In this respect, the trend
observed before and after the upgrade in the selected macroeconomic
variables of the countries is analyzed in a five-year perspective.
Rating upgrade allows for access to the wider pool of global capital, enhances
improvements in perceptions regarding sovereign risk, and enables the public
and the private sector to have access to low-cost and long-term foreign
financing. As a reflection of this, the total external debt, which declines before the
upgrade mostly due to public debt, remarkably trends upwards after the
upgrade (Chart 5). The uptrend in external debt in this period is primarily driven by
the private sector. Following the upgrade, the external debt goes up while the
interest rate paid for the external debt goes down (Chart 6).
Chart 5. Total External Debt
(Percent of GDP)
Chart 6. Interest Payments on External Debt
(Percent of GDP)
44
Interest Payments for External Debt
42
Average Interest Rate for New External Debt
(right axis)
2.5
2.0
40
7
6
1.5
38
5
1.0
36
4
Source: World Bank, Datastream, CBRT staff calculations.
5 Years After
4 Years After
3 Years After
2 Years After
Upgrade
1 Year After
1 Year Before
2 Years Before
3 Years Before
3
4 Years Before
0.0
5 Years Before
5 Years After
4 Years After
3 Years After
2 Years After
Upgrade
1 Year After
1 Year Before
2 Years Before
3 Years Before
4 Years Before
34
5 Years Before
0.5
Source: World Bank, Datastream, CBRT staff calculations.
The easier access to low-cost foreign financing also reflects upon the domestic
loan market. As a result, with the credit rating upgrade to investment grade,
domestic loans extended to private sector accelerate (Chart 7). The decline in
loan interest rates accompanies the acceleration in loans, which in turn leads to a
drop in the spread between loan and deposit rates (Chart 8).
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93
Central Bank of the Republic of Turkey
Chart 7. Change in Private Sector Domestic
Credit Volume
Chart 8. Spread Between Loan and Deposit
Rates
(Percent of GDP)
(Percent)
7
Year of Upgrade
5 Years After Upgrade
15
6
5
12
4
9
3
Source: World Bank, Datastream, CBRT staff calculations.
Slovenia
Poland
S. Africa
Croatia
Bahrain
Lithuania
Russia
Colombia
Mexico
Romania
5 Years After
4 Years After
3 Years After
2 Years After
Upgrade
0
1 Year After
0
1 Year Before
3
4 Years
Before
3 Years
Before
2 Years
Before
1
Hungary
6
2
Source: World Bank, Datastream, CBRT staff calculations.
In sum, countries with credit rating upgrade to investment grade are observed to
have easier access to foreign financing. Consequently, these countries attract
capital in the form of portfolio investment and external borrowing, enabling
private and public sector to borrow at lower costs from the external markets. This
also reflects on the domestic loan markets, and domestic private sector loans
grow while loan rates drop.
With
regards to Turkey, the improvement in Turkey’s risk premium in recent years
is largely reflected on the foreign financing alternatives of the private sector.
Nonetheless, an upgrade of Turkey to investment grade can further facilitate
access to low-cost and long-term foreign financing in the upcoming period. This
may contribute to the strengthening of the Turkish economy and improve the
resilience of the Turkish economy against shocks. Nevertheless, given the current
economic climate, easier and cheaper access to foreign financing has the
potential to pose risks on the balance sheet structures of the financial sector, firms
and households in the long term. In order to contain these risks, the significance of
macroprudential measures will grow further in the upcoming period.
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Box
5.3
Monetary Analysis at the CBRT
The CBRT has been implementing its monetary policy within the explicit inflationtargeting regime since 2006. Although monetary aggregates do not have a direct
role in making policy decisions, they should still be monitored as they provide an
outlook for possible inflation and economic activity developments besides the
risks to financial sector stability.
Figure 1. Monetary Analysis Work Flow Chart
Accordingly,
studies on monetary analysis at the CBRT are conducted under 3
main categories (Figure 1): The first category analyzes monetary dynamics based
on the sub-items of broad money supply M3 as defined by the European Central
Bank and the aggregated balance sheet of the monetary sector. To detail
further, the currency in circulation and sight deposits, the sub-items of M3 which
are kept for transactions motive, provide information on aggregate demand
conditions and the liquidity of the banking system. The time-deposit sub-item, on
the other hand, can be related to portfolio movements and financial conditions
besides economic activity, and hence, it contributes to the understanding of risk
perception of economic agents as well as the developments in financial markets.
Meanwhile, the course of FX deposits is an indicator of the confidence in TL
investment tools. Moreover, the permanent movements in foreign exchange rates
can leave FX deposits as an important resource for monetization in the economy.
Repo and investment funds, which are included in broad money definitions, are
considered to be significant sources of information for monitoring dynamics of the
money and capital markets as they provide substitution between these markets.
Inflation Report 2011-III
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Central Bank of the Republic of Turkey
Besides this information
in sub-items, analyzing deposits by their maturities and
currency denomination is also important for monitoring balance sheet risks of the
banking sector. Meanwhile, analyzing the money-holding behavior by sectors
can aid in finding out the propensities to save and spend of the monetary agents
that drive monetary developments in addition to understanding the possible
effects of these propensities on price stability.
Meanwhile, entries of the broad money M3, which shows total liabilities of the
consolidated balance sheet of the banking sector, including the CBRT, constitutes
the other significant pillar of the first category as it may provide significant
information on medium and long-term dynamics underlying current monetary
developments. The analytic decomposition of the banking sector balance sheet
yields broad money, loans extended to the private sector, net claims on the
public sector, net external assets and other items mostly involving capital as
entries. In normal times with price stability, the expansion in the money supply is
expected to be fed mostly by the loans extended to the private sector, whereas
under extraordinary economic circumstances, monetary expansion is through
increases in claims on the public due to changes in fiscal policy and net external
assets due to sudden capital movements, which are beyond the direct control of
the monetary policy. Therefore, given the information it provides on the source of
monetary expansion, analyzing the consolidated balance sheet can be useful in
producing policy implications.
The
second category of the monetary analysis conducted at the CBRT is the
estimation of a stable money demand function. Studies made at the CBRT,
considering the effect of macroeconomic uncertainties on money-holding
behavior, indicates that with broad money measures like M2Y and M3 as defined
by the European Central Bank, a stable relationship can be obtained between
national income and interest rates (Özdemir and Saygılı, 2010). The stable
structure of the money demand function indicates that a stable relationship
between monetary growth and inflation exists as well. Moreover, knowing the
determinants of the money demand also contributes to the understanding of the
shocks on income velocity of money calculated by the relevant monetary
measure. In addition, money demand function is used in calculating the
equilibrium quantity of money to be reached when the goods and money
markets are in equilibrium. Therefore, the equilibrium quantity of money can be
used to calculate liquidity indicators that may provide preliminary information on
risks
96
against
price
stability
like
price
gap,
real
money
gap
and
Inflation Report 2011-III
Central Bank of the Republic of Turkey
monetary overhang by being compared to current money stock. Furthermore,
the coefficients of a stable money demand function are also important for
estimating the monetary growth rate consistent with the inflation target. However,
relying on assumptions like the economy grows at the potential and price stability
is ensured, these forecasts mostly provide an outlook regarding medium and longterm outlook.
The
third and last category of the monetary analysis involves the inflation
forecasts and policy analyses made by using various models encompassing
money. For example, the macroeconomic models pioneered by Khan and Knight
(1981) are beneficial in policy analyses for countries such as Turkey, where
persistent fiscal policy driven monetary shocks are prevalent, as they allow for
interactions between monetary and fiscal policies (Özdemir and Turner, 2008).
Moreover, these models rely on fund flows, which make them crucial tools to
understand the effect of capital flows on the economy. Lastly, in the analysis of
the relationship between monetary aggregates and other macroeconomic
variables, general equilibrium models and econometric models are also among
the tools frequently used by the CBRT.
In sum, the CBRT closely monitors monetary indicators in terms of the information
they provide on inflation and financial stability, and evaluates the information
derived from monetary aggregates as a supporting fact to economic analysis.
REFERENCES
Khan, M.S. and M.D. Knight, 1981, Stabilization Programs in Developing Countries:
a Formal Framework, IMF Staff Papers, 28: 1-53.
Özdemir, K.A. and P. Turner, 2008, A Monetary Disequilibrium Model for Turkey:
Investigation of a Disinflationary Fiscal Rule and its Implications for
Monetary Policy, Journal of Policy Modeling, 30(2): 349-361.
Özdemir, K.A. and M. Saygılı, 2010, Economic Uncertainty and Money Demand
Stability in Turkey, CBRT Working Paper No.10/15.
Inflation Report 2011-III
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Central Bank of the Republic of Turkey
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6. Public Finance
The fast economic recovery and falling interest expenditures continue to
enhance Turkey's fiscal outlook. Increasing tax revenues amid robust domestic
demand and the decline in interest expenditures were the major drivers of the
improved budget balances in the first half of 2011. In addition, the relative
slowdown in the growth of primary expenditures also contributed to the
improvement in budget balance.
Increases in indirect taxes, mainly VAT on imports, driven by the vigorous
private consumption demand were particularly effective in the favorable
outlook of the budget performance, pointing to the cyclical nature of the
improvement in fiscal balances.1 In addition, within the scope of the law on
restructuring
of
public
claims
(tax
and
insurance
premium
amnesty),
applications of which were due on May 31, 2011, an additional budget revenue
of about 1 percent of the GDP is envisaged for 2011. Using these additional
revenue gains from cyclical influences or other arrangements to reduce public
debt will contribute to the balancing of domestic and external demand.
Additionally, strengthening the fiscal structure by implementing institutional and
structural reforms envisaged in the MTP remains critical for maintaining fiscal
discipline.
6.1. Budget Developments
The central government budget and the primary balance produced a
surplus of TL 2.9 billion and TL 25.3 billion, respectively in the first half of 2011
(Table 6.1.1). Higher tax revenues fueled by economic recovery and falling
interest expenditures were the main drivers of the year-on-year improvement in
the budget balance. In addition, the relative slowdown in the growth of primary
expenditures helped bring the budget deficit down.
1
See Box 6.1.
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Central Bank of the Republic of Turkey
Table 6.1.1.
Central Government Budget Aggregates
(Billion TL)
January-June
2010
January-June
2011
Rate of Increase
(Percent)
Actual/Target
(Percent)
136.5
27.6
108.9
121.1
98.6
18.2
-15.4
143.2
22.4
120.8
146.1
122.7
18.5
2.9
4.9
-18.6
10.9
20.7
24.4
1.3
-
45.8
47.2
45.6
52.4
52.9
46.8
-8.5
12.1
25.3
108.5
181.2
Central Government Budget Expenditures
Interest Expenditures
Primary Expenditures
Central Government Budget Revenues
I. Tax Revenues
II. Non-Tax Revenues
Budget Balance
Primary Balance
Source: Ministry of Finance.
Having
slightly
deteriorated
due
to
sharp
increases
in
primary
expenditures in the last quarter of 2010, central government budget balance
and primary budget balance to GDP ratios have started to improve amid the
favorable budget outturn in the first half (Chart 6.1.1). The budget revenues to
GDP ratio has picked up from end-2010 amid strong tax revenues during the first
half of 2011, while the primary expenditures to GDP ratio displayed a modest
decline in the first two quarters of 2011 compared to end-2010 figures
(Chart 6.1.1).
Chart 6.1.1.
Central Government Budget
(Annualized, Percent of GDP)
Budget Balance
8
Budget Balance
Budget Revenues and Primary Expenditures
Primary Balance
26
Budget Revenues
Primary Expenditures
6
24
4
1.9
2
0
22
20
-2
-1.8
-4
-6
18
16
-8
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2*
2007
2008
2009
2010
2011
14
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2*
2007
2008
2009
2010
2011
* Estimate.
Source: Ministry of Finance.
Central government primary expenditures increased slightly by 10.9
percent year-on-year in the first half of 2011. The limited increase in primary
expenditures was mainly due to the 6.1 percent increase in current transfers, the
major component of primary expenditures. Personnel expenditures, another
major component of primary expenditures, were up 16.1 percent. Meanwhile,
capital expenditures increased by about 24.6 percent, implying that public
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
investments made a positive contribution to GDP growth in the first half of 2011
(Table 6.1.2).
Table 6.1.2.
Central Government Primary Expenditures
(Billion TL)
Primary Expenditures
1. Personnel Expenditures
2. Government Premiums to SSI
3. Purchase of Goods and Services
a) Defense and Security
b) Health Expenditures
4. Current Transfers
a) Duty Losses
b) Health, Pension and Social Benefits
c) Agricultural Support
d) Shares Reserved From Revenues
5. Capital Expenditures
6. Capital Transfers
January-June
2010
108.9
31.7
5.4
10.5
3.4
2.5
51.8
1.4
28.4
4.6
12.8
5.5
1.4
January-June
2011
120.8
36,8
6,3
12,4
3.5
2.6
55.0
0.9
27.2
5.5
14.6
6.8
1.7
Rate of Increase
(Percent)
10.9
16,1
18.4
17.8
2.7
4.5
6.1
-38.0
-4.4
19.5
13.8
24.6
23.8
Actual/Target
(Percent)
45.6
51.0
49.8
41.2
34.7
52.0
47.5
17.0
43.5
92.2
51.0
31.4
40.3
Source: Ministry of Finance.
General budget revenues increased by 20.8 percent year-on-year in the
first half of 2011. Tax revenues were up 24.4 percent, while non-tax revenues
increased by 1.3 percent on soaring capital revenues, notwithstanding the
decline in enterprise and property revenues and interests, shares and fines
(Table 6.1.3). In particular, the substantial increase in consumption-based tax
revenues such as VAT on imports indicates that consumption demand remains
strong. Additionally, the record high temporary corporate tax payments in
February and May also contributed to the rapid increase in tax revenues. SCT
revenues increased at a relatively slower pace owing to the limited increase in
SCT on oil, natural gas and tobacco products.
Table 6.1.3.
Central Government General Budget Revenues
(Billion TL)
General Budget Revenues
I-Tax Revenues
Income Tax
Corporate Tax
Domestic VAT
SCT
VAT on Imports
II-Non-Tax Revenues
Enterprises and Property Revenues
Interests, Shares and Fines
Capital Revenues
January-June
2010
January-June
2011
Rate of Increase
(Percent)
Actual/Target
(Percent)
116.8
98.6
19.3
10.1
12.3
25.6
16.5
18.2
6.3
10.1
0.6
141.2
122.7
23.2
13.9
15.1
29.8
23.3
18.5
6.0
9.9
1.8
20.8
24.4
20.0
37.6
23.2
16.0
41.2
1.3
-5.2
-1.9
191.8
52.0
52.9
48.9
59.9
56.4
48.7
56.7
46.8
81.9
47.7
18.5
Source: Ministry of Finance.
The annual rate of increase in real tax revenues, which has been on the
rise since the fourth quarter of 2009 with the recovery of private consumption
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101
Central Bank of the Republic of Turkey
demand, lost some pace due to the waning base effect in the second and
third quarters of 2010 before rising sharply again as of the last quarter of 2010
(Chart 6.1.2). Real tax revenues increased by 21.5 percent year-on-year in the
second quarter of 2011. SCT revenues and VAT revenues on imports, major
components of tax revenues, increased by 11.3 and 39.2 percent year-on-year,
respectively, in real terms. Meanwhile, domestic VAT revenues rose by 13.7
percent year-on-year in real terms (Chart 6.1.2).
Chart 6.1.2.
Real Tax Revenues
(Annual Percent Change)
Real Tax Revenues
Real VAT and SCT Revenues
Real Domestic VAT Revenues
25
21.5
60
50
20
40
15
Real SCT Revenues
Real VAT Revenues on Imports
30
10
20
5
10
0
0
-10
-5
-20
-10
-30
-15
-40
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2007
2008
2009
2010
2011
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2007
2008
2009
2010
2011
Source: Ministry of Finance.
6.2. Developments in the Debt Stock
The fiscal and debt management policies consistent with the prudent
monetary policy stance in 2010 as well as the faster-than-expected economic
recovery since the last quarter of 2009 helped improve fiscal balances, thus
public debt stock indicators. 2010 was marked by a decline in public debt
ratios, a significant fall in the real cost of borrowing, an extended average
maturity of debt, a decreased share of interest rate and exchange rate
sensitive debt in overall debt and a reduced domestic debt rollover ratio. This
favorable outlook also continued throughout the first half of 2011.
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The central government debt stock increased by 4.7 percent from end2010 to TL 495.9 billion at end-June 2011 (Chart 6.2.1). Changes in net domestic
debt and net external debt accounted for TL 9.6 billion and TL 2.3 billion,
respectively, of the increase in central government debt. Meanwhile, due to
depreciation of the USD against the euro and the appreciation of USD against
the Turkish lira, parity and exchange rate changes brought central government
debt up by TL 3.5 and 7.2 billion, respectively.
Chart 6.2.1.
Public Debt Stock Indicators
Public Debt Stock Indicators
Composition of the Central Government Debt Stock (Percent)
Total Public Net Debt Stock (Percent of GDP)
600
100
500
80
Floating-Rate*
FX-Denominated/FX-Indexed**
26.6
80
Fixed-Rate
495.9
70
27.8
EU-Defined Central Government Nominal Debt Stock (Percent
of GDP)
Central Government Total Debt Stock (Billion TL, right axis)
37.4
30
60
300
36.5
27.9
40
400
36.0
50
35.7
41.5
60
40
200
20
100
10
0
0
2003
2005
2007
2009
2011/03
20
0
2001
2003
2005
2007
2009
2011/06
* Floating-rate debt stock includes discounted securities with a maturity less than 1 year and GDBS with floating rates.
** FX-denominated/indexed debt stock includes external debt stock and FX-denominated and FX-indexed domestic debt stock.
Source: Treasury, CBRT.
Public debt ratios posted a favorable outlook in the first quarter of 2011
amid ongoing economic recovery and the improving budget performance. The
ratio of total net public debt stock to GDP declined by 0.9 percentage points
from end-2010 to 27.9 percent. Meanwhile, the ratio of EU-defined general
government nominal debt stock to GDP remained unchanged at end-2010
level (Chart 6.2.1).
The Treasury’s financing program for 2011 has been formulated based on
an approach to limit the liquidity, interest rate and foreign exchange sensitivity
of the debt stock. In this regard, the share of fixed-rate instruments in total debt
stock decreased slightly year-on-year as of June 2011 (Chart 6.2.1).
Inflation Report 2011-III
103
Central Bank of the Republic of Turkey
Chart 6.2.2.
Maturity of Borrowing from Domestic and External Markets
Average Maturity of Domestic Cash Borrowing and Termto-Maturity of the Domestic Debt Stock
(Month)
48.9
50
40
33.6
30
Borrowing By Bond Issue
35
7
30
6
25
5
20
4
15
3
10
2
5
1
0
0
Average Maturity of Domestic Debt Stock
Average Maturity of Domestic Cash Borrowing
2011/06
2010
2009
2008
2007
2006
2005
2004
2003
2010
2011/06
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
2002
10
2001
20
External Borrowing (billion USD, right axis)
Average Maturity of External Borrowing (year)
Maximum Maturity of External Borrowing (year)
Source: Treasury, CBRT.
The financing strategy implemented to reduce liquidity risk also continues
in 2011. The ratio of public deposits to average monthly debt service has been
205.5 percent as of the first half of 2011. With an average maturity of domestic
cash borrowing above 2010 averages, term-to-maturity of total domestic debt
stock increased to 33.6 months in June 2011 (Chart 6.2.2). Moreover, bond issues
have yielded a long-term external debt of USD 3.2 billion in the first six months of
2011, with an average maturity slightly down to 16.3 years from 2010
(Chart 6.2.2).
Having fallen rapidly from early 2009 until early 2011, the monthly average
real interest rates at discount Treasury bill auctions remain low despite some
increase in recent months (Chart 6.2.3). The substantially extended average
maturity and the low cost of domestic borrowing support the favorable outlook
for public debt sustainability.
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Chart 6.2.3.
Domestic Borrowing
Total Domestic Debt Rollover Ratio
(Percent)
Average Maturity of Borrowing and Interest Rates at
Discount Auctions
Maturity (day)
Average Compounded Interest Rate (right axis)
70
Real Interest Rate (right axis)
110
800
103.5
700
60
100
600
50
500
40
89.2
90
400
89.3
30
300
80
20
200
10
100
70
2005
2007
2009
2011/05
0
0212
0306
0312
0406
0412
0506
0512
0606
0612
0706
0712
0806
0812
0906
0912
1006
1012
1106
0
2003
Source: Treasury, CBRT.
Domestic debt rollover ratio was 89.2 percent for the first five months of
2011 (Chart 6.2.3). However, this ratio is expected to decline to 83.9 percent by
the end of the first nine months of 2011 as envisaged by the Treasury's domestic
borrowing strategy for July-September 2011.
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Central Bank of the Republic of Turkey
Box
Structural Budget Balance and Fiscal Stance
6.1
2
Fiscal policy can affect macro and micro balances in an economy and can also
be affected by changes in the economy. The latter necessitates an approach
that considers cyclical effects in formulating the fiscal stance and analyzing
budget deficits, a significant indicator of the fiscal performance. In this context,
calculation of the structural (cyclically-adjusted) budget balance is crucial in
determining whether fiscal policy is used as a countercyclical tool.
Structural
budget balance is derived by subtracting budget components
sensitive to cyclical fluctuations from the actual budget balance. In other words,
structural budget balance is the budget balance that occurs when the national
income equals the potential output. This Box aims to formulate the fiscal stance of
Turkey in the 2006-2010 period by calculating the structural primary budget
balance (in terms of central government budget) and determine to what extent
the budget balance is influenced by cyclical movements.
Methodology
Various methods are developed by international organizations like the OECD, IMF
and ECB in order to calculate the structural budget balance.3 As the OECD
approach is the most commonly used method in the economic literature, the
structural primary budget balance in this study is calculated by adopting the
OECD method.
Although,
the methods developed and used by the above-mentioned
organizations are different, a 3-step estimation method is common:
1)
Determining the budget expenditure and revenue items that are sensitive
to cyclical movements, and estimating the national income elasticity of
the tax revenues,
2)
Developing potential output and output gap series in order to determine
the cyclical movements,
3)
Subtracting additional income and expenditure items driven by cyclical
movements from the budget balance.
2
This Box is based on Çebi and Özlale (2011).
Van den Noord (2000), Girouard and André (2005); Hagemann (1999) and Bouthevillain et al. (2001) can be referred to for
the OECD approach; for the IMF approach and for the ECB approach, respectively.
3
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In
the first step, tax elasticity coefficients that measure the sensitivity of tax
revenues to output level (or output gap) are separately calculated in four
different tax categories for Turkey. These items can be listed as indirect taxes,
income tax on wages, income tax on non-wage earnings and corporate tax.
Elasticity calculations are made by both considering the legal tax structure (tax
tariff, tax rate etc.) and using econometric estimation methods. Calculations are
mainly based on the OECD approach; however, for comparison purposes, the
ECB approach was also used in calculating indirect tax elasticity.
In the second step, a potential output series is developed by using the Hodrick
Prescott (HP) filter, and accordingly, an output gap series is constructed. In the
last step, the structural primary budget balance is calculated by using the
following OECD method:
 4 * 

b* =  ∑ Ti  − G + X  /Y *
 i =1 

(
Ti = Ti Y * / Y
*
)
εt
i,
y
where b* is the share of structural budget balance within potential GDP, Ti* is
cyclically-adjusted tax revenues (i income type), Y* is the potential output level, Y
is the output level, εt,y is the elasticity of tax revenues to output gap, and G and X
are primary expenditures and non-tax revenue items, respectively.
Findings and Evaluation: Structural Primary Budget Balance and Fiscal Stance
In
structural budget balance calculations, indirect tax elasticity, elasticity of
income tax on wages, and elasticity of corporate tax and income tax on nonwage earnings are assumed to be 0.94, 1.5 and 1.2, respectively. The tax elasticity
coefficient weighted by the share of each tax item in tax revenues is found to be
1.07 for 2009. Table 1 and Chart 1 illustrate how structural and cyclical primary
budget balances calculated by these elasticities have changed over the 20062010 period in Turkey.
Table 1. Structural and Cyclical Primary Budget Balance
(Percent of Potential GDP)
Primary Budget
Inflation Report 2011-III
Structural
Budget
Cyclical Budget
2006
5.5
5.2
0.3
2007
4.2
3.6
0.5
2008
3.5
3.5
0.0
2009
0.1
1.0
-0.9
2010
0.8
1.2
-0.4
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Central Bank of the Republic of Turkey
Chart 1. Primary Budget Surplus and Structural Primary Budget Surplus
Primary Surplus/GDP
Structural Primary Balance/ Potential GDP
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2006
2007
2008
2009
2010
Formulation of the fiscal stance measured by the change in the structural budget
balance can vary depending on the economic circumstances. Implementation
of an expansionary (contractionary) fiscal policy in times of economic
contraction (expansion) points to the presence of a countercyclical fiscal policy.
On the contrary, implementation of a contractionary (expansionary) fiscal policy
in times of economic contraction (expansion) indicates that the fiscal policy is
pro-cyclical. Implementation of an expansionary fiscal policy during the
economic contraction in 2009 shows that the fiscal policy implemented in 2009
was countercyclical. In other words, the fiscal authority prioritized economic
stability in 2009 on account of the global crisis.
In sum, estimations regarding the structural budget balance indicate that the precrisis fiscal space was largely used in the post-crisis period (Table 1 and Chart 1).
Meanwhile, there was a limited tightening in the fiscal policy for 2010. Budget
data pertaining to the first quarter of 2011 suggest that the fiscal stance will get
tighter and contribute to macroeconomic stability by supporting the policies
implemented by the CBRT.
REFERENCES
Bouthevillain, C., P. Cour-Thimann, G. van den Dool, P. Hernández de Cos, G.
Langenus, M. Mohr, S. Momigliano, S. and M. Tujula, 2001, Cyclically
Adjusted Budget Balances: An Alternative Approach, ECB Working Paper
Series No. 77.
Çebi, C. and Ü. Özlale, 2011, Structural Budget Balance and Fiscal Stance in
Turkey. CBRT Working Paper No. 11/11.
108
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Girouard, N. and C. André, 2005, Measuring Cyclically-Adjusted Budget Balances
for OECD Countries, OECD Economics Department Working Paper No.
434.
Hageman, R., 1999, The Structural Budget Balance: The IMF’s Methodology. IMF
Working Paper No. 99/95.
Van den Noord, P.,2000, The Size and Role of Automatic Fiscal Stabilisers in the
1990s and Beyond, OECD Economics Department Working Paper No. 230.
Inflation Report 2011-III
109
Central Bank of the Republic of Turkey
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7. Medium-Term Projections
This Chapter gives information about the CBRT's recent monetary policy
strategy and the related policy decisions. Furthermore, it summarizes the
underlying forecast assumptions and presents the medium-term inflation and
output gap forecasts as well as the monetary policy outlook over the upcoming
three-year horizon.
7.1. Recent Monetary Policy Decisions
The CBRT, with a view to minimizing the risks against price stability and
financial stability, has been implementing a policy mix of low policy rate, wide
interest rate corridor and high reserve requirement ratios since November 2010,
given the global and domestic economic climate.
Lagged effects of cumulative increases in import prices led to a gradual
and envisioned increase in core inflation indicators in the second quarter. MPC
stated that this increase was due to a relative price change in tradable goods
rather than a deterioration in the general pricing behavior, and hence,
secondary effects are yet to be observed. In this context, considering the
slowdown in economic activity and the uncertainties in the global economy,
policy rate and TL required reserve ratios were kept constant since the previous
reporting period. Moreover, invigorating the emphasis on global risks at the July
meeting, the MPC stated that all policy instruments may be eased should
problems in advanced economies intensify and lead to contraction in domestic
economic activity.
The mounting concerns in the second quarter regarding sovereign debt
problems across some European countries as well as global economic growth
adversely affected the risk appetite and capital flows to emerging economies,
also including Turkey. In view of these developments, the daily amount to be
purchased via FX auctions was reduced to USD 30 million from USD 50 million in
May and in June. Towards the end of July, FX buying auctions were suspended
in order to monitor the effects of the decisions taken by the EU pertaining to
solve the sovereign debt problems.
Lastly, in July, in order to extend the maturity structure of the banking
sector liabilities, foreign exchange required reserve ratios were decreased for
Inflation Report 2011-III
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long-term liabilities, while they were kept unchanged for liabilities with maturities
less than one-year.
7.2. Current State of the Economy, Short-Term Outlook and
Assumptions
First-quarter GDP data were consistent with our projections in the April
2011 Inflation Report, and economic activity in this period remained robust,
despite a quarter-on-quarter slow down. Domestic demand, and in particular
the private sector demand, continued to be the main driver of economic
growth in this period. Against the weak course of exports, imports continued to
boost, leading to further negative contribution of net external demand to
growth. Thus, the divergence between the paces of recovery in domestic and
external demand became more pronounced in this period. Employment
conditions continued to improve displaying a better outlook compared to the
previous reporting period, and unemployment rate returned to its pre-crisis level
in the first quarter of 2011.
Consumer prices, which went up by 1.83 percent in the second quarter of
2011, increased by 6.24 percent on annual basis. This increase is consistent with
the April Inflation Report projection that the base effects stemming from food
price movements will determine the course of inflation, and in this respect, the
annual inflation will increase in the second quarter of 2011. Furthermore, lagged
effects of the cumulative increases in TL-denominated import prices were also
influential in second-quarter rise in inflation. While the annual rate of increases in
core inflation indicators went up in this period, the seasonally adjusted trends
indicated a slowdown.
Food prices recorded a rise in the second quarter in line with the
projections in the April Inflation Report. This rise is attributable to the increase in
unprocessed food prices, mainly fresh fruits and vegetables. Moreover,
processed food prices also posted hikes owing to the price increases in fats and
oils parallel to the domestic and international price developments. In short, 1.3
points of the quarter-on-quarter increase of 2.25 points in consumer inflation in
the second quarter stemmed from food inflation.
The surge in producer prices amid the rises in imported input prices
continued in the second quarter of 2011 as well. Despite the relatively flat
course of international oil prices compared to the end of the first quarter,
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domestic fuel prices went up due to the depreciation of the Turkish lira.
Reverberations of the high course of international commodity prices besides the
depreciation of the Turkish lira on core goods prices continued in this quarter.
Table 7.2.1.
Revisions to 2011 Assumptions
April 2011
Food Price Inflation
(Year-end Percent Change)
Processed Food
Unprocessed Food
Import Prices
(Average Annual Percent Change)
Oil Prices
(Average Annual, USD)
Export-Weighted Global Production Index
(Average Annual Percent Change)
Given
the
high
volatility
in
July 2011
7.5
7.5
7.0
8.0
7.0
8.0
16.2
15.4
115
115
2.60
2.51
unprocessed
food
prices
and
the
developments in agricultural commodity prices, food inflation projection for
2011 was maintained as 7.5 percent. Accordingly, the assumption for
unprocessed and processed food inflation at end-2011 is maintained at 8
percent and 7 percent, respectively (Table 7.2.1).
In the April Inflation Report, with reference to future prices for
commodities, oil prices were assumed to be 115 USD/bbl for 2011 and onwards,
and import prices were assumed to increase by an average 16.2 percent yearon-year. Although crude oil prices remained slightly below 115 USD/bbl in the
second quarter, considering the data for the first half of July, crude oil price
assumption was kept unchanged at 115 USD/bbl for 2011 and onwards. Other
commodity prices remained high, despite a limited decline in the second
quarter. In view of the futures prices, import prices are assumed to record an
average increase by 15.4 percent in 2011 (Chart 7.2.1) Thus, the contribution of
oil and other commodities to inflation forecasts remained unchanged
compared to the previous reporting period.
The rise in tariffs on imports of fabrics and apparels at various rates across
country groups is supposed to put an upward pressure on clothing prices. This
rise is expected to be effective as of the new season, and thus raise inflation in
the last quarter.
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Central Bank of the Republic of Turkey
Chart 7.2.1.
Revisions to Oil and Import Price Assumptions
Oil Prices (USD/bbl)
April 2011
Import Prices (2003=100)
July 2011
April 2011
July 2011
135
210
125
200
115
190
105
Source: Bloomberg, CBRT.
0713
0113
0712
0112
0711
0111
0710
0110
0709
0109
0708
0108
0107
0713
0113
0712
0112
0711
0111
0710
120
0110
130
35
0709
140
45
0109
150
55
0708
160
65
0108
75
0707
170
0107
85
0707
180
95
Source: TurkStat, CBRT.
Second-quarter data exhibit a quarter-on-quarter slowdown in the robust
increase in domestic demand. Seasonally adjusted industrial production has
decreased for four consecutive months starting from February. Given the
lagged effects of the policy measures as well as the global slowdown, domestic
demand is envisioned to follow a milder course in the second half of the year.
Indices constructed by aggregating selected leading economic indicators also
point to a similar outlook (Chart 4.1.10).
External demand remains weak. The possibility of a spillover of the Greek
debt crisis to other European countries, the slowdown in the U.S. economic
recovery and the weak course of the Japanese economy in the aftermath of
the earthquake led to a contraction in the global economic activity in the
second quarter. An overall outlook for 2011 suggests that despite the decline in
growth expectations for the U.S. economy, growth forecasts for the euro area,
our main trading partner, were slightly revised upwards. In this context,
projections for export-weighted global growth index for Turkey posted no
significant change. Therefore, baseline scenario forecasts were based on the
assumption that external demand would recover slowly and gradually, and no
significant revision was made for the external demand outlook compared to
the previous reporting period (Chart 7.2.2).
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Chart 7.2.2.
Export-Weighted Global Economic Activity Index*
(2009Q1=100)
111
April 2011
July 2011
109
107
105
103
101
99
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2008
2009
2010
2011
2012
* For methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”.
Source: Bloomberg, Consensus Forecasts, CBRT.
In sum, while inflation rose in the second quarter as envisaged, economic
activity lost pace due to poor external demand outlook. In this respect, starting
point of the output gap was slightly revised downwards. Medium-term outlook
for factors affecting inflation remained unchanged.
In building medium-term inflation forecasts within the inflation targeting
regime, the CBRT uses not only policy rates, but also, required reserve ratios and
other liquidity management tools. In this process, the impact of the policy mix
on monetary and financial conditions are observed mainly through the credit
channel. Thus, while presenting inflation forecasts, certain assumptions on credit
growth are also made. In this context, medium-term projections are based on
the assumption that the rate of increase in credits would largely slow down in
the upcoming period due to the tightening effects of the ongoing monetary
and fiscal policies besides the reverberations of the measures on consumer
loans taken by the BRSA.
Lastly, inflation forecasts are based on the assumption that a majority of
the revenues obtained within the law on restructuring of the public claims would
be used to lower public debt, and hence, fiscal policy would be tightened in
the upcoming period. Forecasts are based on an outlook of a limited fall in the
ratio of primary expenditures to GDP besides an ongoing rise in the ratio of
public debt to GDP and insignificant changes in risk premiums. Moreover, tax
adjustments are expected to be consistent with inflation targets and automatic
pricing mechanisms.
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Central Bank of the Republic of Turkey
7.3. Medium-Term Outlook
Against this background and assuming that credit growth rate declines to
25 percent at end-2011 and the policy rate will be kept unchanged until the
year end, inflation will be, with 70 percent probability, between 5.9 and 7.9
percent with a mid-point of 6.9 percent at end-2011, and between 3.5 and 6.9
percent with a mid-point of 5.2 percent at end- 2012. Inflation is expected to
stabilize around 5 percent in the medium term (Chart 7.3.1).
Chart 7.3.1.
Inflation and Output Gap Forecasts*
Forecast Range*
Year-End Inflation Targets
Uncertainty Band
Output Gap
12
10
Control
Horizon
8
Percent
6
4
2
0
-2
-4
0614
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0610
-6
* Shaded region indicates the 70 percent confidence interval for the forecast.
Inflation forecast path was not subject to a notable change compared to
the April Inflation Report since no significant revisions were made to the
assumptions underlying our forecasts (Chart 7.3.2). Revised forecasts suggest
that keeping inflation in line with targets over the medium term requires a
measured and vigorous credit growth. In order to give a better perspective to
this end, annual rate of credit growth underlying inflation forecasts is provided. It
should be emphasized that these credit growth rates are not strict targets for
the CBRT. The nominal credit growth consistent with the medium-term inflation
target may vary across years depending on the course of inflation, economic
growth and the composition of the aggregate demand.
Even though underlying inflation is expected to follow a stable trend in
line with the medium-term targets, base effects are likely to have a substantial
impact on inflation during the second quarter. A correct understanding of these
effects will help public to better interpret inflation developments, and thus,
improve expectations management. Inflation is expected to be driven mainly
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Central Bank of the Republic of Turkey
by base effects due to food prices in 2011, and accordingly, annual inflation is
expected to decline in the third quarter, and rise in the last quarter. Year-end
inflation is expected to slightly overshoot the target due to tariff adjustments on
clothing imports and the cumulative effects of the rises in import prices. Through
the end of 2012, inflation is expected to reach the medium-term target of 5
percent due to fading of these temporary effects as well as the tightening
effect of the adopted policies (Chart 7.3.2).
Comparison of April 2011 and July 2011 Inflation Report Forecasts
Chart 7.3.2.
Chart 7.3.3.
Inflation Forecast
Output Gap Forecast
0.5
10.0
0
9.0
-0.5
Actual
-1
July 2011
8.0
-1.5
April 2011
-2
7.0
-2.5
6.0
July 2011
-3
-3.5
5.0
-4
4.0
-4.5
April 2011
-5
3.0
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2010
2011
Source: TurkStat, CBRT.
2012
2013
2010
2014
2011
2012
2013
2014
Source: CBRT.
Output gap, which shows the effects of aggregate demand conditions
on inflation, is revised downwards for the second quarter of 2011, compared to
the previous reporting period. However, forecasts are based on the assumption
that this decline will be temporary amid the normalization in the global
economy, and the output gap will return to the path envisaged in the April
Inflation Report in the period ahead (Chart 7.3.3).
Unpredictable fluctuations in items that are beyond the control of the
monetary policy, such as unprocessed food and tobacco, are among major
factors causing deviations in inflation forecasts. Hence, inflation forecasts on
unprocessed food and tobacco are also shared with the public. Forecasts are
based on the assumption that annual unprocessed food inflation will be 8
percent, while the annual rate of increase in tobacco and alcoholic beverages
will remain in line with inflation targets. In this context, our inflation forecasts
excluding unprocessed food, tobacco and alcoholic beverages are shown in
Chart 7.3.4. Accordingly, inflation is expected to rise gradually until the last
quarter of 2011, assume a downward path thereafter and stabilize around 5
percent in the medium term (Chart 7.3.4).
Inflation Report 2011-III
117
Central Bank of the Republic of Turkey
Chart 7.3.4.
Inflation Forecast Excluding Unprocessed Food, Tobacco and Alcoholic
Beverages
Forecast Range*
Output Gap
12
10
8
Percent
6
4
2
0
-2
-4
0614
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0610
-6
* Shaded region indicates the 70 percent confidence interval for the forecast.
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 regarding the monetary policy outlook underlying the
inflation forecast should not be perceived as a commitment on behalf of the
CBRT.
Comparison of CBRT Forecasts with Inflation Expectations
It is critical that economic agents, being aware of the temporary factors,
should focus on the medium-term inflation trend, and therefore, take the
inflation target as a benchmark in their pricing plans and contracts. In this
respect, to serve as a reference guide, CBRT’s current inflation forecasts should
be compared to inflation expectations of other economic agents. Year-end
inflation expectations as well as 12-month and 24-month ahead inflation
expectations of the Survey of Expectations respondents are above our baseline
scenario forecasts (Table 7.3.1).
Table 7.3.1.
CBRT Inflation Forecasts and Expectations
CBRT Forecast
CBRT Survey of Expectations*
Inflation Target**
2011 Year-end
6.9
7.3
5.5
12-Month Ahead
6.1
6.9
5.2
24-Month Ahead
5.1
6.3
5.0
*
July 2011, second survey period results.
**
Calculated by linear interpolation of year-end inflation targets for 2011- 2013.
Source: CBRT.
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7.4. Risks and Monetary Policy
Under current circumstances, risk factors and the associated monetary
policy measures are assessed within a framework where both price stability and
financial stability are observed. Accordingly, risk factors are not only assessed
with respect to their impact on the level; but also, on the composition of the
aggregate demand since the level of the aggregate demand is related to
price stability, while its composition is directly related to financial stability.
Hence, risk factors regarding global economy are also evaluated against this
backdrop.
The baseline scenario, and hence, our inflation forecasts are built on the
assumption that the second-quarter slowdown in global economic activity will
mainly be temporary, given the forecasts by international institutions. However,
developments since the previous reporting period have intensified downside
risks regarding the global economy.
Problems in credit, real estate and labor markets in advanced economies
are yet to be fully solved. Moreover, concerns on fiscal dynamics in these
economies still persist. In particular, mounting problems regarding sovereign
debt in the euro area peripheral economies have intensified downside risks to
the global economy. Should the sovereign debt problems regarding some
European economies and the concerns on global growth continue to have
adverse impact on the risk appetite, the interest rate corridor may be narrowed
gradually. Moreover, an outcome whereby global economic problems intensify
and domestic economic activity contracts may require an easing in all policy
instruments.
Even if debt problems in the euro area are resolved before they turn into
a global crisis, it is still likely to experience a prolonged period of weak
economic activity in advanced economies coupled with continued economic
growth in emerging markets driven by domestic demand. In such a case, there
may be a resurge in short-term speculative capital inflows to emerging markets
which may render itself as weak external demand and elevated commodity
prices with rising capital inflows, feeding into macro financial risks for the
domestic economy. Should this scenario materialize, the policy mix of low policy
rates and high reserve requirements may be implemented for a long period, in
order to contain risks to price stability and financial stability.
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Developments in exchange rates and import prices have been adversely
affecting core inflation since the last quarter of 2010. The additional tariffs on
fabrics and apparels are another leading factor that may lift up core inflation
indicators in the coming period. Under current circumstances, the increase in
core inflation reflects only the relative price movements while the current level
of aggregate demand contains the second round effects of these price
movements. However, core inflation is expected to increase in the forthcoming
period, posing upside risks to inflation expectations and price-setting behavior.
Should such a risk materialize and hamper the attainment of medium-term
inflation targets, the CBRT will not hesitate to tighten monetary policy. In such a
case, the mix of policy tools to be used for tightening will depend on
developments regarding domestic demand, capital flows, current account and
credit growth.
The impact of the ongoing tightening measures on credit volume and
domestic demand is expected to be more significant during the second half of
the year. However, the extent and the timing of the impact may vary
depending on the developments beyond the control of the monetary policy.
The impact of the ongoing tightening measures on credit volume and domestic
demand is expected to be more significant during the second half of the year.
However, the extent and the timing of the impact may vary depending on the
developments beyond the control of monetary policy. The lagged effects of
the policy measures on price stability and financial stability will be closely
monitored, and further measures will be taken if deemed necessary.
The CBRT will continue to monitor fiscal policy developments closely while
formulating monetary policy. Sustaining the fiscal discipline under current
circumstances is essential to limit risks posed by the current account deficit
driven by the divergence between domestic and external demand. Saving the
additional tax revenues acquired both within the law on restructuring of public
claims and also owing to strong economic activity would not only reduce risks
to price stability and financial stability, but also increase the effectiveness of the
new policy mix. In this respect, our forecasts presented in the baseline scenario
assume that the additional budget revenues will be saved to a large extent. A
revision in the monetary policy stance may be considered should the fiscal
stance deviate significantly from this framework, and consequently, have an
adverse effect on the medium-term inflation outlook.
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Charts
1. OVERVIEW
Chart 1.1.1.
Chart 1.1.2.
Chart 1.1.3.
Chart 1.1.4.
Chart 1.1.5.
Chart 1.2.1.
Chart 1.2.2.
Chart 1.2.3.
Chart 1.2.4.
Chart 1.2.5.
Chart 1.3.1.
CBRT Policy Mix
TL and Emerging Market Currencies
Exports and Imports of Goods and Services
TL Business Loan Rates
TL Loan Rates
April 2011 Inflation Forecasts and Realizations
Core Inflation Indicators SCA-H and SCA-I
Prices of Services
Export-Weighted Global Economic Activity Index
Revisions to Oil and Import Price Assumptions
Inflation and Output Gap Forecasts
2
3
3
3
3
4
5
5
6
6
7
2. INTERNATIONAL ECONOMIC DEVELOPMENTS
Chart 2.1.1.
Aggregated Growth Rates
12
Chart 2.1.2.
Export- and GDP-Weighted Global Production Indices
12
Chart 2.1.3.
Unemployment in Advanced Economies
13
Chart 2.1.4.
Real Estate Prices for the U.S.
13
Chart 2.1.5.
JP Morgan Global PMI Indices
13
Chart 2.1.6.
PMI Indices
13
Chart 2.2.1.
S&P Goldman Sachs Commodity Prices
15
Chart 2.2.2.
Crude Oil (Brent) Prices
15
Chart 2.2.3.
OPEC Capacity, Quota and Production
15
Chart 2.3.1.
Annual CPI Inflation in Advanced and Emerging Economies
17
Chart 2.3.2.
Annual Core CPI Inflation in Advanced and Emerging Economies
17
Chart 2.3.3.
Monthly CPI Inflation in Advanced and Emerging Economies
17
Chart 2.3.4.
Monthly Core CPI Inflation in Advanced and Emerging Economies
17
Chart 2.3.5.
U.S. Inflation Compensation
18
Chart 2.3.6.
Euro Area Inflation Compensation
18
Chart 2.4.1.
Global Risk Appetite
19
Chart 2.4.2.
CDS Rates in Selected Countries
19
Chart 2.4.3.
Banking Sector Deposits
20
Chart 2.4.4.
Share of Eurosystem Liquidity in Banking Sector Liabilities
20
Chart 2.4.5.
CDS Rates on Italian Bonds and German/Italian Bond Yield Spread
20
Chart 2.4.6.
Public Debt Stock to GDP Ratio in Italy
20
Chart 2.4.7.
Exchange Rate and Risk Premium Indicators for Emerging Economies
21
Chart 2.4.8.
Developments in Global Stock Markets
21
Chart 2.4.9.
U.S. Lending Survey
21
Chart 2.4.10.
Euro Area Lending Survey
21
Chart 2.5.1.
Policy Rate Changes in Advanced Economies from Sept. 2007 to Jun. 2011
22
Chart 2.5.2.
Policy Rates in Advanced Economies
22
Chart 2.5.3.
Policy Rate Changes in Emerging Economies from Sept. 2007 to Jun. 2011
23
Chart 2.5.4.
Policy Rates in Inflation-Targeting Emerging Economies
23
Chart 2.5.5.
FOMC Policy Rate Expectations
24
Chart 2.5.6.
Year-End Policy Rate Expectations
24
Chart 2.5.7.
Year-End Policy Rate Expectations in Emerging Economies
25
3. INFLATION DEVELOPMENTS
Chart 3.1.1.
CPI by Subcategories
32
Chart 3.1.2.
Contribution to Annual CPI Inflation
32
Chart 3.1.3.
Unprocessed Food and Consumer Prices
32
Chart 3.1.4.
Subcategories of Unprocessed Food and Consumer Prices
32
Chart 3.1.5.
Food Prices
33
Chart 3.1.6.
Selected Processed Food Prices
33
Chart 3.1.7.
Energy Prices
34
Chart 3.1.8.
Energy and TL Oil Prices
34
Chart 3.1.9.
Prices of Core Goods
35
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121
Central Bank of the Republic of Turkey
Chart 3.1.10.
Prices of Core Goods
35
Chart 3.1.11.
Prices of Services by Subcategories
36
Chart 3.1.12.
Prices of Services by Subcategories
36
Chart 3.1.13.
Prices of Services
36
Chart 3.1.14.
Diffusion Index of Services Prices
36
Chart 3.1.15.
Core Inflation Indicators SCA-H and SCA- I
37
Chart 3.1.16.
Core Inflation Indicators SCA-H and SCA- I
37
Chart 3.1.17.
CPI and SCA-H Diffusion Indices
37
Chart 3.1.18.
Core Inflation Indicators SATRIM and FCORE
37
Chart 3.1.19.
Agricultural Prices
38
Chart 3.1.20.
Manufacturing Industry and PMI Output Prices
38
Chart 3.2.1
12- and 24-Month Ahead CPI Expectations
39
Chart 3.2.2.
Inflation Expectations Curve
39
Chart 3.2.3.
Distribution of 12-Month Ahead Inflation Expectations
40
Chart 3.2.4.
Distribution of 24-Month Ahead Inflation Expectations
40
4. SUPPLY AND DEMAND DEVELOPMENTS
Chart 4.1.1.
Contribution to GDP Growth by Demand Components
48
Chart 4.1.2.
GDP and the Final Domestic Demand
48
Chart 4.1.3.
Production and Import Quantity Indices of Consumption Goods
49
Chart 4.1.4.
Domestic Sales of Automobiles and White Goods
49
Chart 4.1.5.
Consumer Confidence
49
Chart 4.1.6.
Weekly Consumer Loans
49
Chart 4.1.7.
Production and Import Quantity Indices of Capital Goods
50
Chart 4.1.8.
Domestic Sales of Commercial Vehicles
50
Chart 4.1.9.
12-Month Ahead BTS Expectations for Investment
50
Chart 4.1.10.
Leading Indicators Index
50
Chart 4.1.11.
Final Domestic Demand
51
Chart 4.2.1.
Contribution of Net External Demand to Annual GDP Growth
52
Chart 4.2.2.
Exports and Imports of Goods and Services
52
Chart 4.2.3.
Quantity Index for Exports Excluding Gold
52
Chart 4.2.4.
Imports and Industrial Production Indices for the Global Economy
52
Chart 4.2.5.
GDP-Weighted Global Production Index
53
Chart 4.2.6.
Global PMI Indices
53
Chart 4.2.7.
Quantity Index for Imports
54
Chart 4.2.8.
Quantity Indices for Imports by Subcategories
54
Chart 4.2.9.
Current Account Balance
54
Chart 4.3.1.
Farm and Non-Farm Employment
55
Chart 4.3.2.
Unemployment
55
Chart 4.3.3.
Industrial Employment and Production
55
Chart 4.3.4.
Services and Construction Sector Employment
55
Chart 4.3.5.
Manufacturing Industry Employment
56
Chart 4.3.6.
Household Spending and Real Wage Payments
56
Chart 4.3.7.
Hourly Labor Cos
57
Chart 4.3.8.
Non-Farm Value Added and Employment
57
5.
FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION
Chart 5.1.1.
Growth Rates in Advanced and Emerging Economies
73
Chart 5.1.2.
Policy Rates in Advanced and Emerging Economies
73
Chart 5.1.3.
EMBI
74
Chart 5.1.4.
Regional CDS Indices
74
Chart 5.1.5.
Portfolio Flows to Emerging Economies
74
Chart 5.1.6.
Net Portfolio Flows of of Non-Residents
74
Chart 5.1.7.
Yields on GDBS
75
Chart 5.1.8.
Second-Quarter Changes in 2-year Market Rates
75
Chart 5.1.9.
12-Month Ahead CPI Inflation Expectations
75
Chart 5.1.10.
12-Month Ahead Policy Rate Expectations
75
Chart 5.1.11.
Yield Curve
76
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Chart 5.1.12.
Interest Rate Spread
76
Chart 5.1.13.
2-year Real Interest Rates for Turkey
76
Chart 5.1.14.
2-year Real Interest Rates for Turkey
76
Chart 5.1.15.
Yields on TL Savings Deposits
77
Chart 5.1.16.
Average Maturity of TL Deposits
77
Chart 5.1.17.
TL and Emerging Market Currencies
77
Chart 5.1.18.
TL Currency Basket and Risk Premium Indicators
77
Chart 5.1.19.
Implied Volatility of Exchange Rates
78
Chart 5.1.20.
Implied Volatility of Exchange Rates
78
Chart 5.1.21.
Balance Sheet Decomposition of M3
78
Chart 5.1.22.
Annual Growth of the Real Monetary Base
79
Chart 5.1.23.
Market Liquidity
80
Chart 5.2.1
Loan Growth Rates
80
Chart 5.2.2
Loans to GDP
80
Chart 5.2.3
Financing of Non-Financial Institutions
81
Chart 5.2.4
Weekly Growth of TL and FX Business Loans
81
Chart 5.2.5
Business Loan Growth Rates by Scale
82
Chart 5.2.6
FX Business Loans by Scale
82
Chart 5.2.7
TL Business Loan Rates
82
Chart 5.2.8
FX Business Loan Rates
82
Chart 5.2.9
Weekly Growth Rates of Consumer Loans
83
Chart 5.2.10
TL Loan Rates
84
6.
PUBLIC FINANCE
Chart 6.1.1.
Chart 6.1.2.
Chart 6.2.1.
Chart 6.2.2.
Chart 6.2.3.
Central Government Budget
Real Tax Revenues
Public Debt Stock Indicators
Maturity of Borrowing from Domestic and External Markets
Domestic Borrowing
100
102
103
104
105
7. MEDIUM-TERM PROJECTIONS
Chart 7.2.1.
Chart 7.2.2.
Chart 7.3.1.
Chart 7.3.2.
Chart 7.3.3.
Chart 7.3.4.
Revisions to Oil and Import Price Assumptions
Export-Weighted Global Economic Activity Index
Inflation and Output Gap Forecasts
Inflation Forecast
Output Gap Forecast
Inflation Forecast Excluding Unprocessed Food and Tobacco
114
115
116
117
117
118
Tables
2. INTERNATIONAL ECONOMIC DEVELOPMENTS
Table 2.1.1.
Growth Forecasts
14
Table 2.2.1.
Idle Capacity in OPEC Countries
16
Table 2.2.2.
Production, Consumption and Inventory Forecasts for Agricultural Commodities
16
Table 2.3.1.
Inflation Forecasts
18
3. INFLATION DEVELOPMENTS
Table 3.1.1.
Prices of Goods and Services
34
Table 3.1.2.
Prices of Core Goods
35
Table 3.1.3.
PPI and Subcategories
39
5. FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION
Table 5.2.1
Changes in Main Balance Sheet Items
84
6. PUBLIC FINANCE
Table 6.1.1.
Central Government Budget Aggregates
100
Table 6.1.2.
Central Government Primary Expenditures
101
Table 6.1.3.
Central Government General Budget Revenues
101
7. MEDIUM-TERM PROJECTIONS
Table 7.2.1.
Revisions to 2011Assumptions
113
Table 7.3.1.
CBRT Inflation Forecasts and Expectations
118
Inflation Report 2011-III
123
Central Bank of the Republic of Turkey
Boxes in Previous Inflation Reports
2011-II
3.1. Additional Tariffs on Clothing Imports and Possible Impacts on CPI
4.1. Changing Trends in the Labor Market
5.1. Credit Expansion and the Current Account Deficit
5.2. Effects of Decisions on Required Reserves
7.1. Designing and Communicating the New Monetary Policy Approach by the CBRT
2011-I
2.1. The Sensitivity of the EU Periphery to the Debt Crisis
2.2. Causes of the Increase in the U.S. Long-term Nominal Bond Returns Following the Second Round
of Quantitative Easing
3.1. Sources of Volatility in Unprocessed Food Prices
3.2. An Evaluation of Core Inflation Indicators
5.1. The Derivative Markets and the Recent Developments in the Foreign Exchange Markets
7.1. Financial Stability Under Inflation Targeting: The CBRT's Actions
7.2. The Role of Reserve Requirements in Monetary Policy
7.3. Sources of Revisions to Inflation Forecasts for 2010 Year-End
2010-IV
2.1. Capital Flows to Emerging Market Economies
3.1. Changes in Wheat Prices and Their Effects on Consumer Prices
4.1. Ramadan Effect on Economic Activity
4.2. Uncertainty and Economic Activity
5.1. The Financial Contagion Effect in Foreign Exchange and Capital Markets: Case of Turkey
7.1. Import Price Projections
2010-III
2.1. Determinants of the Monetary Stance in Emerging Economies During the Second Quarter of 2010
3.1. Underlying Inflation
4.1. Capacity Utilization Rates for Domestic and External Markets
4.2. Observations on Employment Conditions
4.3. A Comparison of Non-Farm Employment and Production During Two Crisis Episodes: 2000-2001 and 2008-2009
6.1. Developments in Budget Deficit and Public Debt Stock: An International Comparison
7.1. Monetary Policy Stance During September 2008 – July 2010
2010-II
2.1. Foreign Demand Index for Turkey
3.1. The Role of Meat Prices in Food Price Inflation Spike
4.1. Global Crisis, Foreign Demand Shocks and the Turkish Economy
5.1. The Impact of Monetary Policy Decisions on Market Returns
5.2. Post-Crisis Exit Strategy of Monetary Policy in Turkey
6.1. Fiscal Rule: General Framework and Planned Practice in Turkey
7.1. Communication Policy and Inflation Expectations Following Recent Inflation Developments
2010-I
1.1. A backward Glance on end-2009 InflatĐon Forecasts
3.1. Volatility of Unprocessed Food Inflation in Turkey: A Review of the Current Situation
3.2. Base Eeffects and Their Implications for the 2010 Inflation Outlook
5.1. The Impact of Central bank’s Purchases of Government Securities on Market Returns
5.2. Banks’ Loans Tendency Survey and Changes in Loans
5.3. The Financial Structure of a Firm and the Credit Transmission Mechanism
7.1. Inflation Expectations Before and After the Target Revision in 2008
2009-IV
2.1. Risk of Deflation in the US and the Euro Area
2.2. Capital Flows to Emerging Markets: IIF Forecasts for 2009-2010
3.1. The Course of Durable Goods Prices in 2009: The Impact of Tax Adjustments
4.1. Fınancial Stress and Economic Activity
5.1. Banks' Loans Tendency Survey and Changes in Loans
124
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2009-III
2.1. Global Recessions and Economic Policies
3.1. The Impact of Temporary Tax Adjustments on Consumer Prices
4.1. Measuring Underlying Exports: Are Core Indicators Needed?
5.1. Mid-Crisis Impact of Country Risk on Policy Rates
6.1. The Fiscal Implications of the Global Crisis on Advanced and Emerging Economies
2009-II
1.1. Measures Taken by the Central Bank of the Republic of Turkey to Reduce the Impact of the
Global Crisis
1.2. The Front-Loaded Monetary Policy since November 2008 and Its Effects
2.1. Expectations About Global Economy
4.1. Monitoring the Trends in Employment: Do We Need Core Measures?
5.1. Changes in the Risk Premium for Emerging Markets and Policy Rate Decisions
5.2. Global Crisis and Financial Intermediation
2009-I
2.1. Expectations About Global Economy
7.1. Accountability Mechanisms in Inflation-Targeting Countries
2008-IV
3.1. Crop Production Forecasts and Price Developments
3.2. An Empirical Analysis of Oil Prices
4.1. Sources of Growth in the Turkish Economy
2008-III
2.1. Recent Developments in Global Inflation and Monetary Policy Measures
3.1. Medium-term Forecasts for Food Prices
4.1. Is There Any Increase in Economic Activity in the Fırst Quarter of 2008?
The Impact of Seasonal Variations and Working Days on National Accounts
5.1. Changes in Liquidity and Monetary Policy Reference Rate
2008-II
2.1. Recent Developments in Global Inflation
3.1. Recent Food Price Developments
4.1. Update of National Accounts Data
5.1. An Overview on Risk remium Volatility and Risk Appetie Elasticity in Emerging Economies
2008-I
2.1. A Brief Overview of the Appreciation of Yuan and Its Likely Results
2007-IV
5.1. Yield Curves and Monetary Policy Decisions
2007-III
3.1. Recent Price Developments in Agricultural Raw Materials
4.1. Structural Change in the Export Performance of Turkey After 2001
2007-II
3.1. Wages and Services Inflation
5.1. Information Contained in the Inflation-indexed Bonds about Inflation Expectations
2007-I
3.1. The Course of Durable Goods Prices after May
3.2. Chinese Effect on Domestic Prices
6.1. Treasury’s 2007 Financing Program
Inflation Report 2011-III
125
Central Bank of the Republic of Turkey
2006-IV
2.1. Results from a Structural VAR Analysis of the Determinants of Capital Flows into Turkey
2.2. Commodity Markets
7.1. Inflation Targeting Regime, Accountability and IMF Conditionality
2006-III
3.1. Behavior of Price Level and Inflation in Case of Likely Shocks
4.1. Results of the Survey on Pricing Behaviour of Firms
4.2. Rise in International Energy Prices and Its Effects on Current Account Deficit
5.1. Debt Structures of Companies in Turkey
2006-II
2.1. International Gold Price Developments and Their Effects on the CPI
3.1. Relative Price Differentiation, Productivity and the Real Exchange Rate
6.1. Inflation Targeting Regime, Accountability and IMF Conditionality
2006-I
2.1. The use of Special CPI Aggregates in the Measurement of Core Inflation
2.2. The Exchange Rate Pass-through in Turkey: Has the Pass-through Changed with the New CPI Index?
3.1. Productivity Developments in the Manufacturing Industry
5.1. Commitments about Fiscal Policy
6.1. Inflation Targeting Strategy and Accountability
126
Inflation Report 2011-III
Central Bank of the Republic of Turkey
Abbreviations
AMA
Automotive Manufacturers Association
bbl
BRSA
barrel
BTS
CBRT
Business Tendency Survey
CDS
CEEMEA
Credit Default Swap
CPI
ECB
Consumer Price Index
EFSF
EMBI
European Financial Stability Fund
EPFR
EU
Emerging Portfolio Fund Research
Fed
FHFA
Federal Reserve Bank
FOMC
FX
Federal Open Market Committee
GDBS
GDP
Government Domestic Borrowing Securities
HLFS
ILII
Household Labor Force Survey
ISE
MPC
Istanbul Stock Exchange
MSCI
MTP
Morgan Stanley Capital International
OECD
O/N
Organization for Economic Co-Operation and Development
OPEC
PMI
Organization of the Petroleum Exporting Countries
PPI
SCA
Producer Price Index
SCT
SEE
Special Consumption Tax
SME
S&P
Small and Medium-Sized Enterprises
SSI
TEA
Social Security Institution
TL
TurkStat
Turkish Lira
U.K.
U.S.
U.S.A.
United Kingdom
USD
WGIA
United States Dollar
VAT
VIX
Value Added Tax
Inflation Report 2011-III
Banking Regulation and Supervision Agency
Central Bank of the Republic of Turkey
Central Eastern Europe, Middle East and Africa
European Central Bank
Emerging Markets Bond Index
European Union
Federal Housing Finance Agency
Foreign Exchange
Gross Domestic Product
Industrial Labor Input Indices
Monetary Policy Committee
Medium-Term Program
Overnight
Purchasing Managers Index
Special CPI Aggregate
State Economic Enterprises
Standard and Poor’s
Turkish Exporters Assembly
Turkish Statistical Institute
United States
United States of America
White Goods Industrialists Association of Turkey
Volatility Index
127
Central Bank of the Republic of Turkey
2011 Calendar of MPC Meetings, Inflation Reports and
Financial Stability Reports
Monetary Policy Meeting
Inflation Report
(in Turkish)
January 20, 2011
January 25, 2011
(Thursday)
(Tuesday)
Financial Stability Report
(in Turkish)
February 15, 2011
(Tuesday)
March 23, 2011
(Wednesday)
April 21, 2011
April 28, 2011
(Thursday)
(Thursday)
May 25, 2011
May 30, 2011
(Wednesday)
(Monday)
June 23, 2011
(Thursday)
July 21, 2011
July 28, 2011
(Thursday)
(Thursday)
August 23, 2011
(Tuesday)
September 20, 2011
(Tuesday)
October 20, 2011
October 26, 2011
(Thursday)
(Wednesday)
November 23, 2011
November 29, 2011
(Wednesday)
(Tuesday)
December 22, 2011
(Thursday)
128
Inflation Report 2011-III