Download 2014-III

2014-III
Contents
1.
2.
3.
4.
5.
6.
7.
OVERVIEW
1
1.1. Monetary Policy and Monetary Conditions
1
1.2. Macroeconomic Developments and Main Assumptions
4
1.3. Inflation and the Monetary Policy Outlook
8
1.4. Risks and the Monetary Policy
9
INTERNATIONAL ECONOMIC DEVELOPMENTS
11
2.1. Global Growth
11
2.2. Commodity Prices and Global Inflation
13
2.3. Financial Conditions, Risk Indicators and Capital Flows
15
2.4. Global Monetary Policy Developments
16
INFLATION DEVELOPMENTS
19
3.1. Core Inflation Outlook
20
3.2. Food, Energy and Alcohol-Tobacco Prices
23
3.3. Domestic Producer Prices
26
3.4. Expectations
27
SUPPLY AND DEMAND DEVELOPMENTS
33
4.1. Gross Domestic Product Developments and Domestic Demand
33
4.2. External Demand
36
4.3. Labor Market
39
FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION
49
5.1. Financial Markets
49
5.2. Credit Volume and Monetary Indicators
58
PUBLIC FINANCE
79
6.1. Budget Developments
79
6.2. Developments in the Public Debt Stock
82
MEDIUM-TERM FORECASTS
85
7.1. Current State, Short-Term Outlook and Assumptions
85
7.2. Medium-Term Outlook
87
Box 3.1. The Sensitivity of Inflation to Business Cycles in Turkey
29
Box 4.1. Seasonal Adjustment of GDP: Direct vs. Indirect Approach
42
Box 4.2. Real and Nominal Balancing of Turkey’s External Trade
45
Box 5.1. Credit Growth and the Current Account Balance
Box 5.2. The Relationship between Consumer and Commercial Loans
and the Current Account Deficit in Turkey
63
Box 5.3. The Relationship between the System’s Funding Need and TL Loans
70
Box 5.4. Firms’ Access to Credit in Turkey: A Survey-Based Analysis
74
BOXES
66
Central Bank of the Republic of Turkey
1. Overview
Following the protracted global uncertainty, financial volatilities subsided and liquidity
conditions improved in the second quarter of 2014. In this period, conditions for the global risk appetite
remained favorable while the sluggish course of capital flows to emerging economies reversed
(Chart 1.1). More recently, the Fed’s decision to continue with an accommodative policy for an
extended period of time and to lower its long-term interest rate projections, as well as the ECB‘s policy
rate cut and announcement of a new quantitative easing program have been the key factors
improving global liquidity conditions. This moderate global growth outlook and favorable conditions for
risk appetite are expected to continue to support capital flows into emerging economies over the
upcoming period.
The deteriorating risk sentiment towards Turkey shifted into reverse gear following the strong and
front-loaded monetary tightening in January and risk premium indicators recorded a notable
improvement in the second quarter due to reduced domestic and external uncertainty (Chart 1.2). In
the first half of the year, economic activity continued to expand moderately, while growth of net
exports contributed positively to economic growth. Thus, the current account deficit showed a marked
improvement. The effect of exchange rate developments on inflation began to decline by the second
quarter and underlying trend of inflation improved. These improvements in macroeconomic balances
are expected to continue into the second half of the year on the back of a tight monetary policy
stance, macroprudential measures and a recovering external demand.
Chart 1.1.
Chart 1.2.
Portfolio Flows to Emerging Economies
CDS for Emerging Economies and Turkey*
(4-Week Moving Average, Billion USD)
(Basis Points)
Equity Funds
Turkey
Emerging Economies
Selected Emerging Economies
200
200
-2
-2
175
175
-4
-4
150
150
-6
-6
125
125
-8
-8
100
100
Source: EPFR.
300
0113
0213
0313
0413
0513
0613
0713
0813
0913
1013
1113
1213
0114
0214
0314
0414
0514
0614
0714
0714
225
0
0414
225
0
0114
2
1013
250
2
0713
250
0413
4
0113
275
4
1012
275
0712
300
6
0412
8
6
0112
8
Bond Funds
* Emerging economies include Brazil, Czech Republic, Indonesia, South
Africa, Colombia, Hungary, Mexico, Poland, Romania and Chile. Selected
emerging economies are Brazil, Indonesia and South Africa.
Source: CBRT, Bloomberg.
1.1. Monetary Policy and Financial Conditions
Due to heightened domestic and external market uncertainties during late 2013 and early 2014,
Turkey’s risk premium indicators rose. Meanwhile, the Turkish lira diverged slightly from other emerging
market currencies by depreciating at a faster rate (Charts 1.2 and 1.1.5). In order to contain the
deterioration in inflation expectations and the pricing behavior and also to maintain macroeconomic
and financial stability, the CBRT delivered a strong and front-loaded monetary tightening at its interim
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
MPC meeting on January 28 (Chart 1.1.1). Moreover, the operational framework was simplified and the
CBRT funding was henceforth provided primarily from the one-week repo rate (Chart 1.1.2).
Since the publication of the April Inflation Report, conditions that necessitated the strong and
front-loaded monetary tightening of January 28 have improved to a large extent. This improvement is
due mostly to the reduced domestic and external uncertainty as well as to the Fed’s and ECB’s latest
decisions. In June, the Fed announced that it would continue with its low rate policy over the medium
run. Additionally, the FOMC members revised down their long-term interest rate projections from 4 to
3.75 percent. Meanwhile, the ECB set a negative borrowing rate and announced a new quantitative
easing program due in September. These developments helped global liquidity conditions to improve,
providing some push for capital flows into emerging markets. Moreover, in addition to improved
financial indicators, the deterioration in inflation during the first quarter stopped, leading to a notable
decline in non-food inflation in recent months.
Owing to the strong and front-loaded monetary tightening on January 28, the resulting
decrease in risk premiums, the improving global liquidity conditions, the slowing trend of inflation and
the waning cumulative effects of exchange rate depreciation on inflation, the CBRT recently decided
to deliver measured rate cuts. Firstly, in April, the late liquidity window lending rate was lowered from 15
to 13.5 percent. Then, the one-week repo rate was cut by 50, 75 and 50 basis points in May, June and
July, respectively. (Chart 1.1.1).
Chart 1.1.1.
Chart 1.1.2.
CBRT Rates and BIST O/N Repo Rates
CBRT Funding*
(Percent)
(2-Week Moving Average, Billion TL)
Interest Rate Corridor
CBRT Average Funding Rate
BIST O/N Rates
1-Week Repo Rate
Marginal Funding
O/N Funding
1-Week Repo
1-Month Repo
Reverse Repo at the BIST and IMM
Net OMO
15
60
13
13
50
50
11
11
40
40
9
9
30
30
7
7
20
20
5
5
10
10
3
3
0
0
1
1
-10
60
-10
0113
0213
0313
0413
0513
0613
0713
0813
0913
1013
1113
1213
0114
0214
0314
0414
0514
0614
0714
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
15
Source: BIST, CBRT.
Despite the rate cuts, the monetary stance remains tight. Long-term interest rates have recently
fallen on improved risk indicators and increased global liquidity. The spread between long-term rates
and the CBRT funding rate remains close to zero (Chart 1.1.3). Similarly, the spread between long-term
and short-term market rates is well below the average of past years (Chart 1.1.4 ). Currently at this
state, these indicators reflect a tight monetary policy stance.
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
Chart 1.1.3.
Chart 1.1.4.
Money Market and the CBRT Funding Rates
Interest Rate Spread*
(Percent)
(Percent)
12
5-Year Market Rate-CBRT Average Funding Rate
CBRT Average Funding Rate
3-Month Market Rate
5-Year Market Rate
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
Interim MPC Meeting
-1.0
-1.0
-1.5
-1.5
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
-0.5
* Spread between 4-year and 6-month yields derived from the ENS yield curve, 5day moving average.
Source: BIST.
Source: BIST, CBRT.
During increased global financial uncertainty from May 2013 to early 2014, Turkey, along with
other emerging economies, experienced marked currency depreciation and a surge in implied
exchange rate volatility. After the strong monetary tightening at end-January 2014, the risk sentiment
improved; the Turkish lira appreciated, thereby weakening the recent divergence of the Turkish lira
from the peer currencies; and the implied volatility declined. Due to decreased domestic and external
uncertainty, announcements of extended accommodative monetary policy from central banks in
advanced economies and the tight monetary policy stance, the Turkish lira volatility appears to have
recently fallen more, compared to similar countries (Charts 1.1.5 and 1.1.6).
Chart 1.1.5.
Chart 1.1.6.
TL and Emerging Market Currencies vs USD*
Implied FX Volatility*
(22.05.2013=1)
(1 month)
Turkey
Emerging Economies
Selected Emerging Economies
1.30
1.25
1.30
30
1.25
27
Emerging Economies with
Current Account Deficit
27
24
1.20
1.20
Interim MPC Meeting
30
24
Turkey
21
21
1.15
1.15
18
18
1.10
1.10
15
15
12
12
9
9
1.00
6
6
0.95
3
3
* Emerging economies include Brazil, Czech Republic, Indonesia, South Africa,
Colombia, Hungary, Mexico, Poland, Romania and Chile. Selected emerging
economies are Brazil, India, Indonesia and South Africa.
Source: CBRT, Bloomberg.
0714
0614
0514
0414
0314
0214
0114
1213
1113
1013
0913
0813
0714
0614
0514
0414
0314
0214
0114
1213
1113
1013
0913
0813
0713
0613
0513
0.95
0713
1.00
0613
1.05
0513
1.05
* Emerging economies with currency account deficit include Brazil, Czech
Republic, Indonesia, India, South Africa, Colombia, Hungary, Mexico,
Poland, Romania and Chile.
Source: CBRT, Bloomberg.
The banking sector’s funding costs decreased amid recent improvements in market conditions,
which passed to both consumer and commercial loan rates. Yet, lower loan rates notwithstanding, the
growth rates of consumer loans and credit card debts continued to hover significantly below the
average of previous years amid the adoption of macroprudential measures by the BRSA (Chart 1.1.7).
The growth rate of commercial loans displayed a slight slowdown in previous years, which, however, is
markedly limited compared to the deceleration in consumer loans (Chart 1.1.8). The fact that
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
consumer loan growth decreases to reasonable levels while commercial loan growth remains steady is
expected to support financial stability, the balancing process and the disinflation.
Chart 1.1.7.
Chart 1.1.8.
Consumer Loan Growth
Commercial Loan Growth
(Adjusted for Exchange Rate Effect, 13-Week Moving
Average, Annualized, Percent)
(Adjusted for Exchange Rate Effect, 13-Week Moving
Average, Annualized, Percent)
2014
2007-2013 Average
2007-2013 Average
2014
0
Jan
40
Dec
0
Oct
5
0
Nov
5
0
Sep
5
Jul
10
5
Aug
10
Jun
10
May
15
10
Apr
15
Mar
20
15
Feb
20
15
Dec
20
Oct
25
20
Nov
25
Sep
25
Jul
30
25
Aug
35
30
Jun
35
30
Apr
35
30
May
35
Mar
40
Jan
40
Feb
40
Source: CBRT.
In light of these developments, the FCI estimated by the CBRT for the second quarter of 2014
was in line with the forecast given in the April Inflation Report, with financial conditions becoming less
tight (Chart 1.1.9). More specifically, the recovery in capital flows and the stock market affects financial
conditions favorably (Chart 1.1.10).
Chart 1.1.9
Chart 1.1.10
Financial Conditions and Credit Growth
Financial Conditions Index and Contributions
FCI (standardized)
tightening
accommodative
Net Credit Use/GDP (percent, right axis)
2.0
14
1.5
12
1.0
2.0
Credit Rate
Benchmark Rate
Capital Inflows
Long-Term Interest Rate
Exhange Rate
Credit Standards
Stock Return
2.00
1.5
1.50
1.0
1.00
0.5
10
0.5
0.50
0.0
8
0.0
0.00
-0.5
-0.50
-1.0
-1.00
-1.5
-1.50
-2.0
-2.00
-2.5
-2.50
-0.5
-1.0
6
-1.5
4
-2.0
2
-2.5
-3.0
0
-3.0
123412341234123412341234123412
2007
2008
2009
2010
2011
2012
2013 14
-3.00
123412341234123412341234123412
2007
2008
2009
2010
2011
2012
2013 14
* For further details on measuring FCI, see the CBT Research Notes in Economics No. 12/31.
Source: CBRT.
1.2. Macroeconomic Developments and Main Assumptions
Inflation
Annual consumer inflation rose by 0.8 points quarter-on-quarter to 9.16 percent in the second
quarter of 2014, while inflation excluding unprocessed food and tobacco at 9.09 percent was
consistent with the April Inflation Report (Charts 1.2.1 and 1.2.2). This second-quarter rise in inflation was
mainly attributed to prices of food and core goods. Food prices, in particular, had the worst second
quarter in the history of the index due to supply shocks. In the core goods category, prices of durable
goods fell in this quarter but prices of sub-items, which is subject to the lagged effects of the exchange
rate depreciation remained on the rise. In the services category, the underlying trend was steady at its
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
relatively high level. The impact of the Turkish lira depreciation after the second half of 2013 on annual
inflation peaked in this quarter. Thus, the rise in the annual inflation of core inflation indicators halted.
Chart 1.2.1.
Chart 1.2.2.
April 2014 Inflation Forecasts and Realizations
April 2014 Inflation Forecasts and Realizations
Excluding Unprocessed Food and Tobacco
(Percent)
(Percent)
April 2014 Forecasts*
April 2014 Forecasts*
Actual Inflation
Actual Inflation
12
12
10
10
10
10
4
6
4
4
4
0614
6
0314
6
1213
8
0913
8
0614
0314
6
1213
8
0913
8
Percent
12
Percent
12
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: TurkStat, CBRT.
The uptrend in core inflation indicators slowed in the second quarter and diffusion indices
declined. In this period, USD-denominated import prices remained flat, while cost factors excluding
food products followed a moderate course on the back of the Turkish lira appreciation. Therefore,
indicators for both the underlying inflation and the pricing behavior improved from the first quarter.
The inflation outlook is expected to be governed mainly by the course of economic activity,
exchange rates and food prices. Consumer inflation is expected to trend downward in the upcoming
period. Both the partially improved pricing behavior and the moderate course of final domestic
demand will support the fall in consumer inflation. Moreover, inflation expectations are likely to remain
anchored due to the tight monetary policy stance.
The elevated level of food prices has recently been the main factor slowing down the decline in
inflation. Negative supply shocks and the exchange rate pass-through caused food prices to surge
significantly. In this context, the annual CPI inflation has been diverging notably from the annual nonfood CPI inflation since mid-2013 (Chart 1.2.3). This divergence is more significant considering the
seasonally adjusted inflation in recent months driven by supply-side factors (Chart 1.2.4). Thus, the
course of food prices, which essentially falls outside the domain of monetary policy, is likely to be
influential on the inflation outlook over the forthcoming period.
Recent realizations on domestic food prices diverged markedly from those on international food
prices. After climbing amid the first-quarter’s negative supply-side developments, international food
prices slumped to a one-and-a-half-year low. Domestic prices, on the other hand, rose on par with
international prices in the first quarter, but continued to climb in the second quarter although
international prices were markedly down (Charts 3.2.5 and 3.2.6). Many products whose prices are
rising domestically are subject to high external trade taxes. Therefore, an active external trade policy to
be imposed on certain agricultural products might be effective in curbing the upside risks on food
prices.
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
Chart 1.2.3.
Chart 1.2.4.
Food Prices and CPI
Food Prices and CPI
(Seasonally Adjusted, 3-Month Moving Average, Annualized)
CPI (excl. food)
CPI
7
6
6
8
6
6
4
4
2
2
0
0
1212
0614
0314
1213
0913
0613
0313
5
1212
5
10
8
0614
7
10
0214
8
12
1213
8
14
12
1013
9
16
14
0813
9
CPI
16
0613
10
0413
10
0213
CPI (excl. food)
0414
(Annual Percent Change)
Source: TurkStat, CBRT.
Supply and Demand
According to the GDP data of the first quarter of 2014, demand developments proved largely
consistent with the outlook presented in the April Inflation Report. Expenditures on durable goods and
the private sector machinery and equipment investments, which are relatively more sensitive to the
exchange rate, financing conditions and expectations posted a quarterly decline, while expenditures
on non-durable consumption goods and private sector construction investments recorded a quarteron-quarter increase. In this period, public expenditures remained on the increase and net exports
contributed significantly to growth. Thus, the GDP increased, while final domestic demand followed a
flat course (Chart 1.2.5).
Chart 1.2.5.
Chart 1.2.6.
GDP and Final Domestic Demand
Production, Export and Imports of Consumption
Goods*
(Seasonally Adjusted, Billion TL, 1998 Prices)
(2010=100)
Production
Exports
Imports (right axis)
Final Domestic Demand
32
32
30
30
Millions
GDP
140
130
120
130
110
120
28
100
28
90
110
26
80
26
100
24
24
22
22
70
60
90
50
12341234123412341234123412341
2007
2008
Source: TurkStat, CBRT.
2009
2010
2011
2012
2013 14
80
40
123412341234123412341234123412
2007
2008
2009
2010
2011
2012
2013 14
* Estimate for April and May.
Source: TurkStat, CBRT.
Second-quarter data on the expenditure side suggest a mild increase in private consumption,
private construction investments and public expenditures, but a sustained weak course in the private
sector machinery and equipment investments. The mild uptick in the production of consumption goods
driven by the high uptrend in exports continues, yet imports follow a rather flat course (Chart 1.2.6).
Export-driven production increase is apparent all over the economy. In fact, external trade has
witnessed a continuation of uptrend in exports excluding gold in contrast to the decline in imports
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
excluding gold for the last two quarters (Chart 1.2.7). Thus, external trade developments continue to
support growth and the current account balance has exhibited a notable improvement since the start
of the year (Chart 1.2.8). Accordingly, the current account deficit is expected to become apparently
narrower in the second quarter and economic activity is estimated to record a moderate increase.
Chart 1.2.7.
Chart 1.2.8.
Export and Import Quantity Indices
Current Account Balance
(Seasonally Adjusted 2010=100)
(12-Month Cumulative, Billion USD)
Current Account Balance
Current Account Balance (excl. gold)
Current Account Balance (excl. energy and gold)
20
20
Exports (excl. gold)
Imports (excl. gold)
140
140
130
130
120
120
110
110
10
10
0
0
-10
-10
-20
-20
-30
-30
2012
2013 14
* Estimate for June.
Source: TurkStat, CBRT.
0414
2011
1213
2010
0813
2009
0413
2008
1212
2007
0812
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 12*
0412
-90
70
1211
-80
-90
70
0811
-70
-80
80
0411
-60
-70
80
1210
-50
-60
0810
-50
0410
90
1209
-40
90
0809
-40
0409
100
1208
100
Source: CBRT.
Alleviation of domestic and external uncertainties, the quarter-on-quarter improvement in
consumer confidence in the second quarter and the global economic recovery are projected to
support the recovery in economic activity in the second half of the year. As a result of the tight
monetary policy stance coupled with macroprudential measures, the recovery is expected to be
gradual and mild. Accordingly, domestic demand conditions are expected to support disinflation and
the current account deficit is envisaged to improve further. Recent geopolitical developments, on the
other hand, may pose downside risks to growth and the balancing process directly due to the trade
channel as well as the oil price channel.
Energy, Import and Food Prices
In the second quarter of the year, oil prices remained slightly above the path presented in the
April Inflation Report, while import prices lagged behind projections (Chart 1.2.9). Nevertheless, the
average oil price assumption for 2014 was revised upwards, while exports were revised downwards
(Table 7.1.1). The current outlook suggests that the developments in oil and import prices largely
balance each other in the inflation outlook. Accordingly, year-end inflation forecasts were not subject
to any revision due to external prices. The assumption for year-end food price inflation is maintained at
9 percent (Table 7.1.1). However, food inflation hovers around remarkably high levels at the end of the
second quarter. An active external trade policy in agricultural products, the domestic prices of which
increased more notably than international prices, is assessed to curb the upside risks to food prices.
Inflation Report 2014-III
7
Central Bank of the Republic of Turkey
Chart 1.2.9. Revisions to Oil and Import Price Assumptions
Oil Prices (USD/bbl)
Import Prices (USD, 2010=100)
July 2014
July 2014
April 2014
April 2014
1214
0914
0614
0314
1213
1214
Source: Bloomberg, CBRT.
0913
100
0613
100
0313
90
1212
90
0912
105
0612
105
0312
100
1211
100
0914
110
0614
110
0314
110
1213
110
0913
115
0613
115
0313
120
1212
120
0912
120
0612
120
0312
130
1211
130
Source: CBRT, TurkStat.
Fiscal Policy and Tax Adjustments
Medium-term projections are based on the assumption that tax adjustments and administered
prices are consistent with the inflation targets and automatic pricing mechanisms. Thus, the end-2014
inflation forecast was not subject to any revision stemming from the fiscal policy. The medium-term
fiscal policy stance is based on the MTP projections covering the 2014-2016 period. Accordingly, it is
assumed that the cautious fiscal stance will be preserved and primary expenditures will be kept under
control.
1.3. Inflation and the Monetary Policy Outlook
Medium-term forecasts are based on the assumption that the tight monetary policy stance will
be maintained by keeping a flat yield curve until there is a significant improvement in the inflation
outlook and the improvement in the global liquidity conditions is sustained. A further assumption is that
the annual loan growth rate will stabilize around 15 percent by the end of 2014 on the back of the
macroprudential measures. Accordingly, inflation is expected to be, with 70 percent probability,
between 6.7 percent and 8.5 percent (with a mid-point of 7.6 percent) at end-2014 and between 3.3
percent and 6.7 percent (with a mid-point of 5 percent) at end-2015. Inflation is projected to stabilize
around 5 percent in the medium term(Chart 1.3.1).
Chart 1.3.1.
Inflation and Output Gap Forecasts
12
Forecast Range*
Uncertainty Band
Year-End Inflation Targets
Output Gap
10
Control
Horizon
0617
0317
1216
0916
0616
-4
0316
-4
1215
-2
0915
-2
0615
0
0315
2
0
1214
2
0914
4
0614
4
0314
6
1213
8
6
0913
8
0613
Percent
10
12
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: CBRT.
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
Due to high food prices and the lagged effects of exchange rate depreciation, annual inflation
is expected to considerably exceed the 5-percent target at the year-end. On the back of the mild
course of import prices, the gradual elimination of the lagged effects of the exchange rate and the
moderate course of private domestic demand conditions, inflation is envisaged to drop to 7.6 percent
at the year-end (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
Loan growth continues at reasonable levels in response to the tight monetary policy stance and
macroprudential measures. In the first half of the year, consumer loan growth fell well below its average
of recent years, while commercial loan growth was relatively more robust. This favorable growth
composition of loans both contribute to disinflation and support balancing by curbing final domestic
demand.
In line with these developments, final domestic demand displays a modest outlook. Meanwhile,
with the help of the recovery in external demand, exports contribute positively to economic growth.
Under the current outlook of demand components, aggregate demand conditions are estimated to
curb inflationary pressures and the current account deficit is expected to exhibit a significant
improvement in 2014. Recent geopolitical developments on the other hand, may pose downside risks
to growth and the balancing process directly due to the trade channel as well as the oil price channel.
In addition, a rise in oil prices may bear adverse effects on inflation.
The adverse impact of exchange rate developments since mid-2013 on annual inflation is
gradually tapering off. Indeed, the underlying trend of core inflation indicators has recently displayed a
decline amid the alleviation of inflationary pressures led by the exchange rate particularly on durable
goods. However, the high course of food prices due to supply-side developments has recently limited
the pace of decline in inflation. Should the year-end food inflation stay above the assumed level and
food prices remain high, consumer price inflation will exceed the figures presented in the Inflation
Report. Given the falling prices in foreign agricultural products in the second quarter, an active external
trade policy for these products is assessed to curb upside risks to food prices.
Inflation hovering above the target in the recent future necessitates close monitoring of the
negative effects on the pricing behavior. Accordingly, the CBRT will closely monitor inflation
expectations, pricing behavior and other factors that affect inflation, and maintain a tight monetary
policy stance by keeping a flat yield curve until there is a significant improvement in the inflation
outlook.
Recently, the Fed has stated that accommodative policies will be maintained for a long time
and lowered the long-term interest rate forecasts which had a positive effect on the markets. In
addition, the ECB reduced the policy rates and announced a new quantitative easing program,
boosting the global risk appetite. These developments led to expansionary effects on global liquidity
Inflation Report 2014-III
9
Central Bank of the Republic of Turkey
conditions and capital inflows towards emerging economies saw a recovery. The mild global growth
outlook and the favorable conditions for risk appetite are expected to further support capital flows to
emerging economies in the upcoming period. Accordingly, should capital inflows accelerate, the CBRT
may take steps to strengthen foreign exchange reserves.
The CBRT closely monitors developments on fiscal policy and tax adjustments with regard to their
effects on the inflation outlook. The baseline monetary policy stance is formulated under the
assumption that fiscal discipline will be maintained and there will be no unanticipated hikes on
administered prices in the forthcoming period. A revision of 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 structural reforms that will ensure the sustainability of the fiscal discipline and
reduce the savings deficit will support macroeconomic stability in the medium term. Steps taken in this
regard will also provide more room for maneuvering the monetary policy and improving social welfare
by keeping the interest rates of long-term government securities at low levels. In this respect,
implementing the structural reforms required by the MTP remains to be of utmost importance.
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2. International Economic Developments
The first quarter of 2014 was marked by an ongoing moderate growth of global economic
activity, but the rate of growth slowed quarter-on-quarter. This slowdown was mainly attributed to the
US economy that shrank sharply amid severe weather conditions and emerging economies whose
growth rates were down from the previous quarter. Data on the second quarter of the year suggest
that the slowdown across emerging economies will persist, but global economic activity will remain
robust largely due to advanced economies. In fact, leading indicators for the US economy, one of the
main drivers of the course of global economic activity, point to growth in the second quarter after the
sharp contraction in the first quarter.
The effects of the global economic recovery on commodity prices, albeit marginal, have been
observed since the second quarter. The upsurge in industrial metal prices during this period was largely
driven by the recovery of the Chinese economy, while, in the upcoming period, the course of
commodity prices will be determined by the global economic recovery as well as the upward pressure
on oil prices triggered by geopolitical risks. In line with the rise in commodity prices, inflation rates
increased slightly from the previous reporting period across both advanced and emerging economies.
Nevertheless, as inflation rates still hover mostly below targets and economic recovery is yet to reach
the desired level, monetary policies in both advanced and emerging economies were on the easing
side in the second quarter.
It is remarkable that global financial markets were generally filled with optimism in the second
quarter although there was no significant improvement in global economic activity. In this period, the
risk appetite was favorable and the downtrend in capital flows to emerging economies reversed.
Despite the limited recovery across emerging economies, the reduced downside risks on the global
growth outlook and the favorable course of the risk appetite will encourage more portfolio flows into
these economies over the upcoming period. The lower prospect for a sooner-than-expected
tightening in monetary policy by the Fed compared to the previous reporting period will also support
capital flows to emerging economies in the forthcoming period. All these developments suggest that
the global monetary policy that was unexpectedly loose in the second quarter will tighten a little in the
rest of the year. This tightening will become more significant in 2015.
2.1. Global Growth
The global economy continued to recover in the first quarter of 2014, but the rate of growth was
slower than that in the fourth quarter of 2013 (Chart 2.1.1). The first-quarter slowdown of global growth
was essentially driven by the weather-related contraction in the US economy. However, the favorable
growth outlook for the Euro Area, one of Turkey’s biggest export destinations, continued into the first
quarter of the year. The pace of growth in emerging economies, on the other hand, slowed quarteron-quarter in the first quarter (Chart 2.1.2).
Inflation Report 2014-III
11
Central Bank of the Republic of Turkey
Chart 2.1.1.
Chart 2.1.2.
Global Growth Rates*
Global Growth Rates*
(Annual Percent Change)
April (Export-Weighted)
July (Export-Weighted)
April (GDP-Weighted)
6
July (GDP-Weighted)
(Annual Percent Change)
Emerging Economies
Advanced Economies
6
4
4
2
2
0
0
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-2
-2
-4
-4
-4
-4
Actual
-6
-6
Forecast
12341234123412341234123412341234
2007 2008 2009 2010 2011 2012 2013 2014
-6
2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
-6
2008
2009
2010
2011
2012
2013 2014
* Weighted by each country’s share in Turkish exports and by each country’s share in global GDP for export-weighted growth and GDP-weighted growth,
respectively.
Source: Bloomberg, CBRT.
Second-quarter readings on global PMI suggest that the manufacturing industry was on a
negative growth path while the services sector was on a positive one, compared to the first quarter
(Chart 2.1.3). In this period, manufacturing PMI indices were down, especially in a large number of
emerging economies. Similarly, manufacturing PMI data for the Euro Area pointed to a quarter-onquarter decline in the second quarter. Yet, manufacturing PMI data for the US were more favorable in
this period. Combined with labor market data, these readings indicate that the US economy will
expand in the second quarter (Chart 2.1.4). In conclusion, the pace of growth in emerging economies
will continue to slow in the second quarter, while the Euro Area recovery may lose some momentum.
However, the global economic activity is expected to grow further in the second quarter mostly due to
advanced economies, particularly the US. The fact that capital flows to emerging economies were on
the rise during May and June is expected to have a positive effect on emerging economies and
therefore on the global economic activity in the upcoming period.
Chart 2.1.3.
Chart 2.1.4.
Markit Global PMI Indices
Manufacturing Industry PMI Indices
Services
Euro Area
Manufacturing
60
60
55
55
60
55
55
50
50
45
45
40
40
0314
1113
0713
0313
1112
0712
0312
1111
0711
0311
1110
0314
1113
0713
0313
1112
0712
0312
1111
0711
0311
1110
0710
45
0310
45
0710
50
0310
50
USA
60
Source: Markit.
In the July edition of Consensus Forecasts bulletins, end-2014 growth forecasts were revised
downwards for the US and the Euro Area and upwards for Japan and the UK compared with the
previous reporting period. Growth forecasts for emerging economies, on the other hand, were revised
downwards overall, except for China and India (Table 2.1.1). The duly-revised GDP and export-
12
Inflation Report 2014-III
Central Bank of the Republic of Turkey
weighted global manufacturing indices indicate that the global economy will continue to grow in the
rest of the year, but the pace of growth will be slightly below the level projected in the previous
reporting period (Chart 2.1.1).
Table 2.1.1.
Growth Forecasts for end-2014 and 2015 (Average Annual Percent Change)
July
April
2014
2015
2014
2015
World
Advanced Economies
USA
Euro Area
Germany
France
Italy
2.9
3.2
2.6
3.2
2.7
1.2
1.9
0.9
0.6
3.0
1.5
2.0
1.3
1.1
1.6
1.1
2.0
0.7
0.3
3.0
1.6
2.0
1.2
1.1
Spain
Greece
Japan
UK
Emerging Economies
Asia-Pacific
China
India
Latin America
Brazil
Eastern Europe
1.0
0.1
1.3
2.8
1.5
1.5
1.3
2.4
1.1
0.2
1.5
3.0
1.7
1.8
1.3
2.6
6.0
7.3
5.4
2.2
1.8
1.7
6.1
7.2
6.0
2.8
2.0
2.8
6.0
7.3
5.4
1.9
1.5*
1.5
6.1
7.2
6.2
2.7
1.8*
2.6
* As of June.
Source: Consensus Forecasts.
2.2. Commodity Prices and Global Inflation
In the second quarter of 2014, the headline commodity price index displayed a quarter-onquarter increase of 1.5 percent. In this period, energy, industrial metal and precious metal prices rose
by 3.5, 7.5 and 3.4 percent, respectively, while agricultural prices dropped by 14.5 percent
(Chart 2.2.1).
Chart 2.2.1.
Chart 2.2.2.
S&P Goldman Sachs Commodity Prices
Crude Oil (Brent) Prices*
(January 2009=100)
Headline
Industrial Metals
Agriculture
200
(USD/bbl)
Energy
Precious Metals
Futures (April 25)
Spot
Futures (July 18)
40
40
60
60
Source: Bloomberg.
0110
0510
0910
0111
0511
0911
0112
0512
0912
0113
0513
0913
0114
0514
0914
0115
0515
0915
80
0514
80
0114
80
0913
80
0513
100
0113
100
0912
120
0512
120
0112
120
0911
120
0511
160
0111
160
0910
140
0510
140
0110
200
* April 25 and July 18 denote the arithmetical average of the prices
quoted at futures contracts during April 1-25, 2014 and July 1-18, 2014,
respectively.
Source: Bloomberg.
The global economic recovery appears to have become influential on commodity prices, albeit
only marginally. In addition, concerns over oil supply, coupled with geopolitical risks, continue to put
upward pressure on oil prices. Expectations for Brent crude oil prices, standing at 113 USD as of the end
of the second quarter, have also increased from the previous reporting period (Chart 2.2.2). The
Inflation Report 2014-III
13
Central Bank of the Republic of Turkey
second-quarter rise in industrial metal prices is attributed to the favorable growth outlook for the
Chinese economy. Meanwhile, after the first-quarter increase, agricultural prices decreased
substantially in the second quarter amid the favorable course of production.
Compared with the previous reporting period, headline and core CPI inflation rates were up in
advanced economies, mostly on the back of Japan and the US. Emerging economies saw a similar
increase in their headline and core inflation rates, with core inflation showing a faster pace of increase
(Charts 2.2.3 and 2.2.4).
Chart 2.2.3.
CPI Inflation in Advanced and Emerging Economies
(Annual, Percent)
Chart 2.2.4.
Core Inflation in Advanced and Emerging
Economies
(Annual, Percent)
Emerging Economies
Emerging Economies
10
6
8
8
5
5
6
6
4
4
4
4
3
3
2
2
2
2
0
0
1
1
-2
-2
0
0
Source: Bloomberg, CBRT.
6
0314
0913
0313
0912
0312
0911
0311
0910
0310
0909
Advanced Economies
0309
0314
0913
0313
0912
0312
0911
0311
0910
0310
0909
0309
0908
Advanced Economies
0908
10
Source: Bloomberg, DataStream, CBRT.
End-2014 and end-2015 inflation forecasts were revised downwards for the Euro Area, the UK
and China and upwards for the US, Japan, Latin America and Eastern Europe (Table 2.2.1). Upside risks
on agricultural and oil prices and monetary easing policies across advanced economies continue to
pose a major risk to global inflation for the upcoming period.
Table 2.2.1.
Inflation Forecasts for end-2014 and 2015
(Average Annual Percent Change)
April
World
Advanced Economies
USA
Euro Area
Germany
France
Italy
Spain
Greece
Japan
UK
Emerging Economies
Asia-Pacific
China
India
Latin America
Brazil*
Eastern Europe
July
2014
3.0
2015
3.1
2014
3.2
2015
3.1
1.7
0.9
1.4
1.0
0.8
0.3
-0.9
1.9
2.6
1.9
1.3
1.8
1.3
1.1
1.0
-0.1
2.1
1.7
2.0
0.7
1.1
0.7
0.5
0.2
-0.9
1.7
2.7
2.1
1.2
1.8
1.1
0.9
0.8
-0.1
2.0
1.8
3.4
2.6
7.7
10.8
6.3
5.2
3.6
3
7.1
9.4
5.8
4.9
3.3
2.4
8.0
11.3
6.4**
5.4
3.5
2.9
6.9
10.0
6.0**
5.0
* December to December.
** As of June.
Source: Consensus Forecasts.
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
2.3. Financial Conditions, Risk Indicators and Capital Flows
In the second quarter, despite ongoing concerns over global growth, the reluctance of the Fed
to signal a rate hike any time soon and its downward revision to long-term interest rate forecasts and
the ECB’s new package of easing measures led to a recovery in the global risk appetite (Chart 2.3.1).
As for the Fed funds futures contracts, the expected date of the first Fed funds rate increase remains
unchanged but the expected size of the rate hike has decreased slightly (Chart 2.3.2). This was mostly
due to the 25 basis-point cut in the Fed’s long-term interest rate projections despite its barely changed
monetary policy rhetoric. Moreover, this decrease in policy rate projections caused the US Treasury
bond yields to fall slightly in the medium to long term.
Chart 2.3.1.
Chart 2.3.2.
Global Risk Appetite
Fed Funds Futures
(Percent)
Credit Suisse Risk Appetite Index
VIX (inverted, right axis)
6
10
July 18
April 26
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.0
-8
45
0714
0117
0.0
0716
40
0116
-6
0715
0.5
0115
0.5
0714
35
0114
-4
0713
30
0113
-2
0712
25
0112
0
0711
20
0111
2
0710
15
0110
4
Maturity
Source: Bloomberg, Credit Suisse.
Source: Bloomberg.
Although there was no significant improvement in the global growth outlook, financial markets
were upbeat in the second quarter. In this context, thanks to the accommodative monetary policies of
major central banks, stock markets continued to appreciate in the second quarter across both
advanced and emerging economies. Moreover, yields on borrowing bills and bonds in emerging
economies receded amid the waning emerging market risk sentiment and the return of capital flows to
emerging economies (Chart 2.3.3).
Chart 2.3.3.
Chart 2.3.4.
Regional EMBI Developments*
Weekly Portfolio Flows to Emerging Economies
(Billion USD)
-10
-10
-15
-15
0714
-5
0414
-5
0114
0
1013
0714
0114
0713
0113
0712
0112
0711
100
0111
100
0710
200
0110
200
0
0713
300
5
0413
300
5
0113
400
Bond Funds
10
1012
400
Equity Funds
10
0712
500
Asia
Latin America
500
0412
Global
Europe
0112
(5-year)
* EMBI indices denote the yield spread of the USD-denominated bills and
bonds of countries over US Treasury bills and bonds.
Source: Bloomberg.
Inflation Report 2014-III
Source: EPFR.
15
Central Bank of the Republic of Turkey
The ongoing downtrend in capital flows to emerging economies reversed in the second quarter.
Emerging economies, which experienced portfolio outflows as of May 2013 when the Fed first signaled
its exit from the quantitative easing program, have been witnessing significant inflows since April 2014
(Chart 2.3.4). This was owed to the moderate course of global economic activity and the favorable risk
appetite. Across portfolios, both equity and bond funds saw similar amounts of inflows.
Despite the slowing economic activity in emerging economies, the modest global growth
outlook and the favorable risk appetite are expected to encourage more portfolio flows into emerging
economies in the upcoming period. Yet, the likelihood of the Fed embarking on a sooner-thanexpected tightening with regard to its exit strategy from quantitative easing may pose a downside risk
to capital flows. Nevertheless, the ECB’s latest decisions are expected to affect capital flows in favor of
emerging economies.
2.4. Global Monetary Policy Developments
The slower-than-expected recovery in global economic activity caused a delay in the monetary
policy normalization process in the second quarter and gave rise to expectations that it would take a
longer time for policy rates to return to historical averages in advanced economies. The most
significant indicator of this development was, without doubt, the 10 basis-point cut in the ECB’s policy
rate in June. Moreover, Sveriges Riksbank also reduced its policy rate by 50 basis points in July
(Chart 2.4.1). On the emerging economies front, the tightening bias that was prevalent in the previous
reporting period particularly against the fluctuations in capital flows and exchange rates was replaced
by a more stabilizing, even easing bias (Chart 2.4.2).
Chart 2.4.1.
Chart 2.4.2.
Policy Rate Changes in Advanced Economies from Jan.
2012 to Jul. 2014* (Basis Points)
Policy Rate Changes in Emerging Economies from Jan.
2012 to Jul. 2014* (Basis Points)
0
-50
-50
-100
-100
Czech Rep.
Euro Area
Norway
-200
Australia
-200
Korea
-150
Sweden
-150
500
300
300
100
100
-100
-100
-300
-300
-500
-500
Mexico
50
0
2012
500
Romania
50
2013
700
Turkey
100
2014Q1
South Africa
100
Apr'14
Russia
150
May'14
Hungary
150
Jun'14
700
Indonesia
200
Israel
Jul'14
2012
Poland
2013
Colombia
2014Q1
Peru
Apr'14
Thailand
May'14
Chile
Jun'14
Brazil
Jul'14
200
* As of July 21, 2014.
Source: Bloomberg, CBRT.
The Fed continued to cut asset purchases by 10 billion USD at its two meetings in the second
quarter. In the statement following the FOMC meeting on June 18, it was reaffirmed that a highly
accommodative stance of monetary policy remains appropriate for a considerable time. Following
these developments, the expected date of the first rate hike was unchanged from the previous
reporting period, while the expected pace of rate hike declined to some extent. Meanwhile, yields on
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Central Bank of the Republic of Turkey
10-year bonds, an indicator for long-term interest rates, fluctuated for a while, particularly due to the
political tensions in Iraq, and settled around 2.5 percent as of end-July (Chart 2.4.3).
The ECB’s rate cut was mostly attributed to the inflation rate that has been hovering well below
the target. In an announcement, the ECB emphasized its aim to keep inflation low, though around 2
percent, and stated that the annual inflation of 0.5 percent as of May was well below the target. In
addition to delivering a rate cut, the ECB also adopted a number of measures to facilitate the
effective use of the credit channel. The most outstanding among these measures is to allow banks to
borrow from the ECB to finance a certain percentage of their loans to the private sector.
Chart 2.4.3.
Yields on 10-year US Treasury Bonds (Percent)
3.2
3.2
3.0
3.0
2.8
2.8
2.6
2.6
2.4
2.4
2.2
2.2
FOMC meeting (April 30)
2.0
2.0
1.8
1.8
1.6
1.6
FOMC meeting (June 18)
7/7/2014
6/7/2014
5/7/2014
4/7/2014
3/7/2014
2/7/2014
1/7/2014
12/7/2013
11/7/2013
9/7/2013
10/7/2013
8/7/2013
7/7/2013
6/7/2013
5/7/2013
4/7/2013
3/7/2013
1.2
2/7/2013
1.4
1.2
1/7/2013
1.4
Source: Bloomberg.
As for emerging economies, monetary policy strategy has displayed a more heterogeneous
pattern since 2013. Banco Central do Brasil and Bank Indonesia have been pursuing an aggressive
monetary tightening since early 2013, owing to the risks fuelled by the high current account deficit and
the aim to bring inflation closer to the target range. Other emerging market central banks, particularly
in Eastern Europe, continued to ease monetary policy in this period as inflation remained mostly below
the target. The first quarter of 2014 was marked by policy rate hikes across countries such as South
Africa, Turkey and India that have been facing current account deficits due to rising exchange rates
and capital outflows amid increased global uncertainty. Yet, monetary tightening glut came to a halt
in the face of reduced uncertainty and heightened expectations of prolonged monetary easing
across advanced economies, and only South Africa raised rates by 25 basis points in July.
In sum, both advanced and emerging economies saw monetary easing in the second quarter,
contrary to anticipations. However, as of July, expectations for the upcoming period point to some
tightening for both groups of economies in spite of the second-quarter easing (Charts 2.4.4 and 2.4.5).
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
Chart 2.4.4.
Chart 2.4.5.
Expected Policy Rates in Advanced Economies
Expected Policy Rates in Inflation-Targeting
Emerging Economies (Percent)
(Percent)
Policy Rate
Policy Rate
Expected Policy Rate (April 2014)
Expected Policy Rate (April 2014)
Expected Policy Rate (July 2014)
0.90
0.80
Expected Policy Rate (July 2014)
0.90
0.80
0.70
0.70
0.60
0.60
0.50
6.75
6.75
6.50
6.50
6.25
6.25
6.00
6.00
5.75
5.75
5.50
5.50
5.25
5.25
5.00
5.00
0.50
0.40
0.40
0.30
0.30
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2011
2012
2013
2014
2015
4.75
4.75
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2011
2012
2013
2014
2015
Source: Bloomberg, CBRT.
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
3. Inflation Developments
In the second quarter of 2014, annual consumer inflation increased by 0.8 points quarter-onquarter to 9.16 percent. The main drivers of this increase were food and core goods prices. It was the
worst second quarter in the history of the index for the food category due to drought and the
exchange rate pass-through. In the core goods category, annual inflation fell in durable goods but
went up further in other core goods that react with a lag to the exchange rate pass-through. In the
services category, while the underlying trend displayed a negative outlook, annual inflation declined
slightly, mainly on base effects. Thus, the rise in the annual rate of change in core inflation indicators
halted as of the second quarter. Meanwhile, after the first-quarter deterioration, both pricing behavior
and inflation expectations saw a partial improvement in the second quarter. Moreover, with the
appreciation of the Turkish lira and the moderate course of import prices, domestic manufacturing
industry prices flattened for the first time after an extended period during this quarter. Therefore, except
for the ongoing supply constraints on food prices, inflation faced relatively fewer cost pressures in the
second quarter.
Across subcategories, food prices recorded a higher-than-average increase in the second
quarter of the year. Services prices also posted a higher-than-average increase, whereas energy prices
dropped compared to previous periods (Chart 3.1).
Chart 3.1.
Chart 3.2.
CPI by Subcategories
Contribution to Annual CPI
(Second-Quarter, Quarterly Percent Change)
2007-2013 Average
(Percentage Points)
2014
Core Goods**
Services
Tobacco and Gold*
Energy
Food
8
8
12
12
6
6
10
10
4
4
8
8
2
2
6
6
0
0
4
4
-2
-2
2
2
-4
0
-4
Food
Energy Tobacco Core Services
and Goods**
Gold*
CPI
0
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II
2008
2009
2010
2011
2012
2013 2014
* Tobacco and Gold: Alcoholic beverages, tobacco and gold.
** Core Goods: Goods excluding food, energy, alcoholic beverages, tobacco and gold.
Source: TurkStat, CBRT.
In sum, in the second quarter, unfavorable food prices and the delayed effects of exchange
rate developments, particularly through prices of core goods, affected consumer inflation. The
contribution of food and core goods prices to annual inflation increased by 0.50 and 0.34 points,
respectively (Chart 3.2). Consumer inflation is expected to follow a downward path in the upcoming
period. The outlook for food prices will determine the pace of disinflation. Yet, both the gradually
waning cumulative effects of exchange rates and the modest course of private final domestic
demand will support the fall in consumer inflation.
Inflation Report 2014-III
19
Central Bank of the Republic of Turkey
3.1. Core Inflation Outlook
Annual core goods inflation soared by 1.37 points to 11.41 percent in the second quarter
(Table 3.1.1 and Chart 3.1.1). This rise in annual inflation was attributed to the prices of core goods
excluding durables, which show a relatively lagged response to exchange rate effects. On the other
hand, the uptrend in the annual inflation of durable goods prices that react rapidly to exchange rate
developments reversed in line with the appreciation in the Turkish lira (Chart 3.1.2). Thus, exchange rate
driven inflationary pressures declined in the second quarter and the rising trend of annual inflation in
core goods prices stopped as of June (Chart 3.1.1). Meanwhile, the underlying trend of the prices in this
category saw major improvement in this period (Chart 3.1.3).
Chart 3.1.1.
Prices of Core Goods and Services
(Annual Percent Change)
Core Goods
Services
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
0908
1208
0309
0609
0909
1209
0310
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
0913
1213
0314
0614
14
Source: TurkStat, CBRT.
Chart 3.1.2.
Chart 3.1.3.
Core Goods Prices
Core Goods Prices
(Annual Percent Change)
Core Goods (excl. durable goods and clothing)
Durable Goods (excl. gold)
20
20
Clothing
(Seasonally Adjusted, 3-Month Moving Average, Annualized)
20
20
-5
-5
-10
-10
-10
-10
0614
-5
1213
-5
0613
0
1212
0
0612
0
1211
0
0611
5
1210
5
0610
5
1209
5
0609
10
1208
10
0608
10
1207
10
0607
15
1206
15
0606
15
0606
1206
0607
1207
0608
1208
0609
1209
0610
1210
0611
1211
0612
1212
0613
1213
0614
15
Source: TurkStat, CBRT.
With the appreciation of the Turkish lira during April-May, prices of core goods fell for two
consecutive months. Compared with the first quarter of the year, the recent relatively stable course of
exchange rates alleviates pressures on core goods inflation through both the exchange rate and the
expectations channel. Accordingly, the annual inflation in this category is expected to fall further in the
rest of the year.
20
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Table 3.1.1.
Prices of Goods and Services
(Quarterly and Annual Percent Change)
2013
II
1.33
0.90
-0.92
-1.69
-4.70
0.99
4.86
20.95
0.05
0.65
-2.66
0.72
1.53
1.15
-1.35
2.50
1.59
2.18
2.34
1.28
4.02
CPI
1. Goods
Energy
Food and Non-Alcoholic Beverages
Unprocessed Food
Processed Food
Core Goods
Clothing and Footwear
Durable Goods (excl. gold)
Furniture
Electrical and Non-Electrical Appliances
Automobile
Other Durable Goods
Core Goods (excl. clothing and durable goods)
Alcoholic Beverages, Tobacco and Gold
2. Services
Rent
Restaurants and Hotels
Transport
Communication
Other Services*
III
0.97
0.46
2.95
0.19
-2.29
2.27
-0.62
-10.43
3.75
1.59
0.12
5.55
1.80
0.75
0.68
2.32
1.70
2.85
2.63
1.30
2.65
2014
IV
2.28
2.72
2.20
4.01
6.46
2.04
3.48
10.38
1.12
2.89
0.91
0.67
2.69
2.13
-4.39
1.16
1.81
2.42
0.18
0.09
0.82
Annual
7.40
7.18
5.15
9.67
12.88
7.11
6.20
4.82
7.62
9.50
-1.48
10.27
7.25
5.05
6.74
7.98
6.50
9.86
7.20
3.09
10.43
I
3.57
4.08
0.21
7.50
10.79
4.57
2.05
-10.32
9.54
3.14
3.86
16.65
2.78
3.21
8.24
2.37
1.30
4.54
1.24
-0.14
3.10
II
2.06
2.05
-1.12
0.41
-2.16
2.82
6.16
22.36
-0.39
4.00
-2.51
-1.24
2.75
2.85
-0.92
2.10
1.82
2.81
2.68
0.02
2.42
* Services excluding rents, restaurants and hotels, transport and communication.
Source: TurkStat, CBRT.
Services prices increased at a rate higher than historical averages in the second quarter
(Chart 3.1.4). However, annual inflation dropped by 0.4 points from the end of the first quarter to 8.2
percent, largely due to base effects. This relatively high level of services inflation is owed to
developments in the subcategories of restaurants and hotels and other services (Chart 3.1.5). Apart
from these two subcategories, annual inflation hovers slightly below 7 percent in transport and rents
and remains quite moderate in communication services.
Chart 3.1.4.
Chart 3.1.5.
Prices of Services by Subcategories
Prices of Services by Subcategories**
(Second-Quarter, Quarterly Percent Change)
2007-2013 Average
3.0
(Annual Percent Change)
2014
2.5
2.0
3.0
14
2.5
12
2.0
10
13.2
14
12
9.3
1.5
10
8.2
6.9
8
6.8
8
1.5
6
1.0
1.0
0.5
0.5
2
0.0
0
4
1.3
2
Communication
Rent
Transport
Other*
Restaurants and
Hotels
0
Services
Other*
Communication
Transport
Restaurants and
Hotels
Rent
Services
0.0
6
4
* Services excluding rent, restaurants, hotels, transport and communication.
** As of June.
Source: TurkStat, CBRT.
The recent uptrend in services prices is largely driven by cost factors. Rising food prices has a
negative impact on consumer inflation, directly through food items consumed by households and
indirectly through the use of food as an input in services items. In fact, inflation in catering services,
which accounts for 90 percent of the restaurants and hotels group, surged by about 4.5 points in the
Inflation Report 2014-III
21
Central Bank of the Republic of Turkey
past three quarters amid rising food prices, the key input for the sector (Chart 3.1.6). Meanwhile, prices
of other services have been affected negatively by the lagged effects of the Turkish lira depreciation
through channels such as foreign currency quoted prices (package tours, etc.) and use of imported
inputs (maintenance and repair services) (Chart 3.1.7). In addition to the rise in these cost factors,
soaring inflation expectations also affected the outlook for services prices. Services inflation is expected
to slow over the medium run, particularly in subcategories of restaurants and hotels and other services,
once food prices normalize and exchange rate related effects wear off.
Chart 3.1.6.
Chart 3.1.7.
Prices of Catering Services and Food
Prices of Other Services and the Currency Basket*
(Annual Percent Change)
(Annual Percent Change)
Other Services (6-month lagged)
14
Currency Basket (right axis)
Food (excl. fresh fruits and vegetables)
16
14
Catering Services (right axis)
14
12
12
12
35
30
13
25
20
10
15
11
10
8
10
6
5
10
8
9
6
0
4
8
4
7
2
2
6
0
-5
-10
-20
0106
0706
0107
0707
0108
0708
0109
0709
0110
0710
0111
0711
0112
0712
0113
0713
0114
0309
0609
0909
1209
0310
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
0913
1213
0314
0614
-15
* Prices of other services excluding driving course fees. For further details,
see Section 3.1, Inflation Report 2013-III.
Source: TurkStat, CBRT.
Source: TurkStat, CBRT.
Indicators regarding the underlying trend and pricing behavior of the services sector showed
some improvement in the second quarter. According to seasonally adjusted data, the underlying trend
of services inflation slowed but remained relatively high (Chart 3.1.8). The diffusion index of services
prices fell slightly from its elevated levels (Chart 3.1.9).
Chart 3.1.8.
Chart 3.1.9.
Prices of Services
Diffusion Index for Prices of Services*
(Seasonally Adjusted, 3-Month Moving Average, Annualized)
Services
16
16
Services (excl. driving course fees)
(Seasonally Adjusted, 3-Month Moving Average)
0314
0.2
0913
0.2
0313
0.3
0912
0.3
0312
0.4
0911
0.4
0311
0.5
0910
0.5
0310
0.6
0909
0.6
0309
-2
0.7
0908
-2
0.7
0308
0
0314
2
0
0913
2
0313
4
0912
4
0312
6
0911
6
0311
8
0910
10
8
0310
10
0909
12
0309
12
0908
14
0308
14
* 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.
In line with this outlook in core goods and services, annual inflation in SCA-H and SCA-I displayed
a marginal increase in the second quarter (Chart 3.1.10). However, after the impact of the Turkish lira
depreciation on inflation peaked, the rise in core inflation indicators halted in this quarter. A joint
analysis of the seasonally adjusted underlying trend of SCA-H and SCA-I, the alternative core inflation
22
Inflation Report 2014-III
Central Bank of the Republic of Turkey
indicators monitored by the CBRT, and diffusion indices suggest that the underlying trend of inflation
declined quarter-on-quarter in the second quarter (Charts 3.1.11, 3.1.12 and 3.1.13). Although the
current levels of these indicators are still high, their second-quarter performance point to some
improvement in the first quarter’s pricing behavior deterioration.
Chart 3.1.10.
Chart 3.1.11.
Core Inflation Indicators
Core Inflation Indicators
(Seasonally Adjusted, 3-Month Moving Average, Annualized)
SCA-I
SCA-H
SCA-I
Source: TurkStat.
Source: TurkStat, CBRT.
Chart 3.1.12.
Chart 3.1.13.
Diffusion Indices for CPI and SCA-H
Core Inflation Indicators SATRIM and FCORE*
(Seasonally Adjusted, 3-Month Moving Average)
(3-Month Moving Average)
FCORE
SCA-H
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
Source: TurkStat, CBRT.
0614
0613
1213
1212
1211
0612
1210
0611
0610
0609
1209
0608
1208
0.0
1207
0.0
1206
0607
0.1
0606
0.1
SATRIM
1.5
1.5
1.3
1.3
1.1
1.1
0.9
0.9
0.7
0.7
0.5
0.5
0.3
0.3
0.1
0.1
-0.1
-0.1
0606
1206
0607
1207
0608
1208
0609
1209
0610
1210
0611
1211
0612
1212
0613
1213
0614
CPI
0614
1213
0613
-5
0612
-5
1211
0
0611
0
1210
5
0610
5
1209
10
0609
10
1208
15
0608
15
1207
20
0607
20
0606
0614
1213
0613
1212
0
0612
0
1211
2
0611
2
1210
4
0610
4
1209
6
0609
6
1208
8
0608
8
1207
10
0607
10
1206
12
0606
12
1206
SCA-H
1212
(Annual Percent Change)
* For further details, see Box 3.2, Inflation Report 2011-I.
Source: CBRT.
3.2. Food, Energy and Alcohol-Tobacco Prices
Annual food inflation increased to 12.47 percent in the second quarter, remaining above the
April Inflation Report assumptions. Driven by prices of fresh fruits and vegetables and processed food,
this increase was mainly attributed to supply shocks associated with below-average precipitation and
frost as well as to lagged effects of the Turkish lira depreciation. Thus, the index recorded its highest
second-quarter price change.
Annual unprocessed food inflation soared by 2.93 points quarter-on-quarter to 12.75 percent
due to prices of fresh fruits and vegetables that displayed the smallest quarterly decline in recent years
(Chart 3.2.1). Fruit prices, in particular, increased at a rate above historical averages in this period,
mostly due to the hail and frost that occurred in late March. Meanwhile, other unprocessed food prices
Inflation Report 2014-III
23
Central Bank of the Republic of Turkey
moderated in this quarter after the negative first-quarter outlook (Chart 3.2.2). Processed food prices,
on the other hand, rose by a substantial 2.82 percent in the second quarter, bringing the annual
inflation in this category to 12.21 percent (Table 3.1.1 and Chart 3.2.1). This increase was driven by price
hikes that dominated the whole category (Chart 3.2.3). The effects of the drought that became more
pronounced with precipitations below seasonal norms reduced slightly upon the above-seasonal
precipitations in May and June, but cumulative effects keep processed food prices on the rise
(Chart 3.2.4).
Chart 3.2.1.
Chart 3.2.2.
Food Prices
Unprocessed Food Prices
(Annual Percent Change)
(Annual Percent Change)
Fresh Fruits and Vegetables
Processed Food
35
35
Unprocessed Food
30
30
25
25
20
20
15
45
45
Other Unprocessed Food
-5
-5
-15
-15
-10
-10
-25
-25
0611
0614
-5
0
0314
-5
0
1213
5
0913
5
5
0613
10
5
0313
10
1212
15
0912
15
0612
15
0312
25
1211
25
0911
35
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
0913
1213
0314
0614
35
Source: TurkStat, CBRT.
Chart 3.2.3.
Chart 3.2.4.
Processed Food Prices
Average Precipitation
(Annual Percent Change)
(mm)
Normal*
Source: TurkStat, CBRT.
2013-2014
Southeastern
Anatolia…
Eastern Anatolia
Region
Black Sea
Region
Aegean
Region
1000
900
800
700
600
500
400
300
200
100
0
Central Anatolia
Region
0614
1213
-5
0613
0
1212
0
-5
0612
5
1211
10
5
0611
10
1210
15
0610
20
15
1209
20
0609
25
1208
30
25
0608
30
2012-2013
1000
900
800
700
600
500
400
300
200
100
0
Marmara
Region
35
Turkey
35
Mediterranean
Region
Bread and Cereals
Other Processed Food
*1981-2010 average.
Source: General Directorate of Meteorology.
Food prices are broadly in line with international prices. Except for the 2010-2011 period, the
annual rate of increase in exchange-rate-adjusted international food prices and the domestic food
inflation display a similar course (Chart 3.2.5). However, in 2014, domestic food prices have been
increasing at a much faster rate than international prices. In particular, international food prices fell in
the second quarter, while domestic food prices showed no such decline. This divergence mostly
reflects the negative supply shocks in domestic production. Especially domestic wheat prices have
been on a rising trend over the past year, contrary to international prices. (Chart 3.2.6). After climbing
in the first quarter, international wheat prices fell by the same margin in the second quarter, whereas
24
Inflation Report 2014-III
Central Bank of the Republic of Turkey
domestic wheat prices continued to rise in the second quarter. In addition to wheat, prices of rice,
legumes, dried fruits and nuts, processed meat products, cheese and dairy products have also
increased remarkably over the past year. Thus, adopting external trade measures that would boost the
domestic supply and balance the prices of major food staples such as rice, corn, lentils, and, especially
wheat may be influential on the future course of food price inflation. Currently, domestic prices of
staple foods are well above their international counterparts (Table 3.2.1).1
Chart 3.2.5.
Chart 3.2.6.
International and Domestic Food Prices*
International and Domestic Wheat Prices*
(Annual Percent Change)
(January 2003=100)
S&P GSCI Wheat
FAO Food Price Index
S&P GSCI Agriculture
100
FAO Cereals Price Index
350
25
250
PPI Wheat Prices (right axis)
Domestic Food Prices (right axis)
230
300
80
20
210
60
40
15
20
10
250
190
200
170
150
0
150
130
100
110
5
90
-20
50
0
70
0
50
1203
0704
0205
0905
0406
1106
0607
0108
0808
0309
1009
0510
1210
0711
0212
0912
0413
1113
0614
1203
0604
1204
0605
1205
0606
1206
0607
1207
0608
1208
0609
1209
0610
1210
0611
1211
0612
1212
0613
1213
0614
-40
* Denominated in TL for FAO food price index and S&P GSCI agriculture.
Excluding fresh fruits and vegetables for domestic food prices.
Source: TurkStat, CBRT, FAO, Bloomberg.
*Denominated in TL for FAO cereals price index and S&P GSCI wheat.
Source: TurkStat, FAO, Bloomberg.
Table 3.2.1.
Domestic and International Food Prices
(USD/Ton)
Wheat
Domestic
Market Price
(USD)
Anatolian
Red Hard
400
Barley
327
Corn
Rice
Red Lentil
368
Osmancık/
Baldo
1360 / 1844
Mersin
(seed)
1123
International Export Prices
(USD)
USA HRW
(USA Gulf)
291
EU (France)
225
USA 3YC
(USA Gulf)
190
USA
Long Grain
569
Canada
749
USA SRW
(Fob Gulf)
232
Ukraine
(forage)
219
Argentina
(Up River)
188
Thailand
428
USA
595
Customs Duty
(Percent)
USA DNS
(Fob PNW %14)
316
France
(malting)
269
Ukraine
194
USA Calrose
Medium Grain
1050
130
130
130
Vietnam
415
34
19.3
Source: Turkish Minister of Economy, Turkish Grain Board, Daily Market and Commodity Exchange Prices Bulletin on July 15, 2014 available at
http://www.tmo.gov.tr/Upload/Document/piyasabulteni/piyasabulteni_tr.pdf.
Energy prices affected consumer inflation positively in the second quarter, falling by 1.12
percent (Table 3.1.1 and Chart 3.1). In this period, the Turkish lira began to gain strength after the sharp
depreciation in the first quarter, while average oil prices surged by about 4.5 USD quarter-on-quarter
because of the increased geopolitical uncertainty. Due to the Turkish lira appreciation and the price
ceiling imposed by the EMRA, fuel prices declined by 3.32 percent while prices of home utilities
remained flat. Hence, annual energy inflation fell by 0.21 points to 4.25 percent in the second quarter
and remained moderate relative to other subcategories. Both the cumulative effects of past
The Turkish Grain Board was recently allowed to import certain products free of customs duty for a temporary period and amount. See
http://www.resmigazete.gov.tr/eskiler/2014/04/20140419-7-1.pdf.
1
Inflation Report 2014-III
25
Central Bank of the Republic of Turkey
depreciations in the Turkish lira and drought-related factors pose an upside risk to administered energy
items, such as electricity and natural gas, in the home utilities category for the upcoming period.
After soaring due to the first-quarter’s SCT rate hike, prices of alcoholic beverages and tobacco
products remained virtually unchanged in the second quarter.
3.3. Domestic Producer Prices
In the second quarter of 2014, domestic producer prices (D-PPI) decreased by 0.38 percent
amid the moderate course of manufacturing prices (Table 3.3.1). Thus, annual D-PPI inflation
decreased by 2.57 points quarter-on-quarter to 9.75 percent (Chart 3.3.1).
Table 3.3.1.
D-PPI and Subcategories
(Quarterly and Annual Percent Change)
2013
2014
II
III
IV
Annual
I
II
1.95
1.93
2.43
6.97
5.52
-0.38
Mining
2.12
4.60
1.49
12.64
4.91
-1.77
Manufacturing
Manufacturing (excl. petroleum products)
0.88
3.97
1.50
8.45
6.29
0.11
1.03
3.45
1.57
8.00
6.26
0.26
1.10
3.17
1.63
7.85
6.27
0.55
Electricity and Gas
1.44
0.75
0.11
-11.16
-1.17
-4.85
Water
1.50
1.29
2.28
10.77
3.66
2.29
Intermediate Goods
1.12
4.21
1.65
8.88
5.99
-0.57
Capital Goods
2.02
4.66
1.09
11.42
6.78
-1.04
Durable Goods
-1.54
3.22
-0.15
0.51
8.47
-1.18
Nondurable Goods
1.42
2.39
2.23
8.24
5.79
2.18
D-PPI
Manufacturing (excl. petroleum and base metal products)
D-PPI by Main Industry Groups
Source: TurkStat, CBRT.
With the appreciation of the Turkish lira, manufacturing industry prices flattened in the second
quarter of the year (Table 3.3.1 and Chart 3.3.2). Across subcategories, producer prices for food,
furniture and wood products increased, whereas producer prices for base metals, apparel, machinery
and chemicals decreased. In this period, USD-denominated import prices remained mild, while TLdenominated import prices declined (Chart 3.3.3).
Chart 3.3.1.
Chart 3.3.2.
Domestic Producer and Consumer Prices
Manufacturing Prices
(Annual Percent Change)
(Annual Percent Change)
D-PPI
Manufacturing (excl. petroleum and base metal
products )
25
Manufacturing (right axis)
CPI
20
20
15
15
16
14
20
12
10
10
15
10
10
8
Source: TurkStat.
0614
1213
0613
1212
0612
1211
0611
1210
0610
-10
1209
0
0609
-5
1208
2
0608
0614
1213
0613
1212
0612
1211
0611
1210
0610
1209
0609
1208
0608
1207
-5
0607
-5
0
4
1207
0
0607
0
5
6
1206
5
0606
5
Source: TurkStat, CBRT.
The uptrend in the manufacturing industry excluding petroleum products and base metal prices
that entail information on the underlying trend of producer prices ended in this quarter (Chart 3.3.4).
26
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Manufacturing industry prices for intermediate, capital and durable goods fell in the second quarter,
with nondurable goods being the only subcategory recording a rise by 2.18 percent (Table 3.3.1). This
rise was driven by food manufacturing prices that also reflected on consumer prices. However, the
moderate course of manufacturing prices is expected to have a positive effect on consumer prices,
particularly through core goods, in the upcoming period. Overall, the second-quarter outlook for
producer prices indicated that cost-side pressures on consumer prices have subsided in all sectors but
food.
Chart 3.3.3.
Chart 3.3.4.
Import Prices in USD and TL*
Manufacturing Industry Prices Excluding Petroleum
and Base Metal Products
(Index, 2010=100)
(3-Month Moving Average )
Import Prices (USD)
170
2.5
2.5
150
150
2.0
2.0
130
130
1.5
1.5
110
110
1.0
1.0
90
90
0.5
0.5
70
70
0.0
0.0
50
50
-0.5
-0.5
170
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
0913
1213
0314
0614
0614
1213
0613
1212
0612
1211
0611
1210
0610
1209
0609
1208
0608
1207
0607
1206
Import Prices (TL)
* Estimate for June.
Source: TurkStat, CBRT.
3.4. Expectations
After rising in the first quarter of 2014 on unfavorable food prices and the lagged effects of
exchange rates, inflation expectations remained broadly unchanged in the second quarter
(Chart 3.4.1). As of July, 12-month and 24-month-ahead inflation expectations are 7.3 and 6.7 percent,
respectively. Across maturities, expectations are revised upwards from the April Inflation Report, with
longer-term expectations increasing by a smaller margin (Chart 3.4.2). Currently, inflation expectations
hover above the 5 percent target set for end-2014 and end-2015.
Chart 3.4.1.
Chart 3.4.2.
12-Month and 24-Month-Ahead CPI Expectations*
Inflation Expectations**
(Annual Percent Change)
(Annual Percent Change)
12-Month-Ahead
4
4
3
3
2
2
0716
4
5
4
0516
5
0108
0508
0908
0109
0509
0909
0110
0510
0910
0111
0511
0911
0112
0512
0912
0113
0513
0913
0114
0514
5
6
5
0316
6
7
6
0116
6
8
7
1115
7
9
8
0915
7
10
9
0715
8
11
10
0515
8
July 2014
11
0315
9
Inflation Target
Uncertainty Band
0115
9
April 2014
1114
10
0914
10
0714
24-Month-Ahead
* CBRT Survey of Expectations, second survey period results for the pre-2013 period.
** Calculated by linear interpolation of expectations for different time spans using the CBRT Survey of Expectations, second survey period results for the
pre-2013 period.
Source: CBRT.
Inflation Report 2014-III
27
Central Bank of the Republic of Turkey
The dispersion of medium-term inflation expectations reveals a slight deterioration in inflation
expectations in July compared to the first quarter (Charts 3.4.3 and 3.4.4). The percentage of
respondents expecting 24-month-ahead inflation to be 7.5 percent and above, which was 7 percent in
April, increased to 14 percent in July.
Chart 3.4.3.
Chart 3.4.4.
Distribution of 12-Month-Ahead Inflation
Expectations*
Distribution of 24-Month-Ahead Inflation
Expectations*
(Percent)
(Percent)
60
60
April 2014
60
60
April 2014
50
July 2014
50
46
50
50
40
40
39
40
36
July 2014
4645
50
40
31 30
30
20
11
30
30
20
20
10
0
0
0
7
0 0
0
3.50-4.49 4.50-5.49 5.50-6.49 6.50-7.49
≥ 7.5
14
11
10
2 2
0
< 3.0
13
13
10
0
30
2
20
10
1
0
0
< 3.50 3.50-4.494.50-5.495.50-6.496.50-7.49
≥ 7.5
* CBRT Survey of Expectations, second survey period results for the pre-2013 period. Horizontal axis denotes inflation rates, while the vertical axis denotes
the Kernel forecast. For further details, see CBRT website Data/Surveys/Survey of Expectations/Methodological Explanation.
Source: CBRT.
28
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Box
3.1
The
The Sensitivity of Inflation to Business Cycles in Turkey
relationship between business cycles and inflation is a key question that monetary policy tries to
answer. The capability of economic activity to affect inflation is a critical parameter that determines the
magnitude of the monetary policy reaction. The sensitivity of inflation to business cycles has recently
weakened across the world, particularly in emerging economies; in other words, the fact that the Phillips
curve has flattened is frequently being addressed in academic debates. This observation is mostly backed
by factors such as increased globalization, the reduced unit labor costs in emerging economies, particularly
China, and the strengthened credibility of central banks by adopting inflation targeting.
The growth-inflation relationship may not only differ by periods due to
changing conditions, but also by
subcategories of price indices (consumer price index, etc.) that are heterogeneous in composition. In this
context, Froehling and Lommatzsch (2011) analyzed the correlation between sub-indices and output gap
for Euro Area countries. In light of the Phillips curve equations estimated for each subcategory, a new index
was constructed by output-gap-responsive subcategories. The authors conclude that this index was much
more responsive to business cycles than typical core inflation indices.
This box briefly discusses the results of a recent study that is based on a similar approach to answer the
question of how much of the consumer inflation can be controlled in Turkey through the traditional demand
channel.2 The study estimates alternative Phillips curves for 152 subgroups by using COICOP 5-digit CPI data
for the 2004-2014 period:
∑
In the equation,
stands for inflation,
stands for output gap,
∑
and
variables stand for
the control elements, which are TL-denominated import prices and wages that are exogenously added;
stands for the error term. This equation determines product groups whose output gap coefficients are
statistically significant and economically reasonable (larger than zero), allowing consumer inflation to be
divided into two sub-indices as responsive and unresponsive to the output gap.
The analysis has shown that 35 sub-indices of goods and services that make up around 30 percent of the
CPI in Turkey are affected by the output gap. Accordingly, these groups consist mostly of sub-items of
services, while some items included in the processed food and energy groups are also responsive to
business cycles (Table 1).
2
For further details, see Atuk et al. (2014).
Inflation Report 2014-III
29
Central Bank of the Republic of Turkey
Table 1. Sub-Indices of Goods and Services Responsive to the Output Gap
Core Goods
1. Washing machines, dryers, dishwashers
19. Women’s hair salons, etc.
2. TVs and video recorders
20. Social services
3. A/C, heaters and humidifiers
21. House insurance
4. Small appliances
22. Dry-cleaning, mending, making and renting clothes
5. Tools, gardening tools and other misc. accessories
23. Repairing and renting shoes
6. Spare parts and accessories for personal transportation vehicles
24. Real rent paid by a tenant living in an apartment building
7. Women’s shoes
25. Repair of home appliances
8. Materials for home maintenance and repair
26. In-house services
9. Household cleaning products
27. Washing and dry-cleaning of household furniture
Services
Food
10. Urban transportation by bus
28. Flour and other grains
11. Urban transportation by taxi
29. Bread
12. Intercity road transportation
30. Pasta products
13. Marine and inland waterway transportation
31. Margarine
14. Other purchased transport services
32. Other oils and fats
15. Catering services
33. Jams, marmalades and honey
16. Beverage services
34. Water and mineral water
17. Hotels and inns
Energy
18. Other accommodation services
35.Solid fuels
Source: Authors’ calculations.
80
output gap in many EU countries. Froehling and
70
Lommatzsch (2011) show that about 56 percent
60
of the price index is responsive to the output gap
50
in 16 Euro Area countries, while Halka and
40
countries (Chart 1).
The analysis for Turkey introduces a new index by
using
the
CPI
weights
of
the
output-gap-
Greece
Malta
Turkey
Portugal
Ireland
Austria
Luxemburg
effect on inflation in Turkey compared to EU
Poland
are based on demand management have less
Slovakia
0
Netherlands
Therefore, these findings reveal that policies that
Italy
10
Germany
index is affected by the output gap in Poland.
Finland
20
Spain
30
Kotlowski (2013) show that 50 percent of the price
France
of the overall price index is responsive to the
Chart 1. Share of Output-Gap-Responsive Sub-Indices in CPI by
Countries*
(Percent)
Slovenia
an international comparison, more than half
Belgium
By
* The consumer basket may vary by countries. More specifically, the fact that food prices
have a high share while technological products have a low share in CPI may weaken the
sensitivity of general price index to output gap in an emerging economy.
Source: Authors’ calculations for Turkey, Halka and Kotlowski (2013) for Poland, Froehling
and Lommatzsch (2011) for others.
responsive series. The remaining products, excluding fresh fruits and vegetables and alcohol-tobacco items,
which are beyond the control of monetary policy, are used to produce another price index that is
unresponsive to the output gap. Accordingly, consumer inflation has differed markedly between the
output-gap-responsive and output-gap-unresponsive groups until recent years. Moreover, the inflation
range is much wider in the output-gap-responsive group (highest: 20 percent, lowest: 0 percent) while it is
only between 4-11 percent in the other group (Chart 2).3
Since the rate of inflation in the output-gap-responsive group is not solely determined by business cycles, inflation may differ from what is implied
by the domestic activity. For example, the robust economic activity and the outstanding increase in international prices of some products (such as
food) caused the group’s inflation to soar as high as 20 percent right before the global crisis.
3
30
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Chart 2. Output-Gap-Responsive and Unresponsive Price Indices and SCA-H*
(Annual Percent Change)
Output-Gap-Unresponsive Index
25
25
SCA-H
Output-Gap-Responsive Index
0114
0713
0113
0712
0112
0711
0111
0710
0110
0709
-5
0109
-5
0708
0
0108
0
0707
5
0107
5
0706
10
0106
10
0705
15
0105
15
0704
20
0104
20
* Output-gap-unresponsive index excludes fresh fruits and vegetables as well as alcohol and tobacco.
Source: TurkStat, Authors’ calculations.
In the output-gap-unresponsive group, which accounts for about 60 percent of the CPI, import costs are
very influential, and thus, import prices and the exchange rate channel have a more dominant role in
inflation dynamics (Chart 3). Hence, the CBRT closely monitors exchange rate developments and
emphasizes cyclical and structural policies that would provide exchange rate stability.
Chart 3. Output-Gap-Unresponsive Price Indices and Import Costs *
(Annual Percent Change)
Output-Gap-Unresponsive Index
Import Prices in TL (right axis)
12
50
40
10
30
8
20
6
10
0
4
-10
0114
0713
0113
0712
0112
0711
0111
0710
0110
0709
0109
0708
0108
0707
0107
0706
0106
0705
0105
0704
-20
0104
2
* Output-gap-unresponsive index excludes fresh fruits and vegetables as well as alcohol and tobacco.
Source: TurkStat, Authors’ calculations.
Monitoring
the course of inflation through these two indices, which have different dynamics, helps to
understand the causal relationship between policy variables (interest rate, exchange rate, etc.) and the
target variable, and therefore, determines which monetary policy tools are needed to what extent in order
to control inflation. Moreover, in addition to the monetary policy, the effects of fiscal policy practices
(public spending, incomes policy, etc.) can also be monitored and measured in the price index responsive
to cycles. Hence, one can conclude that the content of information these indices entail is different from
core inflation indices constructed by conventional exclusion methods.
Inflation Report 2014-III
31
Central Bank of the Republic of Turkey
For example, the SCA-H index is closely correlated with the output-gap-unresponsive price index, which
largely reflects the effects of import costs. Yet, this correlation weakens considerably between 2009 and
2010 due to the negative impact of the global crisis on domestic activity (Chart 2). This weakening can
easily be explained by the output-gap-responsive and output-gap-unresponsive price indices breakdown.
Hence, decomposing the price index in this manner helps to understand the source of changes in the
underlying trend of inflation.
In sum, empirical
findings show that around 30 percent of the consumer basket is affected by business
cycles in Turkey. This suggests that counter-cyclical policies alone may not suffice to maintain price stability.
Therefore, maintaining financial stability and lowering import dependence emerge as key factors to
decrease the exchange rate pass-through, while implementing goods and labor market reforms to reduce
wage rigidity and to increase productivity are policy priorities that would mitigate the inflation inertia.
REFERENCES
Atuk, O., C. Aysoy, U. Özmen and Ç. Sarıkaya, 2014, The Sensitivity of Inflation to Business Cycles in Turkey,
forthcoming CBRT Working Paper.
Froehling, A. and K. Lommatzsch, 2011, Output Sensitivity of Inflation in the Euro Area: Indirect Evidence from
Disaggregated Consumer Prices, Deutsche Bundesbank Economic Studies No. 25/2011.
Halka, A. and J. Kotlowski, 2013, Does Domestic Output Gap Matter for Inflation in a Small Open Economy,
National Bank of Poland Working Paper No. 152.
32
Inflation Report 2014-III
Central Bank of the Republic of Turkey
4. Supply and Demand Developments
The GDP data of the first quarter of 2014 suggest that economic activity remained consistent
with the outlook presented in the April Inflation Report and expanded by an annual 4.3 percent. Final
domestic demand was flat in the first quarter of 2014 as the weak course of private demand was
compensated by public sector demand. Exports of goods and services registered a robust growth with
the support of gold exports, while imports of goods and services posted a quarter-on-quarter decrease.
Thus, demand components continued to balance.
Data pertaining to the second quarter of 2014 point to no acceleration in economic activity. On
the production side, the industrial production index displayed a similar pattern to the previous quarter’s
average in the April-May period. On the expenditures side, the slowdown in private demand stopped,
especially on the consumption side, due to recovering financial conditions and confidence indices.
Thus, domestic demand is envisaged to follow a weak course in the first half of the year.
External demand indicators show that the upward underlying trend in exports continued into the
second quarter, thereby supporting growth. The first-quarter fall in import demand slowed in the
second quarter amid the pause in declining domestic demand. Thus, it is projected that the balancing
among demand components will continue in the second quarter and the current account deficit will
record a slight decline on a quarterly basis. However, the geopolitical tensions in Iraq pose a downside
risk to the ability of exports to contribute to growth and to the contraction of the current account
deficit.
In sum, after displaying a sluggish course in the first half of the year due to domestic uncertainty
and tight financial conditions, domestic demand is envisioned to recover gradually and modestly amid
less tight financial conditions in the second half. Moreover, exports are expected to contribute further
to growth in the upcoming period on the back of the lagged effects of the real exchange rate
depreciation and the global economic recovery suggested by survey indicators. Yet, the ongoing
uncertainties over the strength of global economic recovery, global monetary policies and
geopolitical tensions pose a downside risk to growth.
4.1. Gross Domestic Product Developments and Domestic Demand
According to the national accounts data released by the TurkStat, the GDP posted a year-onyear increase by 4.3 percent in the first quarter of 2014. The TurkStat made some changes, effective as
of the first quarter of 2014, to the seasonal adjustment method. The seasonally adjusted GDP that was
formerly obtained by using direct adjustment will be estimated using indirect adjustment as of 2014
(Box 4.1). Thus, the quarter-on-quarter increase in the seasonally adjusted GDP based on indirect
adjustment is 1.7 percent (Chart 4.1.1). Meanwhile, despite the upsurge in public demand, final
domestic demand was flat in this quarter due to slowing private demand (Chart 4.1.2). Across
subcategories of private demand, construction investments and the demand for nondurable goods
were up quarter-on-quarter in the first quarter of 2014 while private machinery and equipment
investments and the demand for durable goods, which are more sensitive to exchange rate and
financing conditions, decreased, as envisaged in the April Inflation Report.
Inflation Report 2014-III
33
Central Bank of the Republic of Turkey
Chart 4.1.1.
Chart 4.1.2.
GDP and Final Domestic Demand
Public and Private Demand
(Seasonally Adjusted, Billion TL, 1998 Prices)
(Seasonally Adjusted, 2011Q1=100)
Private Demand
34
34
Final Domestic Demand
32
32
30
30
28
28
26
26
24
24
22
22
20
20
1234123412341234123412341234123412341
Millions
GDP
140
140
Public Demand
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
60
1234123412341234123412341234123412341
2005 2006 2007 2008 2009 2010 2011 2012 2013 14
2005 2006 2007 2008 2009 2010 2011 2012 201314
Source: TurkStat, CBRT.
The second-quarter data indicate that private final demand was moderate in the second
quarter. In the April-May period, the production of consumption goods continued to increase, while
that of imports flattened after falling markedly in the first quarter (Chart 4.1.3). Across subcategories of
consumption goods, production was up in both durable goods and nondurable goods. The effects of
the Turkish lira appreciation, the improved financial conditions and the increased consumer
confidence of the second quarter were evident in the demand for durable goods. In fact, imports of
durable goods and domestic sales of automobiles and home appliances, both indicators of the
demand for durable goods, were on the rise (Chart 4.1.4). As for machinery and equipment
investments, the production and imports of investment goods excluding transport vehicles recorded a
decline (Chart 4.1.5). On the construction front, data on investments indicate that the production of
mineral products dropped whereas imports thereof continued to rise (Chart 4.1.6). In sum, the secondquarter data suggest that final domestic demand posted a modest quarter-on-quarter growth, largely
on the back of consumer demand.
Chart 4.1.3.
Chart 4.1.4.
Production and Import Quantity Indices of
Consumption Goods
Sales of Automobiles and White Goods
(Seasonally Adjusted, 1000)
(Seasonally Adjusted, 2010=100)
Automobile
White Goods (right axis)
Production
Imports (right axis)
125
120
125
115
600
550
45
500
95
40
450
85
35
400
75
30
350
25
300
20
250
15
200
105
100
95
65
90
85
55
80
45
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 12*
2005 2006 2007 2008 2009 2010 2011 2012 2013 14
* As of May.
Source: TurkStat, CBRT.
34
650
50
105
110
60
55
115
10
150
34123412341234123412341234123412
2006 2007
2008
2009
2010
2011
2012
2013 14
Source: TURKBESD, AMA, CBRT.
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Chart 4.1.5.
Chart 4.1.6.
Production and Import Quantity Indices of Capital
Goods Excluding Transport Vehicles
Production and Import Quantity Indices of NonMetallic Mineral Goods
(Seasonally Adjusted, 2010=100)
Production
(Seasonally Adjusted, 2010=100)
Production
140
125
130
130
120
135
120
115
125
120
110
110
100
100
Imports
140
Imports (right axis)
115
110
105
105
95
100
90
85
90
95
80
80
70
60
145
75
90
65
70
85
55
60
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 1 2 3 4 1 2 3 4 12*
45
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 12*
2005 2006 2007 2008 2009 2010 2011 2012 2013 14
2005 2006 2007 2008 2009 2010 2011 2012 2013 14
* As of May.
Source: TurkStat, CBRT.
BTS indicators point to no acceleration in domestic demand for the third quarter of 2014. In fact,
registered domestic market orders and 3-month-ahead order expectations in the manufacturing sector
of consumption goods decreased (Chart 4.1.7). Similarly, registered domestic market orders in the
manufacturing sector of investment goods were on the decline. However, expectation of new orders in
the manufacturing sector of investment goods increased remarkably (Chart 4.1.8). Meanwhile,
expectations of investment and employment, which reflect the relatively longer-term decisions of firms,
displayed a mild rebound, yet remained weak in the second quarter (Chart 4.1.9). On the other hand,
the consumer confidence recorded a quarterly increase in the second quarter (Chart 4.1.10).
Chart 4.1.7.
Chart 4.1.8.
Registered Domestic Market Orders and Expectation of
New Domestic Market Orders in the Manufacturing
Sector of Consumption Goods*
Registered Domestic Market Orders and
Expectation of New Domestic Market Orders in the
Manufacturing Sector of Investment Goods*
(Seasonally Adjusted)
(Seasonally Adjusted)
Registered Domestic Market Orders
Registered Domestic Market Orders
Expectation of New Domestic Market Orders (right
axis)
Expectation of New Domestic Market Orders (right axis)
0
30
0
40
-5
25
-10
30
-10
20
-20
20
15
-30
10
10
-40
0
5
-50
-10
0
-60
-20
-40
-5
-70
-30
-45
-10
-80
-40
-50
-15
-90
-15
-20
-25
-30
-35
123412341234123412341234123412
2007
2008
2009
2010
2011
2012
2013 14
-50
123412341234123412341234123412
2007 2008 2009 2010 2011 2012 2013 14
* Question 19 in BTS asks the survey respondents whether registered domestic market orders are above or below normal. Question 21in BTS asks the survey
respondents the expectation of new domestic market orders to increase or decrease in the upcoming 3-month.
Source: CBRT.
Inflation Report 2014-III
35
Central Bank of the Republic of Turkey
Chart 4.1.9.
Chart 4.1.10.
BTS Expectation for Investment and Employment*
Consumer Confidence
(Seasonally Adjusted)
CNBC-e
Expected Investment
Expected Employment
30
TurkStat-CBRT(right axis)
30
20
20
10
10
0
0
124
85
114
80
104
75
94
70
84
65
* Question 23 in BTS asks the survey respondents the expectation of fixed
investment to increase or decrease in the upcoming 12-month relative to
past 12-month. Question 7 in BTS asks the survey respondents the expectation
of total employment to increase or decrease in the upcoming 3-month.
Source: CBRT.
0414
1013
0413
1012
0412
1011
0411
1010
0410
1009
0409
0414
1013
50
0413
54
1012
-60
0412
55
-60
1011
60
64
0411
74
-50
1010
-40
-50
0410
-40
1009
-30
0409
-30
1008
-20
0408
-20
1007
-10
0407
-10
Source: CNBC-e, TurkStat, CBRT.
To sum up, final domestic demand was flat in the first quarter of 2014 due to the slowing private
demand despite the robust increase in public demand. Second-quarter readings suggest that private
demand expanded moderately quarter-on-quarter, mostly on the back of consumer demand. Looking
at the data on survey indicators, the appreciation and decreased volatility of the Turkish lira, the
improved financial conditions, the increased consumer confidence and the favorable global
economic outlook together reveals that the second-half rise in final domestic demand will be a
gradual and modest one. On the other hand, it should be noted that the geopolitical unrest in Iraq
puts downside pressure on domestic demand through the confidence channel. Under these
circumstances, domestic demand developments are expected to put no upward pressure on inflation
and continue to contribute positively to the current account deficit and the balancing process.
4.2. External Demand
National accounts data of the first quarter of 2014 indicate that exports of goods and services
grew by 11.4 percent, while imports thereof rose by 0.8 percent in annualized terms. Thus, net exports
contributed 2.7 points to annual growth, as envisaged in the April Inflation Report, and the balancing
among external demand components continued in this quarter (Chart 4.2.1). In seasonally adjusted
terms, exports recorded an increase, while imports declined in the first quarter (Chart 4.2.2).
Chart 4.2.1.
Chart 4.2.2.
Contribution of Net Exports to Annual GDP Growth
Exports and Imports of Goods and Services
(Percentage Point)
Imports
Net Exports
8
(Seasonally Adjusted, 1998 Prices, Billion TL)
Exports
Imports
8
10.0
10.0
6
6
9.5
9.5
4
4
9.0
9.0
2
2
8.5
8.5
8.0
8.0
7.5
7.5
0
0
-2
-2
7.0
7.0
-4
-4
6.5
6.5
-6
-6
6.0
6.0
-8
-8
5.5
5.5
-10
-10
1
2011
2012
2
3
2011
4
1
2
3
2012
4
1
2
3
2013
4
1 2*
2014
5.0
Millions
Exports
5.0
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 2 3 4 12*
2006 2007 2008 2009 2010 2011 2012 20132014
* Estimate.
Source: TurkStat, CBRT.
36
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Data regarding the second quarter of 2014 reveal that the export quantity index trended
downwards in the April-May period. The core index excluding gold exports continued with its steady
course and posted a quarter-on-quarter increase in this period (Chart 4.2.3). Recent indicators on PMI
point to a sustained recovery on a global scale. Yet, the export-weighted global growth, a mediumterm indicator, maintained a positive outlook (Chart 2.1.1). Therefore, exports excluding gold are
believed to have continued to increase and support growth in the second quarter as well (Chart 4.2.1).
Chart 4.2.3.
Chart 4.2.4.
Export Quantity Indices
Import Quantity Indices
(Seasonally Adjusted, 2010=100)
Exports
(Seasonally Adjusted, 2010=100)
Imports
Exports (excl. gold)
140
140
120
120
100
100
80
80
60
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 2 3 4 1 2 3 4 12*
2006 2007 2008 2009 2010 2011 2012 20132014
Imports (excl. gold)
135
135
125
125
115
115
105
105
95
95
85
85
75
75
65
65
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 12*
2006 2007 2008 2009 2010 2011 2012 20132014
* Estimate for June.
Source: TurkStat, CBRT.
The import quantity index posted an increase in the second quarter after slumping in the first
quarter. However, excluding gold, the index performed weakly and recorded a modest increase.
Recent domestic demand indicators point to a moderate consumer demand for the second quarter.
The production and imports of durable goods hovered above their first-quarter average during AprilMay. Additionally, domestic sales of automobiles and home appliances posted a gradual quarter-onquarter rebound. Reviewing these developments in quarterly terms, it is expected that imports
excluding gold will be almost flat amid a recovering domestic demand (Chart 4.2.4). Accordingly,
imports of goods and services are also expected to near their first-quarter level (Chart 4.2.2).
The geopolitical tensions in Iraq might pose a downside risk to the ability of exports to contribute
to growth for the recent period. The Middle East and Africa have been major export destinations in
recent years and Iraq has ranked second in Turkey’s export destinations (Charts 4.2.5 and 4.2.6). In this
context, if the uncertainty in Iraq persists, the improvement in external balance might slow via oil prices
and exports destined to both Iraq and other countries in the region. Current indicators suggest that the
impact will mostly come through exports. In fact, according to Turkish Exporters Assembly data, exports
to Iraq fell by 21.3 percent in June, while exports to the Near and Middle East countries excluding Iraq
continued to increase.
Inflation Report 2014-III
37
Central Bank of the Republic of Turkey
Chart 4.2.5.
Chart 4.2.6.
Regional Export Shares
Leading Export Countries*
(6-Month Moving Average, Percent, Excluding Gold)
EU-27
Other
70
(12-Month Cumulative, Excluding Gold)
MENA
CIS
70
60
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
60
50
50
40
40
30
30
20
0414
1113
0613
0113
0812
0312
1011
0511
1210
0710
0210
0909
0409
0
1108
0
0608
10
0108
10
Germany
Iraq
UK
Italy
Russia
France
USA
Spain
UAE
Netherlands
China
Egypt
Israel
Azerbaijan
Saudi Arabia
Romania
Belgium
Iran
Libya
Poland
20
* As of May 2014.
Source: TurkStat.
Source: TurkStat, CBRT.
In the second quarter of 2014, final domestic demand is expected to moderate, while exports
are estimated to maintain their steady rise and contribute positively to growth. It is projected that net
exports’ positive contribution to growth and the balancing process will continue in this period (Chart
4.2.1). Thus, the recovery in both the seasonally adjusted and 12-month cumulative current account
balance is anticipated to be more pronounced in the second quarter. Meanwhile, the current
account balance excluding energy and gold appears to have produced a surplus in this period
(Charts 4.2.7 and 4.2.8). This improvement is expected to continue into the remainder of 2014. However,
the recent geopolitical unrest poses a downside risk to the improving current account balance and the
contribution of net external demand for the second half of the year.
Chart 4.2.7.
Chart 4.2.8.
Current Account Balance*
Current Account Balance*
(Seasonally Adjusted, Billion USD)
Current Account Balance
Current Account Balance (excl. gold)
Current Account Balance (excl. energy and gold)
(12-Month Cumulative, Billion USD)
Current Account Balance
Current Account Balance (excl.gold)
Current Account Balance (excl. energy and gold)
12
30
30
6
6
10
10
0
0
-10
-10
-6
-6
-30
-30
-12
-12
-50
-50
-18
-18
-70
-70
-90
-90
-24
-24
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 12*
2005 2006 2007 2008 2009 2010 2011 2012 2013 14
1208
0409
0809
1209
0410
0810
1210
0411
0811
1211
0412
0812
1212
0413
0813
1213
0414
12
* Estimate for June.
Source: TurkStat, CBRT.
38
Inflation Report 2014-III
Central Bank of the Republic of Turkey
4.3. Labor Market
In February 2014, the structure of the Household Labor Force Survey saw major changes to
comply with EU statistics. The frequency in conducting the survey was increased; the sampling design
was changed; the criteria of unemployment were modified; and population projections used in
generalizing survey results were changed. The duration of job search used in the unemployed
classification was lowered to the last four weeks from the last three months in line with EU standards.
Accordingly, both the level and the seasonality of the statistics used in monitoring the labor market
were changed. Some selected series reflecting only the overall outlook from the old survey were dated
back as far as January 2005 by the TurkStat using a model. However, series related to subcategories
cannot be calculated retrospectively due to the modified structure of the survey. The assessments for
this part are made based on the backdated survey series released by TurkStat, which reflect the overall
outlook for the labor market.
The unemployment rate has fallen slightly since the last quarter of 2013 thanks to the recovery in
non-farm employment (Chart 4.3.1). Yet, the simultaneous increase in labor force participation
restrained the fall in unemployment (Chart 4.3.2). There is a strong positive correlation between the
changes in employment and the labor force in Turkey. The larger the share of temporary jobs in
employment growth, the stronger the correlation, hence restricting the effect of employment growth
on unemployment. This was also valid for the fourth quarter of 2013 and the first months of 2014. During
March-April, employment growth lost momentum, leaving the unemployment rate unchanged
(Charts 4.3.1 and 4.3.2).
Chart 4.3.1.
Chart 4.3.2.
Unemployment Rates
Contributions to Quarterly Changes in Non-Farm
Unemployment
(Seasonally Adjusted, Percent)
Labor Force Participation Rate (right axis)
Unemployment Rate
Non-Farm Unemployment Rate
18
51
50
16
(Seasonally Adjusted, Percent)
Employment Loss
Participation Rate
Population Rise
Non-Farm Unemployment Rate
3
3
2
2
1
1
47
0
0
46
-1
-1
-2
-2
49
14
48
12
10
45
8
44
-3
6
43
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 12*
-3
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2*
2010
2011
2012
2013
2014
2007 2008 2009 2010 2011 2012 2013 2014
* As of April.
Source: TurkStat.
* 2-month difference as of April.
Source: TurkStat, CBRT.
Non-farm employment was weak throughout 2013 and it was not until the last quarter of 2013
that employment began to recover on the back of the construction and services sectors. Meanwhile,
industrial employment picked up in the first quarter of 2014 (Chart 4.3.3). Following the robust
employment growth of the first quarter, construction employment declined during March-April while
industrial employment flattened (Charts 4.3.3 and 4.3.4). Indicators of economic activity point to a
Inflation Report 2014-III
39
Central Bank of the Republic of Turkey
sluggish outlook for the second quarter. Mineral production, which provides information on construction
activity, posted a quarter-on-quarter decrease in the second quarter (Chart 4.1.6). Likewise, industrial
production stopped growing in the second quarter (Chart 4.3.4).
Chart 4.3.3.
Chart 4.3.4.
Contributions to Quarterly Change in Non-Farm
Employment
Industrial Employment and Production
(Seasonally Adjusted, 2005 = 100)
(Seasonally Adjusted, Point)
Services
Construction
Industrial
5
Non-Farm Employment
Industrial Employment
Industrial Production (right axis)
5
130
120
120
110
110
100
100
90
90
80
80
Source: TurkStat, CBRT.
0505
1105
0506
1106
0507
1107
0508
1108
0509
1109
0510
1110
0511
1111
0512
1112
0513
1113
0514
0414
-2
0214
-2
1213
-1
1013
-1
0813
0
0613
0
0413
1
0213
1
1212
2
1012
2
0812
3
0612
3
0412
4
0212
4
130
Source: TurkStat.
Similar to indicators of economic activity, survey results directly related to manufacturing industry
employment point to a slight quarter-on-quarter deterioration in the employment outlook for the
second quarter. In the second quarter, the BTS indicator on expectation of employment decreased
only marginally, while the PMI employment indicator declined notably. Although both indices still signal
an employment growth by hovering above the neutral mark, the PMI employment indicator warns of
downside risks for industrial employment in the second quarter (Chart 4.3.5).
According to data obtained from Kariyer.net, a human resources firm, the number of
applications per job post increased in the second quarter. Computed by dividing the total number of
job applications by job openings and closely linked with non-farm unemployment, this set of data hints
at no improvement in the unemployment rate for the second quarter (Chart 4.3.6).
Chart 4.3.5.
Chart 4.3.6.
BTS Employment Expectations and PMI Employment
Index
Number of Applicants per Job Advert and Non-Farm
Unemployment
(Seasonally Adjusted)
(Seasonally Adjusted)
BTS Employment Expectations
Job Applications
Non-Farm Unemployment (percent, right axis)
PMI Employment Index (right axis)
130
13
80
40
110
12
70
35
90
60
30
70
9
50
25
50
8
Source: TurkStat, Markit, CBRT.
40
16
15
11
0614
1213
0613
1212
0612
1211
0611
1210
0610
1209
0609
1208
0608
1207
10
0607
0614
45
1213
14
90
0613
150
1212
50
0612
100
1211
170
0611
55
1210
110
0610
17
1209
190
0609
60
1208
18
120
0608
210
1207
65
0607
130
Source: TurkStat, Kariyer.net.
Inflation Report 2014-III
Central Bank of the Republic of Turkey
As of the first quarter of 2014, employment and wage developments seem to support domestic
demand. In this period, total wage payments continued to rise year-on-year in real terms (Chart 4.3.7).
However, the higher-than-expected consumer price inflation may put a cap on real wage growth in
the rest of 2014.
On the cost front, the impact of wage hikes on prices is likely to have increased in this period. As
of the first quarter of 2014, the average rise in hourly wages was higher than the minimum wage hike for
2014. With this increase in hourly wages, unit wages surged at a rate close to inflation, by an annual 8
percent, as of the first quarter of 2014 (Chart 4.3.8).
Chart 4.3.7.
Chart 4.3.8.
Household Domestic Consumption and Real Wage
Payments* (Annual Percent Change)
Unit Labor Cost*
(Annual Percent Change)
Real Wage Payments-Short-Term Labor Statistics
Industrial
Consumption Spending (excl. furniture, household
appliances and maintenance, transport and communication,
recreation and culture)
14
14
12
10
8
6
4
2
0
-2
-4
-6
-8
12
10
8
6
4
2
0
-2
-4
-6
-8
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
2007
2008
2009
2010
2011
2012
2013 2014
* Calculated as the weighted average of total wages paid in industrial,
construction, trade and services activities. Deflated by CPI.
Source: TurkStat , CBRT.
Services
30
30
25
25
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
-10
12341234123412341234123412341
2007
2008
2009
2010
2011
2012
20132014
* In the services sector, unit labor cost is calculated by dividing total
wage payments by services CPI adjusted turnover. In the industrial
sector, total wage payments are divided by output.
Source: TurkStat Short-Term Labor Statistics, CBRT.
In sum, the growth in non-farm employment observed since the final quarter of 2013 lost pace in
the March-April period. After recording a remarkable increase in the first quarter, construction
employment declined during March-April. Leading indicators for the second quarter suggest that
employment growth will slow and the unemployment rate will edge up. Given the modest growth
outlook, the 2014 unemployment rate might be up a little from 2013.
Inflation Report 2014-III
41
Central Bank of the Republic of Turkey
Box
4.1
Seasonal Adjustment of GDP: Direct vs. Indirect Approach
Temporary yet recurring movements such as seasonal and calendar effects make it difficult to understand
the underlying trend in a series. On the other hand, data adjusted for such movements do not contain
ordinary effects and offer new information in the series, thereby allowing for an assessment of the current
state and guiding forecasts. The GDP series has both seasonal and calendar effects. Therefore, it is
necessary to use seasonally adjusted data when analyzing the quarterly changes in economic activity.
There are two main approaches to seasonal adjustment of the GDP, which is obtained by aggregating subseries: direct and indirect. In the direct approach, the aggregated series are seasonally adjusted. In the
indirect approach, the seasonally adjusted GDP is obtained by the weighted sum of the seasonally
adjusted sub-items of the GDP. The TurkStat has been producing seasonally adjusted GDP data by using the
indirect rather than the direct approach since the first quarter of 2014.1 This box compares the direct and
indirect seasonal and calendar adjustments of the GDP data and discusses the outlook that both methods
offer for economic activity.
There is no theoretical or empirical evidence in the literature showing that the direct approach is superior to
the indirect approach or vice versa.2 Broadly speaking, if the sub-series share a similar seasonal structure; i.e.
they peak and bottom at almost the same time, one can suggest choosing the direct approach in
seasonal adjustment. However, if the sub-series have different seasonal characters and/or the weight of
each sub-series in the aggregated series changes dramatically by periods, the indirect approach is
recommended.3 The results of direct and indirect adjustments of a series are not always the same.
Therefore, the magnitude and direction of the quarterly changes these approaches imply may vary.4 In this
case, the quality of the seasonally adjusted data determines the approach to be used. Basically, the
seasonally adjusted series and its residuals should contain no seasonality and the revision to an already
adjusted series after adding new data should be small. Moreover, smoothness can also be considered
when comparing the data adjusted with both approaches.
Chart
1 shows the direct and indirect seasonal adjustments of the GDP series with base year 1998.
Accordingly, both series display a similar pattern at the index level. However, the quarterly changes of the
series show that there are occasional gaps between both approaches, which may be as wide as 0.9
percentage points (Chart 2 and Table 1).5 On the other hand, during 1998Q1-2014Q1, these gaps are
almost zero on average and are found to be statistically insignificant. Furthermore, the quarterly changes
calculated using both approaches have the same sign for 95 percent of the analyzed period.6 In 56
percent of the number of observations, the indirect approach produces larger quarterly changes than the
For further information, see www.tuik.gov.tr/HbGetir.do?id=16192&tb_id=17.
Eurostat (2009).
Ladiray and Mazzi (2002).
4 Koçak, et al. (2010) and ECB (2012) present divergence in industrial production for the Euro Area.
5 For example, in 2014Q1, the growth in economic activity was up 0.3 points to 0.8 percent as per the direct approach, and up 0.8 points to 1.7
percent as per the indirect approach. Thus, the direct approach points to a more moderate economic growth for the first quarter compared to
the indirect approach.
6 In other words, these quarterly changes have different signs in 3 of the 64 observations (1998Q3, 1999Q2 and 2006Q1).
1
2
3
42
Inflation Report 2014-III
Central Bank of the Republic of Turkey
direct approach and the gap between both approaches in these observations is measured to be 0.32
percent on average. When the quarterly changes obtained by the direct approach are larger, the gap
appears to be 0.38 percent on average. Lastly, the variance of the quarterly changes obtained by the
indirect approach is found to be slightly less than the variance of the quarterly changes obtained by the
direct approach. However, the difference between these two variances is rejected at any conventional
significance level. In sum, during 1998Q1-2014Q1, the average value and volatility of the quarterly GDP
changes computed by direct and indirect seasonal adjustments hardly differ from each other.
Chart 1. GDP
(Seasonally Adjusted, 2005=100, Billion TL)
Indirect
Direct
1.0
1.0
135
0.8
0.8
130
130
0.6
0.6
125
125
0.4
0.4
120
120
0.2
0.2
115
115
0.0
0.0
110
110
-0.2
-0.2
105
105
-0.4
-0.4
100
100
-0.6
-0.6
95
95
-0.8
-0.8
90
90
-1.0
-1.0
98Q2
99Q2
00Q2
01Q2
02Q2
03Q2
04Q2
05Q2
06Q2
07Q2
08Q2
09Q2
10Q2
11Q2
12Q2
13Q2
140
135
05Q1
05Q3
06Q1
06Q3
07Q1
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
10Q3
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
14Q1
140
Chart 2. Difference Between Seasonally Adjusted Quarterly
Growth Rates of GDP Using Direct and Indirect Approach
(Indirect-Direct, Percent)
Source: TurkStat, CBRT.
Table 1. Descriptive Statistics on the Difference Between Seasonally Adjusted Quarterly
Growth Rates of GDP Using Direct and Indirect Approach (Indirect-Direct, 1998Q1-2014Q1)
Average difference
0.02
Minimum difference
-0.81
Maximum difference
0.90
Concordance rate (%)
95.31
Indirect>Direct (%)
56.25
Average difference (Indirect>Direct)
0.32
Average difference (Indirect<Direct)
-0.38
Variance (Indirect/Direct)
0.95
Source: TurkStat, CBRT.
When
a certain GDP series is directly adjusted for seasonal and calendar effects, it signals only one
quarterly change regardless of its composition. However, if the same series is indirectly adjusted for seasonal
and calendar effects, it may imply a different outlook based on the dispersion of each sub-series it consists.
For example, Table 2 shows actual production levels for 2014Q1 as well as two different growth composition
scenarios for the same period. Accordingly, the GDP grew by 4.3 percent year-on-year across all growth
compositions in the first quarter. With direct adjustment, the quarterly growth is 0.8 percent for all three
cases, and thus, only one inference can be drawn for economic activity. However, with the indirect
approach, under different growth compositions, the same, as in actual levels and scenario 1, or different, as
in actual levels and scenario 2, quarterly growth figures can be obtained. Therefore, when interpreting the
quarterly outlook for economic activity with the new approach, it would be more suitable to evaluate how
the GDP components, besides the GDP itself, move and examine the extent of the contribution of these
components to growth.
Inflation Report 2014-III
43
Central Bank of the Republic of Turkey
Table 2. Seasonally Adjusted GDP Using Indirect Approach (2014Q1, Percentage Change)
Agriculture
Manufacturing
Construction
Services
GDP
Year-on-Year
3.9
5.0
5.2
3.9
(excl.
4.3
Quarter-on-Quarter
5.0
1.7
1.0
1.3
construction)
1.7
Year-on-Year
2.8
2.4
3.5
5.3
4.3
Quarter-on-Quarter
3.8
-0.7
-0.5
2.8
1.7
-10.0
2.5
4.0
6.3
4.3
-9.1
-0.6
-0.1
3.7
1.0
Actual
Scenario 1
Year-on-Year
Scenario 2
Quarter-on-Quarter
Source: TurkStat, CBRT calculations.
REFERENCES
Eurostat, 2009, ESS Guidelines on Seasonal Adjustment.
ECB, 2012, The New Approach to Seasonal Adjustment of European Aggregates in Short-Term Statistics, Box
5, April 2012 Monthly Bulletin.
Koçak, A., G. Mazzi and F. Moaura, 2010, How Seasonal Adjustment can Affect the Message Delivered to
Policy Makers: a Simulation Approach Based on the Euro Area Industrial Production, Paper
presented at the 6th Eurostat Meeting on Business Cycle Analysis.
Ladiray, D. and G. Mazzi, 2002, Seasonal Adjustment of European Aggregates: Direct versus Indirect
Approach, Paper presented at the ECB’s Seasonal Adjustment Seminar.
www.tuik.gov.tr/HbGetir.do?id=16192&tb_id=17
44
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Box
Real and Nominal Balancing of Turkey’s External Trade
4.2
The current account balance faced a rapid and severe deterioration in the aftermath of the global crisis.
As shown in Chart 1, the main reason behind the deteriorating current account balance was the increase in
the external trade deficit. In terms of financial stability, this can heighten the country risk due to factors such
as the worsening quality of funds and increased possibility of a sudden stop. In this period, the CBRT
adopted a new policy framework observing financial stability, which, also in accordance with the measures
taken by other policymakers, prompted a balancing of external deficit. A real and nominal analysis of this
balancing is important in controlling the effect of terms-of-trade and evaluating the impact of the adopted
measures.
Chart 2. Exports and Imports
(4-Quarter Moving Average, Percent of GDP)
External Trade Balance
Other Items
Current Account Balance
Source: TurkStat, CBRT.
18
13
13
8
8
3
3
2013Q4
2013Q3
2012Q4
2012Q1
2011Q2
2010Q3
2009Q4
2009Q1
2008Q2
-14
2007Q3
-14
2006Q4
-12
2006Q1
-12
2005Q2
-10
2004Q3
-8
2003Q4
-8
-10
18
2012Q3
-6
2011Q2
-4
-6
23
2010Q1
-4
23
2008Q4
-2
28
2007Q3
-2
33
28
2006Q2
0
2003Q4
2
0
2002Q3
2
33
2001Q2
4
2000Q1
6
4
1998Q4
6
Exports (Current Prices)
Imports (Current Prices)
Imports (1998 Prices)
Exports (1998 Prices)
2005Q1
Chart 1. Current Account Balance
(4-Quarter Moving Average, Percent of GDP)
Source: TurkStat.
Turkey’s external trade volume expanded substantially during 1998Q1-2014Q1 (Chart 2). In order to adjust
for the effects of the terms-of-trade, both exports and imports are estimated by also using the average
prices of 1998 in percent of GDP. Accordingly, after 2002, the real exports series diverged upwards from the
current exports series and the spread widened broadly in time. In this period, the spread between these two
series was 2.9 points on average. This indicates that the GDP price index (Py) increased at a much faster
rate than the exports price index (Px) in the relevant period. As shown in Chart 3, the Px/Py ratio was mostly
below the initial level and recorded a nearly 12 percent decrease by the end of the period. On the other
hand, imports series in current and fixed prices moved very close, especially during 2004Q1-2010Q4. Yet,
after 2010Q4, current imports posted outstanding increases and import prices (Pm) rose at a faster rate than
the GDP price index (Py). In the last quarter, the Pm/Py ratio was 11 percent above the average level of
1998 (Chart 3).
Due to the largely downward trend in relative export prices (Px/Py) and the post-2010 increase in relative
import prices (Pm/Py), the terms-of-trade (Px/Pm) recorded a dramatic two-phase decline, one in the early
2000s and the other in the 2010s (Chart 4). As of the first quarter of 2014, the terms-of-trade fell by a total of
18 percent compared to 1998.
Inflation Report 2014-III
45
Central Bank of the Republic of Turkey
Chart 3. Export and Import Prices to GDP Prices
(4-Quarter Moving Average,1998=100)
Px/Pm
Px/Py
130
130
120
120
110
110
100
100
2013Q4
2012Q4
2011Q4
2010Q4
2009Q4
2008Q4
2007Q4
2006Q4
2005Q4
2004Q4
2003Q4
70
2002Q4
70
2001Q4
80
2000Q4
80
1999Q4
90
1998Q4
90
110
110
105
105
100
100
95
95
90
90
85
85
80
80
75
75
70
70
1998Q4
1999Q3
2000Q2
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
2010Q4
2011Q3
2012Q2
2013Q1
2013Q4
Pm/Py
Chart 4. Export Prices to Import Prices
(4-Quarter Moving Average,1998=100)
Source: TurkStat.
Developments in energy prices stand out as a key variable among possible sources of this terms-of-trade
deterioration. In Chart 5, export and import prices are drawn along with crude oil prices. In this period, oil
prices were up by about 8 times, while Px and Pm increased by 50 and 80 percent, respectively. This
upsurge in import prices is attributed to the high share of oil and petroleum products in Turkey’s imports. On
the other hand, energy items have a relatively small share in exports.7
Terms-of-trade has been subject to a permanent two-phase deterioration following 1998. In this sense, the
worsening of the terms-of-trade can be considered as a negative price shock. As in every price shock, both
the substitution and the income effects may prevail in this case. The substitution effect indicates that goods
with relatively higher prices would be consumed less due to external prices worsening to our disadvantage.
The income effect, on the other hand, indicates that if goods with higher prices are consumed with other
goods, there would be a decline in all consumed goods due to decreased real income resulting from a
negative price shock.
The
size of the decline driven by these two effects will depend on the short and long-term demand
elasticities of the consumption goods. In Turkey’s case, the substitution effect can be limited since hikes in
import prices are dominated by energy items and their short-term demand elasticity is low. This limited
substitution effect can cause rapid deterioration in the external trade balance measured in current prices,
and necessitates the adoption of policies to better cushion the economy against price shocks in the long
term in order to avoid a prolonged deterioration.
To analyze the effectiveness of the measures taken against the recent deterioration in external balance, it
is important to control how terms-of-trade changes affect external balance. To this end, Chart 6 shows the
external balance in fixed and current prices. In these charts, the spread between external balances with
current and fixed prices, which is denoted as price effect, reflects the effect of terms-of-trade.
In the analyzed period, oil and petroleum products accounted for an average of 3 percent of Turkey’s exports and an average of 19 percent of
Turkey’s imports.
7
46
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Chart 5. Prices of Exports, Imports and Brent Oil
(4-Quarter Moving Average,1998=100)
Px
Pm
Chart 6. External Trade Balance and the Price Effect
(4-Quarter Moving Average, Percent of GDP, Inverse Axis)
Price Effect
1998 Prices
Current Prices
Average (Current Prices)
Average (1998 Prices)
Brent Oil (right axis)
220
950
-16
200
850
-14
180
750
-12
-12
650
-10
-10
550
-8
-8
450
-6
-6
350
-4
-4
100
250
-2
-2
80
150
0
0
60
50
2
2
140
1998Q4
1999Q3
2000Q2
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
2010Q4
2011Q3
2012Q2
2013Q1
2013Q4
120
Source: TurkStat, Bloomberg.
-14
1998Q4
1999Q3
2000Q2
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
2010Q4
2011Q3
2012Q2
2013Q1
2013Q4
160
-16
Source: TurkStat.
Analysis of the effects of the measures taken after 2010 on the external balance reveals that there are
discrepancies in real and nominal developments due to terms-of-trade changes. Thanks to these measures,
the real external deficit dropped to its lowest post-crisis level in 2012. This 2012 level of the real external
deficit is, in fact, the average of the period; yet this improvement occurred without any decline in national
income, contrary to the global crisis era, which shows that the policies adopted successfully helped to
balance the economy to a great extent.
In the first quarter of 2014, the real external deficit was 7 percent, nearing the average of 6.2 percent for
the post-1998 period. Current prices still remained elevated despite the improvement in the external deficit.
Falling to 11.8 percent as of the first quarter of 2014, the current external deficit hovers considerably above
the average of 8.8 percent for the post-1998 period. This divergence in the external trade deficit between
current and real prices reveals that measures regarding business cycles delivered significant results in
controlling the external trade deficit, but it is highly important to adopt medium to long-term policy
measures to bring the external trade balance back to reasonable levels against permanent deteriorations
in terms-of-trade.
Having
anti-deficit policies that take terms-of-trade developments into account would be helpful in
adopting efficient and effective measures. The sources of the two-phase terms-of-trade deterioration of the
early 2000s and early 2010s appear to be driven by both export and import prices. In this period, export
prices mostly declined, compared to national income and import prices (Charts 3 and 4). In other words,
Turkey exports a basket of goods whose prices are falling relative to a basket of produced or imported
goods. Thus, it is crucial to have policies that boost the pricing power of exported goods; expand the
basket of items to include items with high prices; and support the transition towards goods with greater
added value in exports.
The rise in energy prices in the same period is a major factor causing import prices to soar. The fact that the
price elasticity of the demand for energy items is mostly low in the short term causes the changes in energy
prices to pass rapidly to the current external trade deficit. Hence, it is vital to create energy policies that
promote efficient energy use and increase domestic energy production without adding to external trade
deficit.
Inflation Report 2014-III
47
Central Bank of the Republic of Turkey
48
Inflation Report 2014-III
Central Bank of the Republic of Turkey
5. Financial Markets and Financial Intermediation
Accommodative monetary policy decisions made by major central banks regarding global
liquidity and the expectation that the quantitative easing would continue for a while caused the
global uncertainties to fade in the second quarter. Moreover, risk premiums and markets for bonds and
bills, stocks and foreign exchange saw a dramatic decline in volatility in this period. These
developments in global financial markets improved the risk sentiment for emerging economies as well
and led capital flows to grow brisk in the second quarter. Turkey’s financial indicators followed a similar
path to those of other emerging economies in this period. In addition to global factors, the CBRT’s tight
monetary policy stance, the macro data pointing to an evident recovery in the current account deficit
and the contribution of macroprudential measures to the balancing process improved Turkey’s
financial indicators. Even though capital flows displayed a fluctuating course, they saw great
improvement on a quarterly basis, and the second quarter witnessed net inflows. The favorable course
of the risk premium and the tight monetary policy stance limited the adverse effects of geopolitical risks
on the Turkish lira in this period. Market rates declined in all maturities.
In the second quarter, the FCI for Turkey, which is calculated as the weighted average of
various financial indicators, remained largely consistent with the forecast announced in the April
Inflation Report. Thus, following the dramatic tightening in the first quarter of 2014, financial conditions
have recently become less tight (Chart 5.1). The recovery in capital flows and stock markets, the
normalization on loan standards and the decline in interest rates have affected financial conditions
favorably.
Chart 5.1.
Chart 5.2.
Financial Conditions and Credit Growth*
Contributions to FCI
FCI (standardized)
Credit Rate
Benchmark Rate
Capital Inflows
Long-Term Interest Rate
tightenining
accommodative
Net Credit Use/GDP (percent, right axis)
2.0
14
1.5
12
1.0
2.0
Exhange Rate
Credit Standards
Stock Return
2.00
1.5
1.50
1.0
1.00
0.5
10
0.5
0.50
0.0
8
0.0
0.00
-0.5
-0.50
-1.0
-1.00
-1.5
-1.50
-2.0
-2.00
-2.5
-2.50
-0.5
-1.0
6
-1.5
4
-2.0
2
-2.5
-3.0
0
123412341234123412341234123412
2007
2008
2009
2010
2011
2012
-3.0
-3.00
123412341234123412341234123412
2013 14
2007
2008
2009
2010
2011
2012
2013 14
* For further details on measuring FCI, see the CBT Research Notes in Economics No. 12/31.
Source: CBRT.
5.1. Financial Markets
Global Risk Perceptions
Normalization in global monetary policies continued in the second quarter of 2014, and the Fed
further reduced asset purchases. Global economic activity continued to recover on the back of
advanced economies, while economic activity remained relatively weak in emerging economies in
this period. The recovery in advanced economies is expected to affect emerging economies positively
Inflation Report 2014-III
49
Central Bank of the Republic of Turkey
through the exports channel while a probable sooner-than-expected normalization in global monetary
policies may lead to a tightening in global financial conditions.
First-quarter growth figures proved lower than expected in the US economy and the ensuing
high-rated revision created a perception that the policy rate increase may be postponed for a while,
and the financial expansion in global markets following the crisis may last for a protracted period.
Another important development in this period is the ECB’s implementation of a negative interest rate
on deposits held at the ECB starting from June due to deflationary risks, the gradual recovery in the
Euro Area notwithstanding. Moreover, the ECB opted for a reduction by 10 basis points in the policy
rate and enforced a new re-financing model to support the real sector.
In the second quarter, signals from the Fed and the ECB affected the risk sentiment for emerging
economies positively, causing a decline in the risk premiums of emerging economies (Chart 5.1.1).
Falling figures in the CDS premiums of emerging economies since the waning of global uncertainties in
January continued through the start of this quarter. However, concerns over oil supply amid the recent
unrest in Iraq led the risk sentiment for emerging economies to slightly deteriorate. As a striking
development, Turkey’s sovereign risk premium worsened a little due to the geopolitical developments,
yet posted more favorable figures compared to other countries (Chart 5.1.2). This is attributed to the
positive growth and current account deficit figures announced in the second quarter, besides the
CBRT’s tight monetary policy stance and waning uncertainties specific to Turkey.
Chart 5.1.1.
Chart 5.1.2.
Regional EMBI Indices
Changes in CDS*
(Basis Points)
(Basis Points)
EMBI Europe
EMBI Asia
EMBI Turkey
EMBI Latin America
Turkey
Emerging Economies
Selected Emerging Economies
500
500
20
450
450
0
400
400
-20
-20
350
350
-40
-40
300
300
-60
-60
250
-80
-80
200
-100
-100
150
150
-120
-120
100
100
-140
-140
0714
0614
0614
0514
0514
0414
0414
0314
0314
0214
0214
1112
1212
0113
0213
0313
0413
0513
0613
0713
0813
0913
1013
1113
1213
0114
0214
0314
0414
0514
0614
0714
200
0
0114
250
20
* Denote the changes from January 24, 2014. Emerging economies include Brazil, Chile, Colombia, Czech Republic, Hungary, Indonesia, Mexico, Poland,
Romania and South Africa. Selected emerging economies are Brazil, Indonesia and South Africa.
Source: Bloomberg.
Portfolio Flows
Decisions of major central banks to support global liquidity and the expectation that yields of
advanced economies will remain low in the upcoming period have caused capital flows towards
emerging economies to post favorable figures since the April Inflation Report. Moreover, due to the risk
premiums of emerging economies, which fell in the second quarter of 2014, coupled with the rising
global risk appetite, demand for the assets of emerging economies increased. Thus, capital outflows in
the first quarter of 2014 reversed in this quarter (Chart 5.1.3). Capital inflows towards Turkey fluctuated in
this period; yet net portfolio flows have proved positive in cumulative terms as of the start of the quarter
50
Inflation Report 2014-III
Central Bank of the Republic of Turkey
and compensated for the outflows in the first quarter (Chart 5.1.4). This is attributed to Turkey’s reduced
risk premium in addition to positive growth and the current account deficit data.
Chart 5.1.3.
Chart 5.1.4.
Portfolio Flows to Emerging Economies*
Portfolio Flows to Turkey*
(Billion USD)
(Billion USD)
25
25
60
20
20
10
0
5
0
2014
-5
-5
January
December
October
November
September
July
August
May
June
April
March
February
-60
January
-60
-40
* Includes stocks and bonds.
Source: EPFR.
10
December
2014
5
March
-40
-20
February
-20
October
0
15
2008-2013
Average
2013
November
0
15
September
20
July
20
August
40
2008-2013
Average
June
2013
40
May
60
80
April
80
* Includes stocks and government securities, excluding repo.
Source: EPFR.
Exchange Rates
Due to the developments since the reporting period of April 2014, currencies of emerging
economies firstly appreciated against the USD amid the increased global risk appetite, but slightly
depreciated due to the rising geopolitical risks as of the second week of June (Chart 5.1.5). Although
the Turkish lira moved in tandem with the currencies of other emerging economies, Turkey’s being
adjacent to the region of intense geopolitical risks and having Iraq as a foremost trading partner
increased the sensitivity of the Turkish lira against these developments. The strong relationship between
the currency basket and the risk premium continued in this period. Before June 10, the outbreak of
extreme chaos in Iraq, the currency basket was around 2.45. Then, it hit 2.53 but compensated for
some part of losses in the rest of the quarter and reverted to 2.47 on July 22 (Chart 5.1.6).
Chart 5.1.5.
Chart 5.1.6.
TL and Emerging Market Currencies vs USD*
Currency Basket and The Risk Premium
(22.05.2013=1)
Turkey
Emerging Economies
Selected Emerging Economies
1.30
Currency Basket (0.5 USD+ 0.5 euro)
1.25
Interim MPC Meeting
1.20
EMBI+Turkey (right axis)
1.30
2.8
1.25
2.7
450
2.6
400
2.5
350
500
1.20
1.15
1.15
2.4
300
1.10
1.10
2.3
250
2.2
200
2.1
150
2
100
1.05
0614
0514
0414
0314
0214
0114
1213
1113
1013
0913
0813
0.95
0713
0.95
0613
1.00
0513
1.00
1.9
50
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
1.05
* Emerging economies include Brazil, Chile, Colombia, Czech Republic, Hungary, Mexico, Poland, Romania, South Africa, India, Indonesia and Turkey.
Selected emerging economies are Brazil, Indonesia South Africa and India.
Source: Bloomberg.
Inflation Report 2014-III
51
Central Bank of the Republic of Turkey
Second-quarter developments had repercussions on the implied exchange rate volatilities of
emerging market currencies as well, and the implied volatilities of emerging market currencies
declined. Turkey’s implied exchange rate volatility moved in tandem with other emerging economies
and posted a decline in both 1-month and 12-month maturities (Charts 5.1.7 and 5.1.8). In this period,
the implied 1-month volatility in the exchange rate saw a bigger drop than that of the 12-month, which
is striking. This is attributable to the decline in Turkey’s short-term domestic uncertainty.
Chart 5.1.7.
Chart 5.1.8.
Implied Volatility of Exchange Rates*
Implied Volatility of Exchange Rates*
(1-Month-Ahead)
30
(12-Month-Ahead)
30
Emerging Economies with Current Account
Deficit
27
27
24
24
21
21
Turkey
24
Turkey
21
21
24
Emerging Economies with Current Account
Deficit
18
18
0714
0614
0514
0414
0214
0314
0114
1213
1113
1013
0913
0813
0713
0613
3
0513
3
0714
3
0614
3
0514
6
0414
6
0214
0314
6
0114
6
1213
9
9
1113
9
9
1013
12
12
0913
12
12
0813
15
0713
15
15
0613
18
15
0513
18
* Emerging economies with current account deficit include Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, India, Indonesia,
Romania and Colombia.
Source: Bloomberg.
Monetary Policy
In the second quarter of 2014, the recent notable decline in uncertainties regarding the Fed’s
asset purchases coupled with the recovery in global growth led risk perceptions in global financial
markets to witness improvements. Moreover, the Fed announced in June that the low interest rate
policy would be maintained in the medium term. Additionally, long-term rate expectations of the
FOMC members were down from 4 percent to 3.75 percent. In the same period, the ECB lowered the
borrowing rate to negative and announced a new quantitative easing policy to be launched in
September. These developments led to an easing in global liquidity conditions, and capital inflows
towards emerging economies improved somewhat. Due to the reduced uncertainty and the slightly
improved risk premium indicators, market rates saw a decline in all maturities. On the other hand, the
tight monetary policy and macroprudential measures kept the credit growth rates at reasonable levels.
In line with these developments, private final domestic demand exhibits a mild outlook. Given the
current outlook of demand components, aggregate demand conditions are projected to limit
inflationary pressures in 2014. Moreover, the negative effects of the cumulative foreign exchange rate
developments since the mid-2013 on annual inflation will taper off. The recent stabilization of the
exchange rate is estimated to improve the inflation outlook.
Due to external and internal developments that affected risk perceptions in the first quarter of
2014, the Turkish lira depreciated significantly and risk premiums increased notably. In order to contain
the negative impact of these developments on inflation and macroeconomic stability, the CBRT
decided at its interim MPC meeting on January 28 to deliver a strong and front-loaded monetary
tightening and to simplify its operational framework. Considering the developments underlying this
strong and front-loaded policy rate hike in January, the CBRT opted for moderate rate cuts in the
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
second quarter of 2014. Firstly, the late liquidity window lending rate was reduced from 15 percent to
13.5 percent in April. Afterwards, due to improvements in global liquidity conditions, waning
uncertainties and improvements in risk premium indicators, the 1-week repo rate was reduced by 50
and 75 basis points, respectively, in May and June. Following these decisions, the rate on the funding
through quantity auctions was lowered to 8.75 percent. Lastly, the CBRT reduced the 1-week repo rate
to 8.25 percent and the overnight borrowing rate from 8 percent to 7.5 percent in July.
Since the publication of the April Inflation Report, CBRT funding, which was launched under the
decision to simplify the operational framework of the monetary policy made in the MPC interim
meeting in January, continued to be provided mainly through 1-week repo auctions (Chart 5.1.9). The
provision of the CBRT funding mostly by 1-week repo auctions led the average CBRT funding rate to
hover around the weekly funding rate. Therefore, moderate rate cuts delivered due to waning
domestic and external uncertainties since April were also reflected on the average funding rate.
Liquidity measures taken in the same context caused a slight fall in the BIST overnight repo rates. The
BIST overnight repo rates have recently hovered around the 1-week repo rate (Chart 5.1.10).
Chart 5.1.9.
Chart 5.1.10.
CBRT Funding*
CBRT Rates and BIST O/N Repo Rates (Percent)
(2-Week Moving Average, Billion TL)
Marginal Funding
O/N Funding
1-Week Repo
1-Month Repo
Reverse Repo at the BIST and IMM
Net OMO
Interest Rate Corridor
CBRT Average Funding Rate
BIST O/N Rates
1-Week Repo Rate
15
15
50
50
13
13
40
40
11
11
30
30
9
9
20
20
7
7
10
10
5
5
0
0
3
3
-10
1
1
0113
0213
0313
0413
0513
0613
0713
0813
0913
1013
1113
1213
0114
0214
0314
0414
0514
0614
0714
-10
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
60
60
Source: BIST, CBRT.
While opting for moderate rate cuts recently, the CBRT maintained the tight monetary policy
stance by keeping the yield curve nearly flat. Due to the slump in long-term rates in the second quarter
of 2014, the spread between 5-year market rates and the CBRT’s average funding rate hovered below
zero in this period (Chart 5.1.11). Moreover, the spread between the 4-year market rate and the 6month rate obtained from the yield curve hovered around zero (Chart 5.1.12). The distance of these
indicators from the historical average values, which was positive, points to the tight stance in the
monetary policy. The CBRT will closely monitor inflation expectations, pricing behaviors and other
factors affecting inflation and maintain the tight monetary policy stance by keeping the yield curve
almost flat until an evident improvement is seen in the inflation outlook in the upcoming period.
Inflation Report 2014-III
53
Central Bank of the Republic of Turkey
Chart 5.1.11.
Chart 5.1.12.
Long-Term Interest Rates and the CBRT Funding Rate
Interest Rate Spread*
(Percent)
(Percent)
12
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
Interim MPC Meeting
-1.0
-1.5
-1.0
-1.5
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
5 Year-Market Rate-CBRT Average Funding Rate
5-year Market Rate
3-Month Market Rate
CBRT Average Funding Rate
* 5-day moving average of the difference of bond rates at 6-month and 4year maturities calculated by prices of bonds traded at the BIST Bonds and
Bills Market by using ENS method. As of July 15, 2014.
Source: BIST.
Source: BIST, CBRT.
In the second quarter of 2014, Turkish lira costs remained higher than foreign currency costs as in
the previous quarter, leaving the use of the ROM advantageous. Proving this advantage, banks
continue to use both gold and foreign exchange ROM considerably (Charts 5.1.13 and 5.1.14). The rate
of use of this facility by banks was 96 percent (57.3/60) for FX and 90 percent (26.9/30) for gold as of the
maintenance period starting on 18 July 2014.
Chart 5.1.13.
Chart 5.1.14.
Banks’ Use of ROM for FX*
Banks’ Use of ROM for Gold*
(Percent)
(Percent)
Upper Bound for FX
Upper Bound for Gold
Use of ROM for FX
Use of ROM for Gold
30
30
50
50
25
25
40
40
20
20
30
30
15
15
20
20
10
10
10
10
5
5
0
0
0
0
0911
1111
0112
0312
0512
0712
0812
1012
1212
0213
0413
0613
0813
0913
1113
0114
0314
0514
0714
60
0911
1111
0112
0312
0512
0712
0812
1012
1212
0213
0413
0613
0813
0913
1113
0114
0314
0514
0714
60
* As of the maintenance period.
Source: CBRT.
CBRT reserves exhibited a partial increase compared to the April Inflation Report (Chart 5.1.15).
In this period, reserves that the banks maintained under the foreign exchange and gold reserve options
and foreign currency required reserves did not display a noticeable change. Considering the recovery
observed in the current account deficit since May, the CBRT revised the daily foreign exchange selling
auction amount downwards. As of 9 May 2014, the foreign exchange selling auction amount was set
as minimum 20 million USD. Thus, in May and June, the fall in reserves stemming from foreign exchange
selling auctions decreased considerably. On the other hand, the rise in re-payments of export
rediscount credits contributed to the rise in the CBRT’s net reserves in the same period (Table 5.1.1).
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
Export rediscount credits are expected push the CBRT reserves upwards in the upcoming period as
well.
Chart 5.1.15.
Table 5.1.1.
CBRT FX Reserves*
Breakdown of FX Reserves*
(Billion USD)
(Billion USD)
Gold Reserves (Precious Metals)
Other Gold Reserves
Gold Reserves (ROM)
FX Reserves (ROM)
FX Reserves (FX Required Reserves)
Other FX Reserves
140
140
120
120
100
100
80
80
60
60
40
40
0714
0514
0114
0314
1113
0913
0713
0513
0113
0313
1112
0912
0712
0512
0
0312
0
0112
20
1111
20
FX Sales
(-)
Rediscount
Credits (+)
October 2013
0.84
1.07
November 2013
1.44
1.70
December 2013
4.67
1.02
January 2014
5.8
0.57
February 2014
1.0
0.30
March 2014
1.05
0.48
April 2014
1.02
0.36
May 2014
0.50
2.06
June 2014
0.42
1.54
July 2014
0.32**
1.46
August 2014
1.37
September 2014
1.41
October 2014
1.30
* Excludes direct FX sales on January 23, 2014. Provisional data for
rediscount credits from July 2014 and onwards. As of July 22, 2014.
Source: CBRT.
* As of July 18, 2014.
Source: CBRT.
Market Rates
In the second quarter of 2014, due to the decisions made by major central banks, the fall in the
risk premiums of emerging economies and the improvement in capital flows, market rates in emerging
economies followed a mild course (Charts 5.1.16 and 5.1.17). Turkey’s market rates fell in all maturities
due to the waning of risks specific to Turkey in this period. However, the risk premiums increased amid
the recent political unrest in Iraq, taking some part of this fallback. Across countries, Turkey’s 5-year and
6-month market rates are among those which exhibited the most dramatic decline since the previous
reporting period (Charts 5.1.18 and 5.1.19).
Chart 5.1.16.
Chart 5.1.17.
5-Year Market Rates*
6-Month Market Rates*
(Percent)
(Percent)
Turkey
Emerging Economies
Selected Emerging Economies
Emerging Economies
Turkey
Selected Emerging Economies
0
0
0113
1112
0912
0714
0
0712
14
0514
0
0314
2
0114
2
1113
2
0913
2
0713
4
0513
4
0313
4
0113
4
1112
6
6
0912
6
6
0712
8
8
0714
8
8
0514
10
10
0314
10
10
0114
12
12
1113
12
12
0913
14
0713
14
0513
14
0313
16
16
* Emerging economies include Brazil, Chile, Hungary, Poland, Peru, South Africa, Mexico, Malaysia, Colombia, China, South Korea, India, Romania
Indonesia, Czech Republic and Thailand. Selected emerging economies are Brazil, Indonesia, South Africa and India. As of July 22, 2014.
Source: Bloomberg.
Inflation Report 2014-III
55
Central Bank of the Republic of Turkey
Chart 5.1.18.
Chart 5.1.19.
Changes in 5-Year Market Rates*
Changes in 6-Month Market Rates*
(Percent)
0.6
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
-0.2
-0.4
-0.4
-0.6
-0.6
-0.8
-0.8
-1.0
-1.0
-1.2
-1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
Colombia
Indonesia
Thailand
Malaysia
India
China
Czech Rep.
South Africa
Chile
South Korea
Mexico
Brazil
Poland
Turkey
Peru
Hungary
Romania
0.6
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
Colombia
Malaysia
Thailand
Indonesia
Czech Rep.
China
Poland
South Africa
India
South Korea
Brazil
Chile
Peru
Hungary
Mexico
Romania
Turkey
(Percent)
* From April 30, 2014 to July 22, 2014.
Source: Bloomberg.
High BIST overnight repo rate expectations stemming from the tight monetary policy
implemented in the previous quarter posted a decline due to the moderate rate reductions in this
quarter. Accordingly, the BIST Repo and Reverse Repo Market overnight rate expectation distribution
shifted towards left compared to April (Chart 5.1.20). Inflation expectations, another factor that may be
influential on market rates, posted a slight increase compared to April (Chart 5.1.21).
Chart 5.1.20.
Chart 5.1.21.
Expected O/N Rates at the BIST Repo and Reverse
Repo Market*
Inflation Expectations*
July 2014
April 2014
0.9
0.8
0.8
0.7
0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0
0
4
5
6
7
* CBRT Survey of Expectations.
Source: CBRT.
8
9
10
11
12
13
July 2014
8.5
8.5
8.30
8.0
8.0
8.12
7.5
7.5
7.27
7.22
7.0
6.73
6.5
7.0
6.5
6.58
6.0
6.0
1113
0114
0314
0514
0614
0814
1014
1214
0215
0415
0615
0815
1015
1215
0216
0416
0616
0816
1016
April 2014
0.9
* End of current month, current year-end, 12-month-ahead and 24-monthahead policy rate expectations derived from the CBRT Survey of
Expectations.
Source: CBRT.
Owing to positive developments in external markets in the second quarter of 2014, market rates
fell in all maturities on a quarterly basis. Having flattened by the end of April, the yield curve has
recently exhibited an additional decline in the short term following rate reductions (Chart 5.1.22).
Meanwhile, the benchmark rate moved parallel to Turkey’s risk premium in the second quarter.
Moreover, the 1-week repo rate was also lowered in the MPC meetings in this quarter, which is thought
to have been effective on the falling benchmark rate (Chart 5.1.23).
56
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Chart 5.1.22.
Chart 5.1.23.
Yield Curve*
Benchmark Interest Rate and EMBI+Turkey
(Percent)
Mean
May 2
July 22
Median
10.0
Benchmark Interest Rate (percent)
9.5
EMBI+Turkey (basis points, right axis)
12
10.0
400
10
350
9.5
9.0
9.0
8.5
8.5
450
11
300
9
250
8
200
7
8.0
8.0
7.5
100
5
50
4
0
0113
0213
0313
0413
0513
0613
0713
0813
0913
1013
1113
1213
0114
0214
0314
0414
0514
0614
0714
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
4.50
4.75
5.00
7.5
150
6
Maturity (year)
* Shaded region denotes the range of maximum and minimum returns at the
corresponding maturities.
Source: BIST, CBRT.
Source: BIST, Bloomberg.
Having risen in the start of the previous quarter, real interest rates have started to decline as of
mid-March and continued to fall across the second quarter. Although 2-year inflation expectations did
not exhibit a noticeable change, the sizeable fall in nominal interest rates was determinant on the
changes in the 2-year real interest rates (Chart 5.1.24). When compared to other emerging economies,
Turkey’s ranking in the list fell slightly due to the recent decline in the 2-year real interest rate
(Chart 5.1.25).
Chart 5.1.24.
Chart 5.1.25.
2-Year Real Interest Rates for Turkey* (Percent)
2-Year Real Interest Rates* (Percent)
4
4
3
3
2
2
1
1
0
0
-1
-1
8
7
6
5
4
3
2
1
0
-1
-2
-3
8
7
6
5
4
3
2
1
0
-1
-2
-3
Brazil
Colombia
Indonesia
Turkey
South Africa
Peru
China
India
Chile
Poland
South Korea
Mexico
Hungary
Malaysia
Thailand
Romania
Philippines
Israel
Czech Rep.
5
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
5
* Calculated as the difference between 2-year discounted bond returns
derived from the yield curve and the 24-month-ahead inflation
expectations derived from the CBRT Survey of Expectations. As of July 15,
2014.
Source: BIST, CBRT.
* Calculated as the difference between 2-year government bond returns
of countries and the 24-month-ahead inflation expectations derived from
the Consensus Forecasts. As of July 15, 2014.
Source: Bloomberg, Consensus Forecasts, CBRT.
Loan Rates and Banking Sector Funding Costs
Rates on loans extended to the non-financial sector, which increased notably in early 2014,
gradually decreased in the rest of the year due to the loosened domestic and external financing
conditions. The largest fall in consumer loans appeared in automobile loans, while the rates on housing
loans posted a quarter-on-quarter decline by 150 basis points (Chart 5.1.26). The fall in commercial loan
rates, which are mostly extended in the short term, proved more evident compared to consumer loan
rates (Chart 5.1.27). According to the results of the Loan Tendency Survey of the second quarter of the
year, the tightening in fees and commissions (non-interest charges) implies that the fall in commercial
loan rates was not reflected on firms.
Inflation Report 2014-III
57
Central Bank of the Republic of Turkey
Chart 5.1.26.
Chart 5.1.27.
Consumer Loan Rates
TL Commercial Loan Rates
(Flow, Annualized, 4-Week Moving Average, Percent)
(Flow, Annualized, Percent)
Housing
Commercial Loan Rate
Commercial Loan Rate (excl. overdraft account)
5
0514
5
0214
8
1113
8
0813
11
0513
11
0213
14
1112
14
0812
17
0512
17
0212
20
1110
0514
0214
1113
0813
8
0513
8
0213
10
1112
10
0812
12
0512
14
12
0212
14
1111
16
0811
16
0511
18
0211
20
18
1110
20
20
1111
22
0811
22
0511
Personal
0211
Automobile
Source: CBRT.
As the CBRT reduced the 1-week repo rate in May and June by 125 basis points in total, the TLdenominated deposit rate fell in the second half of the year. In the same period, as the commercial
loan rates declined as well, the spread between the commercial loan rate and the deposit rate
decreased and neared the long-term average (Chart 5.1.28). As the ECB started implementing a
negative interest rate policy and the Fed signaled for a probable easing with the latest data from the
US in the second quarter of the year, the funding amount flowing into Turkey with other emerging
economies increased, and this had effects on the bonds and bills issued by banks. Rates on domestic
issues of bills and bonds issued by banks saw a greater decline than that in deposit rates in the second
quarter of the year (Chart 5.1.29).
Chart 5.1.28.
Chart 5.1.29.
TL Commercial Loan Rate and Deposit Rate
(Flow, Annualized, 4-Week Moving Average, Percent)
Indicators on the Cost of Banks’ Funding
TL Deposit Interest Rate
Bills and Bonds Rate
Deposit Rate
CBRT Average Funding Rate
TL Commercial Interest Rate
9
12
6
11
11
5.5
10
10
5
9
9
4.5
8
8
4
7
7
3.5
6
6
5
5
4
4
3
3
3
7
2.5
0214
0414
0614
0213
0413
0613
0813
1013
1213
0212
0412
0612
0812
1012
1212
2
0811
1011
1211
5
0214
0414
0614
11
13
12
0213
0413
0613
0813
1013
1213
13
13
6.5
0212
0412
0612
0812
1012
1212
15
7
0811
1011
1211
TL Commercial Interest Rate - TL Deposit
Interest rate (right axis)
17
Source: CBRT.
5.2. Credit Volume and Monetary Indicators
The net credits to GDP ratio, which is critical to financial stability and an indicator of the
relationship among credit growth, economic activity and aggregate demand, trended further
downwards in the second quarter of 2014 and fell below 12 percent reflecting the slowdown in the
credit growth (Chart 5.2.1). In the next quarter, with more supportive financial conditions amid falling
loan rates, assessments indicate that the decline in the net credits to GDP ratio will pace down. The
58
Inflation Report 2014-III
Central Bank of the Republic of Turkey
relatively flat course of the firms’ external net credit use in this period shows that firms had easy access
to external borrowing (Chart 5.2.2).
Chart 5.2.1.
Chart 5.2.2.
Domestic Credit Stock and Net Credit Use
External Credit Stock and Net Credit Use
(Percent, Annualized)
(Percent, Annualized)
External Credit Stock/GDP
External Net Credit Use/GDP (right axis)
Domestic Credit Stock/GDP
Domestic Net Credit Use/GDP (right axis)
18
10
65
16
9
3.5
60
14
8
3
7
2.5
70
55
12
4
2
6
50
10
45
8
40
6
3
0
35
4
2
-0.5
30
2
1
-1
25
0
0
2009
2010
2011
2012
1
4
0.5
-1.5
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
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
2008
1.5
5
2008
2013 2014
2009
2010
2011
2012
2013 2014
Source: CBRT.
The annual growth rates of loans extended to the non-financial sector, which have been
trending downwards since the start of 2014, continued with this trend in the second quarter. This fall is
more evident in consumer loans due to the scope of the measures that the BRSA introduced in the
beginning of the year and the tight monetary policy implemented by the CBRT. The improved
sentiment for the overall economic outlook that affected the loan demand and supply negatively in
the start of the year, the quarter-on-quarter increase in the consumer confidence indices, the fall in
loan rates and the seasonality effect drove the annualized loan growth rates upwards. Against these
developments, loans extended to the non-financial sector adjusted for the exchange rate effect
posted a 17.3 percent year-on-year growth at the end of the second quarter of 2014 (Chart 5.2.3), and
a 19.1 percent growth in annualized terms compared to the first-quarter average (Chart 5.2.4). The
improved sentiment for the overall economic outlook amid the fall in loan rates, the expected
reduction in banks’ domestic funding costs and the decline in domestic risks imply that the decline in
the loan growth rate may slow down in the upcoming quarter.
Chart 5.2.3.
Chart 5.2.4.
Annual Growth Rate of Loans
Quarterly Growth Rate of Loans
(Adjusted for Exchange Rate Effect, Annualized, Percent)
Commercial
Consumer
(Adjusted for Exchange Rate Effect, 13-Week Moving
Average, Annualized, Percent)
Total
Commercial
Total
30
25
20
20
20
20
15
15
10
10
10
10
0
0
60
0514
0214
1113
0813
0513
0213
1112
0812
0512
0212
1111
0811
0511
0211
Consumer
1110
0811
0511
0211
1110
0514
30
25
0214
40
30
1113
40
30
0813
35
0513
35
0213
50
1112
50
0812
40
0512
40
0212
60
1111
45
45
Source: CBRT.
Inflation Report 2014-III
59
Central Bank of the Republic of Turkey
Having lagged behind past years’ averages across the year, consumer loan growth started to
increase in May (Chart 5.2.5). This is attributed to the gradual fall in consumer loan rates besides
seasonality. Across sub-items, the annualized growth rate of housing loans, which has higher interest
rate sensitivity, trended upwards in May. In the Loan Tendency Survey, the annualized growth rate of
the demand for housing loans, which did not change on a quarterly basis, stood at 10.8 percent at the
end of the quarter. The annualized growth rate of personal loans remained below the past years’
average with 21.2 percent in the same period (Chart 5.2.6). Banks did not tighten housing loan
standards, while personal loans were slightly tightened compared to the previous quarter. Automobile
loans continued with a contracted trend in this quarter as well as across the year. Measures taken by
BRSA coupled with the low course of durable goods sales led to a decline in the credit card stock.
Chart 5.2.5.
Chart 5.2.6.
Consumer Loan Growth
Weekly Growth Rate of Consumer Loans
(13-Week Moving Average, Annualized, Percent)
2014
(13-Week Moving Average, Annualized, Percent)
Housing
2007-2013 Average
Personal
Automobile
50
50
15
30
30
10
10
10
10
5
5
-10
-10
0
0
-30
-30
0110
0410
0710
1010
0111
0411
0711
1011
0112
0412
0712
1012
0113
0413
0713
1013
0114
0414
20
15
Dec
20
Oct
70
Nov
25
Sep
25
Jul
90
70
Aug
90
Jun
30
Apr
110
30
May
130
110
Mar
130
35
Jan
40
35
Feb
40
Source: CBRT.
Having shorter maturities than consumer loans, the growth rate of commercial loans remained
slightly lower than past years’ averages in the second quarter, while it was close to those levels at the
start of the year (Chart 5.2.7). In terms of currencies, the growth rate of TL commercial loans, which are
barely sensitive to interest rates, was flat, while the growth rate of FX-denominated commercial loans
has trended upwards since March (Chart 5.2.8). According to the Loan Tendency Survey, demand for
commercial loans remained almost unchanged, while demand for loans by the SMEs posted an
increase in the second quarter. Commercial loan standards of banks recorded a limited easing. In
terms of scales, loan standards remained the same, whereas banks tightened their FX-denominated
commercial loan standards, and eased standards for TL-denominated commercial loans. Contrary to
the previous quarter, perception of the overall economic outlook helped the easing in standards in this
quarter. Banks cut their profit margins slightly on average loans, yet increased the non-interest fees and
commissions. A limited easing in TL-denominated loans is expected in the third quarter, which is
consistent with the expectation of the banks that domestic financing conditions will be eased.
Demand for all types of commercial loans, particularly TL-denominated ones is expected to rise.
60
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Chart 5.2.7.
Chart 5.2.8.
Consumer Loan Growth
Growth Rates of TL and FX Commercial Loans
(Adjusted for Exchange Rate Effect, 13-Week Moving
Average, Annualized, Percent)
(Adjusted for Exchange Rate Effect, 13-Week Moving
Average, Annualized, Percent)
TL Commercial Loans
2007-2013 Average
2014
FX Commercial Loans (including foreign branches)
20
20
15
15
10
10
10
10
5
5
0
0
0
0
-10
0614
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
-10
0311
Dec
30
20
Oct
30
20
Nov
40
25
Sep
40
25
Jul
50
Aug
50
30
Jun
35
30
Apr
35
May
60
Mar
60
Feb
40
Jan
40
Source: CBRT.
In the second quarter of 2014, the decline in the annual growth rate of total credits continued,
although more apparent in consumer loans. Macroprudential measures led to a faster growth in
commercial loans compared to consumer loans, supporting the balancing of the economy. This is
consistent with an outlook in which domestic demand has little support for economic activity and net
exports make a greater contribution. Gradually falling loan rates, expectations for easing in banks’
financing conditions in addition to the rising consumer confidence are estimated to limit the decline in
the loan growth rate and may ensure that it settles on a track of reasonable growth rates with a
moderate pace in the upcoming quarter. The loan growth that has been slowing due to the policies
implemented by the CBRT and the BRSA and the pace of deposit growth are expected to converge
gradually (Chart 5.2.9). The decline in the loan-deposit growth gap is a factor that will enhance the
resilience of the banking sector against possible financial fluctuations by also reducing the banking
sector’s need for external financing.
Chart 5.2.9
Growth of Credits and Deposits*
(Annual Change/GDP)
Deposits
Credits
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
0109
0409
0709
1009
0110
0410
0710
1010
0111
0411
0711
1011
0112
0412
0712
1012
0113
0413
0713
1013
0114
0414
18
* Including participation banks, excluding interbank deposit and not adjusted for exchange
rate effect.
Source: TurkStat, CBRT.
Inflation Report 2014-III
61
Central Bank of the Republic of Turkey
Monetary Indicators
The uptrend in credits extended to the private sector continued to be the determinant factor of
the annual growth of M3, the broad measure of money supply, in the second quarter of 2014. The
annual rate of increase in the Private Sector Claims mostly including the credits extended by banks to
the non-financial individuals and organizations continued to fall in the second quarter of 2014,
constituting the main factor of the decline in the growth of the M3 money supply.
Having contributed negatively since February 2011, Public Sector Claims started to support the
M3 growth in the second quarter of 2014. The negative contribution of net external assets posted a
slight increase compared to the first quarter of the year. Meanwhile, the item Other, which displayed a
relatively steady course in line with bank profitability, is still a non-deposit funding resource for the
banking sector, yet recorded a slight fall compared to the end of the first quarter (Chart 5.2.10).
Chart 5.2.10.
Chart 5.2.11.
Balance Sheet Decomposition of M3
Currency in Circulation and Current Consumption
Spending*
(Contributions to Annual M3 Growth)
(Seasonally Adjusted)
4. Other
3. Private Sector Claims
2. Public Sector Claims
1. Net External Assets
1+2+3-4= M3 (annual percent change)
Current Consumption Spending (annual percent change)
Currency in Circulation (annual percent change)
Currency in Circulation (right axis)
Percent
Billion TL
40
40
35
85
30
30
30
75
25
20
65
20
20
10
10
0
0
-10
-20
-20
0108
0508
0908
0109
0509
0909
0110
0510
0910
0111
0511
0911
0112
0512
0912
0113
0513
0913
0114
0514
-10
Source: CBRT.
55
15
45
10
35
5
0
25
12341234123412341234123412
2008
2009
2010
2011
2012
2013 2014
* Consumption spending includes private and public consumption
excluding furniture, household appliances, and transport and
communication services at current prices.
Source: TurkStat, CBRT.
The annual growth of seasonally adjusted currency in circulation registered a notable decline in
the second quarter of 2014 (Chart 5.2.11). As also stated in the previous inflation report, growth rates of
consumer loans lessened and the private domestic demand lost some momentum due to the tight
monetary policy stance, macroprudential measures and weak capital flows. These became the main
drivers of the fall in the annual growth of the currency in circulation.
62
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Box
5.1
Credit Growth and the Current Account Balance
Global imbalances, which widened persistently before the crisis and narrowed suddenly following the crisis,
caused an increased emphasis on analyzing the current account balance determinants. The effects of
demographics, fiscal balance, growth expectations, net foreign assets and oil dependency on the current
account balance were examined extensively in the economic literature. On the other hand, studies
investigating the effects of financial variables on the current account balance have become popular only
recently. In accordance with the higher prominence of financial variables, this box presents an analysis of
the relationship between credit growth and the current account balance.
Accordingly,
a panel dataset of 49 emerging and advanced economies is used in this analysis. The
dataset is of annual frequency and covers the 1991-2011 period. The ratio of net credit use to the GDP,
which is referred to as credit growth, is selected as the financial variable indicator, whereas widely cited
factors determining the current account balance are used as control variables.
To test the effects of credit growth on the current account balance, the following equation is estimated by
the generalized least squares method under various specifications after correcting for the strong
autocorrelation observed in the current account balance:
(
Here, (
(
)
(
)
) denotes the ratio of the current account balance to the GDP of country i at time t;
)
shows the credit growth;
stands for the control variables; and
expresses the error
term. Table 1 presents the sources as well as the estimated effects of these control variables on the current
account balance.1
Table 1. Data Set
Current Account Balance/GDP
Credit Growth
Net Foreign Assets/GDP
(NFA/GDP)
Dummy Variable for High Debt
Relative Income
Average Growth Rate
Oil Trade Balance/GDP
Fiscal Balance
Financial Center Dummy
1
New Loans/GDP
-
Lane and Milesi-Ferretti (2007)
One period lagged
+
WEO
=1 if NFA/GDP< -60%
Country’s GDP per capita/ GDP
per capita in US
5-year average GDP growth
+
WDI
WEO
The World Bank Global Economic
Expectations
Phillips et al. (2013)
Exorbitant Privilege
WEO
Dependency Ratio (Old)
WDI
Dependency Ratio (Young)
WDI
Population Growth
Terms of Trade
WDI
WDI
Explanation
Expected
Impact
Source
WEO
WDI
-
+
+
=1 for Netherlands, Switzerland and
Belgium
Local currency’s share in world
reserves
Population over 65/working-age
population
Population under 15 /working-age
population
+
+
For further details, see Phillips et al. (2013).
Inflation Report 2014-III
63
Central Bank of the Republic of Turkey
Table
2 presents the estimation results. The first
Table 2. Panel Estimation Results
and the second columns show estimation results
Credit Growth
when control variables are added and excluded,
respectively. Accordingly, credit growth has a
balance
in
both
economic
(2)
-0.027***
(0.005)
(0.006)
Credit Growth*AE
strong and negative effect on the current
account
(1)
-0.030***
Credit Growth*EE
and
Control Variables
statistical terms. For example, in the case where
No
Number of
Observations
the control variables are excluded, a 10 percent
Number of Countries
increase in credit growth causes a 0.3 percent
(3)
(4)
-0.012**
-0.012**
(0.005)
(0.006)
-0.060***
-0.056***
(0.011)
(0.013)
Yes
1000
967
49
49
No
1000
Wald Test p-values
Yes
967
49
49
(0.0001)
(0.0014)
***, ** and * denote significance level of 1, 5 and 10 percent, respectively. Standard
errors are in parentheses. AE and EE denote dummy variables for advanced and
emerging economies.
decline in the current account balance. When
control variables are added, this effect remains
the same in strength.
That the determinants of the current account balance can vary due to country-specific factors is a widely
debated issue in the economic literature. Accordingly, whether the economy is emerging or advanced
may alter the results. Therefore, dummy variables for advanced and emerging economies are included in
the model. Results are presented in the last two columns of Table 2 for the inclusion and exclusion of control
variables, respectively. In this context, the results indicate that credit growth has a negative effect on the
current account balance in both country groups. Nevertheless, the most important finding is that the effect
of credit growth on the current account balance is nearly 5 times larger in emerging economies than that
in advanced economies. Thus, results point to significant differences among countries.
To make this differentiation more apparent, country-specific parameter estimations are extracted using the
equation below:
(
Here
)
(
)
denotes dummy variable for country i and
panel average. Addition of parameters
and
(
)
shows the extent of deviation of this country from the
will suffice to calculate the estimated effect of credit
growth on the current account balance in
that specific country. In Table 3, this total
Table 3. Total Effect for Selected Countries (
)
Panel Averages
-0.027
Poland*
-0.07
Peru
-0.34
Mexico*
-0.07
Pakistan
-0.33
South Africa*
-0.01
growth on the current account balance in
Turkey
-0.26
Indonesia*
-0.01
some
Colombia
-0.23
Brazil*
0.01
Philippines
-0.17
India*
0.05
Hungary*
-0.12
China
0.12
effect is estimated for selected countries. As
illustrated in the table, the effect of credit
emerging
economies
deviate
significantly from the panel average. More
specifically, a 10 percent fall in credit growth
*
is not statistically significant.
results in 0.27 percent increase in the current account balance according to the panel average. However,
the same amount of fall may cause a deterioration of 2.6 percentage points in Turkey’s current account
balance.2
2
For a discussion on the reasons for the heterogeneity of parameters and the probable effects of financial depth, see Ekinci et al. (2014).
64
Inflation Report 2014-III
Central Bank of the Republic of Turkey
In sum, the effects of financial variables on the current account balance, which have been relatively less
discussed in the economic literature, are analyzed in this box. The use of a panel data set of 49 countries
indicates that credit growth has a strong and negative effect that is both economically and statistically
significant for the current account balance. It is inferred that this effect is much more pronounced in
emerging economies compared to advanced economies. As per the country-specific estimations, the
impact is quite powerful in Turkey relative to the other emerging economies.
REFERENCES
Ekinci, M.F., F.P Erdem and Z. Kılınç, 2014, Credit Growth, Current Account and Financial Depth, CBRT
Working Paper No. 14/21.
Lane, P.R. and G.M. Milesi-Ferretti, 2007, External Adjustment and the Global Crisis, Journal of International
Economics, 88(2): 252-265.
Phillips, S., L. Catao, L. Ricci, R. Bems, M. Das, J. Di Giovanni, D.F. Unsal, M. Castillo, J. Lee, J. Rodriguez and
M. Vargas, 2013, The External Balance Assessment (EBA) Methodology, IMF Working Paper Series
No. 13/272.
Inflation Report 2014-III
65
Central Bank of the Republic of Turkey
Box
The Relationship between Consumer and Commercial Loans and the Current Account
5.2
Deficit in Turkey
Turkey experienced a considerable financial deepening in the last decade. Financial deepening is integral
to economic development and close monitoring of credit developments in the meantime is critical to the
implementation of macroeconomic and financial stability policies.
Turkey exhibited a fast and robust economic growth after the global crisis. Total credit growth rates neared
40 percent in annualized terms and net credit use reached 15 percent in mid-2011 (Chart 1). Domestic
financing resources may fail to meet sudden
booms in loan demand, thereby deteriorating the
current account balance.3 This deterioration may
Total Credit Change/GDP (right axis)
20
excessive
end-2010. Following the adoption of this policy,
6
4
2
2
0
0
2014
the CBRT developed a new policy framework in
8
2013
To contain financial risks caused by these factors,
10
4
2012
account balance worsened considerably.4
12
6
2011
elevated in 2010 and 2011 and the current
14
8
2010
illustrated in Chart 1, credit growth remained
16
2009
appreciation of the local currency. In fact, as
18
10
2008
an
2007
by
2006
accompanied
2005
be
Current Account/GDP
12
2004
also
Chart 1. Current Account Deficit and Total Loan Change/GDP
(Percent)
Source: TurkStat, BRSA, CBRT.
and also owing to the measures taken by other
regulatory institutions, credit growth rates receded to reasonable levels; the current account deficit was
reduced; and the excessive appreciation of the Turkish lira ended. These corrections, which were mostly
observed during times of crisis in the past, were experienced without any contraction. This proves that the
implemented policy measures successfully achieved a significant balancing in the economy.
Charts 2 and 3 illustrate net credit use for consumer and commercial loans along with the current account
deficit. For a variety of reasons, the relationship of current account deficit with loans may differ by loan
type. This fact is critical to the design of policy measures for improving the current account balance and
also safeguarding financial stability.
The current account deficit may widen due to an increase in domestic loan demand through external financing. Also, an increase in capital
inflows driven by external factors, like convenient global liquidity conditions, may ease domestic lending and lead to high rates of credit growth. In
both cases, measures to contain credit demand and prevent the easing in lending conditions may cause an improvement in the current account
deficit.
4 Recent studies also discuss that credits are an important determinant of the current account deficit. For example, see CBRT (2014a) and Ekinci et
al. (2014).
3
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Chart 2. Current Account Deficit and Total Consumer Loan
Change/GDP (Percent)
Chart 3. Current Account Deficit and Total Commercial
Loan Change/GDP (Percent)
Current Account/GDP
Commercial Loan Change/GDP (right axis)
Current Account/GDP
Consumer Loan Change/GDP (right axis)
2
0
0
0
2
0
-2
0114
1
4
0513
2
6
0912
4
0112
2
0511
4
8
0910
6
0110
3
10
0509
6
12
0908
8
0108
4
0507
8
14
0906
10
0106
5
0505
10
16
0904
12
0104
6
0104
0804
0305
1005
0506
1206
0707
0208
0908
0409
1109
0610
0111
0811
0312
1012
0513
1213
12
Source: BRSA, CBRT.
As any increase in consumer loans can increase consumption demand and some part of this increase may
be directed towards imported goods, the current account deficit is likely to deteriorate. Moreover, when
the supply capacity in the economy is fixed, an increase in consumption demand financed by consumer
loans may trigger a general price increase in the economy and cause the local currency to appreciate in
real terms. Thus, real exchange rate appreciation can also function as a booster of the current account
deficit as an additional channel.
Meanwhile, the effect of commercial loans on the current account deficit can be expected to differ from
that of consumer loans. For example, while an increase in commercial loans towards providing imported
inputs of firms can widen the current account deficit, an increase in production at the same time may put a
cap on the widening of the current account deficit as long as there is no deterioration in the production
structure in favor of imported inputs. In addition, use of commercial loans for investment purposes may
widen the current account deficit due to the partial provision of the financing requirement from abroad
and/or the use of imported inputs. However, the increase in the production capacity, which is driven by
investments and imported inputs, will eventually be able to contribute to the supply level and contain the
deterioration in the current account deficit. Moreover, the rise in the production capacity caused by
imported inputs and investments can also support the export activities of firms, which can have an
additional lowering effect on the current account deficit. In case firms’ credit constraints for exports are
binding, the rise in commercial loans can reduce the current account deficit by directly increasing exports.
In view of these possibilities, the following empirical model was estimated to analyze the relationship of the
current account deficit with both consumer and commercial loans. In addition to loans, the model also
considers the effects of GDP growth, the real exchange rate (with a 2-period lag) and the lagged value of
the current account deficit.5 For robustness check, the same analysis is repeated by using current account
deficit excluding gold, which has recently moved relatively independent from business cycles of the
economy.6
Credit data used in this box are compiled by the BRSA, while the others are quarterly data obtained from the CBRT resources. All the data are
seasonally adjusted covering the 2003Q4-2013Q4 period. Quarterly current account deficit and non-gold current account deficit variables are
divided by the quarterly GDP; while consumer loan, commercial and total loan change variables are obtained by dividing the quarterly credit
stock changes in these items to the quarterly GDP. The GDP growth is quarter-on-quarter change in GDP. An increase in real effective exchange
rate means the appreciation of the Turkish lira against the USD and all variables excluding the exchange rate are calculated in percentages.
6 None of the variables in the current account deficit equation has the non-stationarity problem. However, the current account deficit excluding
gold exhibits non-stationarity, which is removed by taking the first difference of the series.
5
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
Table 1. Credit Growth and the Current Account Deficit
Dependent Variable :
Current Account Deficit/GDP
Dependent Variable :
Current Account Deficit excl. gold/GDP (First Difference)
(1)
(2)
(3)
(4)
(5)
(6)
3.268
(1.667)*
0.261
(1.469)
0.356
(1.280)
3.084
(1.358)**
1.808
(1.434)
1.950
(1.297)
Current Accountt-1
0.955
(0.095)***
0.859
(0.037)***
0.844
(0.035)***
-
-
-
GDP Growth
-0.157
(0.048)***
-0.090
(0.041)**
-0.051
(0.033)
-0.141
(0.030)***
-0.121
(0.033)***
-0.096
(0.032)***
-0.028
(0.014)*
0.000
(0.012)
0.001
(0.010)
-0.024
(0.011)**
-0.010
(0.012)
-0.010
(0.011)
Total Loan Change/GDPt-1
-
-0.108
(0.020)***
-
-0.049
(0.022)**
-
Consumer Loan Change/GDPt-1
-
-
-0.365
(0.076)***
-
-
-0.229
(0.094)**
Commercial Loan Change/GDPt-1
-
-
-0.035
(0.025)
-
-
0.004
(0.026)
0.917
0.959
0.969
0.368
0.490
0.548
Constant
Real Effective Exchange Ratet-2
*,** and *** denote significance level of 10, 5 and 1 percent, respectively. Number of observations is 39.
According
to the estimation results, GDP growth stands out as an important explanatory variable.
Moreover, the appreciation of the real exchange rate has a significantly positive effect on the current
account deficit. When the net credit use is added, the real exchange rate continues to be influential on the
current account deficit. As displayed in the second column, an increase in the net credit use by 1
percentage points adds 0.77 percentage points to current account deficit in the long term.
Joint
use of consumer and commercial loans in estimations show that any rise in consumer loans
deteriorates the current account balance and the effect of net consumer loan use on the current account
deficit is stronger than that of the net credit use. Meanwhile, use of commercial loans does not have a
significant effect on the current account deficit.7 From an economic point of view, this finding implies that
use of consumer loan increases the current account deficit considerably, whereas commercial loan use
does not have any effect.8 Another striking finding is the reduced significance of GDP and that the real
exchange rate is no longer significant with the inclusion of loans to the empirical model. Therefore, some
part of the effect of GDP growth that appears when the credit variable is not controlled and the effect of
real exchange rate on current account balance manifest through credits. In fact, an increase in consumer
loans may deteriorate the current account deficit through import demand and the appreciation of the real
exchange rate by pushing prices upwards for a given supply.
This finding is valid under various robustness analyses like the use of the first difference of the current account deficit, the current account deficit
excluding gold and energy or the cyclical component of the current account deficit as well. For further details, see Alioğulları et al. (2014).
8 Büyükkarabacak et al. (2009) analyzed 18 emerging economies to show that the composition of credit matters for the trade balance. The
authors find that consumer loans have negative contribution, whereas commercial loans have a positive contribution on the trade balance.
7
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Central Bank of the Republic of Turkey
The fact that the effects of consumer and commercial loans on the current account deficit are different
also entails informative value regarding the measures to be taken to improve the current account balance.
Obtained findings suggest that containing credit growth mostly by limiting consumer loans may improve the
current account balance. Accordingly, with the liquidity policies recently adopted by the CBRT 9 and the
macroprudential measures enforced by the BRSA, consumer loans will further decelerate while commercial
loans will remain strong, thereby favorably affecting the correction of the current account balance.
REFERENCES
Alioğulları, Z.H., Y.S. Başkaya, Y.E. Bulut and M. Kılınç, 2014, Türkiye’de Tüketici ve Ticari Kredilerin Cari Açıkla
İlişkisi (in Turkish), forthcoming CBT Research Notes in Economics.
Büyükkarabacak, B. and S. Krause, 2009, Studying The Effects of Household and Firm Credit On The Trade
Balance: The Composition of Funds Matters, Economic Inquiry, 47(4): 653-666.
CBRT, 2014a, Credit Growth and the Current Account Balance, Box 5.1, Inflation Report 2014-III.
, 2014b, The Relationship between the System’s Funding Need and TL Loans, Box 5.3, Inflation
Report 2014-III.
Ekinci, M.F., F.P. Erdem and Z. Kılınç, 2014, Credit Growth, Current Account and Financial Depth, CBRT
Working Paper No. 14/21.
Güler, M.H., G. Keleş, E. Kilimci, 2014, Sistemin Fonlama İhtiyacı Bileşenleri ve Türk Lirası Kredi İlişkisi (in Turkish),
CBT Research Notes in Economics No. 14/03.
9
For further details, see CBRT (2014b) and Güler et al. (2014).
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
Box
The Relationship between the System’s Funding Need and TL Loans
5.3
This
box presents an analysis of the current monetary policy framework in terms of its effect on the
divergence between the changes in the TL consumer and commercial loans. To this end, the changes in
the amount of TL required reserves and system’s funding need (SFN) excluding TL required reserves, which
are the sub-components of the SFN, are examined in terms of their impact on consumer and commercial
loans. Accordingly, Chart 1 presents the course of the SFN components.
Under
the current monetary policy framework implemented since early 2011, the CBRT uses TL reserve
requirement ratios and the liquidity gap as an active policy tool in addition to the interest rate corridor and
the funding policy. In this context, by raising the share of SFN sub-items within the total liabilities of the
banking sector, the CBRT may deliver both quantitative and qualitative tightening. The rise in the share of
the SFN sub-items (which have shorter maturities than deposits) within the balance sheet increases the
interest rate risk that the banking sector faces due to the maturity mismatch between assets and liabilities,
and this can impose an additional hedging cost to banks. This cost appears in varying degrees by loan
types, which may lead to a divergence between the TL consumer and commercial loan volumes. Due to
this divergence, banks prefer extending commercial loans rather than consumer loans. Thus, the supply of
goods and services as opposed to the demand thereof is supported, which in turn, contributes to price
stability as well as the balancing of domestic and external demand.
SFN Sub-components and TL Loans
The data used in this study covers the January 2011 – November 2013 period, during which the new policy
mix was effectively used. The data on net OMO is used as the SFN indicator. 10 The net OMO is obtained by
subtracting the undue Turkish lira sterilization amount from the undue Turkish lira funding provided by the
CBRT through repo and depot. When the system’s funding need is positive, this implies that the banking
system has a Turkish lira liquidity need.
The effects of SFN sub-components on TL consumer and commercial loans are examined via the impulse
response functions obtained from the structural VAR analyses based on weekly data. The course of TL
consumer loans and SFN excluding TL required reserves is illustrated in Chart 2.
Chart 1. Decomposition of System’s Funding Need
(Billion TL)
Chart 2. TL Consumer Loans and SFN-TL Required Reserves
(Percent)
80
39.00
Consumer Loans/Total Liabilities
(SFN-TL Required Reserves)/Total Liabilities (right axis)
1.50
60
60
38.00
1.00
40
40
37.00
20
20
36.00
0
0
35.00
-20
-20
34.00
-1.50
-40
-40
33.00
-2.00
SFN-TL Required Reserves
TL Required Reserves
SFN
80
0.50
0.00
04/2014
01/2014
10/2013
07/2013
04/2013
01/2013
10/2012
07/2012
04/2012
01/2012
10/2011
07/2011
04/2011
-1.00
01/2011
04/2014
01/2014
10/2013
07/2013
04/2013
01/2013
10/2012
07/2012
04/2012
01/2012
10/2011
07/2011
04/2011
01/2011
-0.50
Source: BRSA, CBRT.
10 For
70
further details, see Güler et al. (2014).
Inflation Report 2014-III
Central Bank of the Republic of Turkey
The net OMO, which denotes the SFN, is determined by the items on the assets and liabilities sides of the
CBRT’s balance sheet. Basically, the asset side of the CBRT’s balance sheet is composed of FX reserves
(
), government domestic debt securities (
) and open market operations (
side covers the money in circulation (
(
), banking sector reserves (
). The liabilities
) and public deposits
).
(1)
In the CBRT’s balance sheet,
i.
When
and
are fixed, the increase in liabilities in equation (1) increases the
net OMO.
Banks, which use nearly all of their deposits in purchasing foreign exchange assets, securities and/or giving
loans, usually provide required reserves through open market operations. Thus, the net OMO mainly
originates from the TL required reserves that the banks need to maintain. This is denoted as “Reserves” in
equation (1).11.
On
the other hand, external factors that are not directly determined by the CBRT, such as changes in
public deposits held at the CBRT and the increase/decrease in the money in circulation, are also influential
on the SFN. The net effect of external factors can take positive or negative values, while SFN usually
fluctuates around the TL required reserves.
ii.
When the liabilities side of the Equation (1) is fixed, a decline in
and
increases
the net OMO as well.
Therefore, other than TL required reserves and external factors, another component influential on the SFN is
FX sales or purchases of the CBRT and the purchases and sales of TL-denominated GDDS. Unlike OMO, this
component affects SFN permanently as long as the operation is not reversed.
Examining
the banking sector balance sheet will be helpful in monitoring the relationship between the
credit development and the SFN. The simplified banking sector balance sheet, which has the assets side
covering FX assets (
CBRT(
(
), the government domestic debt securities (
) and credits (
) and net open market operations (
(
), reserves held at the
) and the liabilities side covering the household and public deposits
)
) are formulated below:
(
)
(2)
Under the current inflation targeting regime, the banking sector can have access to unlimited borrowing
from the CBRT against their collaterals; thus changes in FX reserves are reflected on SFN. Therefore, the
difference between SFN and FX reserves in equation (2) mainly moves in line with the changes in external
factors or by the volition of the CBRT.
Reserves indicate the sum of required reserves and free deposits of banks. As there is a liquidity gap in the system currently, reserves and TL
required reserves are used interchangeably in this box.
11.
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Central Bank of the Republic of Turkey
TL Consumer Loans: Structural VAR analysis
Impulse
response functions of the structural VAR analysis12 scrutinizing how the changes in TL required
reserves and SFN excluding TL required reserves affect TL consumer loans are given in Charts 3 and 4. As
expected, an increase in the SFN excluding required reserves decreases consumer loans through the
balance sheet channel. However, increases in TL required reserves surprisingly do not have a statistically
significant effect on consumer loans. This can be attributed to the diminishing effect of exogenous
increases in required reserves on deposit rates. More specifically, an increase in required reserve ratios raises
the cost of deposits, which can be passed on to customers as lower rates. This fall in deposit rates is assessed
to curb the boosting effect of required reserves (decreasing effect on the credit volume) on the consumer
loan rates.
Chart 3. Impulse Response of TL Consumer Loans to SFN
Excluding Required Reserves*
Chart 4. Impulse Response of TL Consumer Loans to TL
Required Reserves*
0.05
0.05
0.00
0.00
-0.05
-0.05
-0.10
-0.10
-0.15
-0.15
-0.20
-0.20
-0.25
-0.25
-0.30
-0.30
0
2
4
6
8 10 12 14 16 18 20 22 24
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
-2.0
0
2
4
6
8 10 12 14 16 18 20 22 24
* Denotes the impulse responses of consumer loans to a one-unit decline in SFN excluding required reserves and TL required reserves in the period
between 01/01/2011 and 01/11/2013. Response functions were obtained by the structural VAR model including the endogenous variable vector y=
[SFN- required reserves, deposits, reserves, consumer loans, exchange rate]. Optimal lag length was taken as 3 weeks. Straight lines denote responses,
while dashed lines indicate the significance level of 95 percent.
TL Commercial Loans: Structural VAR analysis
Impulse response functions of the structural
VAR analysis13 scrutinizing how the changes in TL required
reserves and SFN excluding TL required reserves affect TL commercial loans are given in Charts 5 and 6.
Accordingly, effects of neither the SFN excluding TL required reserves nor the TL required reserves are
considered to be statistically significant on TL commercial loans. This conclusion proves that a decline in
commercial loans in times of heightened exchange rate volatility and loss of confidence in the economy
cannot be attributed to an increase in the SFN excluding TL required reserves. This result is owed to the
rotative structure of commercial loans besides the low elasticity of commercial loan demand.
The analysis is conducted using the endogenous variable vector y= [SFN- required reserves, deposits, reserves, consumer loans, exchange rate].
For structural VAR analysis contraints, see Güler et al. (2014).
13 The analysis is conducted using the endogenous variable vector y= [SFN- required reserves, deposits, reserves, commercial loans, exchange
rate].
12
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Central Bank of the Republic of Turkey
Chart 5. Impulse Response of TL Commercial Loans to SFNRequired Reserves*
Chart 6. Impulse Response of TL Required Reserves to SFNRequired Reserves *
0.2
0.2
0.3
0.3
0.1
0.1
0.2
0.2
0.0
0.0
0.1
0.1
-0.1
-0.1
0.0
0.0
-0.2
-0.2
-0.1
-0.1
-0.3
-0.3
-0.2
-0.2
-0.4
-0.4
-0.3
-0.3
-0.5
-0.4
-0.5
0
2
4
6
8
10 12 14 16 18 20 22 24
-0.4
0
2
4
6
8
10 12 14 16 18 20 22 24
* Denotes the impulse responses of commercial loans to a one-unit decline in SFN excluding required reserves and TL required reserves in the period
between 01/01/2011 and 01/11/2013. Response functions were obtained by the structural VAR model including the endogenous variable vector y= [SFNrequired reserves, deposits, reserves, commercial loans, exchange rate]. Optimal lag length was taken as 2 weeks. Straight lines denote responses, while
dashed lines indicate the significance level of 95%.
Conclusion
Findings highlight that required reserves do not have a significant effect on TL loans, while increases in SFN
excluding TL required reserves may affect TL consumer and commercial loans differently. Time series
analyses used in this study empirically show that increases in SFN excluding required reserves decrease TL
consumer loans, while they may leave TL commercial loans unchanged. This conclusion is believed to be
caused by differences in maturity as well as structural variation between consumer and commercial loans.
Having a rotative structure and the ability to be extended even at an overnight maturity, TL commercial
loans bear a lower interest rate risk than consumer loans. This lower risk is considered to be the primary
factor that may cause a divergence between consumer and commercial loans. Another striking factor is
the lower interest rate elasticity of demand for commercial loans, which causes commercial loans to be less
responsive to rate increases delivered through the liquidity policy.
REFERENCES
Güler, M.H., G. Keleş and E. Kilimci, 2014, Sistemin Fonlama İhtiyacı Bileşenleri ve Türk Lirası Kredi İlişkisi (in
Turkish), CBT Research Notes in Economics No. 14/03.
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
Box
Firms’ Access to Credit in Turkey: A Survey-Based Analysis
5.4
Surveys conducted to understand the financing structure of the corporate sector enrich the information set
about firms’ balance sheets. Besides the regularly conducted surveys, others are also constructed which
focus on certain firm-related issues. One such survey, called “The Business Environment and Enterprise
Performance Survey (BEEPS)” created jointly by the EBRD and the World Bank, evaluates the business
environment in Eastern Europe and Central Asia in a multi-dimensional way. Results of the BEEPS survey
conducted in 2008 give important clues about the business environment and performance of firms in 29
countries including Turkey. The survey questions on financing enable a better comprehension of firms’
access to credit in different countries. By adopting an original perspective, Kurul and Tiryaki (2014) examine
the credit access of firms operating in Turkey using the results of the 2008 BEEPS survey. This box summarizes
the findings of this study, which analyze the behavioral features of Turkish firms’ financing status.
Findings on the financing structure and credit access of firms
The 2008 BEEPS survey was conducted between April 2008
and January 2009 among 1152 firms, 58.4
percent of which were micro and small-sized.14 Several survey questions were asked to better identify firms’
relationship with banks. The first question asks whether firms have check or deposit accounts. As expected,
a majority of firms has either check or deposit accounts (Chart 1). Moreover, 70.3 percent of firms have
overdraft accounts, while 61.4 percent have credit limits. The positive relation between firm size and having
overdraft accounts and credit limits implies that small-sized firms may have greater credit constraints. In
fact, more than half of micro-sized firms do not have a credit limit.
Chart 1 Firm-Bank Relationship (Percent)
Chart 2. Request for Collateral (Percent)
100
0.0
20.0
40.0
60.0
80.0
80
Overall
60
40
Micro
0
Micro
Overall
Small
Medium
Scale
Firms with Check or Deposit Account
Firms with Overdraft Account
Firms with Credit Limit
Large
Size
20
Small
Medium
Large
.
Source: BEEPS.
The survey also provides information on the collaterals requested from firms during borrowing. Accordingly,
firms were asked whether any collateral was requested on their latest loan application (Chart 2). Survey
responses indicate that 62.9 of the firms were not asked for collateral for their latest extended credit. Results
show that firm size is a significant criterion for banks in their request for collaterals, and as the size becomes
larger, banks have relatively easier ability to meet collateral requirements. The survey also asks the kind of
collateral provided by the firm for the latest extended credit. Responses show that the most preferred
collateral is real estate owned by firms.
It should be considered that the crisis effect may be present in responses given in the surveys conducted between end-2008 and early 2009.
Accordingly, Kurul and Tiryaki (2014) examined how perceptions of firms regarding loan access have changed in the post-crisis period and found
that credit constraints increased and requirement for collaterals got tighter following the crisis.
14
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Central Bank of the Republic of Turkey
In addition, the survey asks firms whether they applied for loans in the latest financial
year, finding that a
majority of firms have applied for loans (Chart 3). The percentage of firms filing a loan application increased
for larger firms, while this ratio was less than 50 percent for micro and small-sized firms. The reasons for firms not
applying for loans are important to determine whether they do not need loans or there are obstacles in their
access to credit. Thus, firms that did not apply for loans were asked for the reasons why they did not apply
(Chart 4). Results show that the major cause is the sufficiency of capital, whereas high interest charges on
loans constituted a constraint for only 7.7 percent of the firms. Analysis by firm size reveals that sufficient
capital was a more common reply for large enterprises, whereas high loan rates proved to be a greater
constraint for small-sized firms. However, the reason for small firms to state high loan rates as their primary
reason for not applying for loans despite their need is mainly attributable to the fact that banks are willing to
extend loans to small firms only under higher interest rates.
0.0
25.0
Chart 4. Reasons for Not Applying (Percent)
50.0
0.0
75.0
Micro
Small
Medium
Large
.
One
Size
Size
Overall
25.0
50.0
75.0
Chart 5. Rejections
(Percent)
100.0
0.0
Overall
Overall
Micro
Small
Medium
Large
.
Micro
Small
Medium
Large
.
Sufficient Capital
Size
Chart 3. Loan Applicants
(Percent)
High Interest Rate
5.0
10.0
15.0
20.0
Other
of the important indicators for credit access is certainly firms’ credit rejections . Chart 5 shows the
percentage of rejected firms. Accordingly, most of the applications were accepted, while the rate of
acceptance increased for larger firms.
Firm Size and Credit Constraints
This section discusses the extent
of credit constraints faced by firms operating in Turkey. Accordingly, the
above analysis is repeated in order to analyze whether credit constraints are smaller for larger sized firms.
In this respect, firms are categorized as those that
Table 1. Summary Statistics on Firms’ Credit Need and Access
applied for loans and those that did not apply for
Total number of firms
1133
Percent
100,0
loans. Then, firms that applied for loans are further
classified as accepted and rejected. Firms that did
not apply for loans are categorized as firms that
do not need loans and firms that are hopeless to
Applicants
Total number of firms
626
Non-Applicants
Total number of firms
507
Percent
Percent
attain loans. Consequently, the number of firms
that need loans and those that have access to
loans can be quite easily identified. Results
indicate that 36 percent of firms do not need loans
as they already have sufficient capital (Table 1). In
55.3
Accepted
Rejected
Total number of
firms
526
Percent
46.4
Total number of
firms
100
Percent
8.8
44.7
Those without
Those without
need
hope
Total number of
Total number of
firms
firms
411
96
Percent
Percent
36.3
8.5
Source: BEEPS.
general, 46 percent of the firms that applied for
loans were accepted, while 9 percent of them were rejected. Against this background, the ratio of firms
experiencing credit constraints was calculated by adding the percentage of those that applied for loans but
were rejected and those that did not apply for loans, despite their need for financing, due their inability to
attain loans for some reason. Accordingly, results show that 17 percent of the firms experience credit
constraints.
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Central Bank of the Republic of Turkey
For an empirical analysis of how
credit constraint varies according to firm size and to determine factors
underlying credit constraint, a logistic regression model is estimated, the results of which are summarized in
Table 2. Similar to the construction of the credit constraint variable, an access-to-credit variable is created,
which is set to 1 for firms that obtained loans, while it is set to 0 for rejected firms and those that did not
apply for loans as they had no hope. Access-to-credit was set as the dependent variable, and firm size
variables besides a set of firm-specific control variables (having any payments overdue by more than 90
days, undergoing an independent auditing, and being an exporter) were selected as explanatory
variables. A logistic regression model was estimated in which micro-sized firms were taken as the reference
group.
Table 2. Factors Determining Credit Access
Number of
observations=699
Logistic Regression Model
Relative Probability
Standard
Deviation
pvalue
Result
Firm size (Small)
1.142
0.301
0.613
Not Reject Ho
Firm size (Medium)
1.808
0.534
0.045
**
Firm size (Large)
2.830
1.076
0.006
*
Overdue payments
0.323
0.075
0
*
Audited
1.373
0.259
0.093
***
Exporter
1.838
0.365
0.002
*
Constant
1.599
0.426
0.078
***
Credit Access
Ho: Contribution of the variable to the model is insignificant.
* ,**, *** denote rejection of Ho at 1, 5 and 10 percent significance level, respectively.
The results summarized in Table 2 support findings obtained by the descriptive analysis, and are in line with
cross-country studies. Correspondingly, Turkish firms are more likely to have access to credit as their size
grows. According to the relative probability (odds) ratio, the chances of medium-sized firms to have credit
access are 1.8 times more of those of micro-sized firms. Similarly, the chances of large-sized firms to have
access to loans are 2.8 times higher than those of micro-sized firms. The estimation results do not exhibit any
statistical difference between micro and small-sized firms regarding their chances of having access to
credit.
Overall,
results suggest that micro and small-sized firms are considerably more credit constrained
compared to medium and large-sized firms. Findings may have significant implications on the financial
policy design. Given the high share of small and medium-sized firms in employment, implementation of
policies to remove evident obstacles against credit access may increase potential production and the
employment level.
Other factors determining credit access are overdue payments, being audited by an independent firm,
and the firm being an exporter. If the firm is too troubled in financial terms to repay its credit or debts, its
credit risk increases, and the bank would be unwilling to extend loans. Results suggest that if the firm has a
credit or tax debt, which is overdue by more than 90 days, the chances of credit access decrease by 67.7
percent.
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On
the other hand, if the firm is audited by an independent firm, then the chances of credit access
increase by 137 percent. If the firm accounts undergo a transparent audit, the firm can be said to have a
reliable and institutional structure. As this can partially diminish the moral hazard and adverse selection
problems that may stem from information asymmetry between the bank and the firm, an independent
auditing of firms may enable a more effective functioning of the credit markets. In fact, the World Bank
(2007) states that the percentage of small and medium-sized firms undergoing an independent auditing in
Turkey is low by international comparisons. Hence, public policies to improve accounting and auditing
practices are believed to have a potential to provide evident relief on credit access.
Lastly, if the firm is an exporter, the chances that the firm has access to credit increase 1.84 times. The
positive correlation between the firm being an exporter and its chances to have credit access is attributed
to the already-settled relation of exporting firms with banks. Firms engaged in exporting activities collect
their export revenues through banks. They also have closer relations with banks compared to other firms as
they undertake transactions regarding the letter of guarantee, the letter of credit, etc. Thus, the information
asymmetry between the firm and the bank can be partially removed if the firm is an exporter. In other
words, the bank may be more willing to extend credit to the firm as it is familiar with accounts and the
activities of the firm.
Conclusion
Firms’ links with the credit market have an important implication regarding the transmission of the monetary
policy. Hence, constraints on firms’ credit demand and access are crucial for their information content
regarding the effectiveness of the credit channel, which may vary by sectors and firm size. The results of the
Business Environment and Enterprise Performance Survey implemented jointly by the EBRD and the World
Bank are important to reveal the relationship between firms and the credit market and that of firms with the
banking sector. The survey results, which are also important in terms of indicating credit constraints faced by
Turkish firms, show that credit constraint is inversely related to the firm size.
REFERENCES
Kurul, D.M. and S.T. Tiryaki, 2014, How Constrained is Firms’ Access to Credit in Turkey? A Survey-based
Analysis, CBT Research Notes in Economics No. 14/01.
World
Bank,
2007,
Turkey
Investment
Climate
Assessment,
vol.
II,
available
at
http://www.tepav.org.tr/upload/files/1271231892r5971.Turkiye_Yatirim_Ortami_Degerlendirmesi_Cilt
_2.pdf.
Inflation Report 2014-III
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6. Public Finance
As of the first half of 2014, the budget performance displayed a slight year-on-year deterioration,
mostly due to the upsurge in primary expenditures and the slowdown in domestic demand driven tax
revenues that became more significant in the second quarter. The favorable course of tax revenues in
the first quarter is believed to be the result of early-2014 tax hikes, exchange rate and price movements
and advance spending on consumption goods before the adoption of macroprudential measures to
restrict domestic demand. On the other hand, the rate of increase in tax revenues slowed slightly in the
second quarter. Meanwhile, the favorable performance of non-tax revenues is mainly attributed to
temporary revenue items that are considered as one-offs.
With regard to the sustainability of the positive course of fiscal balances and to maintaining
fiscal discipline on a permanent basis, it is critical that the fiscal policy be implemented in line with the
MTP’s framework and the primary expenditures be kept under control for the rest of the year.
6.1. Budget Developments
The central government budget posted a deficit of 3.4 billion TL, while the primary budget
registered a surplus of 23.1 billion TL in the first half of 2014 (Table 6.1.1). Tax revenues were on track with
the year-end target, while primary expenditures continued to rise dramatically.
Table 6.1.1.
Central Government Budget Aggregates
(Billion TL)
Central Government Budget
Expenditures
January-June
2013
January-June
2014
Rate of
Increase
(Percent)
Actual/Target
(Percent)
Targeted
Annual Rate
of Increase
(Percent)
187.9
213.9
13.8
49.0
7.0
Interest Expenditures
23.3
26.5
13.6
50.9
4.0
Primary Expenditures
164.6
187.4
13.9
48.7
7.4
Central Government Budget
Revenues
190.9
210.5
10.2
52.2
3.5
I. Tax Revenues
158.4
168.1
6.1
48.3
6.8
II. Non-Tax Revenues
26.2
34.1
30.3
76.5
-10.8
Budget Balance
3.1
-3.4
-
10.1
-
Primary Balance
26.4
23.1
-12.4
123.2
-
Source: Ministry of Finance.
The central government budget deficit to GDP ratio, which declined to 1.2 percent in 2013 amid
the favorable budget performance, is estimated to increase slightly to 1.5 percent in the first half of
2014 (Chart 6.1.1). Meanwhile, the primary budget surplus to GDP ratio assumed an upward course
after declining to 1.1 percent in the third quarter of 2012. This ratio, which hit 2 percent at end-2013, is
estimated to decline slightly to 1.7 percent in the first half of 2014.
Inflation Report 2014-III
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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
Primary Balance
Budget Revenues
Primary Expenditures
7
7
26
26
5
5
24
24
3
3
22
22
1
1
20
20
-1
-1
-3
-3
18
18
-5
-5
16
16
-7
14
-7
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*
2008
2009
2010
2011
2012
2013 2014
14
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*
2008
2009
2010
2011
2012
2013 2014
* Estimate.
Source: Ministry of Finance.
Having surged significantly since 2012 and reaching 22.9 percent at end-2013, the central
government primary expenditures to GDP ratio is estimated to remain elevated also in the first half of
2014 (Chart 6.1.2). On the other hand, the central government budget revenues to GDP ratio
increased upon robust economic activity as well as tax adjustments in September 2012 and January
2013, reaching 24.9 percent at end-2013. The ratio is estimated to decline to 24.6 percent in the first half
of 2014, mainly due to slowing tax revenues based on domestic demand.
The central government primary budget expenditures, which started to surge as of the second
half of 2012, increased further in the first half of 2014. Accordingly, the central government primary
budget expenditures registered a year-on-year increase of 13.9 percent in this period (Table 6.1.2).
During January-June 2014, current transfers, personnel expenditures and purchase of goods and
services, which are major items in primary expenditures, registered an increase of 10.1, 16.5 and 14
percent, respectively. The relatively smaller increase in current transfers restricted the rise in primary
budget expenditures to some degree. Personnel expenditures and public investment expenditures
(capital expenditures and transfers) were the main drivers of the rapid increase in primary expenditures.
On the other hand, most of the upsurge in lending resulted from the rise in loans extended to SEEs.
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
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
7. Lending
January-June
2013
164.6
49.0
8.1
13.3
75.3
1.4
36.5
6.8
19.6
12.0
2.2
4.7
January-June
2014
187.4
57.0
9.6
15.2
83.0
1.5
39.9
6.8
22.8
13.9
2.7
6.0
Rate of
Increase
(Percent)
13.9
16.5
18.7
14.0
10.1
6.5
9.2
0.9
16.7
16.2
22.7
27.6
Actual/Target
(Percent)
48.7
51.9
50.8
40.5
50.7
35.4
51.8
70.5
48.4
37.9
41.5
78.3
Source: Ministry of Finance.
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In the first half of 2014, the central government general budget revenues recorded a year-onyear increase of 9.6 percent (Table 6.1.3). In this period, tax revenues and non-tax revenues increased
by 6.1 and 30.3 percent, respectively.
Table 6.1.3.
Central Government General Budget Revenues
(Billion TL)
General Budget Revenues
I-Tax Revenues
Income Tax
Corporate Tax
Domestic VAT
SCT
VAT on Imports
II-Non-Tax Revenues
Enterprises and Property Revenues
Interests, Shares and Fines
Capital Revenues
January-June
2013
January-June
2014
Rate of Increase
(Percent)
Actual/Target
(Percent)
184.5
158.4
29.5
15.4
19.0
40.0
30.9
26.2
7.5
12.2
5.4
202.2
168.1
34.9
15.4
19.7
40.7
31.5
34.1
8.8
17.0
6.4
9.6
6.1
18.1
0.0
3.7
1.8
1.8
30.3
17.7
39.9
18.3
51.5
48.3
49.3
49.5
49.8
45.5
48.5
76.5
107.8
65.5
72.8
Source: Ministry of Finance.
A closer analysis of tax revenues reveals that income tax revenues displayed high-rated rises in
the first half of 2014, and the rate of increase in tax revenues declined to 3.4 percent from 6.1 percent
after excluding income tax. This is largely attributed to the slowdown in consumption-based tax
collection. Among consumption-based tax revenues, domestic VAT revenues increased by 3.7
percent, while the rate of increase in SCT and import VAT revenues was merely 1.8 percent. The details
of SCT revenues show a 13.3 and 8.4 percent increase in tax revenues on tobacco products and motor
vehicles, respectively. On the other hand, tax revenues on petroleum and natural gas products, which
account for a large share of SCT revenues, decreased by 5.2 percent.
Having turned positive amid tax hikes in September 2012 as well as the base effect, the annual
rate of increase in real tax revenues started to slacken in the second half of 2013. Real tax revenues
dropped by 6.3 percent in the first half of 2014 due to the marked slowdown in domestic demand
driven tax revenues (Chart 6.1.3). Among consumption-based tax revenues, domestic VAT, SCT and
import VAT revenues decreased by 15.2, 8 and 11.8 percent in real terms, respectively, in the first half of
2014 (Chart 6.1.4).
Chart 6.1.3.
Chart 6.1.4.
Real Tax Revenues
Real VAT and SCT Revenues
(Annual Percent Change)
(Annual Percent Change)
Real Domestic VAT Revenues
Real SCT Revenues
60
Real VAT Revenues on Imports
50
25
25
20
20
60
50
40
40
30
30
15
15
10
10
20
20
5
5
10
10
0
0
0
0
-10
-10
-20
-20
-30
-5
-5
-10
-10
-30
-15
-15
-40
12341234123412341234123412
2008
2009
2010
2011
2012
2013 2014
-40
12341234123412341234123412
2008
2009
2010
2011
2012
2013 2014
Source: Ministry of Finance.
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Central Bank of the Republic of Turkey
6.2. Developments in the Public Debt Stock
Public debt stock indicators displayed a favorable outlook in the first half of 2014. The total
public net debt stock and the EU-defined nominal debt stock to GDP ratios continued to decline, the
share of fixed-rate securities in the total debt stock increased, the average maturity of the debt stock
extended and the real cost of borrowing remained low over the past three months.
The central government debt stock stood at 593.4 billion TL as of end-June 2014 (Chart 6.2.1). In
the first quarter of 2014, the total public net debt stock and the EU-defined nominal debt stock to GDP
ratios decreased by 0.8 and 0.4 points, respectively, compared to end-2013 figures (Chart 6.2.1).
Chart 6.2.1.
Chart 6.2.2.
Public Debt Stock Indicators
Composition of the Central Government Debt
Stock*(Percent)
593.4
600
60
Floating-Rate
FX-Denominated/FX-Indexed
100
100
80
31.2
80
Fixed-Rate
31.2
Total Public Net Debt Stock
(Percent of GDP)
EU-Defined Central Government Nominal Debt Stock
(Percent of GDP)
Central Government Total Debt Stock
700
(Billion TL, right axis)
80
300
0
0
2005
2007
2009
2011
2013
40
36.2
100
2003
40
60
200
11.9
20
60
31.6
400
20
37.3
40
32.6
35.9
500
0
2014/6
20
0
2001
2003
2005
2007
2009
2011
2013
* FX-Denominated/FX-Indexed debt stock includes external debt stock and FX-denominated and FX-indexed domestic debt stock.
Source: Treasury.
The share of fixed-rate securities in the total debt stock increased slightly from end-2013
(Chart 6.2.2). As for the interest and exchange rate structure of domestic borrowing, the share of fixedrate borrowing registered a year-on-year decline in the first five months of 2014. The ratio of public
deposits to average monthly debt service stands at 170.3 percent. The average term-to-maturity of the
domestic debt stock rose to 53.9 months (Chart 6.2.3). Meanwhile, in the first six months of 2014,
external borrowing by bond issues amounted to 5.4 billion USD, with the average maturity standing at
15.7 years (Chart 6.2.4).
Chart 6.2.3.
Chart 6.2.4.
Average Maturity of the Domestic Cash Borrowing
and Term-to-Maturity of the Domestic Debt Stock
Borrowing By Bond Issue*
(Month)
External Borrowing (billion USD, right axis)
Average Maturity of External Borrowing (year)
Maximum Maturity of External Borrowing (year)
Average Maturity of Domestic Debt Stock
Average Maturity of Domestic Cash Borrowing
75
75
69.1
53.9
60
35
60
6
25
45
45
20
30
30
15
8
7
30
5
4
3
10
2
15
2013
2014/6
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
1
0
2002
2014/6
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
0
5
2001
15
* Total amount of external borrowing during the corresponding year.
Source: Treasury.
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The domestic debt rollover ratio stood at 86.5 percent at end-May 2014 (Chart 6.2.5). Having
plummeted from early 2009 to early 2011, the average real interest rate1 that had recently been on the
rise due to global financial fluctuations and the cautious monetary policy stance recorded low levels in
the past three months (Chart 6.2.6).
Chart 6.2.5.
Chart 6.2.6.
Total Domestic Debt Rollover Ratio
Average Maturity and Interest Rates of Borrowing at
Discount Auctions
(Percent)
Maturity (day)
Average Compounded Interest Rate (right axis)
110
110
100
100
90
90
86.5
84.5
Real Interest Rate (right axis)
30
600
25
500
20
400
15
300
10
200
5
100
0
80
70
70
2003
2005
2007
2009
2011
2013
0
-5
1203
0604
1204
0605
1205
0606
1206
0607
1207
0608
1208
0609
1209
0610
1210
0611
1211
0612
1212
0613
1213
0614
80
700
Source: Treasury, CBRT.
Real interest rates are calculated by subtracting the 12-month-ahead CPI expectation of the CBRT Survey of Expectations from nominal interest
rates (average annual compounded interest rate at the Treasury’s TL-denominated zero-coupon securities auction).
1
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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 for the upcoming 3-year
horizon.
7.1. Current State, Short-Term Outlook and Assumptions
Financial Conditions
In the second quarter of 2014, the decisions made by major central banks to support global
liquidity and prospects for a continuation in accommodative monetary policy alleviated global
uncertainties, thereby causing a notably lesser volatility in risk premium as well as bills and bonds, stocks
and foreign exchange markets. Against this background, capital inflows towards emerging economies
grew robust in the second quarter of the year. In this period, Turkey’s financial indicators followed a
similar path to those of other emerging economies. The CBRT’s tight monetary policy stance and
macroprudential measures contributed to the balancing process and improved domestic financial
indicators.
Inflation
In the second quarter of 2014, CPI inflation reached 9.16 percent by posting a quarter-onquarter increase of 0.8 percentage points. This was driven by the increase of food and core goods
prices. In particular, food prices followed a quite negative course due to drought and the
reverberations of the exchange rate. Annual inflation slowed in durable goods, which are among the
sub-items of core goods, while other core goods remained on the rise due to lagged effects of the
exchange rate pass-through. On the services front, the underlying trend followed a negative outlook,
while annual inflation edged down mostly due to the base effect. Accordingly, the rise in annual
inflation in core inflation indicators ended in the second quarter.
On the other hand, in the second quarter of the year, pricing behavior and inflation
expectations witnessed an improvement after the deterioration in the first quarter. Moreover, domestic
manufacturing industry prices remained flat after a long period amid appreciation of the Turkish lira
and the mild course of import prices. Hence, except for the ongoing supply-side restraints on food
prices, cost-side pressures on inflation eased slightly in the second quarter.
Table 7.1.1. Revisions to Assumptions
Output Gap
July 2014
April 2014
2014Q1
-1.40
-1.40
2014Q2
-1.30
-1.30
Food Prices
(Year-end Percent Change)
2014
9.0
9.0
2015-2016
8.0
8.0
Import Prices
(Average Annual Percent Change, USD)
2014
-1.8
0.5
2015
-0.3
0.1
Oil Prices
(Average, USD)
2014
108
106
2015
106
102
Export-Weighted Global Production Index
(Average Annual Percent Change)
2014
2.0
2.3
2015
2.6
2.6
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
Demand Conditions
In the first quarter of 2014, economic activity proved largely consistent with the outlook
presented in the April Inflation Report. Accordingly, the output gap was kept unchanged for the first
quarter of 2014 (Table 7.1.1). In this period, the weak course in private sector demand was
compensated by the public sector demand, which led the final domestic demand to follow a flat
course. Exports of goods and services recorded a robust increase on the back of gold exports, whereas
imports of goods and services registered a quarterly decline, thereby causing a further balancing of
the demand components. An analysis of second-quarter leading indicators from the production side
suggests that the industrial production index stayed close to the average of the previous quarter in the
April-May period. Meanwhile, readings on the expenditures side indicate that amid the recovery in
financial conditions and confidence indices, the decline in private sector demand halted particularly
at the consumption side and the mild growth in economic activity continued. Accordingly, the outlook
presented in the April Inflation Report continued in the second quarter of 2014 and the output gap was
kept unchanged (Table 7.1.1).
Domestic demand, which remained mild amid domestic uncertainties and the tightening in
financial conditions in the first half of the year, is expected to settle into a track of gradual recovery in
the second half due to relatively eased financial conditions. Meanwhile, amid the rebound in the
global economy, exports are estimated to further contribute to growth. However, lingering
uncertainties on the strength of recovery in the global economy, global monetary policies and
geopolitical developments pose a downside risk to growth. Indicators of external demand suggest that
the export-weighted global economic activity index remained unchanged from the previous reporting
period, while expectations for recovery were maintained(Chart 7.1.1).
Chart 7.1.1. Export-Weighted Global Economic Activity Index*
(2008Q2=100)
112
April 2014
112
111
July 2014
111
110
109
109
108
108
107
107
106
106
105
105
104
104
103
103
102
102
0612
0812
1012
1212
0213
0413
0613
0813
1013
1213
0214
0414
0614
0814
1014
1214
0215
0415
0615
0815
1015
1215
110
* For methodology, see Box 2.1, Inflation Report 2010-II.
Source: Bloomberg, Consensus Forecasts, CBRT.
Import Prices
In the second quarter of the year, oil prices slightly exceeded the April Inflation Report forecasts,
while import prices lagged behind the predictions (Chart 7.1.2). Thus, the assumption for the average
oil price for 2014 was revised upwards, while that of import prices was revised downwards (Table 7.1.1).
Under the current outlook, the effects of oil and import prices on inflation offset each other. Hence, the
contribution of external prices to year-end inflation forecast was kept constant.
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Chart 7.1.2. Revisions to Oil and Import Price Assumptions
Oil Prices(USD/bbl)
July 2014
Import Prices (USD, 2010=100)
July 2014
April 2014
April 2014
1214
0914
0614
0314
1213
1214
Source: Bloomberg, CBRT.
0913
100
0613
100
0313
90
1212
90
0912
105
0612
105
0312
100
1211
100
0914
110
0614
110
0314
110
1213
110
0913
115
0613
115
0313
120
1212
120
0912
120
0612
120
0312
130
1211
130
Source: Turkstat, CBRT.
Fiscal Policy and Tax Adjustments
Medium-term projections are based on the assumption that tax adjustments and administered
prices are consistent with the inflation targets and automatic pricing mechanisms. Thus, the end-2014
inflation forecast was subject to no revision stemming from the fiscal policy. The medium-term fiscal
policy stance is based on the MTP projections covering the 2014-2016 period. Accordingly, the cautious
fiscal stance will probably be preserved and primary expenditures will likely be kept under control.
7.2. Medium-Term Outlook
Medium-term forecasts are based on the assumption that the tight stance of the monetary
policy will be maintained by keeping the yield curve almost flat and the improvement in global liquidity
conditions will be sustained. Moreover, the annual loan growth rate will near 15 percent by the end of
2014 on the back of the adopted macroprudential measures. Accordingly, inflation is expected to be,
with 70 percent probability, between 6.7 percent and 8.5 percent (with a mid-point of 7.6 percent) at
end-2014 and between 3.3 percent and 6.7 percent (with a mid-point of 5 percent) at end-2015.
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 (Percent)
12
Forecast Range*
Uncertainty Band
Year-End Inflation Targets
Output Gap
10
12
10
Control
Horizon
0617
0317
1216
0916
0616
0316
-4
1215
-4
0915
-2
0615
-2
0315
0
1214
2
0
0914
2
0614
4
0314
4
1213
6
0913
8
6
0613
8
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: CBRT.
The year-end inflation is projected to realize remarkably above the 5-percent target due to the
lagged effects of exchange-rate-driven cost pressures and the unfavorable course of food prices.
Inflation Report 2014-III
87
Central Bank of the Republic of Turkey
Inflation is expected to fall to 7.6 percent at year-end on the back of the mild course of import prices,
the gradual weakening of the cumulative effects of the exchange rate and the moderate course of
final domestic demand conditions (Chart 7.2.1). The second-quarter CPI inflation that remained above
the April Inflation Report projections was mainly led by the negative course of food prices, which are
expected to wane towards the year-end amid the effective use of external trade policies (Chart 7.2.2).
Chart 7.2.3 presents revisions to the output gap forecasts. Accordingly, the output gap is
projected to be consistent with the outlook presented in the April Inflation Report. Output gap forecasts
for the first half of 2014 were kept unchanged. In the second half of 2014, parallel to the recovery in
financial conditions and confidence indices, the fall in private sector demand halted particularly at the
consumption side, which is expected to have a mild effect on the output gap. However, lingering
uncertainties over the strength of the recovery in the global economy, global monetary policies and
geopolitical developments pose a downside risk to growth. Hence, the output gap is expected to be
consistent with the path projected in the April Inflation Report (Chart 7.2.3).
Comparison of April 2014 and July 2014 Inflation Report Forecasts
Chart 7.2.2.
Chart 7.2.3.
Inflation Forecast
Output Gap Forecast
(Percent)
10
(Percent)
10
Actual
1
1
July 2014
July 2014
9
Source: TurkStat, CBRT.
-1
April 2014
0916
1216
0916
0616
-2
0316
-2
1215
0916
1216
0916
0616
0316
1215
0915
0615
0315
1214
0914
4
0614
4
0314
5
1213
5
-1
0915
6
0615
April 2014
6
0315
7
0
1214
7
0
0914
8
0614
8
0314
9
Source: CBRT.
Unpredictable price fluctuations in items beyond the monetary policy domain, such as
unprocessed food and tobacco, are among major factors that cause a deviation in inflation forecasts.
Hence, inflation forecasts excluding unprocessed food and tobacco prices are also publicly
announced. Accordingly, 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 start
a gradual fall by the second half of 2014 and stabilize around 4.5 percent in the medium term.
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
Chart 7.2.4.
Inflation Forecast Excluding Unprocessed Food, Tobacco and Alcoholic
Beverages*
(Percent)
Forecast Range
Output Gap
0617
0317
1216
0916
-4
0616
-2
-4
0316
-2
1215
0
0915
2
0
0615
2
0315
4
1214
6
4
0914
6
0614
8
0314
10
8
1213
10
0913
12
0613
12
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: CBRT.
Comparison of the CBRT’s Forecasts with Inflation Expectations
It is critical that economic agents take the inflation target as a benchmark in their plans and
contracts, and focus on the underlying trend of medium-term inflation, rather than temporary price
fluctuations. Likewise, it is crucial that the CBRT’s current inflation forecasts be compared with inflation
expectations of other economic agents to serve as a reference guide. Accordingly, 12-month and 24month-ahead inflation expectations of the Survey of Expectations’ respondents are above the CBRT’s
baseline scenario forecasts (Table 7.2.1). Furthermore, the increase in inflation expectations in the interreporting period necessitates close monitoring of expectations.
Table 7.2.1.
CBRT Inflation Forecasts and Expectations
CBRT Forecast
CBRT Survey of Expectations*
Inflation Target**
2014 Year-end
7.6
8.3
5.0
12-month-ahead
6.3
7.3
5.0
24-month-ahead
5.0
6.7
5.0
*
July 2014 survey period results.
**
Calculated by linear interpolation of year-end inflation targets for 2014- 2016.
Source: CBRT.
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
Charts
1. OVERVIEW
Chart 1.1.
Chart 1.2.
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 1.1.9.
Chart 1.1.10.
Chart 1.2.1.
Chart 1.2.2.
Chart 1.2.3.
Chart 1.2.4.
Chart 1.2.5.
Chart 1.2.6.
Chart 1.2.7.
Chart 1.2.8.
Chart 1.2.9.
Chart 1.3.1.
Portfolio Flows to Emerging Economies
CDS Rates for Emerging Economies and Turkey
CBRT Rates and BIST O/N Repo Rates
CBRT Funding
Money Market and the CBRT Funding Rates
Interest Rate Spread
TL and Emerging Market Currencies vs USD
Implied FX Volatility
Consumer Loan Growth
Commercial Loan Growth
Financial Conditions and Credit Growth
Financial Conditions Index and Contributions
April 2014 Inflation Forecasts and Realizations
April 2014 Inflation Forecasts and Realizations Excluding Unprocessed Food and
Tobacco
Food Prices and CPI
Food Prices and CPI
GDP and Final Domestic Demand
Production, Export and Imports of Consumption Goods
Export and Import Quantity Indices
Current Account Balance
Revisions to Oil and Import Price Assumptions
Inflation and Output Gap Forecasts
1
1
2
2
3
3
3
3
4
4
4
4
5
5
6
6
6
6
7
7
8
8
2. INTERNATIONAL ECONOMIC DEVELOPMENTS
Chart 2.1.1.
Global Growth Rates
12
Chart 2.1.2.
Global Growth Rates
12
Chart 2.1.3.
Markit Global PMI Indices
12
Chart 2.1.4.
Manufacturing Industry PMI Indices
12
Chart 2.2.1.
S&P Goldman Sachs Commodity Prices
13
Chart 2.2.2.
Crude Oil (Brent) Prices
13
Chart 2.2.3.
CPI Inflation in Advanced and Emerging Economies
14
Chart 2.2.4.
Core Inflation in Advanced and Emerging Economies
14
Chart 2.3.1.
Global Risk Appetite
15
Chart 2.3.2.
Fed Funds Futures
15
Chart 2.3.3.
Regional EMBI Developments
15
Chart 2.3.4.
Weekly Portfolio Flows to Emerging Economies
15
Chart 2.4.1.
Policy Rate Changes in Advanced Economies from Jan. 2012 to Jul. 2014
16
Chart 2.4.2.
Policy Rate Changes in Emerging Economies from Jan. 2012 to Jul. 2014
16
Chart 2.4.3.
Yields on 10-year US Treasury Bonds
17
Chart 2.4.4.
Expected Policy Rates in Advanced Economies
18
Chart 2.4.5.
Expected Policy Rates in Inflation-Targeting Emerging Economies
18
3. INFLATION DEVELOPMENTS
Chart 3.1.
CPI by Subcategories
19
Chart 3.2.
Contribution to Annual CPI
19
Chart 3.1.1.
Prices of Core Goods and Services
20
Chart 3.1.2.
Core Goods Prices
20
Chart 3.1.3.
Core Goods Prices
20
Chart 3.1.4.
Prices of Services by Subcategories
21
Chart 3.1.5.
Prices of Services by Subcategories
21
Chart 3.1.6.
Prices of Catering Services and Food
22
Chart 3.1.7.
Prices of Other Services and the Currency Basket
22
Chart 3.1.8.
Prices of Services
22
Chart 3.1.9.
Diffusion Index for Prices of Services
22
Chart 3.1.10.
Core Inflation Indicators
23
Chart 3.1.11.
Core Inflation Indicators
23
Chart 3.1.12.
Diffusion Indices for CPI and SCA-H
23
Inflation Report 2014-III
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Central Bank of the Republic of Turkey
Chart 3.1.13.
Core Inflation Indicators SATRIM and FCORE
23
Chart 3.2.1.
Food Prices
24
Chart 3.2.2.
Unprocessed Food Prices
24
Chart 3.2.3.
Processed Food Prices
24
Chart 3.2.4.
Average Precipitation
24
Chart 3.2.5.
International and Domestic Food Prices
25
Chart 3.2.6.
International and Domestic Wheat Prices
25
Chart 3.3.1.
Domestic Producer and Consumer Prices
26
Chart 3.3.2.
Manufacturing Prices
26
Chart 3.3.3.
Import Prices in USD and TL
27
Chart 3.3.4.
Manufacturing Industry Prices Excluding Petroleum and Base Metal Products
27
Chart 3.4.1.
12-Month and 24-Month-Ahead CPI Expectations
27
Chart 3.4.2.
Inflation Expectations
27
Chart 3.4.3.
Distribution of 12-Month-Ahead Inflation Expectations
28
Chart 3.4.4.
Distribution of 24-Month-Ahead Inflation Expectations
28
4. SUPPLY AND DEMAND DEVELOPMENTS
Chart 4.1.1.
GDP and the Final Domestic Demand
34
Chart 4.1.2.
Public and Private Demand
34
Chart 4.1.3.
Production and Import Quantity Indices of Consumption Goods
34
Chart 4.1.4.
Sales of Automobiles and White Goods
34
Chart 4.1.5.
Production and Import Quantity Indices of Capital Goods Excluding Transport
Vehicles
35
Chart 4.1.6.
Production and Import Quantity Indices of Non-Metallic Mineral Goods
35
Chart 4.1.7.
Registered Domestic Orders and Expectation of New Domestic Orders in the
Manufacturing Sector of Consumption Goods
35
Chart 4.1.8.
Registered Domestic Orders and Expectation of New Domestic Orders in the
Manufacturing Sector of Investment Goods
35
Chart 4.1.9.
BTS Expectation for Investment and Employment
36
Chart 4.1.10.
Consumer Confidence
36
Chart 4.2.1.
Contribution of Net Exports to Annual GDP Growth
36
Chart 4.2.2.
Exports and Imports of Goods and Services
36
Chart 4.2.3.
Export Quantity Indices
37
Chart 4.2.4.
Import Quantity Indices
37
Chart 4.2.5.
Regional Export Shares
38
Chart 4.2.6.
Leading Export Countries
38
Chart 4.2.7.
Current Account Balance
38
Chart 4.2.8.
Current Account Balance
38
Chart 4.3.1.
Unemployment Rates
39
Chart 4.3.2.
Contributions to Quarterly Changes in Non-Farm Unemployment
39
Chart 4.3.3.
Contributions to Quarterly Change in Non-Farm Employment
40
Chart 4.3.4.
Industrial Employment and Production
40
Chart 4.3.5.
BTS Employment Expectations and PMI Employment Index
40
Chart 4.3.6.
Number of Applicants per Job Advert on and Non-Farm Unemployment
40
Chart 4.3.7.
Household Domestic Consumption and Real Wage Payments
41
Chart 4.3.8.
Unit Labor Cost
41
5.
FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION
49
Chart 5.1.
Financial Conditions and Credit Growth
49
Chart 5.2.
Contributions to FCI
49
Chart 5.1.1.
Regional EMBI Indices
50
Chart 5.1.2.
Changes in CDS
50
Chart 5.1.3.
Portfolio Flows to Emerging Economies
51
Chart 5.1.4.
Portfolio Flows to Turkey
51
Chart 5.1.5.
TL and Emerging Market Currencies vs USD
51
Chart 5.1.6.
Currency Basket and the Risk Premium
51
Chart 5.1.7.
Implied Volatility of Exchange Rates
52
Chart 5.1.8.
Implied Volatility of Exchange Rates
52
Chart 5.1.9.
CBRT Funding
53
Chart 5.1.10.
CBRT Rates and BIST O/N Repo Rates
53
92
Inflation Report 2014-III
Central Bank of the Republic of Turkey
Chart 5.1.11.
Long-Term Interest Rates and the CBRT Funding Rate
54
Chart 5.1.12.
Interest Rate Spread
54
Chart 5.1.13.
Banks’ Use of ROM for FX
54
Chart 5.1.14.
Banks’ Use of ROM for Gold
54
Chart 5.1.15.
CBRT FX Reserves
55
Chart 5.1.16.
5-Year Market Rates
55
Chart 5.1.17.
6-Month Market Rates
55
Chart 5.1.18.
Changes in 5-Year Market Rates
56
Chart 5.1.19.
Changes in 6-Month Market Rates
56
Chart 5.1.20.
Expected O/N Rates at the BIST Repo and Reverse Repo Market
56
Chart 5.1.21.
Inflation Expectations
56
Chart 5.1.22.
Yield Curve
57
Chart 5.1.23.
Benchmark Interest Rate and EMBI+Turkey
57
Chart 5.1.24.
2-Year Real Interest Rates for Turkey
57
Chart 5.1.25.
2-Year Real Interest Rates
57
Chart 5.1.26.
Consumer Loan Rates
58
Chart 5.1.27.
TL Commercial Loan Rates
58
Chart 5.1.28.
TL Commercial Loan Rate and Deposit Rate
58
Chart 5.1.29.
Indicators on the Cost of Banks’ Funding
58
Chart 5.2.1.
Domestic Credit Stock and Net Credit Use
59
Chart 5.2.2.
External Credit Stock and Net Credit Use
59
Chart 5.2.3.
Annual Growth Rate of Loans
59
Chart 5.2.4.
Quarterly Growth Rate of Loans
59
Chart 5.2.5.
Consumer Loan Growth
60
Chart 5.2.6.
Weekly Growth Rate of Consumer Loans
60
Chart 5.2.7.
Consumer Loan Growth
61
Chart 5.2.8.
Growth Rates of TL and FX Commercial Loans
61
Chart 5.2.9.
Growth of Credits and Deposits
61
Chart 5.2.10.
Balance Sheet Decomposition of M3
62
Chart 5.2.11.
Currency in Circulation and Current Consumption Spending
62
6.
PUBLIC FINANCE
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 Balance
Central Government Budget Revenues and Primary Expenditures
Real Tax Revenues
Real VAT and SCT Revenues
Public Debt Stock Indicators
Composition of the Central Government Debt Stock
Average Maturity of the Domestic Cash Borrowing and Term-to-Maturity of the
Domestic Debt Stock
Borrowing By Bond Issue
Total Domestic Debt Rollover Ratio
Average
Toplam
Maturity
İç Borç and
Çevirme
Interest
Oranı
Rates of Borrowing at Discount Auctions
80
80
81
81
82
82
82
82
83
83
7. MEDIUM-TERM FORECASTS
Chart 7.1.1.
Chart 7.1.2.
Chart 7.2.1.
Chart 7.2.2.
Chart 7.2.3.
Chart 7.2.4.
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 2014-III
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87
87
88
88
89
93
Central Bank of the Republic of Turkey
Tables
2. INTERNATIONAL ECONOMIC DEVELOPMENTS
Table 2.1.1.
Growth Forecasts for end-2014 and 2015
13
Table 2.2.1.
Inflation Forecasts for end-2014 and 2015
14
3. INFLATION DEVELOPMENTS
Table 3.1.1.
Prices of Goods and Services
21
Table 3.2.1.
Domestic and International Food Prices
25
Table 3.3.1.
D-PPI and Subcategories
26
6. PUBLIC FINANCE
Table 6.1.1.
Central Government Budget Aggregates
79
Table 6.1.2.
Central Government Primary Expenditures
80
Table 6.1.3.
Central Government General Budget Revenues
81
7. MEDIUM-TERM PROJECTIONS
Table 7.1.1.
Revisions to Assumptions
85
Table 7.2.1.
CBRT Inflation Forecasts and Expectations
89
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
Boxes in Previous Inflation Reports
2014-II
4.1. Revisions to Construction Investment Expenditures
4.2. Capital Flows Towards Turkey and Emerging Economies in 2013: Effects of the Fed’s Policy Change
5.1. Forecasting Exchange Rates Using Yield Curves
5.2. Foreign Currency Liabilities and Exchange Rate Risk of Firms in Turkey
2014-I
3.1. Implications of Base Effects for Consumer Inflation in 2014
4.1. Determinants of Machinery and Equipment Investments of the Private Sector
4.2. The Number of Newly Established Firms and Business Cycles
4.3. Factors Affecting the Coverage Ratio
4.4. A Glance at Income and Price Elasticities of Exports in Turkey: The Importance of Regional Differences
5.1. BRSA Measures
6.1. Structural Budget Balance and the Fiscal Stance
7.1. Sources of Revisions to end-2013 Inflation Forecasts
2013-IV
1.1. Money Markets and the CBRT
2.1. Forward Guidance in Monetary Policy Communication
3.1. Import Prices and Exchange Rate Pass-Through in the CPI and Subcategories
4.1. Impact of Bridge Days on the Industrial Production Index
4.2. Contribution of Public Expenditures to GDP Growth
4.3. Degree of Rigidity in Residential Rents in Turkey
4.4. The Effects of Demographic and Social Changes on Household Savings in Turkey
5.1. The Effectiveness of Macroprudential Measures in Moderating Volatile Capital Flows: The Case of Turkey
5.2. Carry Trade Returns
6.1. Effects of Public Spending Shocks on Real Exchange Rate and External Trade Deficit
2013-III
3.1. The Effect of Domestic Cost Measures on Inflation
4.1. Global Import Growth and Turkey’s Exports
4.2. Cyclically Adjusted Current Account Deficit in Turkey
4.3. Average Hours Worked in the Non-Farm Sector
4.4. Relative Housing Price Deflator in Turkey
5.1. Reserve Options Mechanism as an Automatic Stabilizing Policy Tool
5.2. External Borrowing of Banks and ROM
5.3. The CBRT’s Liquidity Management and Overnight Market Rates
5.4. Yield Curve for Private Sector Securities
2013-II
1.1. Credit Impulse and the Business Cycle
2.1. Export-Weighted Global PMI Index and the Growth Threshold
3.1. Reasons Underlying the Divergence Between the CPI and PPI Inflation Rates
3.2. Minimum Wage, Employer’s Cost and PPI Inflation
4.1. Revisions to the Industrial Production Index
4.2. Effect of Capital Accumulation on Capacity Utilization Rates
4.3. Effects of the External Gold Trade on Macroeconomic Aggregates
4.4. Contributions to the Labor Force Participation Rate
4.5. Effect of 2008 Employment Incentives on Employment by Various Demographic Groups
5.1. Unconventional Monetary Policy Tools and Credit Growth
5.2. The Relation Between O/N Swap Rates and the BIST O/N Repo Rates
2013-I
1.1. What Should be the Plausible Rate of Growth for Loans in Turkey?
2.1. Fiscal Cliff and Potential Effects
3.1. Recent Changes to Taxing of Tobacco Products and the Effects of SCT Rate Hikes on Prices
4.1. Global Output and the Market Share Component of the Export Growth in Turkey
4.2. A Retrospective Analysis of the Current Account Balance in 2012
5.1. Reserve Options Mechanism and the Exchange Rate Volatility
5.2. The Monetary Policy of the CBRT and the USD/TL Exchange Rate Expectations: A Cross-Country Comparison
6.1. The Sensitivity of Tax Revenues to Business Cycles in Turkey
7.1. Sources of Revisions to 2012 Year-end Inflation Forecasts
Inflation Report 2014-III
95
Central Bank of the Republic of Turkey
Abbreviations
AMA
bbl
BIST
BRSA
BTS
CBRT
CDS
CIS
COICOP
CPI
D-PPI
EBRD
ECB
EMBI
EMRA
ENS
EPFR
EU
FAO
FCI
FCORE
Fed
FOMC
FX
GDP
GSCI
IMF
IMM
MENA
MPC
MTP
OMO
O/N
PMI
PPI
ROM
SATRIM
SCA
SCT
SEEs
SMEs
S&P
SSI
TL
TURKBESD
TurkStat
UAE
UK
US
USA
USD
WDI
WEO
VAR
VAT
VIX
96
Automobile Manufacturers Assocation
barrel
Borsa İstanbul
Banking Regulation and Supervision Agency
Business Tendency Survey
Central Bank of the Republic of Turkey
Credit Default Swap
Commonwealth of Independent States
Classification of Individual Consumption According to Purpose
Consumer Price Index
Domestic Producer Price Index
European Reconstruction and Development Bank
European Central Bank
Emerging Markets Bond Index
Energy Market Regulatory Authority
Extended Nelson-Siegel
Emerging Portfolio Fund Research
European Union
Food and Agriculture Organization of the United Nations
Financial Conditions Index
Factor Model Based Core Inflation Indicator
Federal Reserve Bank
Federal Open Markets Committee
Foreign Exchange
Gross Domestic Product
Goldman Sachs Commodity Index
International Monetary Fund
Interbank Money Market
Middle East and North Africa
Monetary Policy Committee
Medium-Term Program
Open Market Operations
Overnight
Purchasing Managers Index
Producer Price Index
Reserve Options Mechanism
Seasonally Adjusted Trimmed Mean Inflation
Special CPI Aggregate
Special Consumption Tax
State Economic Enterprises
Small and Medium-Sized Enterprises
Standard and Poor’s
Social Security Institution
Turkish Lira
White Goods Manufacturers’ Association of Turkey
Turkish Statistical Institute
United Arab Emirates
United Kingdom
United States
United States of America
United States Dollar
World Development Indicators
World Economic Outlook
Vector Autoregression
Value Added Tax
Volatility Index
Inflation Report 2014-III
Central Bank of the Republic of Turkey
2014 Calendar for MPC Meetings, Inflation Report and Financial Stability Report
MPC Meetings
Summary of MPC
Inflation Report
January 21, 2014
January 28, 2014
January 28, 2014
February 18, 2014
February 25, 2014
March 18, 2014
March 25, 2014
April 24, 2014
April 30, 2014
May 22, 2014
May 29, 2014
June 24, 2014
July 1, 2014
July 17, 2014
July 24, 2014
August 27, 2014
September 3, 2014
September 25, 2014
October 2,, 2014
October 23, 2014
October 31, 2014
November 20, 2014
November 27, 2014
December 24, 2014
December 31, 2014
Inflation Report 2014-III
Financial Stability Report
April 30, 2014
May 29, 2014
July 30, 2014
October 31, 2014
November 27, 2014
97