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Central Bank of the Republic of Turkey
1. Overview
Global economic activity continued to be weak in the first quarter of the
year. Meanwhile, risk appetite and capital flows displayed a volatile outlook
amid persisting uncertainties regarding the global economy (Charts 1 and 2).
Problems related to the Euro Area and uncertainties regarding the economic
policies of advanced economies stood out as the leading factors behind the
increase in the volatility of the risk appetite in this period. While the recent
additional monetary easing by the BoJ stimulated the appetite for investment in
risky assets, developments in the Southern Cyprus and Italy proved that fragilities
in the global economy remained significant.
Chart 1.
Chart 2.
Global Risk Appetite
Portfolio Flows to Emerging Economies
(4-Week Average, Billion USD)
Credit Suisse Risk Appetite Index
Equity Funds
VIX (inverted, right axis)
Bond Funds
30
0
0
-4
35
-2
-2
-6
40
-4
-4
-8
45
-6
-6
1010
0410
Source: Credit Suisse, Bloomberg.
0113
-2
0712
2
0112
2
0711
25
0111
0
0710
4
0110
4
0709
20
0109
2
0708
6
0108
6
0413
15
1012
4
0412
8
1011
8
0411
10
6
Source: EPFR, Bloomberg.
Sustained quantitative easing in advanced economies causes global
rates to remain at historic lows, and fuels capital flows towards emerging
economies. On the other hand, lingering fragilities in the global economy lead
to an unstable risk appetite. This outlook for global liquidity and risk appetite
bring about large and volatile portfolio flows towards emerging economies
(Chart 2). This underlines the importance of maintaining a flexible policy
framework with multiple instruments.
Inflation Report 2013-II
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Central Bank of the Republic of Turkey
1.1. Monetary Policy and Monetary Conditions
The CBRT has designed and implemented a new policy framework that
takes into account macro financial risks since the end of 2010. Policies
implemented in this period aimed at managing macro financial risks without
prejudice to price stability in the medium term. To this end, additional policy
instruments were developed. Under the new strategy, monetary policy put
special emphasis on containing the potential excessive volatility in domestic
credit and exchange rates caused by capital flows. In this respect, while credit
growth and its volatility have been brought down, exchange rate has been
aligned closer with economic fundamentals.
Owing to these policies, 2012 was marked as a year of re-balancing. The
composition of growth displayed a healthier outlook, while the current account
continued to improve (Chart 1.1.1). The contribution of net exports to growth
has increased markedly (Chart 1.1.2).
Chart 1.1.2.
Current Account Balance
Contribution to Annual GDP Growth
(12-Month Cumulative, Billion USD)
(Percentage Point)
30
Current Account Balance (excluding
energy and gold)
Current Account Balance
10
30
10
-10
-10
-30
-30
-50
-50
-70
-70
-90
0208
0508
0808
1108
0209
0509
0809
1109
0210
0510
0810
1110
0211
0511
0811
1111
0212
0512
0812
1112
0213
-90
Source: TurkStat, CBRT.
Thousands
Chart 1.1.1.
Final Domestic Demand
Net Exports
Change in Inventories
GDP
25
20
25
20
15
15
10
10
5
5
0
0
-5
-5
- 10
-10
- 15
-15
- 20
-20
- 25
-25
12341234123412341234123412341234
2005 2006 2007 2008 2009 2010 2011 2012
Source: TurkStat, CBRT.
In the second half of 2012, credits decelerated further, domestic demand
remained subdued and inflation followed a downward trend. Accordingly, the
CBRT adopted a more accommodative monetary policy stance by gradually
increasing the liquidity injected to the market. On the other hand, as of late
2012, accelerated capital inflows, revived credit growth and the appreciation
pressure on the Turkish lira led the CBRT to re-focus on macro financial risks. The
MPC stated that in such an environment, the proper policy would be to keep
interest rates low while preserving macro prudential measures. Accordingly,
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Inflation Report 2013-II
Central Bank of the Republic of Turkey
short-term interest rates were lowered in the first quarter of the year, while a
moderate tightening was sustained through required reserves (Chart 1.1.3).
The winding down of risks regarding the Euro Area owing to the support of
the ECB as well as the more effective use of the ROM alleviated the need for a
wide interest rate corridor as of end-2012. Therefore, the CBRT gradually
narrowed the interest rate corridor by lowering the overnight lending rate
(Chart 1.1.3).
Chart 1.1.3.
Policy Rate and Liquidity Policies
Interest Rate Corridor
CBRT Average Funding Rate
BIST O/N Rates (10-day Moving Average)
Policy Rate
15
15
0413
0213
0313
1
0113
1
1112
1212
3
0912
1012
3
0812
5
0612
0712
5
0412
0512
7
0212
0312
7
0112
9
1111
1211
9
0911
1011
11
0811
11
0611
0711
13
0511
13
Source: BIST, CBRT.
In order to slow down the credit growth rate, which remained well above
the reference value of 15 percent, the CBRT normalized its liquidity stance in
late February. In fact, overnight market rates have lately started hovering
around the policy rate (Chart 1.1.3). Moreover, a moderate tightening was
sustained through required reserves so as to contain the excessively
expansionary effects of capital inflows on credit growth. Strong capital inflows in
this period necessitated further increases in ROC’s, ensuring a more effective
use of ROM.
In the first quarter of the year, the MPC emphasized ongoing uncertainties
regarding the global economy as well as the volatility in capital flows, and
maintained its stance that monetary policy should be kept flexible in both
directions. In this context, it was re-iterated that the impact of the measures
undertaken on credit, domestic demand, and inflation expectations will be
Inflation Report 2013-II
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Central Bank of the Republic of Turkey
monitored closely and the funding amount will be adjusted in either direction,
as needed.
Parallel to the volatility in the risk appetite, market rates also followed a
volatile course in the first quarter of the year. Following the publication of the
January Inflation Report, uncertainties in the Euro Area shifted the yield curve
upwards. More recently, capital
inflows
re-accelerated
owing
to
the
quantitative easing package announced by the BoJ. Furthermore, the CBRT’s
policy rate cut in April as well as the favorable risk perceptions regarding Turkey
also supported the downward movement of interest rates. Due to these
developments, the yield curve shifted downwards for each maturity compared
to the previous reporting period (Chart 1.1.4). Real interest rates also displayed
a similar movement and continued to hover around historically-low levels
(Chart 1.1.5).
Chart 1.1.4
Chart 1.1.5.
Yield Curve*
2-Year Real Interest Rates for Turkey*
(Percent)
(Percent)
27 March
26 April
6.5
5
5
6.2
6.2
4
4
3
3
5.9
5.9
2
2
5.6
5.6
1
1
0
0
-1
-1
5.3
5.3
5
5
0.5
1
1.5
2
2.5
3
Maturity (year)
3.5
4
*Calculated from the compounded returns on bonds quoted in BIST
Bonds and Bills Market by using ENS method.
Source: BIST, CBRT.
0410
0610
0810
1010
1210
0211
0411
0611
0811
1011
1211
0212
0412
0612
0812
1012
1212
0213
0413
Yield (percent)
29 January
6.5
* 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: BIST, CBRT.
On account of easing external financing conditions and the CBRT’s
monetary policy decisions, credit rates remained on a downward track in
recent months. Consumer loan rates declined further in line with the fall in longterm market rates, while commercial loan rates declined more markedly with
the lowering of the upper bound of the interest rate corridor (Chart 1.1.6).
Moreover, deposit rates and the bill and bond rates issued by banks also
trended downwards in the first quarter of the year, following the fall in the
CBRT’s average funding rate (Chart 1.1.7).
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Inflation Report 2013-II
Central Bank of the Republic of Turkey
Chart 1.1.6.
Chart 1.1.7.
TL Loan Rates
Primary Market Rates on Domestic Issues of Bills
and Bonds by Banks
(Percent)
(Percent)
Automobile
Personal
Bills and Bonds Rate
Deposit Rate
CBRT Average Funding Rate
21
12
19
19
11
11
17
17
10
10
15
15
9
9
13
13
8
8
11
11
7
7
9
9
6
6
7
5
5
5
4
4
7
0313
0113
1112
0912
0712
0512
0312
0112
1111
0911
0711
0511
0311
0111
1110
5
Source: CBRT.
12
0811
0911
1011
1111
1211
0112
0212
0312
0412
0512
0612
0712
0812
0912
1012
1112
1212
0113
0213
0313
21
Housing
Commercial
Source: PDP, CBRT.
Credits have re-accelerated as of late 2012. Total credit growth has
recently converged to past years’ average (Chart 1.1.8). Against this
background, annual credit growth rates have been hovering above the
reference value (Chart 1.1.9).
Chart 1.1.8.
Chart 1.1.9.
Growth Rate of Real Sector Loans
Annual Growth Rate of Loans
(Adjusted for Exchange Rate, 13-Week Average,
Annualized, Percent)
(Percent)
Commercial Loans
2007-2012 Average
2013
2012
15
15
0
0
10
10
Source: CBRT.
Dec
0313
5
0113
5
1112
20
0912
20
0712
10
0512
10
0312
25
0112
25
1111
15
0911
15
0711
30
0511
30
0311
20
0111
20
1110
35
Nov
35
Oct
25
Sep
25
Aug
40
Jul
40
Jun
30
May
30
Apr
45
Mar
45
Feb
35
Jan
35
Total Loans
Consumer Loans
Source: CBRT.
In sum, strong capital flows and falling interest rates led the FCI to improve
in the first quarter of the year (Chart 1.1.10).
Inflation Report 2013-II
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Central Bank of the Republic of Turkey
Chart 1.1.10.
tightening
easing
Financial Conditions Index*
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
-2.0
-2.5
-2.5
-3.0
-3.0
-3.5
-3.5
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
2006
2007
2008
2009
2010
2011
2012 13
* For further details on financial conditions index, see CBT Research Notes in Economics No.
12/31 and Inflation Report 2012-IV, Box 5.2.
Source: CBRT.
1.2. Macroeconomic Developments and Main
Assumptions
Inflation
Inflation overshot the forecasts in the first quarter of 2013, and climbed to
7.3 percent (Chart 1.2.1). The higher-than-envisaged increase in inflation was
mainly driven by unprocessed food prices, which were mentioned in the
January Inflation Report as an upside risk. Meanwhile, core inflation indicators
also remained slightly above expectations.
Chart 1.2.1.
January 2013 Inflation Forecasts and Realizations (Percent)
Forecast Range*
Actual
12
Percent
10
8
6
0313
1212
0912
0612
0312
4
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: TurkStat, CBRT.
The contribution of exchange rate developments to disinflation declined
in this period. This, coupled with a partial recovery in domestic demand, slowed
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Inflation Report 2013-II
Central Bank of the Republic of Turkey
down the decline in the inflation rate of core goods prices. On the other hand,
the underlying trend of services prices slightly picked-up (Chart 1.2.2).
Accordingly, core inflation indicators remained flat in the first quarter
(Chart 1.2.3). As core inflation indicators stood above expectations, the initial
point of inflation forecasts was slightly revised upwards. This revision added
around 0.2 percentage points to the year-end inflation forecast.
Chart 1.2.2.
Chart 1.2.3.
Core Goods and Services Prices
Core Inflation Indicators SCA-H and SCA-I
(Annual Percent Change)
(Annual Percent Change)
SCA-H
Source: TurkStat.
0
0
0313
2
0912
2
0312
4
0911
4
0311
6
0910
6
0310
8
0909
8
0309
10
0908
10
0308
12
0907
-2
0113
-2
0912
0
0512
0
0112
2
0911
4
2
0511
4
0111
6
0910
6
0510
8
0110
8
0909
10
0509
10
0109
12
0908
12
SCA-I
12
0307
14
0906
Services
0306
Core Goods
14
Source: TurkStat.
Supply and Demand
National income data regarding the last quarter of 2012 point to a
decline in domestic demand due to private investment demand. Demand
conditions in this period followed a slightly weaker course compared to the
projections of the January Inflation Report. Meanwhile, the first quarter data
indicated a mild pick-up in the consumption demand and a notable rebound
in investment. Recently, sustained support of financial conditions, improvement
in confidence indices and the upward trend in credits signal that the recovery
will continue in the second quarter. Thus, forecasts were based on an outlook
entailing a slightly weaker aggregate demand in 2012 compared to the
previous reporting period, while keeping projections for 2013 broadly
unchanged.
External demand remained subdued in the first quarter of 2013. Despite
the slowdown in the Euro Area economic activity, global growth as well as
export-weighted
global
growth
index
remained
almost
unchanged
(Chart 1.2.4).
Inflation Report 2013-II
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Central Bank of the Republic of Turkey
Chart 1.2.4.
Export-Weighted Global Economic Activity Index* (2008Q2=100)
April 2013
January 2013
1113
0913
0713
0513
0313
0113
101
1112
101
0912
102
0712
102
0512
103
0312
103
0112
104
1111
104
0911
105
0711
105
0511
106
0311
106
* For methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”.
Source: Bloomberg, Consensus Forecasts, CBRT.
In sum, domestic and external demand developments do not suggest
any notable change in the impact of demand conditions on inflation forecasts
compared to the previous reporting period.
Energy, Import and Food Prices
Import prices remained below the projections of the January Inflation
Report (Chart 1.2.5). In particular, commodity prices have recently displayed a
higher-than-envisaged decline. In this respect, the assumption for the average
oil price in 2013, which was USD 108 in the January Inflation Report, was revised
downwards to USD 103 in line with the average of the futures prices in the first
three weeks of April (Chart 1.2.5). The effect of this revision on the inflation
forecast for end-2013 was around 0.2 percentage points on the downside. On
the other hand, the projection for the annual rate of increase of food prices
was kept unchanged at 7 percent as in the previous reporting period.
Chart 1.2.5.
Oil and Import Price Assumptions
Oil Prices (USD/bbl)
January 2013
Import Prices (USD, 2010=100)
April 2013
130
120
120
110
110
100
April 2013
115
115
100
110
110
90
90
105
105
80
80
100
100
70
70
60
60
95
95
90
90
0909
1209
0310
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
0913
1213
120
0909
1209
0310
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
0913
1213
120
Source Bloomberg, CBRT.
8
January 2013
130
Source: TurkStat, CBRT.
Inflation Report 2013-II
Central Bank of the Republic of Turkey
Fiscal Policy and Tax Adjustments
Medium-term projections are based on the assumption that no additional
tax adjustments will be introduced to tobacco and energy products in the rest
of the year. On the other hand, other tax adjustments and administered prices
are assumed to be consistent with inflation targets and automatic pricing
mechanisms.
Regarding the fiscal policy stance, medium-term inflation forecasts take
MTP projections as given. Accordingly, it is assumed that fiscal discipline will be
preserved and the structural budget balance will not display a notable change
in the forthcoming period. Thus, there has been no change in end-2013 inflation
forecast stemming from the fiscal policy.
1.3. Inflation and Monetary Policy Outlook
Medium-term forecasts envisage an outlook where macro financial risks
arising from the recent surge in capital inflows are contained. In other words,
the policy stance behind the forecast is one in which interest rates are kept low,
while macro prudential measures are sustained. In this respect, it is assumed
that annual loan growth rate will hover around 15 percent. Accordingly,
inflation is expected to be, with 70 percent probability, between 4.1 percent
and 6.5 percent (with a mid-point of 5.3 percent) at end-2013; and between 3.1
percent and 6.7 percent (with a mid-point of 4.9 percent) at end-2014. 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
0316
1215
0915
0615
0315
1214
0914
0614
0314
1213
0913
0613
0313
1212
0912
0612
0312
-4
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: CBRT.
Inflation Report 2013-II
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Central Bank of the Republic of Turkey
In sum, given the assumptions underlying the inflation forecasts and
external conditions, the upward revision of inflation at the initial point has been
compensated by the downward revision in commodity prices. Accordingly,
inflation forecast for end-2013 was kept unchanged in the inter-reportimng
period and year-end inflation forecast was kept at 5.3 percent.
Inflation is expected to fluctuate in the short term due to the base effect
in energy prices. Accordingly, annual inflation is estimated to decrease
significantly in April, and increase gradually in the May-July period. The
downward trend in inflation is expected to resume after July, bringing inflation
down to 5.3 percent at the year-end (Chart 1.3.1). Meanwhile, core inflation
indicators are projected to remain on a mild track.
Although the year-end forecast was kept unchanged, inflation path was
revised upwards in the short term mainly because of the recently soaring
unprocessed food prices. Inflation is projected to converge to the path
presented in the January Inflation Report by the year-end (Chart 1.3.2).
Comparison of January 2013 and April 2013 Inflation Report Forecasts
Chart 1.3.2.
Chart 1.3.3.
Inflation Forecasts
Output Gap Forecasts
8
8
1
1
January 2013
Actual
0.5
7
0.5
7
0
April 2013
6
6
5
5
January 2013
0
-0.5
-0.5
-1
-1
-1.5
Source: TurkStat, CBRT.
-2
April 2013
1215
0915
0615
0315
1213
0913
0613
-2.5
0313
-2.5
1212
1215
0915
0615
0315
1214
0914
0614
0314
1213
0913
0613
0313
1212
-2
1214
3
0914
3
-1.5
0614
4
0314
4
Source: CBRT.
Chart 1.3.3 presents the revision in output gap forecasts. Due to weakerthan-expected economic activity in the last quarter of 2012, the initial point of
the output gap forecasts was slightly revised downwards compared to the
previous Report. Nevertheless, in line with the expected recovery in domestic
demand, it was assumed that output gap would stay close to the path
envisaged in January over the course of the year.
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Inflation Report 2013-II
Central Bank of the Republic of Turkey
It should be underlined once again that inflation forecasts and the policy
stance are formulated in consideration of macro financial risks. Forecasts are
based on an approach which not only aims at bringing inflation close to the
target of 5 percent, but also warrants stable economic growth. In the
forthcoming period, bringing inflation close to the target without a deterioration
in external balance requires that credit should be growing at a reasonable rate,
while domestic currency should not be appreciating excessively. Therefore, it is
assessed that accommodating the global low interest rate environment while
continuing with a stance to increase reserves is the optimal policy mix.
Chart 1.3.4. Change in Credit /GDP and Current
Chart 1.3.5. CPI-Based Reel Effective Exchange
Account Balance/GDP
Rate (2003=100)
Current Account Balance / GDP
Change in Credit / GDP (right axis)
12
CPI-Based Real Effective Exchange Rate (2003=100)
14
10
1.5% trend
140
140
130
130
120
120
110
110
4
100
100
2
90
90
80
80
12
8
2% trend
16
10
8
6
4
2
Source: TurkStat, CBRT.
1112
0612
0112
0811
0311
1010
0510
1209
0709
0209
0908
0408
1107
0607
0
0107
0
0303
0903
0304
0904
0305
0905
0306
0906
0307
0907
0308
0908
0309
0909
0310
0910
0311
0911
0312
0912
0313
6
Source: CBRT.
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
Developments in the first quarter of the year highlight the ongoing fragility
in the global economy. During this period, data regarding global economy did
not diplay a stable outlook, whereas economic policy uncertainty in advanced
economies has continued. The policy framework designed by the CBRT and the
instruments developed in this respect provide a flexible framework to contain
the adverse impact of the global shocks on the domestic economy.
Inflation Report 2013-II
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Central Bank of the Republic of Turkey
Capital inflows have re-accelerated in the recent period. Improved
perceptions regarding Turkish economy and the monetary expansion package
announced by the Bank of Japan suggest that portfolio flows may continue to
exhibit a strong pattern in the forthcoming period. The possibility of further
inflows of capital as well as weak global demand has the potential to increase
macro financial risks through a deterioration in external balance. Should this
scenario materialize, the CBRT will continue to keep short term interest rates at
low levels, while tightening through reserve requirements and ROM.
On the other hand, the ongoing uncertainty regarding Euro Area
suggests that risk appetite may continue to be volatile. Given the quantitative
easing packages implemented by advanced economies, the impact of the
fluctuations in the risk appetite on capital flows may even increase in the
forthcoming period. Although the ROM plays a stabilizing role against possible
shocks, ongoing uncertainties regarding the global economy and the volatility
in capital flows necessitate the monetary policy to remain flexible in both
directions. Therefore, the impact of the recent measures undertaken on credit,
domestic demand, and inflation expectations will be monitored closely, and
the funding amount will be adjusted in either direction as needed.
On the other hand, monetary policy may normalize in advanced
economies, should the measures taken towards the solution of problems
regarding the global economy be completed sooner and more decisively than
envisaged. Materialization of such a risk may require a tightening using all policy
instruments, since it would lead to a faster than expected rise in aggregate
demand and import prices.
The baseline forecasts in the Report suggest that keeping inflation close to
the target without a deterioration in the external balance would require a mild
increase in the domestic demand along with a reasonable growth rate of
credit. However, it is likely that the domestic demand and credit may display a
stronger course than envisaged. Recently, the gradual easing in financial
conditions indicates upside risks regarding credit growth. The CBRT will closely
monitor the developments in the domestic demand and credit, and take the
necessary measures to prevent a deterioration in the pricing behavior using the
instruments at its disposal.
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Inflation Report 2013-II
Central Bank of the Republic of Turkey
The assumption regarding food prices was kept unchanged in the
baseline scenario. However, the volatile course of unprocessed continues to
pose risks regarding inflation outlook. The CBRT will not respond to volatility in
unprocessed food prices, yet will deliver the necessary tightening should this
lead to a persistent increase and a deterioration in the pricing behavior. On the
other hand, the recent slowdown in global demand and developments
regarding commodity prices offset the upside risks arising from food prices.
The CBRT monitors fiscal policy developments and tax adjustments
closely, with regard to their effects on the inflation outlook. Forecasts presented
in the baseline scenario take the framework outlined in the MTP as given. In this
respect, it is assumed that fiscal discipline will be sustained and there will be no
unanticipated hikes to administered prices. 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.
Prudent fiscal and financial sector policies are crucial for preserving the
resilience of our economy against existing global imbalances. Strengthening the
structural reform agenda that would ensure the sustainability of the fiscal
discipline and reduce the savings deficit would support macroeconomic
stability in the medium term. This will also provide more flexibility for monetary
policy and improve social welfare by keeping interest rates of long-term
government securities persistently at low levels. In this respect, implementation
of the structural reforms envisaged by the MTP remains to be of utmost
importance.
Inflation Report 2013-II
13
Central Bank of the Republic of Turkey
Box
1.1
Credit Impulse and the Business Cycle
Credits gained importance in Turkey as a policy variable by the adoption of a
policy approach that observes financial stability from a macro perspective at
end-2010. Accordingly, credit growth has gradually been aligned with financial
stability in the recent years owing to the implemented macroprudential and
monetary policies. Although the observed slowdown in domestic demand is
considered to a favored and healthy correction, the below-potential growth of
the GDP in 2012 resulted in a highlighted relationship between credit policies and
economic growth. Based on Kara and Tiryaki (2013), this Box introduces and
calculates “credit impulse” in order to contribute to the evaluation of the
relationship between credits and economic activity.
Credit Impulse
The initial recovery in final domestic demand without an increase
in the credit
stock is called “non-credit recovery” in the economic literature, and this is
especially observed during recovery periods following financial crises. Biggs,
Mayer and Pick (2009) provide a theoretical explanation to this observation
through a simple model, and demonstrate that rather than credit stock, new
credit utilization may occasionally be more influential on the relationship between
credits and economic growth. The authors express the relationship between
aggregate demand growth and credits as follows:
(
In
)
this equation,
(
denotes GDP,
)
( )
denotes credit stock,
change in credit stock (net credit utilization),
capital stock, and
denotes the
denotes the depreciation of the
denotes the interest rate. The first term on the right-hand side
of the equation shows the ratio of the change in credit utilization to the national
income. As this term is defined as the change of the change in credits, i.e. the
second-order derivative, it will be called “credit impulse”. The second term in the
equation gives the credit growth rate weighted by the ratio of credits to the
national income. As also underlined in Kara, Küçük, Tiryaki and Yüksel (2013), this
variable, which is directly related to financial stability, corresponds to “net credit
utilization/GDP” (ΔD/Y), and it is expected to follow a stable course for
indebtedness ratios to be robust.
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Central Bank of the Republic of Turkey
The
above equation and these empirical findings are compatible with the
general economic intuitions. Being a flow variable, aggregate spending are
supposed to be more closely related to flow data like net credit utilization, as
opposed to stock data on credits.1 Therefore, the rate of change in aggregate
spending (GDP growth) should be more closely related to the change in net
credit utilization (credit impulse).
The Relationship Between Credit Impulse and Economic Growth
In order to examine the relationship between credits and GDP growth in Turkey,
firstly, credit impulse and net credit utilization/GDP variables are constructed
based on the above equation. Considering the difficulties in the seasonal
adjustment of the GDP and credit series, the above equation was adjusted to
show quarterly year-on-year changes. For example, credit impulse for 2011Q4 is
defined as:
(
)
(
)
( )
while net credit utilization is constructed as following:
(
)
( )
In equations 2 and 3, credit stock ( ) is expressed by banking sector’s total credit
extended to the non-financial sector at the end of each period (nominal and
unadjusted for the exchange rate effect); while the quarterly nominal GDP data is
used to denote ( ) series.
Chart 1 shows GDP growth along with the credit impulse and net credit utilization
estimated using equations 2 and 3. The presence of frequent changes in credit
impulse in the sampling period produces a strong relationship between credit
impulse and economic growth. The sharp decline in credit growth due to unrest
caused by the global crisis in the 2008-2009 period spilled over into credit impulse
and also to the GDP growth. In the succeeding period, owing to accelerated
capital inflows led by the monetary easing policies implemented at a global
scale, the credit volume posted an increase beyond normalization; and credit
impulse peaked in the last quarter of 2010. As of that date, macroprudential
policies implemented by the CBRT in coordination with other authorities brought
about a notable fall in credit growth. Even though the fall in credit growth was not
Due to absence of flow data in total credits, this study employs changes in stock data. Mutluer-Kurul (2012) displays that flow
data on consumer loans are closely related to consumption demand and the comparison of flow data with the changes in
stock data shows that two series follow quite similar path.
1
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Central Bank of the Republic of Turkey
proportionately reflected to GDP growth due to higher contribution of net
exports, the contribution of credit impulse to GDP growth still saw a sharp decline
in 2011 and 2012. To exemplify, credit impulse in 2012Q3 stood close to levels
registered in 2009, following the global crisis.
Chart 1. Real GDP Growth, Credit Impulse and Net Credit Utilization
(Percent)
Real GDP Growth (year-on-year)
Net Credit Utilization (right axis)
Real GDP Growth (year-on-year)
Credit impulse (right axis)
10
3
-8
1
2012Q3
2012Q1
2011Q3
2011Q1
2010Q3
2010Q1
2009Q3
2009Q1
2008Q3
-10
2008Q1
-8
2012Q3
5
-6
-6
2012Q1
7
-4
-5
-4
2011Q3
9
-2
-2
2011Q1
11
0
0
0
2010Q3
13
2
2
2010Q1
15
4
5
4
2009Q3
6
2009Q1
17
6
2008Q3
19
8
10
2008Q1
10
8
Source: CBRT.
The CBRT stated that a 15-percent growth rate for credits in the medium term
would be reasonable and healthy.2 However, there is a frequent public debate
on whether this rate is compatible with the economic recovery expected in 2013.
This is mainly because the relationship between credits and the GDP growth is
considered only from the credit growth rate perspective. However, as also
illustrated above, evaluating the contribution of credits to growth by only focusing
on credit growth rate may be misleading in certain periods. Credit impulse
(change in net credit utilization) may have great informative value regarding
economic growth, especially after periods of major changes in credit growth rate
(like the 2011-2012 period).
In order to see the potential support that credit impulse can provide to economic
growth in 2013, 15 percent was taken as the reference growth rate for credits,
and credit impulse besides annual net credit utilization consistent with this ratio
were depicted in Chart 2.3 As for the GDP growth in 2013, MTP projection was
used. the net credit utilization series on the right-hand side panel points to a
relatively flat course in 2013 when compared to the previous year. Thus, this
indicator may lead to a misperception that a 15-percent rate of credit growth
may cause domestic demand to remain weak in2013. Such a conclusion(as
2
3
See CBRT (2012).
As MTP projections are annual, charts are on annual basis.
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Central Bank of the Republic of Turkey
illustrated on the left-hand side panel) will be incomplete without considering the
year-on-year surge in credit impulse in 2013. In other words, even assuming that
credit growth remains broadly unchanged from the previous year, the increase in
the change in net credit utilization (credit impulse) will enhance support provided
by credits to growth in 2013. This simple example clearly points the importance of
also taking credit impulse variable into account for the evaluation of the
consistency between credit projections and economic growth forecasts.
Chart 2. Real GDP Growth, Credit Impulse and Net Credit Utilization Projections for 2013 (Percent)
Real GDP Growth (year-on-year)
Credit Impulse (right axis)
10
Real GDP Growth (year-on-year)
12
Net Credit Utilization (right axis)
10
10
8
16
8
14
8
4
4
4
2
2
2
0
0
2
2013
4
-6
2012
2013
2012
2011
2010
2009
2008
2007
2006
-8
2005
-6
-4
2011
-6
2010
-4
6
-2
2009
-4
8
0
2008
-2
10
2007
-2
12
2006
6
6
2005
6
Source: CBRT.
In sum, these findings point that credit growth rate of 15 percent, which is taken
as reference in the medium term, corresponds to a notable increase in credit
impulse for 2013, and therefore, is consistent with an accelerated aggregate
demand growth. Accordingly, credit growth rates taken as reference by the CBRT
are thought to be largely commensurate with the growth projections presented in
the MTP.
REFERENCES
Biggs, M., T. Mayer and A. Pick, 2009, Credit and Economic Recovery, De
Nederlandsche Bank Working Paper No. 218/2009.
Kara, H., H. Küçük, S.T. Tiryaki and C. Yüksel, 2013, In Search of a Reasonable
Credit Growth Rate for Turkey, The CBT Research Notes in Economics No.
13/03.
Kara, H. and S.T. Tiryaki, 2013, Credit Impulse and the Business Cycle, The CBT
Research Notes in Economics No. 13/10.
Mutluer-Kurul, D., 2012, Flow Data on Consumer Loans, The CBT Research Notes in
Economics No. 12/35.
CBRT, 2012, Monetary and Exchange Rate Policy for 2013.
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