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Contents 1. 2. 3. 4. 5. 6. 7. OVERVIEW 1 1.1. Monetary Policy Implementation and Monetary Conditions 1 1.2. Macroeconomic Developments and Main Assumptions 4 1.3. Inflation and Monetary Policy Outlook 8 1.4. Risks and Monetary Policy 9 INTERNATIONAL ECONOMIC DEVELOPMENTS 11 2.1. Global Growth 12 2.2. Commodity Prices 17 2.3. Global Inflation 19 2.4. Financial Conditions and Risk Indicators 21 2.5. Capital Flows 25 2.6. Global Monetary Policy Developments 26 INFLATION DEVELOPMENTS 33 3.1. Inflation 33 3.2. Expectations 42 SUPPLY AND DEMAND DEVELOPMENTS 43 4.1. Gross Domestic Product Developments and Domestic Demand 44 4.2. External Demand 48 4.3. Labor Market 52 FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION 71 5.1. Financial Markets 71 5.2. Financial Intermediation and Loans 79 PUBLIC FINANCE 91 6.1. Budget Developments 92 6.2. Developments in the Debt Stock 95 MEDIUM-TERM PROJECTIONS 101 7.1. Current State of the Economy, Short-Term Outlook and Assumptions 101 7.2. Medium-Term Outlook 104 7.3. Risks and Monetary Policy 107 BOXES Box 2.1. Recent Developments in the Euro Area 30 Box 4.1. The Underlying Trend of Economic Activity Using Seasonally Adjusted Data 57 Box 4.2. Real Export Developments by Regions 60 Box 4.3. The Recent Course of Import Prices 64 Box 4.4. GDP, Labor Force, Employment and Unemployment 66 Box 5.1. The Effects of the CBRT’s Monetary Policy Decisions on Reserves 85 Box 5.2. Consumer Loan Margins and Credit Supply 88 Box 6.1. Main Features of the New Incentive System 98 Box 7.1. Differentiating the Domestic and External Demand in Estimating the Output Gap 110 Box 7.2. Inflation Expectations and the Communication 114 Central Bank of the Republic of Turkey 1. Overview In the first quarter of 2012, global economic activity continued to slow down as projected, while global risk appetite improved notably on easing concerns over the Euro Area. The prevention of a disorderly Greek default amid the completion of debt restructuring, as well as ECB’s embarking on another round of 3-year liquidity operation, partially improved perceptions over the Euro Area debt crisis. Furthermore, the better-than-expected outlook in the U.S. economy also contributed to the air of confidence. As a result, global risk appetite was heightened, thereby accelerating capital flows to emerging economies in the first quarter of the year. However, the recent resurge of bond yields amid mounting concerns over the Spanish economy, as well as the lowerthan-anticipated rise in the U.S. employment, interrupted the improvement of perceptions about the global economy. Consequently, capital flows to emerging economies have been more volatile as of early second quarter. Developments in the inter-reporting period indicate ongoing fragilities in the global financial markets. Despite the 4-year period since the outbreak of the global crisis, advanced economies are still going through deleveraging. The problems in the Euro Area, uncertainties regarding the U.S. economy and China as well as supply-side risks on energy prices are still present. Moreover, debt markets remain stagnant and concerns over financial market actors are heightened even in a period of rapidly surging asset prices and loose monetary policy stance, thereby suggesting persistent volatility in global risk perceptions, thus confirming the significance of adopting a flexible monetary policy framework. 1.1. Monetary Policy Implementation and Monetary Conditions Against heightening macro financial risks in the first half of 2011, the Central Bank of the Republic of Turkey (CBRT) aimed at steering the economy gradually towards a more balanced growth composition. Accordingly, in order to slow down loan growth, necessary measures were adopted with the support of other institutions. Moreover, policies were implemented against excessive deviation of exchange rates from economic fundamentals in either direction (Charts 1.1.1 and 1.1.2). Inflation Report 2012-II 1 Central Bank of the Republic of Turkey Chart 1.1.1. Chart 1.1.2. TL and Emerging Market Currencies* Consumer Loan Growth (11.01.2010=1) (Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) Turkey 2011 Emerging Economies 1.4 2012 2007-2011 Average 60 1.34 50 1.28 40 1.22 1.16 30 1.1 20 1.04 10 * Emerging economies include Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea, Colombia and Turkey. Increases denote depreciation of the currency. Source: Bloomberg, CBRT. Dec Nov Oct Sep Aug Jul Jun Apr May Mar 0 Jan 1110 1210 0111 0211 0311 0411 0511 0611 0711 0811 0911 1011 1111 1211 0112 0212 0312 0412 0.92 Feb 0.98 Source: CBRT. New data releases in the inter-reporting period indicate that the balancing process in the economy continues as envisaged. Accordingly, loan growth has slowed down significantly since the second half of 2011, thereby improving the current account balance remarkably (Chart 1.1.3). Domestic demand growth was controlled in this period, while the contribution of net exports increased markedly (Chart 1.1.4). In other words, the composition of growth assumed a robust outlook. Chart 1.1.3. Chart 1.1.4. Current Account Balance Contribution of Net External Demand to Annual GDP Growth (Percent) (Seasonally Adjusted, Billion USD) Current Account Current Account (excl. energy) Imports Exports Net Exports 4 2000 1000 2 0 -1000 0 -2000 -2 -3000 -4000 -4 -5000 -6000 -6 -7000 -8 -8000 1 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1* 2007 * As of February. Source: TurkStat, CBRT. 2 2008 2009 2010 2011 2012 20102011 2 3 2010 4 1 2 3 2011 4 1* 2012 * Estimate. Source: TurkStat, CBRT. Inflation Report 2012-II Central Bank of the Republic of Turkey Having achieved the desired outcomes with respect to alleviating macro financial risks, monetary policy has focused on maintaining price stability as of October 2011. The cumulative effects of the rises in import prices and the depreciation of the Turkish lira, tax adjustments in administered prices (tobacco and energy items) and hikes in unprocessed food prices led to a surge in inflation in the last quarter of the year. Although these developments are mostly temporary, the resulting high inflation brought about the risk of deterioration in inflation expectations. Accordingly, in order to prevent a worsening in the pricing behavior, the CBRT has implemented a strong monetary tightening as of October, by widening the interest rate corridor upwards and effectively using the liquidity operations (Charts 1.1.5 and 1.1.6). Chart 1.1.5. Chart 1.1.6. CBRT Policy Rate and the Interest Rate Corridor CBRT Funding and the Average Funding Rate (Percent) (Percent) Interest Rate Corridor Outstanding Funding (Billion TL) 80 14 12 14 Average Funding Rate (right axis) 1-week Repo Rate 70 Adoption of 1-week repo rate as the policy rate 12 60 10 10 50 8 8 40 6 6 30 4 4 20 Source: CBRT. 0412 0312 0212 0112 1211 0 1111 0 1011 2 0911 0412 0212 1211 1011 0811 0611 0411 0211 1210 1010 0810 0610 0410 0210 0 10 0811 2 Source: CBRT. Utilizing the flexibility offered by the interest rate corridor, an additional monetary tightening has been delivered three times since October (in December, March and April) (Chart 1.1.6). During the episodes of additional monetary tightening, the CBRT significantly raised the average cost of liquidity provided to the market by reducing the funding supplied through quantity auctions. On the other hand, the upper limit on the interest rate corridor was slightly lowered in February, following the heightening in the global risk appetite owing to the improvement in perceptions regarding the Euro Area debt crisis (Chart 1.1.5). In the meantime, the CBRT still maintained its tight monetary policy stance. Accordingly, in April, the MPC underlined that additional monetary tightening might be implemented more frequently in order to prevent a deterioration in the inflation outlook that may be driven by price adjustments to Inflation Report 2012-II 3 Central Bank of the Republic of Turkey energy items and other temporary factors. In addition, the MPC stated that it would be appropriate to preserve flexibility in monetary policy in the event that uncertainties regarding the global economy persist. Keeping the interest rate corridor wide, while occasionally implementing additional tightening ensures a tight monetary policy stance. As a matter of fact, the downward slope of the yield curve and the slowdown in consumer loan growth rates as well as the relatively high interest rates on loans confirm that monetary and financial conditions are tight (Charts 1.1.7 and 1.1.8). Chart 1.1.7. Chart 1.1.8. Yield Curve* Consumer Loan Rates (Flow, Annualized, Percent) January 26, 2012 Automobile April 20, 2012 Personal 22 10 Housing Narrowing of the Interest Rate Corridor 9.5 17 BRSA Measures 9 12 8.5 * Calculated from the compounded returns on bonds quoted in ISE Bonds and Bills Market by using Extended Nelson Siegel (ENS) method. Source: ISE, CBRT. 0412 0312 0212 0112 1211 1111 1011 0911 4 0811 3.5 0711 3 0611 2.5 0511 2 Maturity(year) 0411 1.5 0111 1 0311 7 0.5 0211 Yield (percent) Widening of the Interest Rate Corridor Source: CBRT. 1.2. Macroeconomic Developments and Main Assumptions Inflation In the first quarter of 2012, inflation remained in tandem with the January Inflation Report projections, standing at 10.43 percent at end-March (Chart 1.2.1). The higher-than-envisioned increases in oil prices in this period drove energy prices above projections. In the meantime, unprocessed food prices followed a more favorable course than envisaged. 4 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 1.2.1. January 2012 Inflation Forecasts and Realizations (Percent) 12 Forecast Range* Uncertainty Band Year-End Inflation Targets Actual Inflation 10 8 6 4 2 1212 0912 0612 0312 1211 0911 0611 0311 1210 0 * Shaded region indicates the 70 percent confidence interval for the forecast. As the cumulative effects of exchange rate movements faded, the annual core inflation trended downwards in the first quarter of the year. Meanwhile, prices of services maintained a mild course (Chart 1.2.2). Against these developments, core inflation indicators exhibited a downward trend after an extended period (Chart 1.2.3). Chart 1.2.2. Chart 1.2.3. Prices of Core Goods and Services Core Inflation Indicators SCA-H and SCA-I (Annual Percent Change) (Annual Percent Change) Core Goods 14 H SCA-H Services ISCA-I 12 12 10 10 8 8 6 6 4 4 Source: TurkStat, CBRT. 0312 0811 0111 0610 1109 0409 0908 0208 0707 1206 0506 0305 0312 1211 0911 0611 0311 1210 0910 0610 0310 1209 0909 0609 0 0309 -2 1208 2 0908 0 1005 2 Source: TurkStat. Supply and Demand National income data regarding the last quarter of 2011 indicate that aggregate demand conditions were broadly in line with the outlook presented in the January Inflation Report. Economic activity, which continued to decelerate owing to weaker domestic demand, sustained its growth at a slower pace due to the positive contribution of net exports (Chart 1.2.4). Inflation Report 2012-II 5 Central Bank of the Republic of Turkey Chart 1.2.4. GDP and the Final Domestic Demand (Seasonally Adjusted, 2008Q1=100) GDP 115 Final Domestic Demand 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 3 4 2005 2006 2007 2008 2009 2010 2011 Source: TurkStat, CBRT. Industrial production data regarding early-2012 indicate that economic activity was weaker than expected in the first quarter of the year. Nevertheless, this is considered to stem largely from temporary factors like unfavorable weather conditions and uncertainties regarding global economy. Hence, a mild recovery is expected as of the second quarter. Indeed, the upward course of the indicators on orders and consumption goods for February and March points that the decline in the economic activity is temporary. In the first quarter of the year, the indicators for the global economy and external demand were also in line with the expectations. Growth rates in both advanced and emerging economies continued to slow down, while the Euro Area growth outlook especially remained weak. In sum, the outlook for domestic and external economic activity remained broadly unchanged in the inter-reporting period. Accordingly, as in the previous reporting period, inflation forecasts are based on the assumption that the economy will assume a mild path of growth by the second quarter and aggregate demand conditions will continue to support the fall in inflation. Commodity, Import and Food Prices Since the publication of the January Inflation Report, oil prices remained significantly above the assumed path due to supply-side developments (Chart 1.2.5). Accordingly, oil price assumption, which was USD 110 per barrel in the previous reporting period, was increased to USD 120 per barrel for 2012, and 6 Inflation Report 2012-II Central Bank of the Republic of Turkey USD 115 per barrel for 2013. The contribution of this revision to the inflation forecast for end-2012 was 0.4 percentage points on the upside. On the other hand, in tandem with the decline in non-energy import prices, import price index displayed a better-than-expected course (Chart 1.2.5), pulling down the inflation forecast for end-2012 by around 0.2 percentage points. Meanwhile, import price projections based on commodity futures remained broadly unchanged in the inter-reporting period. Chart 1.2.5. Revisions to Oil and Import Price Assumptions* Oil Prices (USD/bbl) January 2012 135 Import Prices (2003=100) January 2012 April 2012 April 2012 190 125 180 115 105 170 95 160 85 75 150 65 140 55 45 * Shaded region indicates the forecast period. Source: Bloomberg, CBRT. 1213 0613 1212 0612 1211 0611 1210 0610 1209 0609 1213 0613 1212 0612 1211 0611 1210 0610 1209 0609 130 * Shaded region indicates the forecast period. Source: TurkStat, CBRT. In sum, despite the better-than-expected prices in non-energy imports in the first quarter of the year, import prices slightly pulled up the inflation forecast for end-2012, due to the upward revision in energy prices, which have a stronger effect on the consumer price index. Meanwhile, the assumption for annual food inflation was maintained as 7.5 percent throughout the forecast horizon. Fiscal Policy and Tax Adjustments Regarding the fiscal outlook, the medium-term inflation forecasts take the revised projections of the MTP as given. Hence, the baseline scenario envisages that the ratio of primary expenditures to GDP will remain flat, and the structural budget balance will not deteriorate. Moreover, the stipulated tax cuts and government incentives within the new incentive system, which was publicly announced on April 5, are considered to have no adverse effects on the fiscal balance. Inflation Report 2012-II 7 Central Bank of the Republic of Turkey Tobacco prices are assumed to remain constant throughout 2012 amid tax adjustments to tobacco products in October 2011, while increasing in January 2013 as implied by the tax adjustments in October 2011. Furthermore, other tax adjustments and administered prices are assumed to be consistent with the inflation targets and automatic pricing mechanisms. 1.3. Inflation and Monetary Policy Outlook Forecasts are based on the assumption that additional monetary tightening will be implemented more frequently, and consequently, annualized loan growth rate will hover around 14 percent. Accordingly, inflation is expected to be, with 70 percent probability, between 5.3 and 7.7 percent (with a mid-point of 6.5 percent) at the end of 2012, and between 3.4 and 7.0 percent (with a mid-point of 5.2 percent) at the end of 2013. 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 0315 1214 0914 0614 0314 1213 0913 0613 0313 1212 0912 0612 0312 1211 0911 0611 0311 -4 * Shaded region indicates the 70 percent confidence interval for the forecast. Overall, notwithstanding the adverse effect of the upward revisions to energy prices in 2012, the year-end inflation forecast was kept unchanged at 6.5 percent, envisioning that an additional monetary tightening would be implemented to counterbalance this effect. In this respect, the inflation forecast is based on the assumption that loans will grow milder, and aggregate demand conditions will further support disinflation compared to the previous reporting period. Inflation is expected to follow a highly volatile course in the second quarter. The direct effects of electricity and natural gas price hikes in April will 8 Inflation Report 2012-II Central Bank of the Republic of Turkey be around 0.5 percentage points to consumer inflation. Therefore, inflation will temporarily increase, reaching its peak in April. Due to base effects in unprocessed food prices, annual inflation is expected to display a sharp fall in May, while increasing back in June (Chart 1.3.1). Inflation is expected to follow a downward course, as the tight monetary policy implemented by the CBRT since October contains the second round effects, and hence, the cumulative impacts of the temporary price movements taper off. Accordingly, inflation will decline gradually starting from the third quarter, assuming a markedly downward trend by the final quarter of the year (Chart 1.3.1). 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 The high course of inflation and the recent deterioration in the short-term inflation expectations pose risk on the pricing behavior. Due to sharp price increases in the third quarter of 2011, inflation is envisioned to remain remarkably above the target until the last quarter of 2012, requiring a close monitoring of the pricing behavior. Although the delivered monetary tightening of the CBRT since October, besides mild domestic demand conditions have alleviated upside risks on inflation by containing secondary effects, inflation expectations will be cautiously and carefully monitored in the upcoming period, and necessary measures will be taken to keep medium-term inflation outlook consistent with the target. Ongoing uncertainties regarding global economy require further flexibility in monetary policy against volatility in capital flows. Notwithstanding the alleviating concerns regarding the Euro Area sovereign debt problem in the first quarter of 2011, the unfavorable course of growth as well as the currently elevated borrowing costs across the region keep debt sustainability debates alive. Moreover, ongoing deleveraging in the Euro Area banking system feeds into financial fragilities, increasing the probability of a renewed deterioration in the risk appetite. On the other hand, the risk appetite may recover faster than Inflation Report 2012-II 9 Central Bank of the Republic of Turkey expected, should problems regarding the global economy are solved sooner and more decisively than envisaged. Overall, the possibility that global capital flows will continue to be volatile in the forthcoming period confirms the appropriateness of the existing flexibility in the monetary policy framework. Hence, the CBRT will continue to monitor global developments closely, and take the required measures promptly. Another risk factor in the forthcoming period is the uncertainty regarding oil prices. Although the weak course of the global economy largely contains the upside risks to commodity prices, ongoing supply-side problems pose upside risk to energy prices in the short term. Should such a risk materialize, the CBRT will not react to temporary price movements, yet will not tolerate any deterioration in expectations. Unprocessed food prices pose downside risk to inflation outlook over 2012. The probability for a downward correction in unprocessed food prices after hitting the recent-high in end-2011, besides the favorable precipitation during the recent months, increase the likelihood of a better-than-envisioned course for unprocessed food prices throughout the year. Inflation may reach the target faster than projected in the baseline scenario, should the food prices follow a more favorable course than expected. The CBRT monitors fiscal policy developments closely while formulating its monetary policy. The baseline scenario forecasts of the Report are based on the MTP framework, therefore assuming that fiscal discipline will be maintained. 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. Strengthening the structural reform agenda that would ensure the sustainability of the fiscal discipline and reduce the saving deficit will contribute to the relative improvement of Turkey’s sovereign risk, thereby supporting price stability and the financial stability. Making progress in this direction will also provide room for monetary policy maneuver and support social welfare by keeping interest rates of long-term government securities permanently at low levels. In this respect, taking necessary steps towards implementation of the structural reforms envisaged by the MTP is of utmost importance. 10 Inflation Report 2012-II Central Bank of the Republic of Turkey 2. International Economic Developments In the last quarter of 2012, global economic activity accelerated moderately. Growth forecasts for 2012 remained virtually unchanged despite the better-than-anticipated performance of the global economy, with markedly growing divergences across regions. As a matter of fact, downward revisions in the growth prospects for the Euro Area are notable, especially in debt-ridden countries. In the inter-reporting period, the possibility of a disorderly default in Greece has been alleviated, thus attenuating risk perceptions regarding the region. However, the weaker growth outlook in heavily-indebted countries caused renewed concerns. Spain, which is troubled by high unemployment rates, unsettled problems in the real estate market and the failure to control local government spending is at the center of concerns regarding the region (Box 2.1). The surge in Spain’s borrowing costs not only affected Italy and other neighboring countries, both also worsened the performance of the global markets through the risk appetite. The unfavorable course of the Euro Area growth in addition to elevated borrowing costs heighten controversies over debt sustainability, while the social resistance against the adopted measures besides the imminent elections feed into uncertainties. Meanwhile, the failure to establish European Financial Stability Facility (EFSF) as a permanent funding institution, besides the inability to create an efficient security wall by merging EFSF with the European Stability Mechanism, the permanent rescue funding program, weakened the possibility for a notable financial contribution to be provided by G-20 countries. Overall, finding a permanent solution to the problems in the Euro Area is likely to take up a long time. This fact coupled with the pursued monetary easing in advanced economies implies that global risk appetite may continue to be volatile. The early-2012 data releases for the U.S. economy indicated a betterthan-expected outlook for the economic activity, while the favorable course of employment invigorated the prospects for growth. On the other hand, Fed maintained its cautious stance throughout the period despite this positive Inflation Report 2012-II 11 Central Bank of the Republic of Turkey outlook. As a matter of fact, the employment data for March, which lagged below the expectations, confirmed the Fed’s cautious stance. In the period ahead, the U.S. economic outlook and the global risk appetite will mostly depend on the developments regarding the extension of the Fed’s bond swap, which entails the exchange of short-term securities with the long-term ones, as well as the possibility for the implementation of a new round of easing. Having been adversely affected by the global turmoil, economic activity in emerging economies decelerated in the last quarter of 2011, while leading indicators suggested a recovery in the first quarter of 2012. Accordingly, central banks in emerging economies adopted a remarkably less aggressive stance. Despite the favorable outlook in the first quarter, the experience of the Euro Area debt crisis reveals that emerging economies are instantly affected by the problems in the advanced economies. Hence, in the forthcoming period, problems regarding advanced economies, especially the Euro Area countries, are likely to relapse, weighing on emerging economies through foreign trade and interrupted capital flows. Amid soaring energy prices, commodity prices surged in the last quarter. Rather than demand-side pressures, soaring prices were mainly fuelled by supply-side problems that emerged due to the contemplated embargo to be applied to Iran. In view of the fact that Iran is a major oil producer, price increases are likely to persist in the event of a further deepening in the political unrest. 2.1. Global Growth The year-on-year change in GDP-weighted global production, which has decelerated since mid-2010, declined further in the last quarter of 2011. Exportweighted annual growth has also continued to slow down, indicating that uncertainties in advanced economies, and especially the unfavorable growth outlook in the European countries with a major share in the export-weighted global production index, continued to curb global trade in the last quarter of the year (Chart 2.1.1). 12 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 2.1.1. Chart 2.1.2. Global Production* Global Growth Rates* (Annual Percent Change) (Annual Percent Change) Advanced Economies Emerging Economies (right axis) Export-Weighted GDP-Weighted 6 4 4 10 8 2 6 2 0 4 0 -2 2 -2 -4 -4 0 -6 -6 2007 2008 2009 2010 2007 2011 * Weighted by each country’s share in global GDP and Turkey’s exports for GDP-weighted and export-weighted indices, respectively. Source: Bloomberg, CBRT. -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 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2008 2009 2010 2011 * Weighted by each country’s share in global GDP. Source: Bloomberg, CBRT. The composite indices indicate that in the last quarter of 2011, the yearon-year growth of the economic activity lost pace both in advanced and emerging economies (Chart 2.1.2). The U.S. economy, which presented a favorable outlook in the last quarter of the year, contributed positively to growth in advanced economies, while the Euro Area growth continued to display an acute outlook amid the aggravating debt crisis in the second half, thus pulling down growth in advanced economies (Chart 2.1.3). The regional breakdown of growth in emerging economies indicates a continued deceleration across regions in the last quarter (Chart 2.1.4). Chart 2.1.3. Chart 2.1.4. Growth Rates in Selected Advanced Economies Growth Rates in Emerging Economies by Regions (Annual Percent Change) (Annual Percent Change) U.S.A. Asia Eastern Europe Euro Area 6 14 4 10 2 6 0 2 -2 -2 -4 -6 -6 -10 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2007 2008 Source: Bloomberg. 2009 2010 2011 Latin America 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2007 2008 2009 2010 2011 Source: Bloomberg, CBRT. In the last quarter of 2011, the U.S. economy posted a quarter-on-quarter GDP growth by 3 percent in annualized terms. Meanwhile, labor market followed a benign course, adding to the consumer and investor confidence, thus contributing positively to the U.S. economic outlook. However, as underpinned by the Fed officials, the aggregate demand shortfall is likely to Inflation Report 2012-II 13 Central Bank of the Republic of Turkey persist, thus growth will remain on a slow track. The analysis of the labor market developments indicates that despite the favorable course in the last quarter of 2011 and early-2012, March readings fell behind expectations, and main indicators on unemployment hover below the pre-crisis levels (Table 2.1.1). Table 2.1.1. The U.S. Employment Indicators 2011 Unemployment (seasonally adjusted, percent) Educated Non-Educated Employment (non-farm, private, million) Average Duration of Unemployment (week) Discouraged Workers (million) Part-time Workers (million) First-time Appliers to Unemployment Benefits (average monthly, thousand) 2012 2007 2010 Q1 Q2 Q3 Q4 January February March 4.6 9,6 9.0 9.0 9.1 8.7 8.3 8.3 8.2 2.7 6.3 5.8 6.0 6.0 5.8 5.5 5.5 5.6 5.0 115.4 16.9 1.4 4.4 11.4 107.4 33.1 2.5 8.9 10.5 108.5 37.8 2.7 8.4 10.8 109.1 39.2 2.5 8.6 10.6 109.5 40.3 2.6 8.8 10.1 110.0 40.3 2.6 8.5 9.5 110.5 40.1 2.8 8.2 9.4 110.7 40.0 2.6 8.1 9.1 110.8 39.4 2.4 7.7 319 460 409 438 404 393 381 373 357 Source: Bloomberg. In addition, the U.S. real estate market has yet to recover fully, thus feeding into concerns over the sustainability of the last quarter’s favorable outlook (Chart 2.1.5). The ongoing deleveraging by households, real estate market problems, elevated oil prices and concerns over the Euro Area continue to pose downside risks to U.S. growth. As a matter of fact, the headline PMI edged up in the first quarter, while declining back to December figures in March (Chart 2.1.6). Chart 2.1.5. Chart 2.1.6. Real Estate Prices in the U.S. PMI Indices in the U.S. S&P Case Schiller Headline FHFA New Orders 65 222 60 197 55 50 172 45 40 147 35 30 122 25 97 Source: Bloomberg. 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 0112 0111 0110 0109 0108 0107 0106 0105 0104 0103 0102 20 Source: Bloomberg. In the last quarter of 2011, the Euro Area growth slowed down to 2-year low, by registering a quarterly growth of 0.7 percent in annualized terms. Having posted the 2-year low by end-2011, manufacturing industry and services PMI edged up in the first quarter of 2012, still registering a reading below 50 (Chart 2.1.7). 14 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 2.1.7. PMI Indices in the Euro Area Manufacturing Industry Services 60 55 50 45 40 35 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 30 Source: Bloomberg. The Chinese economy, which provided the highest contribution to growth in emerging economies during the post-crisis recovery period, decelerated further in the first quarter of 2012, registering a lower-than-expected growth by a year-on-year 8.1 percent. The Chinese economic growth was mainly driven by consumption, while slightly fuelled by external demand (Chart 2.1.8). In the period ahead, leading indicators imply an accelerated GDP growth for China, while the recent fluctuations in the Chinese housing market should be carefully monitored in terms of their possible effects on growth. As of March, commercial and residential property sales declined notably by a year-on-year 15 percent and 18 percent, respectively (Chart 2.1.9). Source: Bloomberg. 0310 0909 Residential 0309 0908 0308 0907 0307 0906 Commercial 0306 0312 0911 0311 0910 -40 0310 0 0909 -20 0309 50 0908 0 0308 100 0907 20 0307 150 0906 40 0306 200 0905 60 0305 80 250 0904 300 0304 100 0312 (Annual Percent Change) 350 0911 Property Sales in China (12-Month Cumulative, Billion USD) 0311 Chart 2.1.9. Trade Balance 0910 Chart 2.1.8. Source: Bloomberg. Global growth forecasts remained broadly unchanged in the interreporting period. Global PMI figures indicate that manufacturing industry and services edged up in early-2012, while declining back by March (Chart 2.1.10). Inflation Report 2012-II 15 Central Bank of the Republic of Turkey Chart 2.1.10. Chart 2.1.11. JP Morgan Global PMI Indices Global Production Indices* (2008Q2=100) Manufacturing Industry January 2012 (Export-Weighted) April 2012 (Export-Weighted) January 2012 (GDP-Weighted) April 2012 (GDP-Weighted) Services 65 108 60 106 55 104 50 102 45 100 40 98 35 96 Actual Forecast 94 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 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 2007 2008 2009 2010 2011 2012 * Weighted by each countries’ share in Turkey’s exports. Source: Bloomberg, Consensus Forecasts, CBRT. Source: Bloomberg. Year-end global growth forecasts also remained unchanged in the interreporting period. On the other hand, year-end growth forecasts for the U.S. economy were revised slightly upwards, while growth projections in Italy, Spain and Greece were lowered, thus pulling the Euro Area forecasts down in April (Table 2.1.2). The revised GDP and export-weighted global production indices by April forecasts of the Consensus Economics remained in consistent with the outlook presented in the January Inflation Report, confirming that global problems will continue to weigh on external demand in the period ahead, given the absence of prospects for a strong recovery in external economies. Against this backdrop, the external demand outlook for the baseline scenario was kept unchanged from the previous Report (Chart 2.1.11). Table 2.1.2. Growth Forecasts for end-2012 (Annual Percent Change) World Advanced Economies U.S.A. Euro Area Germany France Italy Spain Greece Japan U.K. Emerging Economies Asia-Pacific China India Latin America Brazil Eastern Europe January April 2.6 2.6 2.2 -0.3 0.5 0.0 -1.3 -0.4 -4.1 1.9 0.5 2.3 -0.4 0.7 0.3 -1.5 -1.6 -5.4 2.0 0.7 5.0 8.4 7.3 3.5 3.3 2.6 5.0 8.4 7.2 3.7 3.3 2.8 Source: Consensus Forecasts. 16 Inflation Report 2012-II Central Bank of the Republic of Turkey 2.2. Commodity Prices In the first quarter of 2012, the headline commodity prices hit the 4quarter high on surging energy prices. Industrial metal prices initially trended upwards upon the favorable data releases for China and the U.S. economy, in addition to steps taken towards the solution of the Euro Area debt crisis, while declining back due to heightening downside risks to growth in these economies. Precious metal prices, which climbed in January on prospects for a new round of easing, went down amid weakening of these prospects. Moreover, the declaration of the Indian government to raise gold-import tax led to a contraction in physical gold demand in India, which is renowned with its traditionally strong demand for physical gold (Charts 2.2.1 and 2.2.2). Chart 2.2.1. Chart 2.2.2 S&P Goldman Sachs Commodity Prices Indices Crude Ooil (Brent) Prices* (January 2009=100) Headline Industrial Metals Precious Metals 280 (USD/bbl) Energy Agriculture Spot 0713 0113 0712 0112 0711 0111 0710 0110 40 0109 80 0112 60 0711 120 0111 80 0710 160 0110 100 0709 200 0109 120 0709 140 240 Source: Bloomberg. Futures (January) Futures (April) * Futures (January) and Futures (April) denote the arithmetical average of the prices quoted in futures contract during January 1 and January 16, and April 1 and April 16, respectively. Source: Bloomberg. Supply-side developments continued to pose upside risk to oil prices, causing oil prices to record ever high levels since the 2011 turmoil in Libya. EU’s decision for an embargo on Iran will be put into effect on July 1, driving both European as well as other countries to seek for alternative oil suppliers in order to meet their crude oil need, thereby generating significant fragility by raising political risks in the region and decreasing the effective idle production capacity upon the withdrawal of Iran’s crude oil from the international market. Meanwhile, the declaration by Saudi Arabia to raise production capacity in order to meet the need for crude oil in the event that Iran withdraws from the international oil market, stood out as a favorable development regarding the crude oil market. Inflation Report 2012-II 17 Central Bank of the Republic of Turkey In the last quarter of 2011, non-OPEC countries have also posed supplyside pressures on oil. Crude oil produced in Southern Sudan is refined and pipelined in Sudan to international markets. Following the dispute between the two countries on the duty rates to apply to transportation of oil trade, Southern Sudan shut down oil production. Additionally, the technical setbacks in the North Sea, besides the persisting turmoil in Syria and Yemen weighed on oil supply. The cold winter season in Europe and Russia as well as Japan’s rising demand for oil as an alternative to nuclear energy in electricity production caused an increased demand for crude oil, and posed an upside pressure on oil prices. The soaring unconventional oil production in the U.S. and the relatively milder winter season alleviated the upside pressures on oil prices. Against this background, the course of oil inventories varied by region, while assuming a downward trend when OECD countries are taken into account. Hence, the spread between WTI and Brent oil prices widened (Charts 2.2.3 and 2.2.4). Chart 2.2.3. Chart 2.2.4. OECD Crude Oil Inventories* Oil Prices (Million Barrel) (USD/bbl) 2800 130 2750 30 Brent WTI 120 25 Spread 2700 110 20 100 15 90 10 80 5 2450 70 0 2400 60 -5 2650 2600 * Dotted lines denote projections on oil inventories. Source: U.S. Department of Energy. 0412 0112 1011 0711 0411 0111 1010 0710 0410 0113 0112 0111 0110 0109 0108 0107 0106 0105 0104 2500 0110 2550 Source: Bloomberg. Prices of agricultural products edged up in the first quarter. Despite the increase in cultivated lands and production, the dry and hot weather conditions in Latin America, Argentina in particular, coupled with the probability of an adverse impact of the cold winter season in Europe on the agricultural production of Russia and Ukraine in particular, are considered to create significant uncertainty on the prices of agricultural products (Table 2.2.1). 18 Inflation Report 2012-II Central Bank of the Republic of Turkey Table 2.2.1. Production, Consumption and Inventory Forecasts for Agricultural Commodities* 2009/2010 2010/2011 2011/2012 167.1 685.6 65.0,2 202.5 202.5 651.1 654.8 198.7 198.7 694.3 686.8 206.3 147.6 819.4 822.8 144.1 144.1 829.0 848.1 125.0 125.0 865.0 867.3 122.7 60.8 102.6 47.1 116.6 50.5 123.1 119.0 47.1 114.5 50.5 107.7 66.1 WHEAT(million tons) Initial Inventory Production Consumption Period-end Inventory CORN (million tons) Initial Inventory Production Consumption Period-end Inventory COTTON (million bales) Initial Inventory Production Consumption Period-end Inventory * The figures may be inconsistent due to discrepancies among countries on exports and imports data, as well as the loss and damage in the marketing network. Source: US Department of Agriculture. In sum, the fragile global growth outlook and the supply-side problems mainly fed by the energy sector generate upside risk on commodity prices, thereby constituting a major risk factor on the course of the global economic activity in the period ahead. 2.3. Global Inflation In the first quarter of 2012, inflation rates remained flat in advanced economies, while continuing to plunge in emerging economies (Chart2.3.1). The appreciation of exchange rate in emerging economies amid resurging capital inflows by early-2012 was influential on the course of inflation. Meanwhile, the high base effect in inflation due to elevated commodity prices in the first quarter of 2011 has started to wane, therefore accelerating the fall in inflation. In the meantime, core inflation rates moved in tandem with the headline inflation in both advanced and emerging economies (Chart 2.3.2). Chart 2.3.1. Chart 2.3.2. CPI Inflation in Advanced and Emerging Economies Core Inflation in Advanced and Emerging Economies (Seasonally Adjusted, Annual Percent Change) Inflation Report 2012-II 0112 0711 0111 0710 0109 0708 0108 0112 0 0711 -2 0111 1 0710 0 0110 2 0709 3 2 0109 4 4 0708 5 6 0108 8 Source: Bloomberg, CBRT. Advanced Economies Emerging Economies 6 Emerging Economies 0110 Advanced Economies 10 0709 (Seasonally Adjusted, Annual Percent Change) Source: Bloomberg, Datastream, CBRT. 19 Central Bank of the Republic of Turkey Inflation compensation soared in the first quarter, especially in the Euro Area, on the recently surging energy prices, as well as the expansionary monetary policies implemented by major central banks (Chart 2.3.3). Chart 2.3.3. Inflation Compensation in the U.S. and the Euro Area (Percent) U.S.A. 3.5 Euro Area 3.0 2.5 2.0 1.5 1.0 0.5 0112 0711 0111 0710 0110 0709 0109 0708 0108 0.0 Source: Bloomberg. Global inflation forecasts for 2012 were revised upwards in the interreporting period (Table 2.3.1). In the U.S. economy, the optimism brought about by the better-than-expected macroeconomic data led to notable upward revision of inflation expectations. In the Euro Area, the rising energy prices besides the tax rate hikes under the fiscal measures adopted by the debtridden countries were the major factors leading to upward revisions in inflation forecasts. The persistence of the surge in commodity prices may pose an upside pressure on global inflation in the period ahead. Table 2.3.1. Inflation Forecasts for end-2012 (Annual Percent Change) World Advanced Economies U.S.A. Euro Area Germany France Italy Spain Greece Japan U.K. Emerging Economies Asia-Pacific China India Latin America Brazil Eastern Europe January April 2.8 3.0 1.9 1.9 1.8 1.7 2.3 1.6 0.8 -0.3 2.7 2.3 2.3 2.0 2.1 3.0 1.8 0.9 -0.2 2.8 4.0 3.5 7.2 6.2 5.3 6.3 3.8 3.3 7.0 6.0 5.1 6.4 Source: Consensus Forecasts. 20 Inflation Report 2012-II Central Bank of the Republic of Turkey 2.4. Financial Conditions and Risk Indicators The prevention of a disorderly Greek default amid the completion of debt restructuring improved perceptions about the Euro Area debt crisis, while ECB’s embarking on the second 3-year liquidity operation also eased markets. Moreover, the better-than-expected macroeconomic data in the U.S., especially for the labor market, also contributed to the air of confidence. Accordingly, global risk appetite soared in the first quarter of the year. However, the resurge of bond yields in Spain due to worsening economic outlook and the lower-than-anticipated rise in the U.S. employment in March adversely affected the risk appetite, thereby interrupting the course of improvement as of earlyApril (Chart 2.4.1). Chart 2.4.1. Global Risk Appetite (Point) Credit Suisse Risk Appetite Index VIX (inverted, right axis) 10 0 8 15 6 4 30 2 0 45 -2 -4 60 -6 0112 0711 0111 0710 0110 0709 0109 0708 75 0108 -8 Source: Bloomberg, Credit Suisse. In tandem with the soaring risk appetite, stock markets trended upwards in both advanced and emerging economies. Similarly, emerging market currencies, which saw notable depreciations in the second half of 2011 due to aggravating Euro Area debt crisis, re-appreciated in this period amid soaring risk appetite. However, emerging market currencies depreciated again amid the considerable deterioration in the risk appetite by early-April (Charts 2.4.2 and 2.4.3). Inflation Report 2012-II 21 Central Bank of the Republic of Turkey Chart 2.4.2. Chart 2.4.3. Global Stock Markets Emerging Market Currencies * (December 2007=100) MSCI - Emerging Economies 135 MSCI - Advanced Economies 120 120 90 105 60 0112 0711 0111 0710 0110 0709 0109 0708 0112 0711 0111 0710 0110 0709 0109 0708 0108 Source: Bloomberg. 0108 90 30 * 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 depreciation of the emerging market currencies. Source: Bloomberg. Despite adopted measures by the ECB and the capital enhancing plans proposed in accordance with the advice by the European Banking Authority, the Euro Area debt crisis continues to adversely affect the banking sector. As a matter of fact, the latest Global Financial Stability Report released by the IMF states that the Euro Area banking sector is expected to go through a substantial deleveraging, which will not only worsen the credit markets in the region, but also the international money and capital markets. TED and OIS spreads narrowed after the completion of the first 3-year liquidity operation at the end of December 2011, while remaining high compared to pre-turmoil period before the second half of 2011 (Chart 2.4.4). The euro–USD swap rate also remained high, despite having declined as of end2011, and trended upwards in tandem with the re-elevation of concerns over Spain (Chart 2.4.5). Notwithstanding the declining USD liquidity in the first quarter of 2012 provided by the liquidity swap agreement between Fed and other central banks in order to overcome the global USD liquidity crunch, the swap rate remained in the negative area, pointing that the counterparty risk is a major problem, thus confirming the outlook implied by the TED and OIS spreads. 22 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 2.4.4. Chart 2.4.5. 3-month TED and OIS Spreads Euro/USD Currency Swap Rate (Point) (1-Year, Basis Point) 0108 Source: Bloomberg. 0112 -135 0711 0 0111 -115 0710 0.5 0110 -95 0112 1 0711 -75 0111 1.5 0710 -55 0110 2 0709 -35 0109 2.5 0708 -15 0108 3 0709 5 OIS Spread 0109 TED Spread 0708 3.5 Source: Bloomberg. In fact, the current reading on the ITraxx Europe Senior Financials Index indicates the high level of premium paid against counterparty risk (Chart 2.4.6). The loss of confidence in the Euro Area banking sector results in higher cost of borrowing from alternative financing resources. Chart 2.4.6. ITraxx Europe Senior Financials Index (5-year, Basis Point) 350 300 250 200 150 100 50 0112 0711 0111 0710 0110 0709 0109 0708 0108 0 Source: Bloomberg. The Euro Area debt crisis and its adverse effects on the banking sector bring about setbacks in the credit mechanism, leading to heightened concerns over the sustainability of a steady growth. The recent lending survey released by the ECB pointed that credit conditions were significantly tightened in the second half of 2011, and credit demand edged down (Chart 2.4.7). Meanwhile, the latest lending survey of the Fed indicated a decline in credit demand despite the absence of a notable tightening in credit conditions (Chart 2.4.8). Inflation Report 2012-II 23 Central Bank of the Republic of Turkey Chart 2.4.7. Chart 2.4.8. Lending Survey in the Euro Area* Lending Survey in the U.S.* (Percent) (Percent) Loan Standards (Large Firms) Loan Standards (SME) Loan Demand (Large Firms) Loan Demand (SME) Loan Standards (Large and Middle-Market Firms) Loan Standards (Small Firms) Loan Demand (Large and Middle-Market Firms) -40 -40 -60 -60 * Upward movements indicate tightening in credit conditions. Source: ECB. 2003 2012 2011 2010 2009 2008 2007 2006 2005 -100 2004 -80 -100 2003 -80 2012 -20 2011 0 -20 2010 20 0 2009 40 20 2008 60 40 2007 80 60 2006 80 2005 100 2004 Loan Demand (Small Firms) 100 Source: Fed. Analysis of the commercial paper market as well as the asset-backed securities market in the U.S. is crucial in order to better evaluate the debt market. The U.S. commercial paper market, which significantly met the liquidity needs of the financial and the corporate sector in the pre-crisis period, failed to improve markedly and remained quite below the peak in midst-2007 (Chart 2.4.9). The U.S. commercial paper market, which provides an important source of liquidity to the European banking sector1, faced challenges regarding new issues and posted notable declines in the outstanding amount during May 2010 and the second half of 2011, which were both marked by the deepening of the debt crisis. Having expanded enormously in the pre-crisis period, and thus being criticized for generating asset bubbles, the U.S. asset-backed securities market has recently experienced a pause in the downward course of new issues, with the outstanding amount hovering quite below the pre-crisis period (Chart 2.4.10). 1 Share of foreign financial sector participants is 18 percent as of April 2012. 24 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 2.4.10. Chart 2.4.9. U.S. Asset-Backed Securities Market Outstanding Commercial Paper in the U.S. (Billion USD) (Trillion USD) Total Pay Down New Issue Outstanding Amount (right axis) Financial Sector (right axis) 2.5 0.9 100 3500 75 3000 50 2 0.7 2500 25 2000 0 1.5 1500 -25 0.5 1000 -50 1 500 -75 2012* 2011 2010 2009 2008 2007 2006 2005 0 2004 -100 2003 0112 0111 0110 0109 0108 0107 0106 0105 0104 0.3 0103 0.5 * As of March. Source: Bloomberg. Source: Fed. The favorable performance of asset markets in the first quarter of 2012 amid declining risk perception and increasing risk appetite was interrupted by heightening concerns over Spain, thus signifying the severity of the Euro Area debt crisis as well as the fragility of the financial markets. Fragilities are also likely to soar in the event of a lower-than-anticipated economic growth, especially in the U.S. and China. Moreover, in a period of rapidly surging asset prices and globally eased monetary policies, inert debt markets besides mounting concerns over the acting institutions in the market necessitate further cautious stance. 2.5. Capital Flows Having experienced outflows in the last quarter of 2011, emerging economies have seen capital inflows since early-2012. In tandem with the improving risk appetite, emerging economies witnessed a gradually accelerating capital flows in the first two months of the year. Capital inflows continued in March, albeit at a slower pace. Accordingly, capital inflows balanced the outflows in the last quarter of 2011, while also registering the 1year high on a quantity basis. The breakdown of portfolio flows indicates that investors opted for equities in January and February, while mostly demanding bonds in March. Amid deterioration in the risk appetite as of early-April, emerging economies experienced capital outflows, especially from the equity funds (Chart 2.5.1). Inflation Report 2012-II 25 Central Bank of the Republic of Turkey Chart 2.5.1. Portfolio Flows to Emerging Economies (Billion USD)) Equity Funds Bond Funds 10 45 VIX Index (right axis) 8 40 6 4 35 2 30 0 -2 25 -4 20 -6 15 -8 280312 290212 010212 040112 071211 091111 121011 140911 170811 200711 220611 250511 270411 300311 020311 020211 10 050111 -10 Source: EPFR, Bloomberg. Regional breakdown of portfolio flows to emerging economies shows that Latin American countries have recently attracted capital flows, which more than compensated for the outflows experienced in the previous quarter. Meanwhile, owing to the deteriorating growth expectations for the Euro Area, capital flows to emerging Europe, which has strong commercial and financial connections with the Euro Area countries, remained fairly limited. Table 2.5.1. Regional Breakdown of Portfolio Flows to Emerging Economies* (Million USD, Percent) Total 2011Q4 -11,553 2012Q1 32,429 Emerging Asia Latin America -5,437 (47.1) 14,744 (45.5) -2,552 (22.1) 9,333 (28.8) Emerging Europe -3,050 (26.4) 5,685 (17.5) MENA -514 (4.5) 2,667 (8.2) * Share of each region is given in parenthesis. Source: EPFR. 2.6. Global Monetary Policy Developments In the first quarter of 2012, monetary policy practices continued to remain loose, albeit at a slower pace, thereby underpinning the easing which was stated in the previous Report. The global economic activity remained noninflationary, while supply-side problems, especially in oil prices, were interpreted by the central banks as the major factor to pose upside pressure on inflation. Against this background, policy rates were either lowered slightly or kept constant in general. In the first quarter of 2012, the composite policy rate in advanced economies edged down on a quarterly basis, while Israel, Sweden and Norway opted for 25 basis points reduction (Charts 2.6.1 and 2.6.2). 26 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 2.6.1. Chart 2.6.2. Policy Rate Changes in Advanced Economies from Jan. 2010 to Apr. 2012 (Basis Point) Apr'12 Feb'12 2011Q4 200 Policy Rates in Advanced Economies* (Percent) Mar'12 Jan'12 2010Q1 - 2011Q3 4.5 4.0 150 3.5 100 3.0 50 2.5 0 2.0 -50 1.5 1.0 Czech Rep. 0.5 * As of April 24, 2012. Source: Bloomberg, CBRT. 0312 0911 0311 0910 0310 0909 0309 0908 0308 0.0 0907 Japan Euro Area Norway Canada Australia South Korea Sweden Israel -100 * As of April 24, 2012. Source: Bloomberg, CBRT. Policy rates in advanced economies are expected to remain low for an extended period of time (Chart 2.6.3). In fact, Fed sent no signals for a deviation from its low long-term policy rate policy, which was announced at the start of the year. Given the unfavorable prospects for economic activity, especially in the Euro Area, other major central banks are also unlikely to opt for tightening until the year-end. In the inter-reporting period, policy rate expectations differed mostly for the Euro Area countries. In January, the ECB was expected to lower policy rate by an additional 25 basis points until the year-end, while in April, the policy rate was expected to be fixed until the second half of 2013. Central banks in advanced economies, excluding Fed, ECB, BoE and BoJ, are expected to deliver limited policy rate hikes, especially in the first half of 2013 (Chart 2.6.3). Chart 2.6.3. Expected Policy Rates in Advanced Economies (Percent) April 24, 2012 5 2012 Year-end 2013Q2 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 U.S.A. Euro Area U.K. Japan Canada Australia South Korea Sweden Source: Bloomberg. Inflation Report 2012-II 27 Central Bank of the Republic of Turkey As for the emerging economies, Colombia continued with policy rate hikes in the first quarter of 2012, while Brazil and Romania diverged from peeremerging economies, by opting for sizeable reductions of 125 and 75 basis points, respectively. Brazil continued to lower policy rates in April, delivering a rate cut by 75 basis points. Meanwhile, other emerging economies either kept their policy rates unchanged or imposed slight reductions (Chart 2.6.4). The composite index suggests that in the first quarter of 2012, the average policy rate in emerging economies posted a quarterly decline by 25 basis points to 5.97 percent, and further down to 5.79 percent, following Brazil’s rate cut in April (Chart 2.6.5). Meanwhile, China and India 2 kept their policy rates unchanged in the first quarter, while pursuing monetary easing through other policy instruments. More specifically, China and India reduced required reserve ratios by 50 and 75 basis points, respectively, while India also opted for quantitative easing through bond purchases in March. Moreover, the Reserve Bank of India delivered a discount rate hike by 350 basis points, while also underlining that rather than being a monetary policy maneuver, the discount rate hike was a one-time technical adjustment. Chart 2.6.4. Chart 2.6.5. Policy Rate Changes in Emerging Economies from January 2010 to April 2012* (Basis Points) Apr'12 Jan'12 600 500 400 300 200 100 0 -100 -200 -300 -400 Mar'12 Feb'12 2011Q4 2010Q1 - 2011Q3 Policy Rates in Inflation-Targeting Emerging Economies (Percent) Emerging Economies Turkey 18 16 14 12 10 6 0312 0911 0311 0910 0310 0909 0309 0908 0308 4 0907 Romania Turkey South Africa Russia Hungary Colombia Indonesia Poland Malaysia Peru Thailand Chile Brazil 8 * As of April 24, 2012. Source: Bloomberg, CBRT. Expected policy rates for end-2012 differ across countries. Accordingly, some countries are expected to keep their policy rates unchanged, while others are expected to deliver policy rates hikes (Chart 2.6.6). However, expected changes in policy rates are fairly limited, with no expectation for an aggressive policy response. 2 India lowered policy rates by 50 basis points in April. 28 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 2.6.6. Expected Policy Rates in Emerging Economies (Basis Point) April 24, 2012 202 Year-end 2013Q2 14 12 10 8 6 4 2 Turkey Poland South Africa Thailand Philippines Indonesia China Chile Peru Mexico Colombia Brazil 0 Source: Bloomberg. Inflation Report 2012-II 29 Central Bank of the Republic of Turkey Box Recent Developments in the Euro Area 2.1 In the first quarter of 2012, the ECB conducted further operations regarding European banks. Completion of the Greek debt restructuring and the approval of the new aid package were important steps towards the improvement of the global risk appetite, which was interrupted owing to the resurge in borrowing costs in Spain and Italy from April onwards. In that respect, the failure to immediately enforce the fiscal consolidation measures across the region stands out as a major factor to heighten uncertainties regarding debt sustainability. Against this background, this Box briefly evaluates recent developments that stand out in the Euro Area. ECB conducted its second 3-year Long-Term Refinancing Operation (LTRO) on February 29, after running the first on December 21, 2011. With an increased number of participating banks from the previous operation, 800 banks within the Eurosystem were provided with a liquidity of euro 530 billion (Chart 1). Although a sizeable share of the provided liquidity was consequently retained as deposits at the ECB, the liquidity operations were deemed successful given the limited access of the Euro Area banks to alternative funding resources. As a matter of fact, the declining bond yields of the heavily-indebted countries following the operation alleviated the controversies over debt sustainability. Chart 1. Long-Term Refinancing Operation and Bank Deposits Chart 2. Bond Yield Spreads in Heavily-Indebted Countries over German Bonds (10-year, Points) (Billion Euro) LTRO 1200 Portugal Ireland Spain Italy Greece (right axis) 18 36 3 6 0 0 0 0412 30 0112 200 1011 12 0711 6 0411 400 0111 18 0112 9 0711 600 0111 24 0710 12 0110 800 0709 15 0109 1000 Source: Bloomberg. 30 Bank Deposits Source: Bloomberg. Inflation Report 2012-II Central Bank of the Republic of Turkey The gradually deepening debt sustainability problem in Greece was resolved in March. Under the Private Sector Involvement, 86 percent of the Greek bondholders agreed to participate in the voluntary swap, and 96 percent of the outstanding debt was converted upon the government’s retroactively insertion of the Collective Action Clause. Hence, the Greek debt stock was lowered by euro 100 billion. After the completion of the debt swap and the approval of the requested structural and cyclical measures at the parliament, EU countries and the IMF agreed on the release of the aid package amounting to euro 130 billion. Accordingly, the debt stock to GDP ratio in Greece, which was expected to reach 189 percent in 2012, is estimated to go down to 120 percent by 2020. Following the debt swap, the bond yield spreads of the Greek bonds dropped, while bond rates in Portugal, Italy and Spain soared, thereby fuelling concerns over the region (Chart 2). Contraction of the economic activity, rising unemployment as well as banking sector problems caused bond yield spreads to surge, while also deteriorating the risk appetite, thus adversely affecting the nonEuro Area countries as well. Chart 3. Bad Loans to Total Loans in Spain Chart 4. Housing Price İndex for Spain (Percent) (Nominal, 1995=100) 8 360 7 300 6 240 5 4 180 3 120 2 60 1 Source: Bank of Spain. Inflation Report 2012-II 2011 2009 2007 2005 2003 2001 1999 1997 1995 2012 2010 2008 2006 2004 2002 0 2000 0 Source: Bank of Spain. 31 Central Bank of the Republic of Turkey Heavy job loss experienced by the contractual employees that constitute one thirds of the total labor force was the major source of unemployment in Spain with a rigid labor market structure.3 Besides labor market problems, the ongoing fall in the real estate prices led to a surge in bad loans, thus affecting the banking sector adversely (Chart 3 and 4). The breakdown of bad loans by sectors show that construction and the related sectors constitute a major portion of the overall bad loans. In the period ahead, the Euro Area debt crisis will continue to play a major role over the course of the global risk appetite. Thus, Euro Area countries should closely be monitored with respect to their growth and budget performances as well as their labor market developments. Furthermore, aggravation of the economic problems in Spain is considered to be the major risk factor in the short term. Spain ranks above the OECD average in the index for the strictness of the Employment Protection Legislation, thus implying that the Spanish labor markets are strict. The contractual employment conditions regulated by the reform program of 1980s constitute a dual structure in the labor market. Due to average maturity of contracts, which is less than 1 year, contractual employment declines rapidly and drastically during contractionary periods of demand. This dominating labor market structure in Spain leads to comparatively notable fluctuations in unemployment than in other advanced countries. 3 32 Inflation Report 2012-II Central Bank of the Republic of Turkey 3. Inflation Developments 3.1. Inflation In the first quarter of 2012, annual consumer inflation stood at 10.43 percent, remaining broadly unchanged from the previous quarter. The accelerative effect of the higher-than-envisioned increases in energy prices due to developments in international oil prices was contained by the recently favorable course of unprocessed food prices. Having soared due to depreciation of the Turkish lira throughout 2011, annual inflation in core goods assumed a downward course in the first quarter of the year. Meanwhile, prices of services remained moderate. Hence, inflation remained close to January Inflation Report forecasts in the first quarter. Across subcategories, quarterly price changes in main expenditure groups excluding energy and core goods were below the average of the past years in the first quarter (Chart 3.1.1). Energy prices had a major effect on the lingering of high annual inflation in this period. Annual energy inflation rose by 3 percent in the first quarter, adding an extra 0.46 percentage points to inflation compared to end-2011 (Chart 3.1.2). Meanwhile, the contribution of food inflation was down by 0.22 percentage points amid the mild course of unprocessed food prices. Adverse effects of the depreciation in the Turkish lira on core goods, especially on durables, largely tapered off in this period, and the contribution of core goods to annual inflation declined by 0.15 percentage points. Meanwhile, the contribution of services prices to inflation remained unchanged. Overall, energy prices posted a higher-than-envisioned rise in the first quarter amid the upward course of oil prices. Persisting uncertainties regarding oil prices feed into upside risks on short-term inflation outlook. On the other hand, the relatively favorable course of unprocessed food prices poses downside risks to inflation. Inflation Report 2012-II 33 Central Bank of the Republic of Turkey Chart 3.1.1. Chart 3.1.2. CPI by Subcategories Contribution to Annual CPI Inflation (First-Quarter Percent Change) 2006-2011 Average Core Goods** Tobacco and Gold* 2012 10 14 8 12 6 Services Food and Energy*** 10 4 8 2 0 6 -2 4 -4 2 -6 Energy Tobacco Core Services and Goods** Gold* CPI 0 1207 0308 0608 0908 1208 0309 0609 0909 1209 0310 0610 0910 1210 0311 0611 0911 1211 0312 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. In the first quarter of the year, unprocessed food prices recorded an alltime-low first-quarter increase with 3.66 percent, and registered an annual inflation going down to 13.35 percent (Table 3.1.1). In seasonally adjusted terms, subsequent to the surge in the last quarter of 2011, the unprocessed food prices declined amid the favorable course of fresh fruit and vegetable prices (Chart 3.1.3). Having soared substantially in the previous quarter, prices of fresh fruits and vegetables saw notable downward corrections despite adverse weather conditions (Chart 3.1.4). Thus, unprocessed food inflation was below January Inflation Report forecasts in this period, with a declining contribution to annual inflation down by 1.69 percentage points. Chart 3.1.3. Chart 3.1.4. Unprocessed Food Prices Fresh Fruit and Vegetable Prices and the CPI (Seasonally Adjusted, 3-Month Average, Annual Percent Change) (Seasonally Adjusted, Index, 2003=100) 100 260 80 240 60 220 Fresh Fruit and Vegetable Prices CPI 200 40 180 20 160 0 140 -20 Source: TurkStat, CBRT. 34 1211 0311 0610 0909 1208 0308 0607 0906 0305 0312 1011 0511 1210 0710 0210 0909 0409 1108 80 0608 -60 0108 100 1205 120 -40 Source: TurkStat, CBRT. Inflation Report 2012-II Central Bank of the Republic of Turkey Annual processed food inflation posted a quarter-on-quarter decline by 0.38 percentage points to 9.44 percent (Chart 3.1.5). In this period, the rise in bread prices by 5.15 percent amid the arrangement in the communique on Bread and Bread Varieties of the Turkish Food Codex, was the main factor to contain the decline in annual processed food inflation. Meanwhile, quarterly inflation in the processed food prices excluding bread remained below seasonal averages, and decelerated quarter-on-quarter. Having accelerated since the last quarter of 2010 in line with both domestic and international developments, prices of fats and oils remained on an upward track, albeit at a slower pace (Chart 3.1.6). Following the surge in the previous quarter, prices of dairy products edged down in this period in tandem with the decline in milk prices, while processed meat products accelerated slightly quarter-on-quarter. Overall, annual food inflation dropped to 11.25 percent and remained below the January Inflation Report projections amid the developments in unprocessed food prices. 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 35 210 30 200 25 190 180 20 170 15 160 10 150 5 Source: TurkStat, CBRT. 1211 0611 1210 0610 1209 0609 1208 0608 0607 0312 1211 0911 0611 0311 1210 0910 0610 0310 1209 0909 0609 110 0309 120 -10 1208 130 -5 1207 140 0 Source: TurkStat, CBRT. Fuel prices soared by 8.07 percent in the first quarter amid the surge in international oil prices. Consequently, energy prices rose by 5.08 percent, adding 0.74 percentage points to inflation in the respective period (Chart 3.1.7 and Table 3.1.1). In the meantime, bottled gas and solid fuel prices also posted increases well above historical averages by 8.59 and 5.55 percent, respectively. In addition, water tariff hikes were close to seasonal averages, while increases to electricity and natural gas tariffs were relatively mild. Thus, annual energy inflation went up by a quarter-on-quarter 3 percentage points to 13.39 percent in the first quarter. Hikes in oil prices were reflected on electricity and natural Inflation Report 2012-II 35 Central Bank of the Republic of Turkey gas prices by April, thus pulling energy prices up by 3.5 percentage points, and adding about 0.5 points to CPI inflation. Chart 3.1.7. Chart 3.1.8. Energy Prices Prices of Core Goods and Services (Index, 2003=100) Home Utilities* (Annual Percent Change) Fuel Energy Core Goods 260 14 240 12 Services 10 220 8 200 6 180 4 160 * Home utilities include electricity, water, natural gas, bottled gas and solid fuel. Source: TurkStat, CBRT. 0312 1211 0911 0611 0311 1210 0910 0610 0310 1209 0909 0609 0309 -2 0908 120 1207 0308 0608 0908 1208 0309 0609 0909 1209 0310 0610 0910 1210 0311 0611 0911 1211 0312 0 1208 2 140 Source: TurkStat, 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. energy and food) Core Goods Durable Goods (excl. gold) Alcoholic Beverages, Tobacco and Gold 2. Services Rent Restaurants and Hotels Transport Communication Other Services* I II 2011 III IV Annual 2012 I 1.57 1.53 2.27 3.77 5.08 2.61 -0.68 -1.08 4.26 1.83 2.05 1.37 -2.46 -5.79 0.57 6.32 7.73 1.85 1.07 0.73 2.34 1.18 -1.00 3.03 -0.36 -1.55 3.69 5.66 7.29 4.03 9.57 17.23 3.30 6.93 4.92 1.90 10.45 11.97 10.36 12.21 14.89 9.82 12.51 10.09 12.19 1.55 1.54 5.08 2.89 3.66 2.25 -1.14 -1.32 1.41 0.81 1.67 1.08 1.65 2.28 1.96 1.61 1.05 1.22 0.99 1.80 2.10 -1.71 2.14 4.38 2.02 1.35 2.37 3.07 0.35 2.56 14.46 1.22 1.21 2.14 1.73 0.47 0.65 21.70 6.27 4.71 8.20 9.49 1.04 7.12 -0.33 1.57 0.89 1.99 2.12 0.06 2.24 * Services excluding rents, restaurants, hotels, transport and communication. Source: TurkStat, CBRT. Having soared throughout 2011, annual inflation in core goods assumed a downward course by the first quarter in tandem with the alleviating cumulative effects of exchange rate. Accordingly, core goods posted a year-on-year inflation by 9.82 percent in March (Chart 3.1.8). On the back of the slowdown in durable goods inflation, seasonally adjusted data also signaled a slowdown in the underlying trend of core inflation in the first quarter (Charts 3.1.9 and 3.1.10). Subsequent to the rise in January, prices of core goods remained unchanged in 36 Inflation Report 2012-II Central Bank of the Republic of Turkey February and March amid the declining prices of electrical and non-electrical home appliances other than automobiles and white goods. Meanwhile, annual rate of increases in the prices of core goods excluding durables continued to trend upwards in this quarter (Table 3.1.2). In particular, due to protection measures on textiles and ready-wear, clothing prices continued to rise both in seasonally adjusted terms and on an annual basis, notwithstanding the fall in the manufacturing prices (Chart 3.1.10). Table 3.1.2. Prices of Core Goods (Quarterly and Annual Percent Change) Core Goods Clothing and Footwear Durable Goods (excl. Gold) Furniture Electrical and Non-Electrical Appliances Automobile Other Durable Goods Other I II 2011 III IV Annual 2012 I -1.08 -12.04 4.26 0.75 2.87 6.31 2.15 1.82 7.73 25.08 1.85 5.04 -1.26 2.29 2.71 2.09 -1.55 -12.13 3.69 2.88 0.34 5.68 1.85 1.54 4.92 11.72 1.90 4.01 3.29 0.52 3.00 3.44 10.09 8.01 12.19 13.25 5.27 15.52 10.06 9.18 -1.32 -10.90 1.41 3.19 0.94 1.09 1.22 2.76 Source: TurkStat, CBRT. Chart 3.1.9. Chart 3.1.10. Prices of Core Goods Prices of Core Goods (Seasonally Adjusted, 3-Month Average, Annual Percent Change) (Annual Percent Change) Core Goods (excl. durables and clothing) Durable Goods (excl. gold) Clothing 15 20 15 10 10 5 5 0 0 -5 Source: TurkStat, CBRT. 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 -10 0906 0312 0611 0910 1209 0309 0608 0907 1206 0306 0605 -10 0306 -5 Source: TurkStat, CBRT. Having risen by 1.57 percent in the first quarter, prices of services lost pace compared to previous years (Chart 3.1.11). Prices of services increased by a year-on-year 6.17 percent by the end of the first quarter (Chart 3.1.8). Across subcategories, rents, restaurants and hotels as well as communication services posted quarterly price increases below historical averages (Chart 3.1.11). In particular, prices were flat in the highly competitive communication services, remaining below the first-quarter figures in 2011 (Chart 3.1.12). Year-on-year increase in rent was as low as 4.5 percent. Meanwhile, due to the acceleration Inflation Report 2012-II 37 Central Bank of the Republic of Turkey of domestic fuel prices, transport services inflation surpassed the average of the preceding periods. Overall, consumer inflation remained elevated, while prices of services exhibited a relatively favorable outlook in the first quarter of the year. Chart 3.1.11. Chart 3.1.12. Prices of Services by Subcategories Prices of Services by Subcategories (First-Quarter Percent Change) (Annual Percent Change) 2006-2011 Average Other* Communication Transport Rent Restaurants and Hotels 2012 3.0 20 2.5 16 2.0 1.0 8 0.5 4 0.0 0 Other* -4 -8 1207 0308 0608 0908 1208 0309 0609 0909 1209 0310 0610 0910 1210 0311 0611 0911 1211 0312 Transport RestaurantsHotels Services Communication 12 Rent 1.5 * Services excluding rents, restaurants and hotels, transport and communication. Source: TurkStat, CBRT. Seasonally adjusted data point to a flat outlook in the underlying trend of services inflation in the first quarter (Chart 3.1.13). The diffusion index, which entails information on the extent of the spillover of the price increases, edged up during the last month, by remaining below the previous quarter on a quarterly basis (Chart 3.1.14). Subcategories of the diffusion index suggest that the relative deterioration in the last month was mainly fuelled by transport and other services. 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) 0.7 16 14 0.6 12 10 0.5 8 6 0.4 4 2 0.3 0 Source: TurkStat, CBRT. 38 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 0906 0.2 0306 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 0906 0306 -2 * 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 within a given month. Source: TurkStat, CBRT. Inflation Report 2012-II Central Bank of the Republic of Turkey The courses of annual inflation in core indicators SCA-H and SCA-I were similar to annual core inflation, thereby edging down quarter-on-quarter to 8.28 percent and 7.91 percent, respectively, by the end of March (Chart 3.1.15). Seasonally adjusted data indicate that the underlying trend of SCA-H remained flat, while the underlying trend of SCA-I decelerated slightly in the first quarter of the year (Chart 3.1.16). Chart 3.1.15. Chart 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 12 SCA-H SCA-I SCA-I 20 10 15 8 10 6 5 4 0 2 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 0906 0306 0905 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 0906 0306 0905 0305 Source: TurkStat. 0305 -5 0 Source: TurkStat, CBRT. Diffusion indices for CPI and SCA-H went down in this period (Chart 3.1.17). Alternative core inflation indicators monitored by the CBRT also declined since end-2011 (Chart 3.1.18). However, both the diffusion indices and the core inflation indicators remained above historical averages. Chart 3.1.17. Chart 3.1.18. CPI and SCA-H Diffusion Indices Core Inflation Indicators SATRIM and FCORE* (3-Month Average) (Seasonally Adjusted, 3-Month Average) TÜFE 0.6 SATRIM H FCORE 1.6 1.4 0.5 1.2 1.0 0.4 0.8 0.6 0.3 0.4 0.2 0.2 0.0 Source: TurkStat, CBRT. Inflation Report 2012-II 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 0906 0306 0905 -0.2 0305 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 0906 0306 0905 0305 0.1 * SATRIM: Seasonally adjusted trimmed mean inflation. FCORE: Factor model based core inflation indicator. (See Box 3.2, Inflation Report 2011-I). Source: CBRT. 39 Central Bank of the Republic of Turkey In the first quarter of 2012, the decelerating agricultural inflation and the appreciation of the Turkish lira were influential on the course of producer prices. Accordingly, annual producer price inflation declined quarter-on-quarter by 5.1 percentage points to 8.22 percent. In the farm group, prices of vegetable products as well as fresh fruits and vegetables recorded a relatively mild increase in this period compared to the first period of 2011 (Table 3.1.3). Similarly, livestock prices fell by 0.28 percent in the same period (Chart 3.1.19). Hence, year-on-year farm inflation dropped by 4.38 percentage points to 6.16 percent at the end of the first quarter. Price developments in agricultural products were reflected on consumer prices through fresh fruit and vegetable prices, while affecting the subcategories of the manufacturing industry through certain farm products that are subject to industrial production. The plunge in domestic cotton prices, which started in early 2011, continued in this period, causing the prices of the manufacturing of clothing and textiles products to decline below seasonal averages to 5.77 percent and 1.19 percent, respectively. Meanwhile, notwithstanding the flat course of livestock prices, prices of the manufacturing of meat products and processed meat products were up in this period. Chart 3.1.19. Chart 3.1.20. Agricultural Prices Manufacturing Industry Prices Excluding Oil (First-Quarter Percent Change) (Quarterly Percent Change) 2007-2011 Average 2012 6 3.0 2.5 5 2.0 4 1.5 3 1.0 2 0.5 1 0.0 0 -0.5 Source: TurkStat. 0312 1211 0911 0611 0311 1210 0910 0610 0310 1209 Agricultural Products 0909 Livestock and Products 0609 Crops, Fruits and Vegetables 0309 -1.0 -1 Source: TurkStat, CBRT. Manufacturing prices followed a mild course in the first quarter amid exchange rate developments (Chart 3.1.20). In particular, appreciation of the Turkish lira in the first two months had a dominating effect on the manufacturing prices despite rising international commodity prices. In fact, TL-denominated import prices posted a quarter-on-quarter decline in this period (Chart 3.1.21). Thus, manufacturing industry prices excluding oil soared by a low 0.79 percent, 40 Inflation Report 2012-II Central Bank of the Republic of Turkey thereby causing the annual inflation to decline by 5.12 percentage points quarter-on-quarter to 8.30 percent. Prices of intermediate and capital goods had a benign outlook, despite the interruption of the slowdown in March amid the relative deterioration in exchange rates, besides the developments in commodity prices. Meanwhile, durables and non-durable goods saw higher quarterly price increases by 2.36 percent and 1.4 percent, respectively. Prices of durables soared mainly on the back of manufacturing of furniture prices, which have steadily risen on a quarterly basis. The rise in prices of non-durable goods, on the other hand, was mostly driven by food manufacturing prices. Overall, the first quarter was marked by a mild course in the prices of manufacturing industry excluding oil, as well as farm with a relatively weak course for producer prices. Chart 3.1.21. USD and TL-Denominated Import Prices (Index, 2003=100) Import Prices (USD) Import Prices (TL) 225 200 175 150 125 0212 0811 0211 0810 0210 0809 0209 0808 0208 0807 0207 0806 0206 100 Source: TurkStat. 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 basic metals) Electricity, Gas and Water I 5.40 5.84 6.81 -1.26 5.31 9.70 6.27 5.55 II 0.77 -1.73 -2.67 -0.39 1.30 1.08 1.98 1.95 2011 III 3.31 -6.03 -9.84 2.68 5.24 4.94 4.98 4.67 IV 3.28 13.09 17.18 5.51 1.48 2.93 0.72 0.70 Annual 13.33 10.53 9.83 6.56 13.92 19.76 14.59 13.42 2012 I 0.65 1.65 0.76 -0.28 0.45 0.90 1.06 0.79 4.85 -4.08 1.53 -4.73 4.12 7.89 1.39 7.91 12.38 6.38 0.93 -4.64 Source: TurkStat, CBRT. Inflation Report 2012-II 41 Central Bank of the Republic of Turkey 3.2. Expectations Having risen in the last quarter of 2011 amid soaring annual consumer inflation, inflation expectations remained flat in the first quarter of 2012. Expectations did not deteriorate in this period despite the high course of inflation. However, following the hikes to electricity and natural gas tariffs effective as of April, especially the 12-month ahead expectations were revised upwards (Charts 3.2.1 and 3.2.2). 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 April 2012 Inflation Target 24-Month 9 11 8.5 10 8 9 7.5 8 7 7 6.5 January 2012 Uncertainty Band 6 6 5 5.5 4 5 3 4.5 0414 0214 1213 1013 0813 0613 0413 0213 1212 1012 0812 0612 0312 1211 0911 0611 0311 1210 0910 0610 0310 1209 0909 0609 0309 1208 0412 2 4 * Calculated by linear interpolation of expectations for different time spans using the CBRT Survey of Expectations, second survey period results. Source: CBRT. * CBRT Survey of Expectations, second survey period results. Source: CBRT. The distribution of survey respondents' for both 12-month and 24-month ahead inflation expectations converged in this period (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* January 2012 0.8 April 2012 January 2012 0.80 0.7 0.70 0.6 0.60 0.5 0.50 0.4 0.40 0.3 0.30 0.2 0.20 0.1 0.10 0.0 April 2012 0.00 3 5 7 9 11 2 4 6 8 10 12 14 * Horizontal axis depicts inflation rates, while the vertical axis indicates the Kernel forecast. CBRT Survey of Expectations, second survey period results. Source: CBRT. 42 Inflation Report 2012-II Central Bank of the Republic of Turkey 4. Supply and Demand Developments National accounts data for the last quarter of 2011 remained broadly consistent with the outlook presented in the January Inflation Report. Domestic demand remained almost flat, while net external demand was the main driver of both the quarterly and annual growth, indicating that the economy was balanced further at a robust pace. Quarterly growth rate, which is indicative of the underlying trend of the economic activity, varied significantly in the recent period depending on the method of seasonal adjustment. However, in cumulative terms, the economic activity has clearly lost momentum following the first quarter of 2011. Signals for slowdown were evident in the first quarter of 2012. Despite having recovered slightly in February after the sharp decline in January, seasonally adjusted industrial production in the January-February period remained below the average of the previous quarter, largely due to temporary factors such as unfavorable weather conditions and external uncertainties. As a matter of fact, the upward course of indicators on orders, production and consumption in February and March signals for a rally in production by the second quarter. Following the second half of 2011, the period of which was dominated by external uncertainties, both the global economic activity and the risk appetite improved remarkably. As of the second half of 2011, exports settled into an accelerated track of growth, thereby pointing to the balancing of the economy, and also contributing significantly to favorable perceptions regarding economic fundamentals. As a matter of fact, the ongoing balancing in the first quarter, in addition to markedly improved 12-month cumulative current account deficit eased the key constraint posing downside risks to growth. Overall, foreign trade and external financing suggest a favorable outlook regarding growth in the forthcoming period. Indicators on medium to long-term expectations like employment and investment plans display an optimistic outlook regarding private demand. This optimistic outlook is also bolstered by the recently introduced package entailing government incentives for investments. Widening of the sectoral scope of incentives, lowering of labor costs and extension of the financing opportunities are the three main pillars of the new incentive system, which is Inflation Report 2012-II 43 Central Bank of the Republic of Turkey estimated to further enhance the investment propensity in the short to medium term, while improving competitiveness and reducing structural current account deficit to plausibly and sustainably low levels through reducing of the dependency on imported intermediate goods in the long term. The current outlook suggests that the economy will continue to grow in 2012, albeit at a decelerating pace, and aggregate demand conditions will further support disinflation given the projected mild growth path. In the longer term, the new incentive system is expected to support potential growth and contribute to price stability. 4.1. Gross Domestic Product Developments and Domestic Demand National accounts data released by TurkStat indicate that GDP posted a year-on-year increase by 5.2 percent in the last quarter of 2011, thus registering an annual growth by 8.5 percent over 2011. Demand components were balanced further in the last quarter, with the net external demand providing the highest contribution to growth after an extended period. Private demand continued to bolster growth in the last quarter, albeit at a weaker pace. Public consumption and investment registered a year-on-year decline, thus signifying the major negative contribution by public spending to growth for the first time in a long period. Seasonally adjusted data indicate that GDP recorded a quarterly increase by 0.6 percent in the fourth quarter. Despite the ambiguity of the results for the last quarter, the analysis on the underlying trend of the economic activity indicates that in cumulative terms, the economy has lost pace since the first quarter of 2011 (Box 4.1). The course of demand components remained in line with the outlook presented in the January Inflation Report. Quarterly growth was mainly fuelled by net external demand, while the domestic demand followed a flat course (Chart 4.1.1). 44 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 4.1.1. GDP and the Final Domestic Demand (Seasonally Adjusted, 2008 Q1=100) GDP Final Domestic Demand 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 3 4 2005 2006 2007 2008 2009 2010 2011 Source: TurkStat, CBRT. First-quarter data point to a weak course for final domestic demand. Production of consumption goods, indicative of the private consumption demand, declined in the January-February period. Meanwhile, imports of consumption goods increased during the same period (Chart 4.1.2). Following the decline in January, domestic sales of automobiles increased in February and March, yet lagging behind the last quarter of 2011 (Chart 4.1.3). Similarly, consumer confidence remained weak, displaying a mild recovery in February and March (Chart 4.1.4). Consumer loans continued to register a mild growth in the first quarter of the year (Chart 4.1.5). Chart 4.1.2. Chart 4.1.3. Production and Import Quantity Indices of Consumption Goods Domestic Automobile Sales (Thousand, Seasonally Adjusted) (Seasonally Adjusted, 2005=100) Production Imports (right axis) 125 120 230 60 210 55 190 115 170 50 45 40 110 150 35 130 105 100 95 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 41* 2005 2006 2007 * As of February. Source: TurkStat, CBRT. Inflation Report 2012-II 2008 2009 2010 20112012 30 110 25 90 20 70 15 12341234123412341234123412341 2005 2006 2007 2008 2009 2010 20112012 Source: AMA, CBRT. 45 Central Bank of the Republic of Turkey Chart 4.1.4. Chart 4.1.5. Consumer Confidence Weekly Consumer Loans (Weekly Percent Change, 13-Week Average) CNBC-e Total Personal CBRT (right axis) 120 100 1.5 110 95 1.0 100 90 90 85 80 80 70 75 60 70 Housing Automobile 0.5 -0.5 Source: TurkStat, CNBC-e. 0312 0911 0311 0910 0310 0909 0309 0908 0308 -1.0 0312 1211 0911 0611 0311 1210 0910 0610 0310 1209 0909 0609 0309 0.0 Source: CBRT. Leading indicators point to a weak course for investment demand besides consumption demand. Production of capital goods posted a quarteron-quarter decline in the January-February period, while imports of capital goods increased during the same period (Chart 4.1.6). Following the decline in January, domestic sales of light and heavy commercial vehicles accelerated in February and March, albeit slowly throughout the quarter (Chart 4.1.7). Chart 4.1.6. Chart 4.1.7. Production and Import Quantity Indices of Capital Goods (Seasonally Adjusted, 2005=100) Domestic Sales of Commercial Vehicles Light Commercial Heavy Commercial (right axis) Imports Thousands 200 180 160 30 4.5 25 4.0 3.5 20 140 5.0 Thousands Production (Thousand, Seasonally Adjusted) 3.0 120 15 2.5 100 2.0 10 80 1.5 60 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 * As of February. Source: TurkStat, CBRT. 2008 2009 2010 5 1.0 1234123412341234123412341234123412341 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: AMA, CBRT. In sum, the first-quarter indicators show that domestic demand remained almost flat (Chart 4.1.8). The slowdown in the economy is also supported by production indicators. Industrial production recently followed a volatile and weak course, which has dominated the economy since October 2011. The ongoing downward course of economic activity in the construction-affiliated sectors is also a major indicator to signify the phase of the continuing deceleration in the economy (Chart 4.1.9). 46 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 4.1.8. Chart 4.1.9. Final Domestic Demand Production of Mineral Materials and Private Sector Construction Investment (Seasonally Adjusted, 2008Q1=100) ((Seasonally Adjusted, 2005=100) Production 115 Construction Investment 130 125 110 120 105 115 100 110 105 95 100 95 90 90 85 85 80 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 3 41* 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* 2005 2006 2007 2008 2009 2010 2005 20112012 2006 2007 2008 2009 2010 20112012 * As of February for production and estimate for construction investment. Source: TurkStat, CBRT. * Estimate. Source: TurkStat, CBRT. Despite registering a quarterly decline in the first quarter in tandem with the unfavorable outlook in January, industrial production headed upwards in February and March. Consumer confidence indices as well as the job opportunities index and investment propensity, leading indicators which entail expectations on the future course of the economy, signal for a moderate recovery in the February-March period. Meanwhile, 3-month ahead expectations for orders improved, and the composite leading indicators implied a rallying economic activity by the second quarter of the year (Charts 4.1.10 and 4.1.11). Chart 4.1.10. Chart 4.1.11. 3-Month Ahead Expectations for Orders Leading Indicators Index* (Up-Down, Seasonally Adjusted, Percent) (Seasonally Adjusted) Exports 50 Domestic Market 104 103 40 102 30 101 20 100 10 99 98 0 97 -10 Source: CBRT. Inflation Report 2012-II 0312 0311 0310 0309 0308 0307 0306 0305 0304 0303 0302 0301 0300 0399 0397 94 0407 0707 1007 0108 0408 0708 1008 0109 0409 0709 1009 0110 0410 0710 1010 0111 0411 0711 1011 0112 0412 95 -30 0398 96 -20 * Methodology is based on Atabek-Demirhan, A. and E. ErdoğanCoşar, 2012, İktisadi Faaliyet Analizi: Öncü Göstergeler ve Ekonomi Saati Yaklaşımı (in Turkish), CBRT Economic Notes No.12/02. Source: CBRT. 47 Central Bank of the Republic of Turkey 4.2. External Demand National accounts data for the last quarter of 2011 suggest a marked balancing of the demand components. Exports of goods and services posted a year-on-year increase by 6.7 percent, while imports contracted for the first time after eight quarters, registering a year-on-year decline by 5.1 percent in the last quarter. Thus, net external demand provided the largest contribution to growth after an extended period (Chart 4.2.1). Despite aggravating global problems, exports of goods and services displayed a remarkable quarterly growth in seasonally adjusted terms, and accelerated substantially in the second half of 2011. Imports of goods and services posted a quarterly fall, thus posting a decline for three consecutive quarters (Chart 4.2.2). Quarterly growth was mainly fuelled by net external demand, while domestic demand followed a flat course, thereby pointing to the stronger balancing of the demand components. 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) Imports Exports Exports Net Exports Imports 9.0 4 8.5 2 8.0 0 7.5 -2 7.0 6.5 -4 6.0 -6 5.5 5.0 -8 1 20102011 * Estimate. Source: TurkStat, CBRT. 2 3 2010 4 1 2 3 2011 4 1* 2012 1234123412341234123412341234 2005 2006 2007 2008 2009 2010 2011 Source: TurkStat, CBRT. As an indicator for the balancing of the economy, exports settled into an accelerated track of growth by the second half of 2011, and enhanced further in the first quarter. Export quantity index posted a quarter-on-quarter growth in the January-February period of 2012. Thus, having followed a volatile course in the post-crisis period, exports of goods gained stability by registering an interrupted growth for four consecutive quarters (Chart 4.2.3). 48 Inflation Report 2012-II Central Bank of the Republic of Turkey The EU-27 countries, our major trading partner holding nearly the 50 percent share of our exports, contracted by a year-on-year 0.3 percent in the last quarter of 2011, with growth projections exhibiting an acute outlook for 2012. Accordingly, exports to EU-27 countries will be curbed, while total exports will be stimulated by brisk demand in alternative destinations, North Africa and the Middle East in particular (Chart 4.2.4 and Box 4.2). In other words, heightened search for alternative markets amid the slowdown in domestic demand will have a positive effect on the export outlook, in tandem with the alleviating political unrest in North Africa. Chart 4.2.3. Chart 4.2.4. Quantity Indices for Exports and Imports Global and Regional Imports (Seasonally Adjusted, 2003=100) (Real, Seasonally Adjusted, 2003=100 Global Euro Area Central and Eastern Europe North Africa and Middle East Export Quantity Index Import Quantity Index 200 250 230 180 210 160 190 170 140 150 120 130 100 110 90 80 1234123412341234123412341234123412341* 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 * Estimate for March. Source: TurkStat, CBRT. 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 3 41* 2003 2004 2005 2006 2007 2008 2009 2010 20112012 * As of February. Source: Netherlands Bureau for Economic Policy Analysis. Other indicators on exports suggest that, since November 2011, the Turkish lira has depreciated more heavily against the USD than the currencies of other emerging economies. Similarly, the real exchange rate based on emerging economies remains low (Chart 4.2.5). Accordingly, the exchange rate continues to fuel exports. Meanwhile, the medium-term growth pace of both the GDP and the export-weighted global production index remained unchanged in the interreporting period (Chart 4.2.6). Overall, the gradual recovery in exports is envisioned to continue in the period ahead. Inflation Report 2012-II 49 Central Bank of the Republic of Turkey Chart 4.2.5. Chart 4.2.6. TL and Emerging Market Currencies* (November 2010=1) and the Real Exchange Rate Export and GDP-Weighted Global Production Indices (2003=100) (Seasonally Adjusted, 2009 Q1=100) Export-Weighted (October 2011) Export-Weighted (January 2012) GDP-Weighted (October 2011) GDP-Weighted (January 2012) Emerging Economies TL Real Exchange Rate (right axis) 1.4 115 114 110 1.3 105 1.2 100 111 108 95 1.1 90 1.0 105 85 80 102 0.9 75 70 1110 1210 0111 0211 0311 0411 0511 0611 0711 0811 0911 1011 1111 1211 0112 0212 0312 0412 0.8 * Emerging economies include Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea, and Colombia. As of April 23, 2012. Source: Bloomberg, CBRT. 99 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2009 2010 2011 2012 2013 Source: Bloomberg, CBRT. The import quantity index, which has followed a downward course as of the second quarter of 2011, continued to decline further in the JanuaryFebruary period of 2012 amid the slowdown in domestic demand and the depreciation of the Turkish lira. Across subcategories, imports of intermediate goods decreased, while imports of investment goods excluding consumption goods and transport edged up (Chart 4.2.7). A more detailed analysis of imports signifies diversification across subcategories. In other words, following the first quarter of 2011, durables and semi-durable consumption goods displayed a slight decline compared to passenger cars and industry-related transport vehicles, thereby pointing to the subcategory of imports, in which the effects of policy measures aiming for a slowdown in domestic demand and balancing in demand components are felt most profoundly. The current import outlook for subcategories which are in the direct domain of the monetary policy, i.e. those with high sensitivity to exchange rate and financing conditions, indicates that the economy moves as envisaged (Chart 4.2.8). 50 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 4.2.7. Chart 4.2.8. Import Quantity Indices Import Quantity Indices by Subcategories (Seasonally Adjusted, 2003=100) (Seasonally Adjusted, 2011Q1=100) Total Imports Capital Goods Intermediate Goods Consumption Goods 170 Durables Semi-Durable Goods Transport Vehicles Incidental to Industry Automobile 140 150 120 130 100 110 80 90 60 70 40 50 20 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* 2005 2006 2007 * As of February. Source: TurkStat, CBRT. 2008 2009 2010 20112012 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 41* 2005 2006 2007 2008 2009 2010 20112012 * As of February. Source: TurkStat, CBRT. In sum, net external demand is estimated to further support growth in the first quarter of the year (Chart 4.2.1). The current outlook for export and import quantity indices points to an ongoing balancing in the first quarter (Chart 4.2.3). The balancing of exports and imports in terms of quantity has reflected only modestly on the current account balance due to relative price developments. Amid soaring energy prices, terms of trade have deteriorated as of the second quarter of 2009, continuing throughout the last quarter of 2011 (Chart 4.2.9). Meanwhile, the recently downward course of import prices excluding energy contained the adverse effects of energy prices on terms of trade (Box 4.3). Amid the discontinued deterioration in terms of trade by the first quarter of 2012 and the ongoing balancing of goods, 12-month cumulative current account deficit is estimated to post a notable correction by end-March (Chart 4.2.10). However, in order to bring current account deficit to desired levels in the long term, goods should be further balanced without an additional deterioration in terms of trade, and also through managing of the domestic demand. Inflation Report 2012-II 51 Central Bank of the Republic of Turkey Chart 4.2.9. Chart 4.2.10. Terms of Trade Current Account Balance (2005=100) (12-Month Cumulative, Billion USD) Terms of Trade (excl. energy) Terms of Trade 115 Current Account (excl. energy) Current Account 20 10 110 0 105 -10 100 -20 -30 95 -40 90 -50 85 -60 -70 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* 2005 2006 2007 2008 2009 2010 -80 0205 0705 1205 0506 1006 0307 0807 0108 0608 1108 0409 0909 0210 0710 1210 0511 1011 0312 80 20112012 * As of February. Source: TurkStat,CBRT. * Estimate for March. Source: TurkStat,CBRT. 4.3. Labor Market Employment developments in the last quarter of 2011 were consistent with the outlook presented in the January Inflation Report. Having been fuelled by the services sector, non-farm employment maintained its uptrend. In this period, unemployment rates continued to decline due to soaring employment as well as the weak course of labor force participation. Employment increased quarter-on-quarter across all sectors in January 2012,, while labor force participation decreased and the unemployment rates continued to decline (Charts 4.3.1 and 4.3.2). Growth of non-farm labor force participation has remained weak, both recently as well as throughout the post-crisis period in general, standing out as a major factor to contribute to the decline in unemployment rates (Box 4.4). Chart 4.3.1. Chart 4.3.2. Farm and Non-Farm Employment Unemployment and Labor Force Participation (Seasonally Adjusted, Million) (Seasonally Adjusted, Percent) 18 Labor Force Participation Rate (right axis) 51 Unemployment Rate Non-Farm Unemployment Rate 50 16 49 14 48 12 47 10 46 Non-Farm Employment 18.5 Farm Employment (right axis) 8.5 18.0 8.0 17.5 7.5 17.0 7.0 16.5 6.5 16.0 6.0 15.5 5.5 15.0 5.0 14.5 4.5 14.0 4.0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1* 2007 2008 * As of January. Source: TurkStat, CBRT. 52 2009 2010 2011 2012 20 8 45 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1* 2007 2008 2009 2010 2011 2012 * As of January. Source: TurkStat, CBRT. Inflation Report 2012-II Central Bank of the Republic of Turkey Non-farm employment increased notably in 2011. Having increased strongly in the first quarter of 2011, employment has increased weakly towards the year-end amid losses in the industrial and construction sector employment. In general, growth of non-farm employment gained momentum in the last quarter, displaying divergent patterns across sectors. More specifically, the industrial employment, which has started to decline in the third quarter, continued to decrease in the last quarter, albeit at a slower pace. Construction sector, which remained robust in the first three quarters of the year, experienced employment losses in the last quarter. Employment in the services sector continued to head upwards in the last quarter. Accordingly, services sector contributed positively to seasonally adjusted non-farm employment in the last quarter of 2011, while construction and industrial employment had a negative contribution (Charts 4.3.3 and 4.3.5). Industry and construction sector employment rallied in December 2011 and January 2012, respectively. Moreover, services sector employment continued to rise steadily in January 2012. The growth rate of value added in the construction sector slowed down in the first quarter, and followed a flat course as of the second quarter of 2011 (Chart 4.3.4). In the meantime, construction sector employment continued to surge until the last quarter of the year, while assuming a downward course by the last quarter in tandem with the weakening value added. Unregistered employment fell more notably than registered employment, especially in December (Chart 4.3.3). The decline in registered employment was short-lived and employment rallied in January, thus implying that the slowdown in economic activity was perceived to be temporary or limited, hence signaling a favorable outlook regarding employment conditions. Meanwhile, the production of non-metallic mineral products, which are inputs for the construction sector, also having informative value regarding the construction operations, decreased in the first quarter of 2012, resulting in weaker prospects for construction employment (Chart 4.3.4). Inflation Report 2012-II 53 Central Bank of the Republic of Turkey Chart 4.3.4. Chart 4.3.3. Employment, Value Added and Production of Mineral Materials in the Construction Sector Employment in Services and Construction Sectors (Seasonally Adjusted, Million) (Seasonally Adjusted, 2005=100) 1.8 12.2 11.7 1.6 1.4 11.2 1.2 10.7 1.0 0.8 10.2 0.6 Production 160 Thousands Construction-Registered Construction-Unregistered Services (right axis) 2.0 Value Added Employment 140 120 100 9.7 0.4 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 3 41* 0112 0711 0111 0710 0110 0709 0109 0708 0108 0707 0107 0706 9.2 0106 0.2 2005 2006 2007 2008 2009 2010 20112012 * As of January for employment and February for production. Source: TurkStat, CBRT. Source: TurkStat, CBRT. Having followed a weak course in the first half of the year, industrial production recovered by the third quarter, yet remaining volatile (Chart 4.3.5). Registered industrial employment moved in tandem with the production developments, while total employment including unregistered employment posted a lagged increase in December. Uncertainties regarding economic activity put a cap on employment in this period. In January, both registered and total employment continued to surge. The employment indicator PMI has increased since the third quarter of 2011, moving consistently with the developments in production and registered employment. PMI points to a rise in employment in the first quarter of 2012, notwithstanding the slight decline (Chart 4.3.6). Accordingly, employment is estimated to increase in the first quarter of 2012, while uncertainties regarding economic activity in the U.S. and the Euro Area may curb the improvement of production and the employment conditions. Chart 4.3.5. Chart 4.3.6. Industrial Employment and Production Manufacturing Industry Employment (Quarterly Percent Change) and PMI Employment (Seasonally Adjusted) (Seasonally Adjusted) Industrial Employment Industrial Production (right axis) Industrial Employment-Registered 135 130 6 65 Manufacturing Industry Employment PMI (right axis) 4 60 125 2 55 115 0 50 110 -2 45 -4 40 95 -6 35 90 -8 30 120 105 Source: TurkStat, CBRT. 54 0312 0911 0311 0910 0310 0909 0309 0908 0308 0907 0307 0906 0306 0905 0212 0811 0211 0810 0210 0809 0209 0808 0208 0807 0207 0806 0206 0805 100 Source: TurkStat, Markit, CBRT. Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 4.3.7. Chart 4.3.8. Household Spending and Real Wage Payments* Non-Farm Hourly Labor Cost (Seasonally Adjusted, 2007=100) (Seasonally Adjusted, 2008=100) Real Wage Payments Labor Earnings (annual percent change, right axis) Real Labor Earnings* 120 Consumption Spending (excl. furniture, household appliances and maintenance, transport and communication) 110 14 115 108 12 110 106 105 104 100 102 95 100 90 98 85 96 80 94 1234123412341234123412341234 2005 2006 2007 2008 2009 2010 2011 * Calculated as the weighted average of total wages paid in industrial, construction, trade, accommodation-catering services, transport-warehousing sectors. Deflated by CPI. Source: TurkStat, CBRT. 10 8 6 4 2 0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2007 2008 2009 2010 2011 *Deflated by CPI. Source: TurkStat, CBRT. In the first quarter of 2012, real wage payments continued to bolster the demand for goods, which are particularly sensitive to current income (Chart 4.3.7). In the last quarter of 2011, non-farm hourly real earnings index released under the Labor Cost Indices edged down on a quarterly basis (Chart 4.3.8). Real unit wages, which also entail productivity increases, soared across sectors other than industry in this period (Chart 4.3.9). As stated in the January Inflation Report, real unit wages increased amid the weak course of industrial production, and declined back in the last quarter due to rising production. Meanwhile, real unit wages in services and construction sectors registered increases. During this period, which was marked by flat course of hourly real wages, the rise in real unit wages was driven by the decline in average productivity. In both sectors, employment posted a higher increase than the rise in production/turnover. Against this background, industrial sector prices were not exposed to labor cost pressures in the first quarter of 2012, while the upward trend in the services sector over 2011 may remarkably weigh on the services inflation in the period ahead. Inflation Report 2012-II 55 Central Bank of the Republic of Turkey Chart 4.3.9. Chart 4.3.10. Real Unit Wages (Wage per Hour Worked/Productivity) Job Opportunities Index and Non-Farm Employment/Labor Force (3-Month Average) (Seasonally Adjusted, 2008=100) Industry Services* 115 Job Opportunities over the next 6 months Construction Non-Farm Employment/Labor Force (right axis) 99 110 89 94 88 89 87 84 86 79 85 74 84 69 83 64 82 59 81 105 100 95 90 85 80 1234123412341234123412341234 2005 2006 2007 2008 2009 2010 2011 * Real unit wages in the services sector are calculated as the ratio of total wage payments to turnover. As for the industrial and construction sectors, total wage payments are divided by production and CPI, respectively. Source:, TurkStat, CBRT. 0205 0705 1205 0506 1006 0307 0807 0108 0608 1108 0409 0909 0210 0710 1210 0511 1011 0312 75 Source: TurkStat, CBRT. In sum, employment surged in the services sector in the last quarter of 2011, while decreasing in the construction and industrial sectors, thus restricting the growth of non-farm employment. During December 2011 and January 2012, employment rallied in the industrial and construction sectors. Leading indicators in the first quarter point to a favorable course for industrial employment. Job opportunities index under the CBRT’s Consumer Tendency Survey, which reflects the employment prospects for households, also points to a rise in employment opportunities, thereby reinforcing the favorable expectations regarding employment conditions (Chart 4.3.10). The slowdown in construction operations in the first quarter of 2012 will continue to reflect on the construction employment, while non-farm employment will continue to trend upwards amid rising employment in construction and services sectors (Chart 4.3.11). Chart 4.3.11. Non-Farm Value Added and Employment (Seasonally Adjusted) 1998 Prices Billion TL 27 Million Value Added 18.5 Employment (right axis) 18.0 17.5 25 17.0 16.5 23 16.0 21 15.5 15.0 19 14.5 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 1 2 3 4 1* 2005 2006 2007 2008 2009 2010 2011 2012 * Estimate. Source: TurkStat, CBRT. 56 Inflation Report 2012-II Central Bank of the Republic of Turkey Box The Underlying Trend of Economic Activity Using Seasonally Adjusted 4.1 Data Monitoring the underlying trend of economic activity is essential for decision- makers under the inflation targeting framework. Assessing the current stance of the economy over the business cycle constitutes the basis of the decision-making process, thereby affecting the forecasts. To this aim, seasonally adjusted data as well as their monthly and quarterly percent changes are frequently used. However, seasonal adjustment may significantly differ with respect to methodology and the sample size, thus leading to substantial backward revisions and uncertainty. This uncertainty causes controversies over the assessment of the underlying trend of economic variables, thereby complicating the real-time policy analysis. This issue has been highly debated in the post-crisis period, also for advanced economies like the U.S. and the Euro Area, therefore signifying the need for a cautious approach in interpreting seasonally adjusted data with serious breaks.1 Table 1. Quarterly GDP Growth by Alternative Model Specifications and Sample Size MODEL SPECIFICATION TURKSTAT 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 Last 3-quarter average 1998 4.2 1.6 1.3 1.3 0.6 1.1 AUTOMATIC* 199 8 4.5 2.1 0.3 0.7 1.2 0.8 1999 4.2 1.9 0.3 1.0 1.0 0.7 2000 3.7 2.0 0.2 1.2 0.6 0.7 2001 3.8 2.2 0.5 1.1 0.8 0.8 2002 4.1 2.0 0.3 0.9 0.8 0.7 2003 3.8 2.2 0.5 1.1 0.7 0.8 2004 4.5 1.7 0.6 0.5 1.3 0.8 2005 3.6 2.3 0.7 0.6 0.5 0.6 * Seasonally adjusted by Tramo-Seats using the Demetra software. Unlike the model specification determined by the TurkStat, automatic model results were obtained by leaving specifications like logarithmic transformation, average correction, outlier specification and ARIMA model selection to be automatically determined by the Demetra procedures. Source:TurkStat, CBRT. Central banks are growingly more concerned about the course of the underlying trend in economic activity as economic growth converges to its potential. In fact, changes in output gap, given its recent underlying trend, highly influence the decision for policy to be eased or tightened. For example, according to national accounts data released by the TurkStat, GDP posted a quarter-on-quarter growth by 0.6 percent in the last quarter of 2011. Corresponding to 2.4 percent in annualized terms, this rate signals a marked slowdown in economic activity. Moreover, the gradual decline in quarterly growth rates since the last quarter of 2010 indicate that the economy settled on a mild growth path on account of the adopted measures since November 2010 for slowing down the domestic demand (Table 1). 1 For further details, see ECB (2009). Inflation Report 2012-II 57 Central Bank of the Republic of Turkey On the other hand, the results of seasonal adjustment, also as briefly mentioned above, depend on the sample size in addition to model as well as the outlier specification. Table 1 shows the seasonally adjusted quarterly growth rates produced by recursively shifting the starting point one year forward. The immediate end result is the different policy implications suggested by the model of TurkStat and the automatic model when using the whole sample from 1998. Accordingly, while the official data in the first column signal a gradual economic slowdown, the alternative specification in the second column implies a gradual acceleration in the second half of 2011 (Table 1). Chart 1. Seasonally Adjusted GDP by Direct vs. Indirect Approach (1998 Prices, Billion TL) January 2012 Actual (Indirect) Actual (Direct) 30 29 28 27 26 25 24 23 22 21 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 2005 2006 2007 2008 2009 2010 2011 Source:TurkStat, CBRT. Another important point to note on seasonal adjustment is that direct and indirect approaches may tell different stories about the underlying trend of economic activity. While the above comparison is based on GDP data obtained through direct seasonal adjustment, the indirect approach aggregates data on the individually seasonally adjusted components of the GDP. In the last quarter of 2011, the seasonally adjusted GDP obtained through indirect approach (dotted orange line) is compatible with the outlook presented in the January Inflation Report (grey line). On the contrary, as in the above comparison, direct and indirect approaches imply a different outlook regarding the course of economic activity throughout 2011. In particular, in the third quarter of 2011, the two approaches even differ in terms of the direction of the course, thus signifying the need for a cautious stance in interpreting seasonally adjusted data. 58 Inflation Report 2012-II Central Bank of the Republic of Turkey In sum, assessing the underlying trend of economic activity by using seasonally adjusted data requires a cautious approach. Correspondingly, putting aside the last period, a cumulative assessment of the past three quarters suggests that economic activity has lost momentum since the onset of 2011. Having decelerated markedly in the first quarter of 2012, economic activity will resume its mild growth path by the second quarter as implied by the leading indicators. REFERENCES ECB, 2009, Seasonal Adjustment of Short-Term Economic Indicators for the Euro Area in the Current Recession, ECB Monthly Bulletin August 2009: 63-67. Inflation Report 2012-II 59 Central Bank of the Republic of Turkey Box 4.2 Real Export Developments by Regions Turkey has recently diversified export destinations, consequently leading to lower share of exports to EU and North America, while a higher share of exports to the Middle East, North Africa and other Asia. However, the recently growing economic and political unrest in export destinations signified the need for gathering regional export data in order to monitor external demand. On the other hand, assessing regional exports by using only nominal data may not suffice to evaluate external demand thoroughly. Hence, this Box analyzes Turkey’s exports to major destinations, by using real exports data.2 In order to derive real exports data by regions, a straightforward method is to deflate the nominal regional exports data by export unit value index. This method may prove reliable for regions with similar sectoral composition of exports. However, the sectoral composition of Turkey’s exports varies over time and across regions. Furthermore, export prices differ across sectors as well. 3 Thus, real exports data by regions are computed using sectoral export prices. In addition, real exports data calculated by using the general export price index as well as the nominal export data are also included in the analysis for assessing regional exports. Analysis of exports to EU, Turkey’s main export destination, reveals that real exports computed by using general export prices with base year 2003 fell behind real exports derived by using sectoral export prices (Chart 1). This gap is owed to price increases in exports to EU (manufactured goods-mainly motor vehicles, clothing and textiles) to lag behind general export price increases. Unlike nominal exports data, real exports data suggest that real exports to EU were not heavily affected by the economic crisis experienced towards 2011. Last quarter data on real exports to EU imply a flat course for exports to the region. 2 For further details on the analysis and the methodology, see Aldan and Çulha (2012). For further details on sectoral export price developments and their effect on general export prices, see Aldan and Üngör (2011). 3 60 Inflation Report 2012-II Central Bank of the Republic of Turkey Real exports to non-EU European countries exhibit high volatility when sectoral export prices are discarded. On the other hand, volatility lessens significantly when sectoral export prices are included in the measurement of real exports (Chart 1). Given the significant share of gold exports to non-EU European countries, the divergence of the gold prices from the general export prices constitutes the fundamental source of this volatility. Accordingly, amid soaring gold exports as well as high gold prices in February, real exports measured by general export prices signaled for a recovery in exports, while real exports measured by sectoral export prices implied a relatively mild recovery. Chart 1. Exports to EU and non-EU Europe (Seasonally Adjusted, 2003=100) EU Non-EU Europe Nominal Exports 300 Real Exports (sectoral prices) 600 Nominal Exports Real Exports (sectoral prices) Real Exports (general prices) Real Exports (general prices) 200 400 150 300 100 200 50 100 0 0 * As of February. Source: TurkStat, CBRT. 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1* 500 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1* 250 * As of February. Source: TurkStat, CBRT. Due to iron and steel prices, price effect was notable on exports to the Middle East, especially during 2008 (Chart 2). In other words, nominal exports as well as real exports using general export prices soared, while real exports measured by sectoral prices displayed a moderate growth. The recent data indicate that the effect of the political unrest in Syria was largely contained. Accordingly, nominal exports posted a recovery and real exports displayed a mild growth. In fact, real exports measured by sectoral prices reached an all-time-high by exceeding the peak in 2008. Having declined until 2011 amid political tensions, real exports to North Africa have recently exhibited a strong rebound (Chart 2). Inflation Report 2012-II 61 Central Bank of the Republic of Turkey Chart 2. Exports to Middle East and North Africa (Seasonally Adjusted, 2003=100) Middle East North Africa Nominal Exports Nominal Exports Real Exports (sectoral prices) 700 Real Exports (sectoral prices) 600 Real Exports (general prices) 600 Real Exports (general prices) 500 500 400 400 300 300 200 200 0 0 * As of February. Source: TurkStat, CBRT. Analysis of 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1* 100 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1* 100 * As of February. Source: TurkStat, CBRT. exports to other Asian countries suggest that after the sharp fall in 2008, nominal exports surged, while real exports posted a mild growth (Chart 3). However, exports to other Asia edged down in the first quarter of 2012. Exports to North America, both in nominal and real terms, have recently signaled a rapid surge (Chart 3). Chart 3. Exports to Other Asia and North America (Seasonally Adjusted, 2003=100) Other Asia Nominal Exports Real Exports (sectoral prices) Real Exports (general prices) 500 180 450 160 400 140 350 120 300 100 250 80 200 60 150 20 0 0 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1* 40 50 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1* 100 * As of February. Source: TurkStat, CBRT. 62 North America Nominal Exports Real Exports (sectoral prices) Real Exports (general prices) * As of February. Source: TurkStat, CBRT. Inflation Report 2012-II Central Bank of the Republic of Turkey In sum, seasonally adjusted data for early-2012 indicate that the adverse effects of the weak course of real exports to EU and other Asian countries are largely counterbalanced by the strong course of exports to other regions, and particularly North Africa and North America. REFERENCES Aldan, A. and O. Çulha, 2012, Bölgesel İhracat Miktar Endeksleri (in Turkish), CBRT Economic Notes No.12/12. Aldan, A. and M. Üngör, 2011, 2003-2010 Dönemi Dış Ticaret Fiyat Artışlarının Sektörel Kaynakları (in Turkish), CBRT Economic Notes No. 11/18. Inflation Report 2012-II 63 Central Bank of the Republic of Turkey Box 4.3 The Recent Course of Import Prices Driven by supply-side problems amid geopolitical tensions, soaring energy prices in the first quarter of 2012 have greatly occupied the public agenda, given the associated upside risks to inflation and the current account balance. However, the course of non-energy import prices is relatively more crucial than energy prices in assessing the current account outlook. Hence, this Box analyzes the recent course of import prices, both for energy and non-energy goods. In addition to energy4, which has the leading share in Turkey’s imports, basic metals5, chemical products, machinery and equipment, motor vehicles as well as clothing and textiles6 have major shares in imports (Table 1). As of 2011, energy imports accounted for 22.5 percent of total imports, while the share of non-energy imports reached 50.7 percent. Thus, besides energy imports, the prices of nonenergy imports are also influential on import prices. Table 1. Sectoral Distribution of Imports (Percent) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Energy Basic Metals Chemical Products Machinery and Equipment Motor Vehicles Clothing and Textiles 17.9 16.7 14.8 18.2 20.7 19.9 23.9 21.2 20.7 22.5 11.3 13.5 14.8 14.6 15.2 17.2 17.9 12.7 14.2 15.2 16.8 16.2 15.5 15.0 14.0 13.9 13.4 15.2 14.6 13.8 12.6 11.7 10.6 10.5 10.3 10.1 8.4 8.9 8.4 8.8 5.7 9.2 12.1 10.6 9.5 8.9 7.7 7.6 8.5 8.3 6.2 5.7 5.1 4.7 4.5 4.7 4.1 5.0 5.2 4.6 Source:TurkStat. Since the second half of 2011, energy import prices have diverged notably from the non-energy import prices. In other words, energy prices displayed a gradual and continuous surge in tandem with the rising global energy prices, while nonenergy import prices plunged during the same period. Non-energy import prices declined further in the first quarter of 2012 (Charts 1 and 2). 4 5 6 Including crude oil, natural gas, coal and electricity. Including spare and scrap. Including leather products. 64 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 1. Energy and Non-Energy Import Prices Chart 2. Global Energy and Energy Import Prices (2006=100) (2006=100) Global Energy Prices Energy Import Prices Non-Energy Import Prices 200 Energy Import Prices 180 170 180 160 160 150 140 140 130 120 120 110 100 100 80 90 80 60 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 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* 20112012 * As of February. Source: TurkStat, CBRT. 2006 2007 2008 2009 2010 2011 2012 * As of February. Source: TurkStat, CBRT. The ongoing downward course of non-energy import prices is mainly driven by the prices of basic metals as well chemical products, which have major shares in imports by 15.2 percent and 13.8 percent, respectively. Meanwhile, import prices of machinery and equipment in addition to motor vehicles have also displayed a downward course. Chart 3. Import Price Index by Sectors (2006=100) Chart 4. Import Price Index by Sectors (2006=100) Energy Machinery and Equipment Basic Metals Motor Vehicles Chemical Products 180 170 160 150 140 130 120 110 100 90 80 Clothing and Textiles 140 130 120 110 100 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* 2006 2007 * As of February. Source: TurkStat, CBRT. 2008 2009 2010 2011 2012 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 * As of February. Source: TurkStat, CBRT. In sum, the higher-than-expected increases in oil prices caused energy prices to rise above forecasts in the inter-reporting period. Meanwhile, the favorable course of non-energy import prices partly compensated for the adverse effects of the rising energy prices on inflation. As for the current account balance, the recent downward course of the non-energy import prices counterbalanced the rise in energy import prices. Therefore, not only the energy prices, but also the prices of non-energy imports, which comprise a significant share of imports, should be closely monitored while assessing the developments in the current account balance. Inflation Report 2012-II 65 Central Bank of the Republic of Turkey Box GDP, Labor Force, Employment and Unemployment 4.4 Economic growth accompanied by employment growth is essential for social welfare. This Box analyzes the capacity of economic activity to generate employment and to reduce unemployment between 2005 and 2011. By using quarterly data on the changes in GDP, labor force, employment and unemployment during the 2005Q2-2011Q4 period, the analysis is conducted for two subsamples, 2005Q2-2008Q2 and 2009Q4-2011Q4, by also including unemployment forecasts for 2012. Table 1 presents the average annual growth rates of GDP, labor force, employment and unemployment for the above subsamples. While GDP posted high growth rates in both periods, the associated increase in employment and the fall in unemployment differed between the two periods. Table 1. GDP, Labor Force, Employment and Unemployment* (Average Annual Growth by Quarters) Non-Farm Total Non-Farm Total Non-Farm Unemployment Total Employment Non-Farm Labor Force Total GDP Period 2005Q2-2008Q2 6.7 7.3 1.7 4.1 1.9 4.8 -0.2 -0.5 2009Q4-2011Q4 8.7 9.1 3.9 2.8 6.1 5.6 -1.8 -2.1 * Change in unemployment is the year-on-year change in the unemployment rate. Source: TurkStat, CBRT. The averages of the annual growth in total and non-farm GDP by quarters were quite similar, while non-farm employment posted a higher growth rate than total employment unemployment during rates the 2005Q2-2008Q2 declined slightly. period The (Table1). negligible Meanwhile, improvement in unemployment rates despite high economic growth is noteworthy in this period. GDP posted a higher growth rate in the 2009Q4-2011Q4 period, with total employment and non-farm employment increasing by 6.1 percent and 5.6 percent, respectively. In the meantime, unemployment fell sharply during this period. Table 2 presents the ratio of the average annual growth rates of employment and unemployment to GDP by quarters for the two subsamples. Accordingly, one may conjecture about the extent of the increase in employment and decrease in unemployment brought about by the GDP growth. 66 Inflation Report 2012-II Central Bank of the Republic of Turkey Table 2. Sensitivity of Employment and Unemployment to GDP Growth Change in Employment/ Change in GDP Average Change in Unemployment/ Change in GDP Average Total Non-Farm Total Non-Farm 2005Q2-2008Q2 0.280 0.631 -0.017 -0.070 2009Q4-2011Q4 0.747 0.635 -0.218 -0.241 Subsamples Source: TurkStat, CBRT. During 2005Q2-2008Q2 period, 1 percentage point increase in GDP brought about 0.3 percent increase in employment. Meanwhile, 1 percentage point increase in non-farm GDP growth led to a remarkable 0.6 percent increase in nonfarm employment (Table 2). Similarly, in the 2009Q4-2011Q4 period, GDP growth resulted in an even higher growth in employment, with 1 percentage point increase in GDP growth bringing about 0.75 percent growth in employment. On the other hand, the growth in non-farm employment in response to GDP growth remained unchanged since the previous period. In both periods, growth of total employment differed from the growth of non-farm employment owing to the behavior of the agricultural sector. During the 2005Q2-2008Q2 period, the increase in employment was less effective on reducing the unemployment rate due to the simultaneous increase in the labor force participation. On the other hand, in the second period, the increase in employment exceeded the increase in the labor force participation, thereby reducing unemployment rates considerably. Hence, higher employment may be brought about by economic growth, while lower unemployment may only be attained contingent upon the course of the labor force participation. Against this background, Table 3 presents under various scenarios and assumptions regarding the percentage change in the labor force, the direction of the course of unemployment corresponding to a 4 percentage point increase in GDP. In other words, columns show the possible annual percent change in the labor force, while rows show the sensitivity of employment growth to GDP growth. The direction of the course of unemployment is found by comparing the percentage changes in employment and labor force, while employment growth is measured by multiplying the sensitivity with the percent change in GDP. Inflation Report 2012-II 67 Central Bank of the Republic of Turkey Table 3. Unemployment Forecasts for 2012 with 4 percent GDP Growth Expected Annual Growth of the Labor Force 1.5 2.0 2.5 3.0 4.0 0.4 fall rise rise rise rise 0.6 fall fall rise rise rise 0.8 fall fall fall fall rise Sensitivity Source: CBRT. The course of unemployment over 2012 are shown in the shaded region for various sensitivity and labor force growth figures, which are considered to be relatively plausible. The sensitivity of labor force to GDP growth has recently been elevated (Table 2). In addition, the unemployment figures in January 2012 as well as the employment growth also confirm the improvement in the capacity of GDP to generate employment, and signal for further improvement throughout 2012. Thus, the sensitivity is anticipated to remain within 0.6-0.8 over 2012. The growth rate of labor force has increased recently, mainly as a result of the added worker effect exclusive to crisis periods (Table 1). Thus, envisioning that the growth rate of labor force is likely to decline below the recent averages, labor force is estimated to post a growth rate between 1.5-3.0 in 2012.7 Accordingly, one may conclude that unemployment is likely to decline given a 4 percent increase in GDP, as depicted by the shaded region in Table 3. Similarly, Tables 4 and 5 also confirm the expectation for a fall in unemployment under various assumptions regarding GDP growth in 2012. Table 4. Unemployment Forecasts for 2012 with 3.5 percent GDP Growth Expected Growth of the Labor Force 1.5 2.0 2.5 3.0 4.0 0.4 rise rise rise rise rise 0.6 fall fall rise rise rise 0.8 fall fall fall rise rise Sensitivity Source: CBRT. For further details on the compatibility of the female labor force behavior in Turkey with respect to additional labor force exclusive to crisis periods, see Başkaya and Şengül (2012). 7 68 Inflation Report 2012-II Central Bank of the Republic of Turkey Table 5. Unemployment Forecasts for 2012 with 4.5 percent GDP Growth Expected Growth of the Labor Force 1.5 2.0 2.5 3.0 4.0 0.4 fall rise rise rise rise 0.6 fall fall rise rise rise 0.8 fall fall fall fall rise Sensitivity Source: CBRT. In sum, this Box presents unemployment forecasts for 2012 under various assumptions regarding GDP and labor force growth as well as the sensitivity of employment to GDP growth. Accordingly, unemployment rates are expected to decline by year-end under the condition that the course of labor force and the sensitivity of employment to GDP growth record the expected figures. REFERENCES Başkaya, Y. S. and G. Şengül, 2012, Türkiye’de Emek Piyasasının Çevrimsel Hareketinin Cinsiyet Bazında Analizi (in Turkish), CBRT Economic Notes No. 12/09. Inflation Report 2012-II 69 Central Bank of the Republic of Turkey 70 Inflation Report 2012-II Central Bank of the Republic of Turkey 5. Financial Markets Intermediation Financial and 5.1. Financial Markets First-quarter data on the global economy indicate signs of recovery, while also implying ongoing downside risks. The ECB took measures for the solution of the debt problem and continued with monetary easing in order to boost economic growth. Despite having declined amid adopted measures, bond yields of the debt-ridden countries continue to remain elevated. Moreover, with a view to bolstering economic growth, the Bank of Japan also implemented monetary easing in the first quarter. Monetary easing by major central banks, alleviating uncertainties on the resolution of the Greek debt problem coupled with the favorable outlook in the U.S. growth, thereby improving the global risk appetite (Chart 5.1.1). However, the absence of signals for further monetary easing by major central banks, concerns over the debt problem in the Euro Area and the downward revision of growth forecasts for the Chinese economy have recently deteriorated the global risk appetite. Despite the adopted measures, growth forecasts remained broadly unchanged in the first quarter, for both advanced and emerging economies. Chart 5.1.1. Volatility Index* VIX 90 VIX Volatility (right axis) 0.12 80 0.1 70 60 0.08 50 0.06 40 30 0.04 20 0.02 10 0412 0112 1011 0711 0411 0111 1010 0710 0410 0 0110 0 * 150-day standard deviation of the daily VIX. Source: Bloomberg, CBRT. Favorable developments improving the global risk appetite in the interreporting period have also lowered risk premium in emerging economies (Chart 5.1.2). However, risk premium edged up on the recently adverse developments regarding the global economy as well as soaring oil prices. Turkey’s risk premium remained in tandem with the other emerging economies in this period (Chart 5.1.3). Inflation Report 2012-II 71 Central Bank of the Republic of Turkey Chart 5.1.2. Chart 5.1.3. EMBI Relative EMBI (01.31.2011=1) Europe Latin America Europe Latin America Turkey Asia 600 Turkey Asia 1.05 550 1 500 0.95 450 400 0.9 350 300 0.85 250 0.8 200 0.75 150 Source: Bloomberg. 0412 0312 0312 0312 0212 0412 0212 1211 1011 0811 0611 0411 0211 0112 0.7 100 Source: Bloomberg, CBRT. Monetary easing in advanced economies and the favorable course of global risk perceptions accelerated portfolio flows, especially the equity flows, to emerging economies (Chart 5.1.4). As for Turkey, inflows to equity market and outflows from the GDBS market were observed during January and February (Chart 5.1.5), mainly on the back of profit realizations by non-residents amid declining market rates at the start of the period. On the other hand, nonresidents started to re-invest in the GDBS market, following the rate hikes in March. Chart 5.1.4. Chart 5.1.5. Net Portfolio Flows to Emerging Economies* Net Portfolio Flows of Non-Residents* (Adjusted for Index and Interest Rate, Million USD) (Adjusted for Index and Interest Rate, Million USD) Public Securities Equities 30 25 10 20 8 15 6 10 Currency Swaps GDBS Equities Total 4 5 2 0 -5 0 -10 -2 -15 -4 -20 0412 0112 1011 0711 0411 0412 0112 1011 0711 0411 0111 1010 0710 0410 * As of April 18, 2012. Source: EPFR. 0111 -6 -25 * As of April 13, 2012. Currency swaps are the largest and the most volatile FX-denominated off-balance sheet item. The volume of currency swaps is calculated as the change in off-balance sheet FXdenominated position of banks. Source: BRSA, CBRT. Short-term capital investments, the majority of which is composed of currency swaps by non-residents, increased in early-2012, reflecting also on the off-balance sheet FX-denominated net position of domestic banks, which is a 72 Inflation Report 2012-II Central Bank of the Republic of Turkey major indicator on the volume of the currency swaps by non-residents. Flows to currency swap market in a period of outflows from the GDBS market indicate that non-residents switched to relatively short-term instruments given the ample global liquidity amid monetary easing and the relatively high yields registered in money markets. Overall, non-residents continued to invest in Turkey, when currency swap transactions are included (Chart 5.1.5). Monetary Policy Implementation Owing to the upside risks on cost factors, the CBRT maintained its cautious stance in the inter-reporting period, despite the favorable course of global risk perceptions. The upper limit of the interest rate corridor was lowered by 100 basis points in February, in view of the decisions for monetary easing at a global scale (Chart 5.1.6). Meanwhile, in order to prevent oil price hikes and other cost factors to worsen inflation expectations, the CBRT delivered an additional monetary tightening during March 23 and March 29, 2012. Accordingly, the weighted average funding rate was raised by lowering the quantity of 1-week repo funding (Chart 5.1.7). In the April meeting, stating that temporary cost factors would not be allowed to worsen the inflation outlook, the MPC underlined that additional monetary tightening might be more frequently implemented in the period ahead. Chart 5.1.6. Chart 5.1.7. CBRT Policy Rate and the Interest Rate Corridor CBRT Funding and the Average Funding Rate (Percent) (Percent) Interest Rate Corridor 14 Adoption of 1-week repo rate as the policy rate 12 Outstanding Funding (Billion TL) Average Funding Rate (right axis) 1-week Repo Rate 80 14 70 12 60 10 10 50 8 8 40 6 6 30 4 4 20 Source: CBRT. 0412 0312 0212 0112 1211 0 1111 0 1011 2 0911 0412 0212 1211 1011 0811 0611 0411 0211 1210 1010 0810 0610 0410 0210 0 10 0811 2 Source: CBRT. With a view to facilitating the liquidity management of banks and assisting them in envisioning their total funding costs, the CBRT continued to announce the amount of funding on the days of the quantity auctions besides Inflation Report 2012-II 73 Central Bank of the Republic of Turkey the upper limit of the 1-month repo auction amount. Accordingly, in February, funding quoted on the policy rate was kept between TL 3 billion and TL 7 billion, while the upper limit for traditional 1-month repo auctions was raised from TL 5 billion to TL 6 billion. In the MPC meeting on March 27, the range for the funding amount to be provided through 1-week repo auctions was changed as TL 1 billion to TL 6 billion provided and the upper limit for 1-month repo auction amount was lowered to TL 5 billion. The total amount of funding provided by the CBRT remained broadly unchanged in this period, ranging between TL 40-50 billion (Chart 5.1.8). Moreover, in order to provide a permanent and flexible funding for banks, besides enhancing gold reserves, 20 percent of the required reserves for TL liabilities were facilitated to be held as standard gold, as opposed to the previously 10 percent. Chart 5.1.8. Market Liquidity (Billion TL) 1-month Repo 1-week Repo (Traditional Auction) 1-week Repo (Quantity Auction) Interbank Primary Dealers ISE 60 50 40 30 20 10 30-Mar-12 15-Mar-12 29-Feb-12 14-Feb-12 30-Jan-12 15-Jan-12 31-Dec-11 16-Dec-11 1-Dec-11 16-Nov-11 1-Nov-11 0 Source: CBRT. Market Rates In the first quarter of 2012, market rates edged down in Turkey in tandem with the other emerging economies (Chart 5.1.9). Despite the downward course of the risk premium, market rates declined only slightly owing to the ongoing tight monetary stance of the CBRT (Chart 5.1.10). 74 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 5.1.9. Chart 5.1.10. Changes in 2-year Market Rates in Q1* Yields on GDBS Benchmark Interest Rate (compounded, percent) 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1 -1.2 EMBI+Turkey (right axis) 12 450 400 11 350 10 300 9 250 * Between January 30 and April 20, 2012. Source: Bloomberg, CBRT. 200 0412 0212 0312 0112 1211 1111 1011 0911 0811 0711 0611 0511 100 0411 150 6 0211 0311 7 0111 Romania Brazil Hungary Turkey South Africa Peru Mexico Czech Rep. India Colombia Poland South Korea China Indonesia Israel Malaysia Philippines Thailand Chile 8 Source: ISE, Bloomberg. Inflation expectations, a key determinant of market rates, increased slightly in the inter-reporting period (Chart 5.1.11). On the other hand, short-term inflation compensations soared markedly since January, amid the increase in short-term inflation expectations (Chart 5.1.12). Meanwhile, on the back of the ongoing tight monetary policy stance by the CBRT, inflation compensation declined notably in the medium to long-term. Chart 5.1.11. Chart 5.1.12. Inflation Expectations* Forward Inflation Compensation* April 2012 7.75 January 30, 2012 January 2012 7.61 7 6.5 7.25 7.22 6.96 6.75 April 20, 2012 6 5.5 6.91 6.40 6.25 5 4.5 6.26 4 5.75 3.5 3 0614 0514 0314 0114 1113 0913 0713 0513 0313 0113 1112 5.25 * 12 and 24-month ahead inflation expectations from the CBRT’s Survey of Expectations, second survey period results. Source: CBRT. 0.5 1 1.5 2 2.5 3 3.5 4 * Implied forward inflation compensation of the nominal and CPI-indexed bonds traded at the ISE. Forward inflation compensation is adjusted for inflation compensation up to the relevant maturity, thus reflecting the annual inflation expectation after the expiration of the maturity. Source: CBRT. In the first quarter of 2012, yield curve declined across all maturities, particularly in the long-term, in line with the heightening global risk appetite (Chart 5.1.13). Also in tandem with the CBRT’s additional tightening at the end of March, the interest rate spread turned negative (Chart 5.1.14). The downward slope of the yield curve indicates a tight monetary policy stance. Inflation Report 2012-II 75 Central Bank of the Republic of Turkey Chart 5.1.13. Chart 5.1.14. Yield Curve* Interest Rate Spread* January 26, 2012 April 20, 2012 4 10 3.5 3 Yield (percent) 2.5 2 9.5 1.5 1 0.5 9 0 -0.5 -1 8.5 * Calculated from the compounded returns on bonds quoted at the ISE Bonds and Bills Market by using ENS method. Source: ISE, CBRT. 0412 0212 1211 1011 0811 0611 4 0411 3.5 0211 3 1210 2.5 Maturity (year) 1010 2 0810 1.5 0610 1 0410 0.5 0210 -1.5 * Spread between 4-year and 6-month yields derived from the ENS yield curve, 5-day moving average. Source: ISE, CBRT. The flat course of market rates also reflected on the real rates in the first quarter of the year (Chart 5.1.15). Real interest rates have hovered above other emerging economies in this period (Chart 5.1.16). Chart 5.1.15. Chart 5.1.16. 2-Year Real Interest Rates for Turkey* 2-Year Real Interest Rates* (Percent) (Percent) 5.0 5 4.5 4 4.0 3 3.5 2 3.0 1 2.5 0 2.0 -1 1.0 -2 0.5 0412 0212 1211 1011 0811 0611 0411 0211 1210 1010 0810 0610 0410 0210 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. Hungary Brazil Turkey Colombia Romania Chile Poland India Peru Mexico Malaysia Israel South Korea Thailand South Africa Indonesia Philippines China Czech Rep. 1.5 * As of April 20, 2012. Calculated as the 2-year government bond returns of countries minus the 2-year ahead inflation expectations from the Consensus Forecasts. Source: Bloomberg, Consensus Forecasts, CBRT. Exchange Rate and Reserves The Turkish lira depreciated slightly in the first quarter, similar to currencies of other emerging economies. The Turkish lira diverged from other emerging economies in March, amid soaring oil prices and the lower-than-envisioned correction in the current account deficit (Chart 5.1.17). However, on account of the additional tightening delivered by the CBRT as well as the interruption of the 76 Inflation Report 2012-II Central Bank of the Republic of Turkey acceleration in oil prices, the Turkish lira appreciated in April. Amid the lowerthan-expected current account deficit in April, the Turkish lira appreciated further. Chart 5.1.17. Chart 5.1.18. TL and Emerging Market Currencies* CBRT Reserves and FX Sales* (11.01.2010=1) (Billion USD) Turkey Emerging Economies Gold Reserves 125 1.4 Gross FX Reserves Cumulative FX Sales since August 2011 1.34 100 1.28 75 1.22 1.16 50 1.1 25 0412 0312 0212 0112 0811 * Emerging economies include Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea, Colombia and Turkey. Increases denote depreciation of the currency. Source: Bloomberg, CBRT. 1211 -25 1111 0.92 1011 0 1110 1210 0111 0211 0311 0411 0511 0611 0711 0811 0911 1011 1111 1211 0112 0212 0312 0412 0.98 0911 1.04 * CBRT reserves include gross FX reserves, overdrafts and gold reserves. FX sales include auctions and direct interventions. Source: CBRT. The suspension of FX auctions reversed the downward course of the CBRT’s FX reserves, after the January meeting of the MPC (Chart 5.1.18). Additionally, following the required reserves decision taken at the MPC meeting in March, gold reserves as well as FX reserves have increased (Box 5. 1). Due to the CBRT’s tight monetary policy stance and the favorable course of the global risk appetite, implied volatility of the Turkish lira remained low both in short and in long-term, compared to the currencies of other emerging economies (Charts 5.1.19 and 5.1.20). Chart 5.1.19. Chart 5.1.20. Implied Volatility of Exchange Rates* Implied Volatility of Exchange Rates* (1-Month Ahead) (12-Month Ahead) 30 30 Emerging Economies Emerging Economies 25 25 Turkey 0412 0112 1011 0711 0411 0111 5 0412 5 0112 10 1011 10 0711 15 0411 15 0111 20 1010 20 1010 Turkey * Emerging economies include Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea and Colombia. Source: Bloomberg, CBRT. Inflation Report 2012-II 77 Central Bank of the Republic of Turkey Monetary Indicators Domestic and external economic climate continued to weigh on monetary indicators amid the ongoing volatility in the financial markets. Accordingly, the annual growth of M3, the broad measure of money supply, continued to decline. In fact, balance sheet decomposition of M3 points that the surge in Claims on Private Sector, which mostly consist of bank loans extended to non-financial private individuals and institutions, has recently paused. Meanwhile, Claims on Public Sector continued to provide negative contribution to M3 growth. The fall in Net External Assets is mainly attributed to the interruption of the decline in commercial banks' FX-denominated assets. Lastly, the negative contribution of the item Other, i.e. the monetary sector's non-deposit resources, to the M3 growth remained flat (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 Growth in Percent) 40 30 20 10 0 -10 0212 1111 0811 0511 0211 1110 0810 0510 0210 1109 0809 0509 0209 1108 0808 0508 0208 1107 0807 0507 -20 Source: CBRT. Owing to the slowdown in economic activity, the rate of increase in the seasonally adjusted money in circulation continued to decline in the first quarter of the year (Chart 5.1.22). The adopted measures in addition to the slowdown in the economic activity, as well as soaring interest rates increased the opportunity cost of holding cash, thus resulting in a deceleration in the growth of the money in circulation. 78 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 5.1.22. Currency in Circulation and Current Consumption Spending* (Seasonally Adjusted) Current Consumption Spending (Annual Percent Change) Currency in Circulation (Annual Percent Change) Currency in Circulation (billion TL, right axis) 30 60 25 55 50 20 45 15 40 10 35 5 30 0 25 3 4 1 2 3 4 1 2009 2 3 4 1 2010 2 3 4 2011 1 2012 * Consumption spending includes private and public consumption excluding furniture, household appliances, transport and communication services at current prices. Source: TurkStat, CBRT. 5.2. Financial Intermediation and Loans On account of the CBRT’s tight monetary policy, the slowdown in the economic activity and the surge in margins, growth of loans extended to the real sector by domestic banks still remain low, notwithstanding the edging up in the first quarter (Chart 5.2.1 and Box 5.2). Accordingly, real sector loans posted a year-on-year increase by 21.7 percent in the first quarter, growing by 19.1 percent in annualized terms (Chart 5.2.1). Meanwhile, external borrowing by firms has increased in the first two months of the year (Chart 5.2.2). Chart 5.2.1. Chart 5.2.2. Growth Rate of Real Sector Loans External Borrowing of Firms (Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) (Billion USD) 60 70 50 65 40 60 30 55 20 50 10 45 0 40 -10 35 -20 30 Source: BRSA. 0312 1211 0911 0611 0311 1210 0910 0610 0310 1209 0909 0609 0309 1208 0908 0608 -30 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2007 2008 2009 2010 2011 2012 Source: CBRT. Despite the limited quarter-on-quarter increase in real sector loans extended by domestic banks, growth rate of total loans remained low amid the slowdown in consumer loans (Chart 5.2.3). Annualized data for the first quarter Inflation Report 2012-II 79 Central Bank of the Republic of Turkey suggest that the growth rate of consumer loans went down to 8.3 percent. Although a substantial part of this decline was driven by seasonal effects, growth of loans declined notably, compared to the same period of the preceding years (Chart 5.2.4). Chart 5.2.3. Chart 5.2.4. Growth Rates of Business and Consumer Loans* Consumer Loan Growth (Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) (Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) Business Loans (including foreign branches) 2007-2011 Average Consumer Loans 60 2012 45 40 50 35 40 30 25 30 20 20 15 10 10 5 * Including automobile loans extended by consumer financing firms. Source: CBRT. Dec Oct Nov Sep Jul Aug Jun Apr May Mar Jan 0 Feb 0312 0112 1111 0911 0711 0511 0311 0111 1110 0910 0710 0510 0310 0110 0 Source: CBRT. Amid the monetary tightening delivered as of October 2011, growth rates of all types of consumer loans decelerated significantly. Despite the limited recovery in the first quarter of the year, growth rates of consumer loans still exhibit a fairly weak outlook compared to the pre-tightening period (Chart 5.2.5). Growth rates of housing and personal loans edged up in March, albeit remaining low. The CBRT’s Business Tendency Survey of the last quarter of 2011 indicates that the absence of a tightening in housing loan standards points that the housing loans slowed down mainly on the back of soaring interest rates amid the tight monetary policy stance. Meanwhile, the deceleration in personal loans is attributed to supply-side factors besides the tight monetary policy. In fact, personal loan rates increased more sharply than other loan rates (Chart 5.2.6). The Business Tendency Survey also indicates increased concerns of banks over credit risk, thereby causing tightening in standards for loans with strong cyclicality in credit risk. This is also confirmed by the higher increase in personal loan rates than other loan rates amid the additional monetary tightening delivered in late March. In the first quarter of the year, automobile loans, which constitute less than 10 percent of the consumer loans, decreased sharply due to seasonal effects. Overall, all these developments signify that money and credit markets maintain their tight stance. 80 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 5.2.5. Chart 5.2.6. Weekly Growth Rates of Consumer Loans* Consumer Loan Rates (13-Week Average, Annualized, Percent) (Flow, Annualized, Percent) Housing Automobile Automobile Housing Personal 120 Personal 22 Narrowing of the Interest Rate Corridor 100 80 Widening of the Interest Rate Corridor 17 BRSA Measures 60 40 12 20 0 * Including automobile loans extended by consumer financing firms. Source: CBRT. 0412 0312 0212 0112 1211 1111 1011 0911 0811 0711 0611 0511 0411 0311 0211 0312 0112 1111 0911 0711 0511 0311 0111 1110 0910 0710 0510 0310 0110 0111 7 -20 Source: CBRT. Unlike consumer loans, the growth rate of business loans edged up notably in the first quarter. However, the growth rate of business loans, in both TL and FX, lagged behind the average of the preceding years (Charts 5.2.7 and 5.2.8). In particular, growth of FX-denominated loans has remarkably converged to the growth rate of TL-denominated business loans. In a period with an absence of a strong indicator on accelerating investments, the rise in FX loans, which are mainly used for the financing of investment spending, is viewed to be fuelled by supply-side factors. In fact, soaring FX-denominated deposits generating in-balance sheet FX short position in the first quarter is a prominent factor, which is likely to drive banks to extend FX loans. Chart 5.2.7. Chart 5.2.8. Business Loan Growth Growth Rates of TL and FX Business Loans* (Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) (Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) 2007- 2011 Average TL Business Loans FX Business Loans (including foreign branches) 2012 40 70 35 60 30 50 25 40 20 30 15 20 10 10 5 0 0312 1211 0911 0611 0311 1210 0910 0610 Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan Dec Source: BRSA. 0310 -10 0 Source: CBRT. An analysis of business loans by scale reveals that growth rates of loans extended to large-scale enterprises notably exceeded the growth of loans to Inflation Report 2012-II 81 Central Bank of the Republic of Turkey SMEs in the first two months of the year (Chart 5.2.9), confirming the heightening concerns of banks over the credit risk. In fact, the previous quarter’s Business Tendency Survey results suggest that banks have tightened their lending conditions in tandem with their recent concern over bad loans. This is also confirmed by the accelerating growth of past-due loans (Chart 5.2.10). However, the expectation that the slowdown in economic activity in the first quarter would be temporary stands out as a factor to ease tightening in credit supply. Chart 5.2.9. Chart 5.2.10. Business Loan Growth Rates by Scale* Weekly Growth of Past-Due Loans (Nominal, Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) (13-Week Average, Percent) SME Large-Scale Enterprises 100 2 80 1.5 60 1 40 0.5 20 Source: CBRT. 0911 1211 0312 0611 0910 1210 0311 0610 0909 1209 0310 0609 0908 1208 0309 0308 0112 1011 0711 0411 0111 1010 0710 0410 0110 1009 0709 0409 -1 0109 -40 1008 -0.5 0708 -20 0608 0 0 Source: CBRT. The accelerating growth of business loans in the first quarter is also attributed to the slightly reduced average funding rate by the CBRT (Chart 5.2.11). The decline in funding cost was simultaneously reflected on loan rates and loan-deposit rate spread as well (Chart 5.2.12). Chart 5.2.11. Chart 5.2.12. TL Business Loan Rate and the Average Funding Rate (Flow, 4-Week Average, Percent) TL Business Loan Rate (Flow, 4-Week Average, Percent) ( TL Business Loan Rate Average Funding Rate (right axis) Business Loan Rate (right axis) 6 14 10 5 13 9 4 12 12 8 3 11 11 7 2 10 10 6 1 9 9 5 0 8 16 15 14 0312 0212 0112 1211 1111 13 1011 0911 0811 0611 0511 0411 0211 0311 0711 MPC Meeting on October 20, 2011 BRSA Measures 0111 0312 11 0212 15 0112 7 1211 12 1111 16 1011 8 0911 13 0811 17 Source: CBRT. 82 Business Loan Rate - Deposit Rate Source: CBRT. Inflation Report 2012-II Central Bank of the Republic of Turkey The recent monetary policy measures taken by the CBRT have been influential on deposit rates. Following the CBRT’s suspension of the additional tightening in January, TL deposit rates edged down (Chart 5.1.13). Owing to the ongoing tight monetary policy stance as well as the competitiveness in the deposit market, deposit rates declined less heavily than the CBRT’s weighted average funding rate. In particular, banks, which are challenged to meet total liquidity adequacy ratios, have recently competed drastically to attract more deposits, thereby preventing deposit rates to decline. Following the CBRT’S recourse to additional tightening, deposit rates have recently edged up (Chart 5.1.14). Chart 5.2.13. Chart 5.2.14. Yield Curve on TL Deposits TL Deposit Rate and the Average Funding Rate TL Deposit Rate December 30, 2011 March 16, 2012 March 30, 2012 12.50 Average Funding Rate (right axis) 11 13 10.5 12 10 11 9.5 10 12.00 11.50 11.00 10.50 9 9 8.5 8 8 7 7.5 6 7 5 10.00 12-month Source: CBRT. 0312 6-month 0212 3-month 0112 1-month 1211 8.00 1111 0811 8.50 1011 9.00 0911 9.50 Source: CBRT. FX-denominated business loan rates soared slightly on a quarterly basis (Chart 5.2.15). Owing to the decline in FX deposit rates, the spread on FXdenominated loans and deposit rates widened in this period. Chart 5.2.15. FX Business Loan Rates (Flow, 4-Week Average, Percent) FX Busines Loan Rate - FX Deposit Rate FX Business Loan Rate (right axis) 4 8 MPC Meeting on October 20, 2011 0312 4 0112 0 1111 5 0911 1 0711 6 0511 2 0311 7 0111 3 Source: BRSA. Inflation Report 2012-II 83 Central Bank of the Republic of Turkey In sum, the monetary tightening in the last quarter of 2011 decelerated loan growth. In particular, consumer loans, which are expected to be more sensitive to interest rates, have notably lost pace. On the other hand, heightened concerns of banks over credit risk have weighed on the credit supply as of the last quarter of 2011. However, the relatively favorable economic outlook in the first quarter may alleviate these concerns. Hence, assuming that external borrowing will not pose a significant constraint, credit developments in the period ahead are expected to be largely shaped by demand-side factors. 84 Inflation Report 2012-II Central Bank of the Republic of Turkey Box 5.1 Amid The Effects of the CBRT’s Monetary Policy Decisions on Reserves mounting concerns over sovereign debt problems in some European countries, the CBRT has adopted extensive measures as of the second half of 2011, in order to contain the possible adverse effects on domestic markets. Accordingly, external markets were closely monitored and FX liquidity was provided with appropriate means and methods, when deemed necessary. This Box analyzes the effects of the adopted monetary policy decisions since the second half of 2011, on CBRT’s FX and gold reserves. With a view to meeting the need for FX liquidity amid worsening risk perceptions, the CBRT has conducted regular FX sale auctions as of August 5, 2011. In addition, the CBRT also provided FX liquidity through direct sale interventions, in the event that unhealthy price formations are observed in the exchange rate. Amid favorable global liquidity conditions at the onset of 2012, the CBRT has suspended regular FX sale auctions as of January 25, 2012. The FX liquidity provided through auctions and direct interventions amounted to USD 16 billion, pulling FX reserves down (Chart 1 and Table 1). Chart 1. CBRT Reserves and FX Sales* (Billion USD) Gold Reserves Gross FX Reserves 125 Cumulative FX Sales since August 2011 100 75 50 25 0 0312 0212 0112 1211 1111 1011 0911 0811 -25 * CBRT reserves include gross FX reserves, overdrafts and gold reserves. FX sales include auctions and direct interventions. Source: CBRT. In order to provide FX liquidity to the market, the CBRT also opted for reductions in FX required reserve ratios. Accordingly, FX required reserve ratios were lowered by 0.5 points across all maturities on August 5, thereby providing FX liquidity of USD 930 billion to the market. Moreover, in order to provide additional FX liquidity to the market and to stimulate the extension of the maturity of the banking sector FX liabilities, FX required reserve ratios were lowered further on October 5, providing FX liquidity of USD 1.3 billion to the market. Inflation Report 2012-II 85 Central Bank of the Republic of Turkey In order to curb the adverse effects of the FX sale auctions and direct sale interventions on reserves, on September 12, the CBRT facilitated to hold up to 10 percent of the TL-denominated required reserves in USD and/or in euro, thus providing a permanent and relatively low-cost funding to meet the TL liquidity deficit. Thus, 10 percent of the TL required reserves, amounting to TL 6.8 billion, was enabled to be kept in USD, corresponding to USD 3.9 billion, out of which, USD 2.9 billion was facilitated as of September 30, 2011. This facility was raised to 20 percent and 40 percent, respectively on October 5 and October 27, 2011. Finally, USD 11.1 billion was facilitated as of March 30, 2012 (Table 1). Chart 2. Export Rediscount Credits Another reserves tool is for through rediscount credits. credits granted are affecting FX (Billion USD) in 3 Rediscount 2.5 changes in TL, but 2 collected in FX, thus resulting in an 1.5 increase in FX reserves. Hence, the 1 CBRT, with a view to enhancing the 0.5 FX reserves, facilitated the use of September 12, 2011. Accordingly, 0312 0212 0112 1211 1111 1011 0911 0811 0711 0611 0511 0 0411 on 0311 credits 0211 rediscount 0111 export Source: CBRT. the closure period for rediscount credit commitments was extended from 4 months to 6 months, with credit limits being raised from USD 2.5 billion to USD 3 billion. The credit limit was further raised to USD 4.5 billion and the closure period for commitments was extended to 12 months. Following these arrangements, rediscount credits increased by USD 1.7 billion and reached to USD 2.6 billion as of March 30, 2012 (Chart 2 and Table 1). In order to enhance gold reserves and provide flexibility to banks in their liquidity management, the CBRT facilitated to hold up to 10 percent of the TL required reserves as standard gold on November 1, 2011, corresponding to 55 tons (USD 3.1 billion), out of which, 87 percent has been facilitated as of March 30, 2012. This facility was raised to 20 percent on March 27, to be effective as of April 13, thus leading to an increase in gold reserves (Chart 1 and Table 1). 86 Inflation Report 2012-II Central Bank of the Republic of Turkey In order to enhance gold reserves, on September 12, the CBRT facilitated to hold up to 100 percent and 10 percent of the required reserves to be kept as standard gold for precious metal deposit accounts and for FX liabilities other than precious metal deposit accounts, respectively. With the extension of required reserves regulation to cover precious metal deposit accounts, the CBRT reserves increased by USD 685 million. Moreover, banks have exploited 66 percent of the facility to keep up to 10 percent of the FX liabilities other than precious metal deposit accounts as standard gold (Table 1). However, this facility was lowered to 0 percent on March 27, to be effective as April 13, 2012. Extension of required reserves regulation to cover precious metal deposit accounts caused CBRT gold reserves to increase, while facilitation of FX required reserves to be held as standard gold affected the composition of reserves, without affecting the quantity. Table 1. Effects of Policy Measures on Reserves*,**,*** (Changes since Jun. 30, 2011, Million USD) Adopted Measures FX Sale Auctions and Direct Sale Interventions Facilitation of TL Required Reserves to be kept as FX Facilitation of TL Required Reserves to be kept as standard gold Facilitation of FX Required Reserves to be kept as standard gold Sept. 30, 2011 Gold FX Reserves Reserves 0 -3030 Dec. 30, 2011 Gold FX Reserves Reserves 0 -13450 Mar. 30, 2012 Gold FX Reserves Reserves 0 -16056 0 2915 0 10221 0 11057 - - 2291 0 2711 0 - - 1720 -1720 2284 -2284 Does not include the additional FX liquidity provided through FX required reserve ratio reductions. ** Does not include the additional gold reserves due to coverage of precious metal deposit accounts under reserve requirement. *** Does not include the effect of rediscount credits on reserves as the maturity of these credits is 4 months, and hence, the effects can only be observed with a 4-month lag. Source: CBRT. * In sum, the CBRT’s FX sale auctions and direct sale interventions since August 2011, as well as reductions in FX required reserve ratios caused FX reserves to decline. On the other hand, the arrangements on reserve requirements and rediscount credits largely compensated for this decline. Accordingly, the CBRT’s reserves fell merely to USD 91.4 billion on March 30, 2012 from USD 97.6 billion on August 5, since the launch of FX sale auctions. Inflation Report 2012-II 87 Central Bank of the Republic of Turkey Box 5.2 Consumer Loan Margins and Credit Supply Assessing credit conditions is crucial for evaluating financial and monetary conditions as well as regarding financial stability. This Box analyzes consumer loan margins, which may be considered to be indicative of the conditions in credit supply. Calculation of margins is based on Button et al. (2010). Accordingly, the cost of funding and credit risk premium is subtracted from loan rates, which also include other non-interest fees and commissions charged on the newly extended consumer loans.1 The increase in margins when calculated as such shows that the additional cost brought about by changing economic climate is passed over to consumers through increased costs. Hence, margins can be considered to be an indicator for credit supply. Studies based on banking sector surveys also reveal that loans are initially adjusted through changes in loan rates. 2 However, for assessing changes in margins, operational costs and competitiveness should also be taken into account. Assuming that operational costs and competitiveness remain broadly unchanged in the short term, loan margins are viewed to be a better indicator of the credit supply conditions in the short term. The derived margin series for the relevant loan categories are depicted in Chart 1. Accordingly, margins soared sharply immediately after the 2008 global crisis, implying that credit tightness experienced during that period was mainly owed to supply-side factors. As the adverse effects of the crisis on the Turkish economy were alleviated, margins declined, indicating that supply- side factors were largely influential on the rapid credit expansion experienced during the post-crisis period. Meanwhile, credit growth slowed down notably in the second half of 2011. The derived margin series imply that the additional cost brought about by the adopted measures of the BRSA and the CBRT was more than proportionately passed over to loan rates, thus indicating stronger supply-side factors weighing on credit growth. 1 2 For further details on the calculation of the funding cost and credit risk premium, see Karaşahin and Özel (2012). Alper et al. (2011). 88 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 1. Consumer Loan Margins (Percent, 4-Week Average) Housing Automobile Personal 18 16 14 12 10 8 6 4 2 0112 0711 0111 0710 0110 0709 0109 0708 0108 0707 0107 0 Source: CBRT. Banks’ Loans Tendency Survey, quarterly conducted by the CBRT for monitoring and assessing credit supply and demand conditions, is another indicator for credit supply conditions. For a quantitative analysis of the survey, the net percent change in survey responds are computed, with positive values of the net percent change indicating a loosening in the credit conditions. The reverted net percent change series are displayed in Chart 2, where positive values thus indicate tightness in credit conditions. Chart 2. Margins and Loan Standards (Percent) Automobile Loan Margin (right axis) Housing Loan Margin (right axis) Automobile Loan Standards Housing Loan Standards -100 10 -80 9 -100 14 -80 12 7 -60 10 -40 6 -40 8 -20 5 -20 6 0112 0711 0111 0710 0 0110 2 40 0709 4 0112 0711 0111 0710 0110 0709 0109 0708 0108 0707 0 0107 1 60 0 20 0107 2 40 0109 20 0708 3 0108 4 0 0707 8 -60 Personal Loan Margin (right axis) Personal Loan Standards -100 20 -80 -60 15 -40 -20 10 0 20 5 40 Inflation Report 2012-II 0112 0711 0111 0710 0110 0709 0109 0708 0108 0707 0 0107 60 89 Central Bank of the Republic of Turkey Changes in margins should not always be interpreted as changing credit supply conditions. Measurement biases in the calculation of funding cost and credit risk premium may complicate the attribution of minor changes in margins to changes in credit supply conditions. Yet, these biases are relatively negligible for sizeable changes in margins. Hence, our analysis focuses on periods with sharp changes in margins. Meanwhile, banks can restrict credit supply also through credit rationing, thus without resorting to loan rate adjustment. Hence, a thorough understanding of the changes in credit supply requires not only analyzing margins, but also the volume of credits. In sum, loan margins enable relatively closer and timely monitoring of the credit supply developments than Banks’ Loans Tendency Survey. Assessing the recent credit supply conditions against this background, the slowdown in the credit growth may well be attributed to the recent surge in loan margins after June 2011. REFERENCES Alper K., H. Atasoy, R. Karaşahin and D. Mutluer-Kurul, 2011, Arzın Merkezine Seyahat: Bankacılarla Yapılan Görüşmelerden Elde Edilen Bilgilerle Türk Bankacılık Sektörünün Davranışı (in Turkish), CBRT Working Paper No. 11/24. Button, R., S. Pezzini and N. Rossiter, 2010, Understanding the price of new lending to households, Bank of England Quarterly Bulletin 50(3): 172-182. Karaşahin, R. and Ö. Özel, 2012, Tüketici Kredilerinde Oluşan Marjlar ve Kredi Arzı (in Turkish), CBRT Economic Notes No. 12/10. 90 Inflation Report 2012-II Central Bank of the Republic of Turkey 6. Public Finance Soaring tax revenues and falling interest expenditures amid higher-thananticipated economic growth favorably affected the fiscal balances in 2011, thus causing a year-on-year decline in central government budget deficit and public debt stock to GDP (Chart 6.1). The additional revenue collected within the Law No. 6111 on the “Restructuring of Public Claims”, the applications of which had expired by May 31, 2011 besides the relative slowdown of the growth of primary expenditures also contributed to the improvement in budget performance. Chart 6.1. Central Government Budget Deficit and EU-Defined Public Debt Stock (Percent of GDP) 3 20 2014* 2013* 2011 2012* 2010 2009 2008 2007 2006 2005 2004 2003 2002 0 2001 2014* 2013* 2011 2012* 2010 2009 2008 2007 2006 2005 2004 2003 2002 0 2001 32.0 40 1.0 6 1.5 60 1.4 9 37.0 80 35.0 Public Debt Stock Maastricht Criterion: 60% Budget Deficit 12 * MTP targets. Source: Ministry of Finance. Increases in indirect taxes, VAT on imports in particular, which are mainly fuelled by the vigorous private consumption demand, in addition to revenues collected under the tax amnesty were particularly effective on the favorable outlook of the budget performance, pointing that the improvement in fiscal balances was mainly driven by cyclical factors and regulations. The additional revenues collected under the law on the restructuring of public claims will continue into 2012, providing further support to budget revenues. Furthermore, SCT rate hikes to certain products within fiscal measures effective as of October will also favorably affect the budget revenues in 2012. However, possible declines in tax revenues amid a potential slowdown in the economic activity as well as upside risks to public expenditures, personnel expenditures in particular, may interrupt the ongoing improvement in the budget performance in 2012. Moreover, stipulated tax cuts and other government incentives within the new Inflation Report 2012-II 91 Central Bank of the Republic of Turkey incentive system, which was publicly announced on April 5, will favorably affect public revenues by enhancing investment and employment in the medium to long term, yet may lead to lower public savings in the short term (Box 6.1). Thus, it should be emphasized that in order to ensure sustainability of the favorable fiscal outlook as well as the fiscal discipline, reinforcement of the fiscal framework through institutional and structural improvements envisaged in the MTP remains critical. 6.1. Budget Developments Central government budget posted a deficit of TL 6.4 billion, while primary balance registered a surplus of TL 10.9 billion in the first quarter of 2012 (Table 6.1.1). The increase in interest expenditures by 24 percent was mainly influential on the year-on-year deterioration in the budget performance. On the other hand, the quarterly increase in the interest expenditures is related to the maturity structure of the debt stock, and is anticipated to slow down in the following months. Moreover, the relatively slower growth of tax revenues signal a deceleration in the economic activity. Table 6.1.1. Central Government Budget Aggregates (Billion TL) Central Government Budget Expenditures Interest Expenditures Primary Expenditures Central Government Budget Revenues I. Tax Revenues II. Non-Tax Revenues Budget Balance Primary Balance JanuaryMarch 2011 JanuaryMarch 2012 Rate of Increase (Percent) Actual/Target (Percent) 72.9 14.0 58.9 68.7 57.5 8.7 -4.1 83.8 17.3 66.5 77.4 64.5 9.6 -6.4 15.1 24.0 13.0 12.6 12.2 9.9 55.9 23.9 34.5 22.1 23.5 23.2 21.7 30.5 9.8 10.9 10.6 37.4 Source: Ministry of Finance. Having displayed a year-on-year improvement in 2011 on the back of the favorable budget outturn, the central government budget balance to GDP has deteriorated moderately in the first quarter of 2012, while continuing to remain low. The slightly worsening central government primary balance to GDP in the first quarter of 2011 amid rapidly soaring primary expenditures, remained unchanged in the first quarter of 2012 from the year-end (Chart 6.1.1). Central government budget revenues with a modest year-on-year decline in 2011, soared mildly in the first quarter of 2012, while central government primary expenditures to GDP remained unchanged since end-2011 (Chart 6.1.2). 92 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 6.1.1. Chart 6.1.2. Central Government Budget Balance Central Government Budget Revenues and Primary Expenditures (Annualized, Percent of GDP) (Annualized, Percent of GDP) Budget Balance 8 Primary Balance Budget Revenues 24 Primary Expenditures 23 6 22 4 1.9 2 21 20 0 19 18 -2 -1.5 -4 17 16 -6 15 -8 14 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1* 2007 2008 2009 2010 2011 2012 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1* 2007 2008 2009 2010 2011 2012 * Estimate. Source: Ministry of Finance. Central government primary expenditures posted a year-on-year growth by 13 percent in the first quarter of 2012. Current transfers and personnel expenditures, major components of the primary expenditures, were up 9.3 percent and 15.3 percent, respectively. Meanwhile, expenditures on goods and services declined by 1.2 percent, mainly on the back of the dramatic fall in health expenditures due to coverage of green card holders under the general health insurance plan. Furthermore, expenditures within the general health insurance plan is a component of the current transfers, as opposed to being a component of the purchases of goods and services. The rapid surge in personnel expenditures in the January-March 2012 period was mainly owed to soaring salaries and severance pay. On the other hand, the low rate of increase in health, pension and social benefits, the major component of current transfers, restricted the rise in current transfers. Agricultural support declined temporarily by 7.2 percent (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 JanuaryMarch 2011 58,.9 18.8 3.3 4.8 1.2 1.1 29.6 0.3 15.8 2.8 7.6 1.5 0.3 JanuaryMarch 2012 66.5 21.6 3.7 4.7 1.2 0.3 32.3 0.4 16.2 2.6 9.0 1.7 0.2 Rate of Increase (Percent) 13.0 15.3 13.0 -1.2 -3.3 -72.7 9.3 58.0 2.4 -7.2 19.0 13.8 -23.5 Actual/Target (Percent) 22.1 26.5 26.2 16.3 11.3 32.8 24.8 9.5 23.5 36.3 26.6 6.1 4.8 Source: Ministry of Finance. Inflation Report 2012-II 93 Central Bank of the Republic of Turkey Central government general budget revenues posted a year-on-year growth by 11.9 percent in the January-March 2012 period. Meanwhile, tax revenues and non-tax revenues increased by 12.2 percent and 9.9 percent, respectively (Table 6.1.3). The increase in income tax revenues by 24.7 percent slightly contained the slowdown in the growth of tax revenues. Income tax mainly comprises withholding tax on wages, salaries, interest and capital earnings. Therefore, the ongoing increase in registered employment is considered to be influential on soaring income tax revenues. Meanwhile, domestic VAT revenues increased mildly by 9.2 percent, while SCT revenues increased by a mere 4.5 percent. The slowdown in the growth of SCT revenues was mainly owed to the year-on-year decline in SCT collection on oil and natural gas products, as well motor vehicles by 0.4 percent and 11 percent, respectively. In the meantime, VAT revenues on imports registered a growth by 5.9 percent, remaining well below the growth rate by 34.5 percent in 2011. 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 JanuaryMarch 2011 JanuaryMarch 2012 Rate of Increase (Percent) Actual/Target (Percent) 66.2 57.5 10.4 6.6 7.3 13.3 10.3 8.7 2.6 4.3 1.3 74.0 64.5 13.0 7.4 8.0 13.9 10.9 9.6 2.9 4.8 0.6 11.9 12.2 24.7 12.4 9.2 4.5 5.9 9.9 9.1 12.5 -51.6 23.0 23.2 24.1 27.1 23.9 19.7 20.2 21.7 31.1 21.8 5.5 Source: Ministry of Finance. The annual rate of increase in real tax revenues, which has decelerated since the third quarter of 2011, continued to slow down further in the first quarter of 2012, hitting the recent-low since the last quarter of 2009. The slowdown in the economic activity since the third quarter of 2011 was especially influential on the declining growth of real tax revenues (Chart 6.1.3). Consumption-based tax revenues are the primary tax revenue items which were adversely affected by the slowdown in the economic activity. Hence, SCT revenues, a major component of the tax revenues, registered a year-on-year decline by 5.4 percent in real terms, in the first quarter of 2012. Meanwhile, during the same period, domestic VAT revenues and VAT revenues on imports posted a year-onyear decline by 1.2 percent and 4.1 percent, respectively, in real terms (Chart 6.1.4). 94 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 6.1.3. Chart 6.1.4. Real Tax Revenues Real VAT and SCT Revenues (Annual Percent Change) (Annual Percent Change) 25 60 20 50 Real Domestic VAT Revenues Real SCT Revenues Real VAT Revenues on Imports 40 15 30 10 20 5 10 1.6 0 0 -10 -5 -20 -10 -30 -15 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2007 2008 2009 2010 -40 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2011 2012 2007 2008 2009 2010 2011 2012 Source: Ministry of Finance. 6.2. Developments in the Debt Stock Public debt stock indicators improved further in the first quarter of 2012. The real cost of borrowing decreased, the maturity of the debt stock was extended and the share of interest and exchange-rate-sensitive securities in the debt stock declined. Chart 6.2.1. Chart 6.2.2. Public Debt Stock Indicators Composition of the Central Government Debt Stock (Percent) Total Public Net Debt Stock (percent of GDP) FX-Denominated/FX-Indexed Floating-Rate Fixed-Rate 80 600 100 500 80 29.6 519.9 70 27.8 EU-Defined General Government Nominal Debt Stock (percent of GDP) Central Government Total Debt Stock (billion TL, right axis) 40 200 20 100 10 0 0 2003 2005 2007 2009 2011 34.1 30 34.0 60 300 22.4 40 400 38.1 50 36.4 39.4 60 20 0 2001 2003 2005 2007 2009 2011 * Floating-Rate debt stock includes discounted securities with a maturity less than 1 year and GDBS with floating rates. ** FX-Denominated/FX-Indexed debt stock includes external debt stock and FX-denominated and FX-indexed domestic debt stock. Source: Treasury, CBRT. The ratio of total public net debt stock and EU-defined general government nominal debt stock to GDP posted a year-on-year decline by 6.5 points and 3 points, to 22.4 percent and 39.4 percent, respectively, by end-2011 Inflation Report 2012-II 95 Central Bank of the Republic of Turkey (Chart 6.2.1). Meanwhile, as of March 2012, central government debt stock remained unchanged from end-2011 (Chart 6.2.1). Chart 6.2.3. Chart 6.2.4. Average Maturity of Domestic Cash Borrowing and Term-to-Maturity of the Domestic Debt Stock Borrowing By Bond Issues (Month) 70 60.8 35 7 30 6 25 5 20 4 15 3 60 50 34.2 30 10 2011 2010 2009 2008 2007 2006 2005 2011 2012/3 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 2004 0 2003 1 0 0 Term-to-Maturity of the Domestic Debt Stock 2 5 2002 10 10.5 2001 20 2012/3 40 External Borrowing (billion USD, right axis) Average Maturity of the External Borrowing (year) Maximum Maturity of the External Borrowing (year) Average Maturity of the Domestic Cash Borrowing Source: Treasury, CBRT. As of March 2012, the Treasury has continued on its borrowing strategy to alleviate the sensitivity of the debt stock to liquidity, interest rate and exchange rate. Accordingly, the share of fixed-rate securities increased in the total debt stock (Chart 6.2.2). The ratio of public deposits to average monthly debt service reached 154.6 percent. Term-to-maturity of the domestic debt stock hit 34.2 months amid the year-on-year increase in the average maturity of the domestic cash borrowing (Chart 6.2.3). External borrowing by bond issues amounted to USD 3.6 billion, with a year-on-year decline in the average maturity to 10.5 years (Chart 6.2.4). Chart 6.2.5. Chart 6.2.6. Total Domestic Debt Rollover Ratio Average Maturity of Borrowing and Interest Rates at Discount Auctions (Percent) 800 110 Maturity (day) Average Compounded Interest Rate (right axis) Real Interest Rate (right axis) 700 60 600 100 50 500 89.0 90 84.5 80 40 400 30 300 89.3 20 200 10 100 2003 2005 2007 2009 2011 0 1202 0603 1203 0604 1204 0605 1205 0606 1206 0607 1207 0608 1208 0609 1209 0610 1210 0611 1211 0 70 70 Source: Treasury, CBRT. 96 Inflation Report 2012-II Central Bank of the Republic of Turkey According to the Treasury’s announced strategy on domestic borrowing for April-June 2012, domestic debt rollover ratio, which is envisaged to fall to 78.8 percent by end-June, stood at 89 percent in February 2012 (Chart 6.2.5). Having fallen sharply from the onset of 2009 till the beginning of 2011, the average real interest rates at discount auctions have recently displayed a mild increase, albeit remaining currently low (Chart 6.2.6). Inflation Report 2012-II 97 Central Bank of the Republic of Turkey Box 6.1 Main Features of the New Incentive System Fiscal policy is an instrument that can affect the economy both from the demand side as well as from the supply side. Fiscal policy is significant in the short term for improving macroeconomic stability from the demand side through taxes and expenditure policies, while in the long term, fiscal policy may affect supply side by enhancing economic growth and potential output. To give an example, a reduction in direct taxes such as income and corporate tax may affect factors of production like labor and capital, and thus, contribute to growth and employment in the long term without causing any inflationary pressures. Hence, the new incentive system, the general features of which were publicly announced on April 5, is estimated to have broad effects on the economy by supporting economic growth through supply-side economic policies. This Box summarizes the main features of the incentive package as well as its range of application.1 The new incentive system is the fourth incentive system in Turkey launched over the last decade. The new system preserves the main features of the previously enacted incentive system, the provision of government incentive for investments, which was published on Official Gazette on July 16, 2009. However, the new system brings about major changes and novelties in certain aspects. In fact, in the previous incentive system, Turkish provinces were categorized under 4 regions with respect to their socioeconomic development, while the new system divides Turkey into 6 regions, with higher incentives granted to socioeconomically inferior regions. Narrowing the current account deficit by expanding the production of intermediate goods and products with high import dependency, providing higher investment incentives to least-developed regions, removing differences across regions with respect to their level of development, enhancing the effectiveness of incentives, contributing to clustering activities and supporting high and mediumhigh technology investments are determined as the main objectives of the new incentive system. The new incentive system comprises general and regional investment incentive schemes besides large scale and strategic investment incentives. Stipulated measures for the attainment of goals vary by schemes (Table 1). Measures of incentives include VAT exemption, customs duty exemption, tax reduction, social security premium support to employer’s share, 1 For further details, see Ministry of Economy (2012) and Prime Ministry of Turkey (2012). 98 Inflation Report 2012-II Central Bank of the Republic of Turkey interest support, land allocation and VAT refund. The use of each incentive depends on the region as well as the size of the investment. Furthermore, with the objective to ensure a net wage increase, to reduce cost of labor and to create new employment opportunities, investments in region 6 are eligible for additional incentives of income tax withholding allowance and social security premium support to employee’s share. Table 1. The New Incentive System General Investment Incentive Scheme Regional Investment Incentive Scheme Large Scale Investment Incentive Scheme Strategic Investment Incentive Scheme VAT Exemption VAT Exemption VAT Exemption VAT Exemption Customs Duty Exemption Customs Duty Exemption Customs Duty Exemption Customs Duty Exemption Tax Reduction Tax Reduction Tax Reduction Social Security Premium Social Security Premium Social Security Support (Employer’s Share) Support (Employer’s Share) Premium Support (Employer’s Share) Land Allocation Land Allocation Land Allocation Interest Support Interest Support VAT Refund * Investments in region 6 are eligible for income tax withholding allowance and social security premium support to employee’s share. Source: Ministry of Economy (2012). Unlike prior incentive packages, the new incentive system provided improved privileges to investments in industrial zones. Another new feature of the system is the facilitation of tax reduction both during the operation as well as the investment period. Furthermore, for investing firms in regions other than region 1, a certain portion of the tax reduction is applied to total earnings accrued through all activities during the investment period. The new system enables increased tax allowance in less-developed regions, thus providing significant funding to investing firms. Moreover, in order to enhance financing opportunities, interest support is maintained in the new incentive system as another measure of incentive. Another important feature of the new incentive system is the special emphasis placed on the strategic investments for the production of intermediate goods and products, more than 50 percent of which are provided by imports. In addition, the announced package is expected to contribute significantly to the narrowing of the current account deficit and the improvement of the international competitiveness, by supporting high-technology investments as well as investments with high value added. Inflation Report 2012-II 99 Central Bank of the Republic of Turkey In sum, the new incentive system is expected to support economic growth through expansionary fiscal policies, including tax reduction and other government incentives, and therefore, enhance investment and employment, and consequently, lessen regional socioeconomic divergences. The adopted measures of incentives are stipulated to reduce public savings in the short term, while favorably affecting the fiscal outlook by creating higher public revenues in tandem with the expanding output, investment and employment in the medium to long term. REFERENCES Ministry of Economy, 2012, New Investment Incentives Program, Presentation dated April 15, 2012. Prime Ministry of Turkey, 2012, Yeni Teşvik Sistemi (in Turkish), Press Release dated April 05, 2012. 100 Inflation Report 2012-II Central Bank of the Republic of Turkey 7. Medium-Term Forecasts This chapter 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. Current State, Short-Term Outlook and Assumptions Monetary Conditions In the inter-reporting period, the CBRT maintained its cautious stance in tandem with the monetary tightening delivered since October 2011, and continued to effectively utilize the interest rate corridor between O/N lending and borrowing rates. Accordingly, with a view to hinder the possible adverse effects of the recent surge in energy prices and other cost factors on the medium-term inflation outlook, an additional tightening was delivered by March 23 and April 12, 2012. Consequently, the quantity of 1-week repo funding was lowered and the weighted average funding rate was raised (Chart 5.1.7). Furthermore, at its meeting on April 18, the MPC underlined that additional tightening would be implemented more frequently in the upcoming period, in order to prevent deterioration in the inflation outlook. Amid growing global risk appetite in the first quarter, market rates edged down similar to other emerging economies. Meanwhile, owing to the adopted monetary tightening, short-term rates declined only slightly (Chart 5.1.9). Thus, market rates declined across all maturities, in particularly in the long-term (Chart 7.1.1). On account of the additional tightening delivered in March and April, the interest rate spread turned negative, and the yield curve followed a downward course. Therefore, monetary policy continued to assume a tight stance in the inter-reporting period. Inflation Report 2012-II 101 Central Bank of the Republic of Turkey Chart 7.1.1. Yield Curve* January 26, 2012 Yield (percent) 10 April 20, 2012 9.5 9 8.5 0.5 1 1.5 2 2.5 Maturity (year) 3 3.5 4 * Calculated from the compounded returns on bonds quoted in ISE Bonds and Bills Market by using ENS method. Source: ISE, CBRT. Inflation In the first quarter of 2012, major factors influencing inflation remained in line with the January Inflation Report forecasts. CPI inflation posted a year-onyear increase by 10.43 percent, close to the previous projections (Chart 1.2.1). Annual inflation in core goods slowed down in the first quarter, while prices of services assumed a mild course. The pass-through from the higher-thanenvisioned increase in energy prices was limited, on the back of the recently favorable course of unprocessed food prices. Food prices weighed less heavily on the CPI inflation amid the betterthan-anticipated course of unprocessed food prices in the first quarter of 2012. However, in view of the high volatility in unprocessed food prices as well as the course of agricultural commodity prices, the year-end forecast for food inflation remained unchanged (Table 7.1.1). Table 7.1.1. Revisions to 2012 Assumptions Output Gap January 2012 April 2012 2011Q4 -0.25 -0.35 2012Q1 -0.59 -1.20 2012-2014 7.5 7.5 Food Price Inflation (Year-end Percent Change) Import Prices (Average Annual Percent Change, USD) 2012 -0.3 -0.7 2013 -0.7 -0.7 Oil Prices (Average Annual, USD) 2012 110 120 2013 105 115 Export-Weighted Global Production Index (Average Annual Percent Change) 2012 1.39 1.38 2013 - 2.44 102 Inflation Report 2012-II Central Bank of the Republic of Turkey Demand Conditions National accounts data for the last quarter of 2011 remained broadly in line with the outlook presented in January Inflation Report. The domestic demand followed a flat course, while net external demand was the main driver of growth. Accordingly, domestic and external demand were balanced further (Box 7.1). First-quarter data as well as indicators on private consumption and investment demand suggest a slowdown in the final domestic demand. Furthermore, data releases on the industrial production for early-2012 indicated a weaker-than-envisioned course for economic activity. Hence, output gap forecasts for the first quarter of 2012 were slightly revised downwards (Table 7.1.1). First-quarter data on external demand signal further increase in exports, which have started to recover as of the second half of 2011. Export-weighted global production index remained broadly unchanged in the inter-reporting period, while exchange rate continued to give support to exports (Chart 7.1.2). Chart 7.1.2. Export-Weighted Global Economic Activity Index* (2009Q1=100) January 2012 111 April 2012 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 2009 2010 2011 2012 2013 * For methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”. Source: Bloomberg, Consensus Forecasts, CBRT. Import Prices Oil prices soared significantly amid the heightened uncertainty due to growing geopolitical risks in the first quarter of 2012. Accordingly, oil price assumption, which was USD 110 per barrel in the previous Report, was increased Inflation Report 2012-II 103 Central Bank of the Republic of Turkey to USD 120 per barrel for 2012, and USD 115 per barrel for 2013 (Table 7.1.1 and Chart 7.1.4). Meanwhile, the better-than-anticipated course of non-energy import prices in the first quarter partly compensated for the adverse effects of soaring oil prices on inflation (Box 4.3). Current projections based on futures prices assume that import prices in USD will go down by a year-on-year 0.7 percent in 2012. Therefore, the import price assumptions for 2012 remained broadly unchanged in the inter-reporting period (Chart 7.1.3). Chart 7.1.3. Revisions to Oil and Import Price Assumptions Import Prices (2003=100) Oil Prices (USD/bbl) January 2012 April 2012 January 2012 135 April 2012 190 125 180 115 105 170 95 160 85 75 150 65 140 * Shaded region indicates the forecast period. Source: Bloomberg, CBRT. 1213 0613 1212 0612 1211 0611 1210 0610 130 1209 1213 0613 1212 0612 1211 0611 1210 0610 1209 0609 45 0609 55 * Shaded region indicates the forecast period. Source: TurkStat, CBRT. Fiscal Policy and Tax Adjustments Regarding the fiscal outlook, the medium-term inflation forecasts take the revised projections of the MTP as given. The stipulated tax cuts and government incentives within the new incentive system, which was publicly announced on April 5, are considered to have no adverse effects on the fiscal balance. Tobacco prices are assumed to remain constant throughout 2012 amid tax adjustments to tobacco products in October 2011, while increasing in January 2013 as implied by the tax adjustments in October 2011. Furthermore, other tax adjustments and administered prices are assumed to be consistent with the inflation targets and automatic pricing mechanisms. 7.2. Medium-Term Outlook Forecasts are based on the assumption that additional tightening will be delivered more frequently in the upcoming period, and consequently, 104 Inflation Report 2012-II Central Bank of the Republic of Turkey annualized loan growth rate will hover around 14 percent. Accordingly, inflation is expected to be, with 70 percent probability, between 5.3 and 7.7 percent with a mid-point of 6.5 percent at the end of 2012, and between 3.4 and 7.0 percent with a mid-point of 5.2 percent at the end of 2013. Inflation is expected to stabilize around 5 percent in the medium term (Chart 7.2.1). Chart 7.2.1. 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 0315 1214 0914 0614 0314 1213 0913 0613 0313 1212 0912 0612 0312 1211 0911 0611 0311 -4 * Shaded region indicates the 70 percent confidence interval for the forecast. Revised projections signal a notable fall in inflation in the last quarter. Amid soaring energy prices, inflation is envisioned to remain high in the short term with secondary effects remaining limited on the back of mild demand conditions. In the last quarter of 2012, inflation is expected to fall sharply to 6.5 percent by year-end, as the base effects owing to tax adjustments in administered prices fade away in the last quarter. Major factors affecting inflation moved largely in tandem with the January Inflation Report projections. However, the short-term inflation is envisioned to surpass the previous projections amid soaring energy prices in April (Chart 7.2.2). At its meeting on April 18, the MPC underlined that temporarily rising inflation would not be allowed to deteriorate inflation outlook and additional tightening would be delivered more frequently in the upcoming period. In view of the CBRT’s aggressive policy reaction, inflation assumption for end-2012 is kept unchanged in the inter-reporting period. Output gap forecasts based on the above assumptions are given in Chart 7.2.1. Given the latest data releases, output gap forecasts for the first quarter of 2012 have been slightly revised downwards. Also considering the tighter monetary policy stance, forecasts are based on the outlook assuming Inflation Report 2012-II 105 Central Bank of the Republic of Turkey that aggregate demand conditions will provide higher support to disinflation throughout 2012 (Chart 7.2.3). Comparison of January 2012 and April 2012 Inflation Report Forecasts Chart 7.2.2. Chart 7.2.3. Inflation Forecast Output Gap Forecast 11 10 0.5 April 2012 Actual 0.0 9 8 -0.5 7 -1.0 6 January 2012 April 2012 5 -1.5 January 2012 4 3 -2.0 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2010 2011 2012 2013 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2014 2010 Source: TurkStat, CBRT. 2011 2012 2013 2014 Source: CBRT. Unpredictable fluctuations in the prices of items that are beyond the control of the monetary policy, such as unprocessed food, tobacco and alcoholic beverages, are among major factors causing deviations in inflation forecasts. Hence, inflation forecasts excluding unprocessed food, tobacco and alcoholic beverages are publicly announced. Forecasts are based on the assumption that year-end unprocessed food inflation will be 8.5 percent and the prices of tobacco and alcoholic beverages will remain constant throughout the year. Hence, inflation forecasts excluding unprocessed food, tobacco and alcoholic beverages are presented in Chart 7.2.4. The inflation indicator, as measured above, is expected to fall gradually by the third quarter of 2012, and stabilize around 5 percent in the medium term. Chart 7.2.4. Inflation Forecast Excluding Unprocessed Food, Tobacco and Alcoholic Beverages Forecast Range* Output Gap 12 10 Percent 8 6 4 2 0 -2 0315 1214 0914 0614 0314 1213 0913 0613 0313 1212 0912 0612 0312 1211 0911 0611 0311 -4 * Shaded region indicates the 70 percent confidence interval for the forecast. 106 Inflation Report 2012-II Central Bank of the Republic of Turkey 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 the CBRT’s Forecasts with Inflation Expectations It is critical that economic agents, being aware of the temporary factors, should focus on the underlying medium-term inflation, 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. Accordingly, year-end inflation expectations as well as 12-month and 24-month ahead inflation expectations of the Survey of Expectations’ respondents are slightly above our baseline scenario forecasts (Table 7.2.1). Table 7.2.1. CBRT Inflation Forecasts and Expectations * CBRT Forecast CBRT Survey of Expectations* Inflation Target** 2012 Year-end 6.46 7.61 5.0 12-Month Ahead 6.14 6.96 5.0 24-Month Ahead 4.95 6.40 5.0 April 2012, second survey period results. ** Calculated by linear interpolation of year-end inflation targets for 2012- 2014. Source: CBRT. 7.3. Risks and Monetary Policy The high course of inflation and the recent deterioration in the short-term inflation expectations pose risk on the pricing behavior. Due to sharp price increases in the third quarter of 2011, inflation is envisioned to remain remarkably above the target until the last quarter of 2012, requiring a close monitoring of the pricing behavior. Although the delivered monetary tightening of the CBRT since October, besides mild domestic demand conditions have alleviated upside risks on inflation by containing secondary effects, inflation expectations will be cautiously and carefully monitored in the upcoming period, and necessary measures will be taken to keep medium-term inflation outlook consistent with the target. Ongoing uncertainties regarding global economy require further flexibility in monetary policy against volatility in capital flows. Notwithstanding the Inflation Report 2012-II 107 Central Bank of the Republic of Turkey alleviating concerns regarding the Euro Area sovereign debt problem in the first quarter of 2011, the unfavorable course of growth as well as the currently elevated borrowing costs across the region keep debt sustainability debates alive. Moreover, ongoing deleveraging in the Euro Area banking system feeds into financial fragilities, increasing the probability of a renewed deterioration in the risk appetite. On the other hand, the risk appetite may recover faster than expected, should problems regarding the global economy are solved sooner and more decisively than envisaged. Overall, the possibility that global capital flows will continue to be volatile in the forthcoming period confirms the appropriateness of the existing flexibility in the monetary policy framework. Hence, the CBRT will continue to monitor global developments closely, and take the required measures promptly. Another risk factor in the forthcoming period is the uncertainty regarding oil prices. Although the weak course of the global economy largely contains the upside risks to commodity prices, ongoing supply-side problems pose upside risk to energy prices in the short term. Should such a risk materialize, the CBRT will not react to temporary price movements, yet will not tolerate any deterioration in expectations. Unprocessed food prices pose downside risk to inflation outlook over 2012. The probability for a downward correction in unprocessed food prices after hitting the recent-high in end-2011, besides the favorable precipitation during the recent months, increase the likelihood of a better-than-envisioned course for unprocessed food prices throughout the year. Inflation may reach the target faster than projected in the baseline scenario, should the food prices follow a more favorable course than expected. The CBRT monitors fiscal policy developments closely while formulating its monetary policy. The baseline scenario forecasts of the Report are based on the MTP framework, therefore assuming that fiscal discipline will be maintained. 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. Strengthening the structural reform agenda that would ensure the sustainability of the fiscal discipline and reduce the saving deficit will contribute to the relative improvement of Turkey’s sovereign risk, thereby supporting price stability and the financial stability. Making progress in this direction will also 108 Inflation Report 2012-II Central Bank of the Republic of Turkey provide room for monetary policy maneuver and support social welfare by keeping interest rates of long-term government securities permanently at low levels. In this respect, taking necessary steps towards implementation of the structural reforms envisaged by the MTP is of utmost importance. Inflation Report 2012-II 109 Central Bank of the Republic of Turkey Box Differentiating the Domestic and External Demand in Estimating the 7.1 Output Gap Output gap, the difference between current output and the non-inflationary potential output, is one of the frequently used indicators by central banks, also including the CBRT, to assess demand-side pressures on inflation. Designing monetary policy in the post-crisis period to include financial stability besides price stability created the need for alternative views and methods in implementing policy and performing the background analyses. In particular, domestic-demanddriven strong recovery in the Turkish economy caused mounting concerns over sustainability of the current account deficit, which is considered to jeopardize macroeconomic and financial stability in the medium term, thus requiring a special emphasis on demand components for designing the monetary policy. Accordingly, an extensive analysis focusing not only on output gap, but also on its main components is crucial for assessing the overheating of the economy in consideration of the inflation outlook. This Box, by utilizing a Bayesian methodology within a semi-structural model, provides a framework for estimating output gap as well as its main components for the Turkish economy. Model and the Methodology The analysis is built on a New-Keynesian small open economy model, which closely resembles Öğünç and Sarıkaya (2011) in specification and estimation, but differs from the above study by explicitly including behavioral equations for the domestic and the external demand. The equations of the model can be expressed as follows: 1 ̃ (1) ∗ ! 1 % ' 110 (' 1 ! (2) " % ( ' # $ (3) %& ) (4) *+̃ , (5) Inflation Report 2012-II Central Bank of the Republic of Turkey Equation (1) expresses domestic demand gap, d./ , as a function of its lagged value, its expected value for one-period ahead and the real interest rate, r/ ,. Equation (2) summarizes the behavior of the export demand gap,x/ , as a function of foreign output gap, y/∗ , and real exchange rate, q/ . Equation (3) shows that import demand gap, m/ , depends on the domestic demand gap and the export demand gap besides the real exchange rate. Equation (4) is the identity expressing output gap in terms of its main components, which are domestic demand gap, export demand gap and the import demand gap. Finally, equation (5) summarizes the behavior of inflation using a New-Keynesian Phillips curve, by also including real import prices,s/ ,in addition to output gap as the main marginal cost item. Model parameters for 2002Q1-2011Q4 are estimated using Bayesian techniques, and by including GDP, imports, exports, inflation rate, interest rates, foreign output gap, real effective exchange rate and real import prices in the estimation.1 Results The central estimate for the output gap and the uncertainty band computed by the distribution of the parameter estimates are presented in Chart 1.2 The estimation results display that output was well below its potential in the beginning of 2009, while output headed towards a strong recovery in the subsequent postcrisis period. The central estimates imply that output gap was non-inflationary in the aftermath of the crisis, thus indicating the absence of an overheating in the economy. Chart 1. Output Gap (Percent Deviation from the Potential Output) 10 5 0 -5 -10 Uncertanity Band Central Estimates -15 I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1 All series, except real interest rates, real exchange rates and real import prices, are seasonally adjusted. For a detailed discussion about the model, data set and the estimation results, see Alp, Öğünç and Sarıkaya (2012). The central estimate for the output gap is computed by using average values obtained from the estimated posterior distribution of the parameters. 2 Inflation Report 2012-II 111 Central Bank of the Republic of Turkey Estimates of the output gap components are shown in Chart 2. The results imply that the post-crisis recovery is mainly driven by domestic demand, while exports hovered below its potential for a prolonged period. Meanwhile, real appreciation of the Turkish lira amid strong recovery of the domestic demand explains lingering of imports above its potential. However, even the upper bound of the output gap estimates do not point to an overheating as of the third quarter of 2010, with no significant divergence between domestic demand and exports, and each individual component hovering below their potential. Chart 2. Output Gap Components (Percent Deviation from the Potential) Export Demand Gap Import Demand Gap Domestic Demand Gap 20 15 10 5 0 -5 -10 -15 -20 -25 -30 I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV 2002 On 2003 2004 2005 2006 2007 2008 2009 2010 2011 the other hand, this observation has changed significantly by the fourth quarter of 2010. Accordingly, estimation results indicate that output was close to its potential, domestic demand surpassed its potential in tandem with its ongoing strong course, while exports remained below their potential owing to global uncertainties and the weak external demand. In other words, the Turkish economy showed no signs of overheating in this period and registered growth despite the serious divergence between domestic and external demand. The finding on the divergence of the demand components as well as the estimation results indicate that high current account deficits, which were accompanied by high growth rates in the past, may not necessarily signal overheating at other times. In sum, the estimation results are consistent with the economic outlook underlying the monetary policy implementations as of the last quarter of 2010. Taking into account of the fact that the deterioration of the growth composition may jeopardize financial stability, the monetary policy aimed to drive the economy to a stable growth path by effectively utilizing multiple tools. In fact, the adopted policy measures lessened the divergence between domestic and external demand, and the economy has settled into a relatively stable growth path as of the second quarter of 2011. 112 Inflation Report 2012-II Central Bank of the Republic of Turkey REFERENCES Alp, H., F. Öğünç and Ç. Sarıkaya, 2012, Para Politikası ve Çıktı Açığının Kompozisyonu (in Turkish), CBRT Economic Notes No. 12/07. Öğünç, F. and Ç. Sarıkaya, 2011, Görünmez Ama Hissedilmez Değil: Türkiye'de Çıktı Açığı (in Turkish), Central Bank Review 11(2): 15-28. Inflation Report 2012-II 113 Central Bank of the Republic of Turkey Box 7.2 Inflation Expectations and the Communication In the last quarter of 2011, inflation soared rapidly amid the cumulative effects of the import prices and the exchange rate, in addition to tax adjustments to tobacco products and elevated increases to unprocessed food prices. Even though these developments were largely temporary, the CBRT has adopted a cautious stance in order to prevent medium-term expectations to be adversely affected from past inflation, and to worsen inflation outlook. Accordingly, by following an active communication policy, the CBRT has announced in detail the underlying reasons for the surge in inflation through presentations, reports and papers. Furthermore, closely monitoring the course of short-term inflation, the CBRT has informed the public against sharp moves. More importantly, a strong monetary tightening has been delivered as of October 2011, placing a special emphasis on price stability in this period. This Box questions the effectiveness of the CBRT’s strategy in controlling inflation expectations. The Role of Past Inflation in Expectations Formation Controlling expectations is critical for preventing deterioration of the pricing behavior amid the temporarily rising inflation. The significant and time-varying weight given to past inflation in forming expectations is documented by Başkaya, Kara and Mutluer (2008) for the Turkish economy. Analyzing the sensitivity of inflation expectations to inflation realizations during the rapidly soaring inflation period of the last quarter of 2011 will provide significant information about the effectiveness of the communication policy, as well as the possible changes in the pricing behavior. 12 and 24-month ahead inflation expectations remained stable, notwithstanding the surge in inflation as of the last quarter of 2011 (Chart 1). The course of expectations in this period when compared to previous periods of high inflation rates indicates significant difference with respect to the formation of expectations. In other words, inflation expectations deteriorated notably following the rapid surge in inflation during 2006 and 2008, while medium-term expectations remained quite stable subsequent to soaring of inflation by end-2011. The absence of deterioration in expectations given the 4.3 percentage point increase in inflation within 3 months brings about the question of whether the sensitivity of expectations to inflation realizations has lessened. A finding on the lower sensitivity will support the assertion that the CBRT’s communication policy as well as the monetary policy are effective. 114 Inflation Report 2012-II Central Bank of the Republic of Turkey Chart 1. Inflation Realizations, Expectations, Targets and Forecasts* 12-Month Ahead 24-Month Ahead 12-Month Ahead Inflation Expectation 12-Month Ahead Inflation Target Past Inflation 24-Month Ahead Inflation Expectation 24-Month Ahead Inflation Target Past Inflation 0 0 0 0412 2 0 1011 2 0411 2 1010 4 2 0410 4 0412 16 1009 4 0409 6 4 1008 6 0408 6 1007 8 6 0407 8 1006 8 0406 10 8 1011 10 0411 10 1010 12 10 0410 12 1009 12 0409 14 12 1008 14 0408 14 1007 14 0407 16 1006 16 0406 16 * Inflation expectations are the average of the first and the second survey period results of the CBRT’s Survey of Expectations. Monthly inflation target series are computed by the linear interpolation of the year-end inflation targets. The year-end inflation target was kept constant despite the upward revision in June 2008, while inflation targets for end 2009 and 2010 were revised from 4 percent to 7.5 percent and 6.5 percent, respectively. Accordingly, 12-month ahead inflation targets for the June-December 2008 period was taken as 7.5 percent, whereas linearly interpolated values using the revised inflation target figures were utilized for the subsequent period. For the 24-month ahead inflation targets, linearly interpolated values using the revised inflation targets are used. Source: TurkStat, CBRT. Empirical Findings This section is based on findings by Başkaya, Gülşen and Kara (2012), which replicates Başkaya, Kara and Mutluer (2008) by using revised data, and analyzes the effects of the recent inflation realizations on expectations formation. The model seeks to assess the dependence of inflation expectations on inflation targets and other control variables, such as the change in exchange rates, risk premium, industrial production index and the changes in oil prices '8: , 9 ; μ8 ' =, ' The dependent variable '8: , 9 > 1 @ 12, 24. 9 is the k-month ahead inflation expectation of the CBRT’s Survey of Expectations respondent i at time t, rate of the previous month, ' =, Ɛ8 ' is the annual inflation 3 9 is the k-month ahead inflation target. represents the weight assigned to past inflation in expectations formation. Monitoring the course of this parameter over time may reveal significant information regarding how the dependence of expectations on inflation realizations changes over time. Accordingly, the above model is computed over a rolling window of 18 months (Chart 2). 3 Monthly inflation targets are linearly interpolated by using year-end inflation targets. Inflation Report 2012-II 115 Central Bank of the Republic of Turkey The results indicate a notable decline in the sensitivity of both 12-month and 24month ahead inflation expectations to inflation realizations during 2011 (Chart 2). Despite an edging up in the last quarter of 2011, the sensitivity is still low compared to previous periods. Chart 2. The Sensitivity of Inflation Expectations to Inflation Realizations (18-Month Rolling Window) 1110-0412 1110-0412 0610-1111 0110-0611 0809-0111 0309-0810 1008-0310 0508-1009 1207-0509 0707-1208 0207-0708 0906-0208 0 -0.1 0406-0907 0 -0.1 0610-1111 0.1 0110-0611 0.2 0.1 0809-0111 0.2 0309-0810 0.3 1008-0310 0.4 0.3 0508-1009 0.4 1207-0509 0.5 0707-1208 0.6 0.5 0207-0708 0.6 0906-0208 24-Month Ahead 0406-0907 12-Month Ahead * Dotted lines show the 95 percent confidence interval. Conclusion In sum, the conducted analyses demonstrate that inflation expectations are relatively less sensitive to inflation realizations, notwithstanding the sharp increase in inflation during 2011. This finding reveals that the CBRT was able to convince the public about the temporary nature of the surge in inflation, and proves the effectiveness of the CBRT’s communication policy with a focus on medium-term inflation outlook. However, both the 12-month as well as the 24-month ahead inflation expectations hovering above inflation target points to the need to make significant progress towards achieving price stability. REFERENCES Başkaya, Y. S., E. Gülşen and H. Kara H., 2012, İletişim Politikası ve Enflasyon Beklentileri (in Turkish), CBRT Economic Notes, forthcoming. Başkaya, Y. S., H. Kara and D. Mutluer-Kurul, 2008, Inflation Expectations and Monetary Policy in Turkey, CBRT Working Paper No. 2008/01. 116 Inflation Report 2012-II Central Bank of the Republic of Turkey Charts 1. OVERVIEW Chart 1.1.1. Chart 1.1.2. Chart 1.1.3. Chart 1.1.4. Chart 1.1.5. Chart 1.1.6. Chart 1.1.7. Chart 1.1.8. Chart 1.2.1. Chart 1.2.2. Chart 1.2.3. Chart 1.2.4. Chart 1.2.5. Chart 1.3.1. TL and Emerging Market Currencies Consumer Loan Growth Current Account Balance Contribution of Net External Demand to Annual GDP Growth CBRT Policy Rate and the Interest Rate Corridor CBRT Funding and the Average Funding Rate Yield Curve Consumer Loan Rates January 2012 Inflation Forecasts and Realizations Prices of Core Goods and Services Core Inflation Indicators SCA-H and SCA-I GDP and the Final Domestic Demand Revisions to Oil and Import Price Assumptions Inflation and Output Gap Forecasts 2 2 2 2 3 3 4 4 5 5 5 6 7 8 2. INTERNATIONAL ECONOMIC DEVELOPMENTS Chart 2.1.1. Global Production 13 Chart 2.1.2. Global Growth Rates 13 Chart 2.1.3. Growth Rates in Selected Advanced Economies 13 Chart 2.1.4. Growth Rates in Emerging Economies by Regions 13 Chart 2.1.5. Real Estate Prices in the U.S. 14 Chart 2.1.6. PMI Indices in the U.S. 14 Chart 2.1.7. PMI Indices in the Euro Area 15 Chart 2.1.8. Trade Balance 15 Chart 2.1.9. Property Sales in China 15 Chart 2.1.10. JP Morgan Global PMI Indices 16 Chart 2.1.11. Global Production Indices 16 Chart 2.2.1. S&P Goldman Sachs Commodity Prices Indices 17 Chart 2.2.2. Crude oil (Brent) Prices 17 Chart 2.2.3. OECD Crude Oil Inventories 18 Chart 2.2.4. Oil Prices 18 Chart 2.3.1. CPI Inflation in Advanced and Emerging Economies 19 Chart 2.3.2. Core Inflation in Advanced and Emerging Economies 19 Chart 2.3.3. Inflation Compensation in the U.S. and the Euro Area 20 Chart 2.4.1. Global Risk Appetite 21 Chart 2.4.2. Global Stock Markets 22 Chart 2.4.3. Emerging Market Currencies 22 Chart 2.4.4. 3-month TED and OIS Spreads 23 Chart 2.4.5. Euro/USD Currency Swap Rate 23 Chart 2.4.6. ITraxx Europe Senior Financials Index 23 Chart 2.4.7. Lending Survey in the Euro Area 24 Chart 2.4.8. Lending Survey in the U.S. 24 Chart 2.4.9. Outstanding Commercial Paper in the U.S. 25 Chart 2.4.10. Asset-Backed Securities Market in the U.S. 25 Chart 2.5.1. Portfolio Flows to Emerging Economies 26 Chart 2.6.1. Policy Rate Changes in Advanced Economies from Jan. 2010 to Apr. 2012 27 Chart 2.6.2. Policy Rates in Advanced Economies 27 Chart 2.6.3. Expected Policy Rates in Advanced Economies 27 Chart 2.6.4. Policy Rate Changes in Emerging Economies from Jan. 2010 to Apr. 2012 28 Chart 2.6.5. Policy Rates in Inflation-Targeting Emerging Economies 28 Chart 2.6.6. Expected Policy Rates in Emerging Economies 29 3. INFLATION DEVELOPMENTS Chart 3.1.1. CPI by Subcategories 34 Chart 3.1.2. Contribution to Annual CPI Inflation 34 Inflation Report 2012-II 117 Central Bank of the Republic of Turkey Chart 3.1.3. Unprocessed Food Prices 34 Chart 3.1.4. Fresh Fruit and Vegetable Prices and the CPI 34 Chart 3.1.5. Food Prices 35 Chart 3.1.6. Selected Processed Food Prices 35 Chart 3.1.7. Energy Prices 36 Chart 3.1.8. Energy and TL-Denominated Oil Prices 36 Chart 3.1.9. Prices of Core Goods 37 Chart 3.1.10. Prices of Core Goods 37 Chart 3.1.11. Prices of Services by Subcategories 38 Chart 3.1.12. Prices of Services by Subcategories 38 Chart 3.1.13. Prices of Services 38 Chart 3.1.14. Diffusion Index for Services Prices 38 Chart 3.1.15. Core Inflation Indicators SCA-H and SCA-I 39 Chart 3.1.16. Core Inflation Indicators SCA-H and SCA-I 39 Chart 3.1.17. CPI and SCA-H Diffusion Indices 39 Chart 3.1.18. Core Inflation Indicators SATRIM and FCORE 39 Chart 3.1.19. Agricultural Prices 40 Chart 3.1.20. Manufacturing Industry and PMI Output Prices 40 Chart 3.1.21. Import Prices in USD and TL 41 Chart 3.2.1. 12- and 24-Month Ahead CPI Expectations 42 Chart 3.2.2. Inflation Expectations Curve 42 Chart 3.2.3. Distribution of 12-Month Ahead Inflation Expectations 42 Chart 3.2.4. Distribution of 24-Month Ahead Inflation Expectations 42 4. SUPPLY AND DEMAND DEVELOPMENTS Chart 4.1.1. GDP and the Final Domestic Demand 45 Chart 4.1.2. Production and Import Quantity Indices of Consumption Goods 45 Chart 4.1.3. Domestic Sales of Automobiles and White Goods 45 Chart 4.1.4. Consumer Confidence 46 Chart 4.1.5. Weekly Consumer Loans 46 Chart 4.1.6. Production and Import Quantity Indices of Capital Goods 46 Chart 4.1.7. Domestic Sales of Commercial Vehicles 46 Chart 4.1.8. Final Domestic Demand 47 Chart 4.1.9. Production of Mineral Materials and Private Sector Construction Investment 47 Chart 4.1.10. 3-Month Ahead Expectations for Orders 47 Chart 4.1.11. Leading Indicators Index 47 Chart 4.2.1. Contribution of Net External Demand to Annual GDP Growth 48 Chart 4.2.2. Exports and Imports of Goods and Services 48 Chart 4.2.3. Export Quantity Index 49 Chart 4.2.4. Global and Regional Imports 49 Chart 4.2.5. TL and Emerging Market Currencies and the Real Exchange Rate 50 Chart 4.2.6. Export and GDP-Weighted Global Production Indices 50 Chart 4.2.7. Import Quantity Indices 51 Chart 4.2.8. Import Quantity Indices by Subcategories 51 Chart 4.2.9. Terms of Trade 52 Chart 4.2.10. Current Account Balance 52 Chart 4.3.1. Farm and Non-Farm Employment 52 Chart 4.3.2. Unemployment and Labor Force Participation 52 Chart 4.3.3. Employment in Services and Construction Sectors 54 Chart 4.3.4. Employment, Value Added and Production of Mineral Materials in the Construction Sector 54 Chart 4.3.5. Industrial Employment and Production 54 Chart 4.3.6. Manufacturing Industry Employment and PMI Employment 54 Chart 4.3.7. Household Spending and Real Wage Payments 55 Chart 4.3.8. Non-Farm Hourly Labor Cost 55 Chart 4.3.9. Real Unit Wages 56 Chart 4.3.10. Job Opportunities Index and Non-Farm Employment/Labor Force 56 Chart 4.3.11. Non-Farm Value Added and Employment 56 118 Inflation Report 2012-II Central Bank of the Republic of Turkey 5. FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION Chart 5.1.1. Volatility Index 71 Chart 5.1.2. EMBI 72 Chart 5.1.3. Relative EMBI 72 Chart 5.1.4. Net Portfolio Flows to Emerging Economies 72 Chart 5.1.5. Net Portfolio Flows of Non-Residents 72 Chart 5.1.6. CBRT Policy Rate and the Interest Rate Corridor 73 Chart 5.1.7. CBRT Funding and the Average Funding Rate 73 Chart 5.1.8. Market Liquidity 74 Chart 5.1.9. Changes in 2-year Market Rates in Q1 75 Chart 5.1.10. Yields on GDBS 75 Chart 5.1.11. Inflation Expectations 75 Chart 5.1.12. Forward Inflation Compensation 75 Chart 5.1.13. Yield Curve 76 Chart 5.1.14. Interest Rate Spread 76 Chart 5.1.15. 2-Year Real Interest Rates for Turkey 76 Chart 5.1.16. 2-Year Real Interest Rates 76 Chart 5.1.17. TL and Emerging Market Currencies 77 Chart 5.1.18. CBRT Reserves and FX Sales 77 Chart 5.1.19. Implied Volatility of Exchange Rates 77 Chart 5.1.20. Implied Volatility of Exchange Rates 77 Chart 5.1.21. Balance Sheet Decomposition of M3 Growth 78 Chart 5.1.22. Currency in Circulation and Current Consumption Spending 79 Chart 5.2.1 Growth Rate of Real Sector Loans 79 Chart 5.2.2 External Borrowing of Firms 79 Chart 5.2.3 Growth Rates of Business and Consumer Loans 80 Chart 5.2.4 Consumer Loan Growth 80 Chart 5.2.5 Weekly Growth Rates of Consumer Loans 81 Chart 5.2.6 Consumer Loan Rates 81 Chart 5.2.7 Business Loan Growth 81 Chart 5.2.8 Growth Rates of TL and FX Business Loans 81 Chart 5.2.9 Business Loan Growth Rates by Scale 82 Chart 5.2.10 Weekly Growth of Past-Due Loans 82 Chart 5.2.11 TL Business Loan Rate and the Average Funding Rate 82 Chart 5.2.12 TL Business Loan Rates 82 Chart 5.2.13 Yield Curve on TL Deposits 83 Chart 5.2.14 TL Deposit and the Average Funding Rate 83 Chart 5.2.15 FX Business Loan Rates 83 6. PUBLIC FINANCE Chart 6.1. Chart 6.1.1. Chart 6.1.2. Chart 6.1.3. Chart 6.1.4. Chart 6.2.1. Chart 6.2.2. Chart 6.2.3. Chart 6.2.4. Chart 6.2.5. Chart 6.2.6. Central Government Budget Deficit and EU-Defined Public Debt Stock Central Government Budget Balance Central Government Budget Revenues and Primary Expenditure Real Tax Revenues Real VAT and SCT Revenues Public Debt Stock Indicators Composition of the Central Government Debt Stock Average Maturity of Domestic Cash Borrowing and Term-to-Maturity of the Domestic Debt Stock Borrowing By Bond Issues Total Domestic Debt Rollover Ratio Average Maturity of Borrowing and Interest Rates at Discount Auctions 91 93 93 94 95 95 95 96 96 96 96 7. MEDIUM-TERM PROJECTIONS Chart 7.1.1. Chart 7.1.2. Chart 7.1.3. Chart 7.2.1. Chart 7.2.2. Chart 7.2.3. Chart 7.2.4. Yield Curve Export-Weighted Global Economic Activity Index Revisions to Oil and Import Price Assumptions Inflation and Output Gap Forecasts Inflation Forecast Output Gap Forecast Inflation Forecast Excluding Unprocessed Food, Tobacco and Alcoholic Beverages Inflation Report 2012-II 102 103 104 105 106 106 106 119 Central Bank of the Republic of Turkey Tables 2. INTERNATIONAL ECONOMIC DEVELOPMENTS Table 2.1.1. Employment Indicators in the U.S. 14 Table 2.1.2. Growth Forecasts for end-2012 16 Table 2.2.1. Production, Consumption and Inventory Forecasts for Agricultural Commodities 19 Table 2.3.1. Inflation Forecasts for end-2012 20 Table 2.5.1. Regional Breakdown of Portfolio Flows to Emerging Economies 26 3. INFLATION DEVELOPMENTS Table 3.1.1. Prices of Goods and Service 36 Table 3.1.2. Prices of Core Goods 37 Table 3.1.3. PPI and Subcategories 41 6. PUBLIC FINANCE Table 6.1.1 Central Government Budget Aggregates 92 Table 6.1.2. Central Government Primary Expenditures 93 Table 6.1.3. Central Government General Budget Revenues 7. MEDIUM-TERM PROJECTIONS Table 7.1.1. Revisions to 2012 Assumptions 102 Table 7.2.1. CBRT Inflation Forecasts and Expectations 107 120 Inflation Report 2012-II Central Bank of the Republic of Turkey Boxes in Previous Inflation Reports 2012-I 2.1. December 9 Decisions and the Euro Area Debt Crisis 2.2. Possible Impacts of Soaring Public Spending in the MENA Region on Crude oil Prices 4.1.A Real-Time Business Cycle Indicator for Turkey 4.2. Recent Developments in the Demand Composition 4.3. A Sectoral Look at the Import Coverage Ratio of Exports 4.4. A Comparison of the Recent Unemployment Rates to 2005-2007 Period by Sectoral 5.1. 5.2. 7.1. 7.2. Employment Dynamics The Liquidity Management in the Recent Period and Its Consequences Changing Role of the Monetary Policy in the Aftermath of the Global Crisis Sources of Revisions to end-2011 Forecasts The Role of Base Effects on the CPI Inflation in 2012 2011-IV 2.1. Balance Sheet Recession: A Comparison between Japan and the U.S. 2.2. Debt Crisis and Sustainability of Public Debt in the Euro Area 2.3. Real Effective Exchange Rate Indicators for Turkey 3.1. Taxation of Tobacco Products and Its Effect on Prices 3.2.Updated Estimates of Exchange Rate and Import Price Pass-Through 3.3. Filtering Short-Term Fluctuations in Price Series 4.1.The Relation Between Business Cycles in Turkey and the Global Economy 4.2. Recent Developments in Investment 5.1. Use of Inflation Compensation in Monetary Policy Analyses 2011-III 2.1. Portfolio Flows to Emerging Economies 3.1. Findings on Price Rigidity Based on Micro Data 3.2. The Effect of Inflation Surprises on Expectations 4.1. Prices of Investment Goods and Investment Spending 4.2. Data on Wages and Earnings 4.3. What the Economic Clock Says About Current Economic Activity 4.4. Fixed Capital Growth Loss during the Recent Crises and Its Impact on the Potential GDP 5.1. Possible Effects of the Amendments to BRSA Regulations 5.2. Credit Rating Upgrade to “Investment Grade” 5.3. Monetary Analysis at the CBRT 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 Inflation Report 2012-II 121 Central Bank of the Republic of Turkey 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 Inflatİon 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. Financial Stress and Economic Activity 5.1. Banks' Loans Tendency Survey and Changes in Loans 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 122 Inflation Report 2012-II Central Bank of the Republic of Turkey 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 fter May 3.2. Chinese Effect on Domestic Prices 6.1. Treasury’s 2007 Financing Program 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 Inflation Report 2012-II 123 Central Bank of the Republic of Turkey Abbreviations AMA Automotive Manufacturers Association bbl BoE barrel BoJ BRSA Bank of Japan CBRT CPI Central Bank of the Republic of Turkey ECB EMBI European Central Bank EPFR EU Emerging Portfolio Fund Research Fed FHFA Federal Reserve Bank FX GDBS Foreign Exchange GDP IMF Gross Domestic Product 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 SME Special Consumption Tax S&P SSI Standard and Poor’s TL TurkStat Turkish Lira U.K. U.S. U.S.A. United Kingdom USD VAT United States Dollar VIX Volatility Index 124 Bank of England Banking Regulation and Supervision Agency Consumer Price Index Emerging Markets Bond Index European Union Federal Housing Finance Agency Government Domestic Borrowing Securities International Monetary Fund Monetary Policy Committee Medium-Term Program Overnight Purchasing Managers Index Special CPI Aggregate Small and Medium-Sized Enterprises Social Security Institution Turkish Statistical Institute United States United States of America Value Added Tax Inflation Report 2012-II Central Bank of the Republic of Turkey 2012 Calendar of MPC Meetings, Inflation Reports and Financial Stability Reports Monetary Policy Meeting Inflation Report (in Turkish) January 24, 2012 31 January 2012 (Tuesday) (Tuesday) Financial Stability Report (in Turkish) February 21, 2012 (Tuesday) 27 Mart 2012 (Tuesday) April 18, 2012 April 26, 2012 (Wednesday) (Thursday) 29 Mayıs 2012 May 31, 2012 (Tuesday) (Thursday) 21 Haziran 2012 (Thursday) July 19, 2012 July 26, 2012 (Thursday) (Thursday) August 16, 2012 (Thursday) September 18, 2012 (Tuesday) October 18, 2012 October 24, 2012 (Thursday) (Wednesday) November 20, 2012 November 29, 2012 (Tuesday) (Thursday) December 18, 2012 (Tuesday) Inflation Report 2012-II 125