Download I. INTERNATIONAL DEVELOPMENTS

TÜRKİYE CUMHURİYET MERKEZ BANKASI
I. INTERNATIONAL DEVELOPMENTS
The general conviction at international level is that global growth performance has improved and
that the markets are not likely to see a second dip on the back of expansionary monetary and fiscal
policies. Despite this positive outlook for the overall global economy, the apparent divergence between the
growth performance of advanced and emerging markets brings about distinctive economic policies as well.
Within this scope, emerging economies opt to contain the macro-financial risks driven by accelerated capital
flows using unconventional policy mixes. Meanwhile, advanced economies tighten their fiscal policies in
order to restore the deteriorated public finances due to the measures taken in the aftermath of the crisis.
The global macro-economic implications of political unrest in the Middle East and the North Africa In the
first quarter of 2011, and the natural disaster in Japan are expected to remain subdued.
The high level of budget deficits and public debt in advanced economies increase
fragility by raising a need for funding in large amounts. Widening budget deficits in many
advanced economies, primarily in Euro area (EA) states have increased the public borrowing need and
hence the debt stock reached record highs (Chart I.1 and I.2).
1200
7
1000
5
60
40
4
600
3
400
2
20
1
Debt Stock
200
0
2008
2009
2010
2011*
2008
2009
2010
2011*
0
2008
2009
2010
2011*
0
800
Budget Deficit (right axis)
Source: IMF
* Forecast
2009
Spain
80
Greece
6
Italy
100
8
Portugal
120
Chart I.2. CDS in PIIGS Countries (basis points)
Ireland
Chart I.1. Debt Stock and Budget Deficit in Some
Countries (% GDP)
2010
Source: Bloomberg
Concerns regarding debt sustainability in Portugal, Ireland, Italy, Greece and Spain
(PIIGS) have increased borrowing costs particularly in the EA. While the debt stock in
peripheral EA countries became unsustainable, concerns over capital and liquidity adequacy ratios of
banking sectors of core EA countries, with PIIGS debt securities on their balance sheets, remain
(Chart I.3). While the credit ratings for EA countries excluding Italy were lowered, the CDS’s were
increased and these countries faced troubles with external borrowing. Against this background,
Greece, Ireland and Portugal received fiscal stimulus from the EU and the IMF (Table I.1). The high
level of interest expenses and the high burden imposed by nationalized banks exacerbate concerns
about a potential restructuring of debts by these countries.
Financial Stability Report – May 2011
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TÜRKİYE CUMHURİYET MERKEZ BANKASI
Table I.1. PIIGS Countries Receiving Fiscal
Stimulus
(Billion Euro)
Chart I.3. Net Receivables of International
Banks from Certain Countries (Billion USD)1,2
1000
900
800
700
600
500
400
300
200
100
0
EFSF
Treasury
Program
Contribution
Duration
IMF
-EFSM*
Greece
80
30
-
3 years
Ireland
45
22.5
17.5
3 years
Portugal
52
26
-
3 years
2007
2008
Spain
Greece
Italy
Portugal
Ireland
Ratings (S&P)
2009
2010
Source: BIS
(1) Data for 2010 are provisional.
(2) Net receivables are calculated by subtracting all the receivables
(credits, securities, etc.) from PIIGS countries on balance sheets of banks
subjected to BIS reporting, from all liabilities (deposits, etc.) to these
countries.
2009
2010
2011
Greece
BBB+
BB+
B
Ireland
AA
A
BBB+
Portugal
A+
A-
BBB-
Source: European Union Commission
(*) European Financial Stability Fund and European Financial Stability
Mechanism
The increased funding cost due to difficulties in accessing non-depository funds in
addition to risks stemming from PIIGS bonds in the European banking sector increases
the dependency of banks on central bank resources. Banks, whose funding costs have
increased in line with higher sovereign risk on the back of problems in public finance, are oriented
towards central bank resources to meet their funding needs (Chart I.4). Furthermore, contracting
interest margins and declining profitability performance affect the financial structures of banks with
unqualified and inadequate capital. Given the elevated level of debt that must be financed by banks in
the short-run, vulnerabilities of advanced financial markets still remain (Chart I.5).
Chart I.4. Liquidity Provided by the ECB to Banks
(Billion Euro)
Chart I.5. Debts of PIIGS Banks Maturing in
2011-12 (% Total Debt)
160
60
140
50
120
40
100
30
80
20
60
10
40
Spain
Italy
2011
Source: ECB
Greece
04.11
02.11
12.10
10.10
08.10
06.10
04.10
02.10
12.09
10.09
08.09
0
Ireland
Portugal
0
20
2012
Source: IMF
Within this scope, while the ECB maintained quantitative easing, it tightened its
monetary policy stance through the interest rates. The ECB enlarged its balance sheet by
purchasing the securities of distressed EA countries and increased the policy rate by 25 basis points
for the first time in a long time in response to inflationary concerns in April 2011. On the other hand,
the fact that the interest gap between the Fed and the ECB widened in favor of the euro leads to
appreciation of the euro and therefore constitutes a risk on growth rates of EA countries. This
situation hampers further increase in the ECB’s policy rate and implementation of its exit strategy.
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Despite the policies of the ECB; the Bank of England, the Fed and the Bank of Japan
continue to stick to the expansionary monetary policies. While these three central banks
continue to keep policy rates at record lows, they do not opt for a new quantitative easing. However,
these central banks are not expected to launch their exit strategies in the near future (Chart I.6 and
I.7).
Chart I.6. Policy Rates in Advanced Economies
(%)
7
6
Chart I.7. Balance Sheet Aggregates and
Inflation Rates of Central Banks of Advanced
Economies (Billion USD, %)
350
6
300
5
5
4
250
4
3
200
2
150
3
2
1
1
100
0
50
01.11
09.10
05.10
01.10
09.09
05.09
01.09
09.08
05.08
01.08
09.07
05.07
01.07
0
-1
0
-2
BoE
USA
Japan
Euro Area
ECB
Fed
UK
2007
Source: Country Central Banks
2008
2009
2010
03.2011
BoJ
Inflation rates for the period 200703.2011 (right axis)
Source: IMF
Asset prices increased, market interest rates decreased and volatility in the markets
attenuated due to ample global liquidity driven by expansionary monetary policies of
advanced economies. The low yields from debt securities increased the demand for financial
products and resulted in further use of commodities as an investment instrument (Chart I.8). Stock
markets regained their pre-crisis highs owing to the increased risk appetite, whereas asset prices rose
significantly. Prevailing concerns about the financial sector in the EA, along with those related to the
earthquake and exports in Japan, led stock markets to underperform compared to US markets. While
metal and gold prices increased to historically high levels, oil prices exhibited a rapid increase as well
(Chart I.9).
Chart I.8. Bond Yields in Advanced Economies
(%)
5.25
5.25
4.75
4.75
4.25
4.25
3.75
3.75
3.25
3.25
2.75
2.75
2.25
2.25
1.75
1.75
Chart I.9. Asset Market Indicators
(December 2007=100)
270
200
225
150
180
100
90
45
03.11
12.10
09.10
06.10
03.10
12.09
09.09
06.09
03.09
MSCI Developing Country Index
MSCI Global Index
S&P GS Energy Prices
S&P GS Non-energy Commodity Prices
VIX
US 10-year Government Bond
UK 10-year Government Bond
Germany 10-year Government Bond
Source: Bloomberg
12.08
09.08
06.08
03.08
0
12.07
04.11
12.10
08.10
04.10
12.09
08.09
04.09
12.08
08.08
04.08
12.07
135
50
Source: Bloomberg
The gradual recovery of demand, recently observed in advanced economies, is
considered to be mainly due to the income and wealth effect rather than the credit
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TÜRKİYE CUMHURİYET MERKEZ BANKASI
channel. No significant recovery was observed in employment and household incomes in advanced
economies, primarily in the USA, largely led by the increase in asset prices and tax rebates; however,
these economies enjoyed an improvement and gradual growth in terms of domestic demand
(Chart I.10 and I.11).
Chart I.10. Growth Rates in Advanced Economies
(%, Annual)
6
Chart I.11. Unemployment Rates in Advanced
Economies (%, Annual)
Euro Area
Japan
UK
USA
Source: IMF
* Forecast
Germany
Japan
UK
2012*
2011*
2004
2012*
2011*
2010
2009
2008
2007
2006
2005
2004
-8
2010
-6
2009
-4
2008
-2
2007
0
2006
2
2005
12
11
10
9
8
7
6
5
4
3
2
4
USA
Source: IMF
* Forecast
It is therefore considered essential that credit markets regain their pre-crisis
effectiveness so as to ensure sustainable development in advanced economies.
Nevertheless, vulnerabilities regarding credit supply prevail in advanced economies and the demand
for credit has not reached the pre-crisis levels yet (Chart I.12 and I.13). Due to low funding costs,
some banks in Europe and the USA continue to bear low-qualified assets on their balance sheets,
expecting that the quality of these assets will improve in the future. Concerns about banks’ capital
adequacy and sovereign risks increase funding costs, which, in turn, slow down the restoration of
credit supply conditions to their pre-crisis levels in Europe. Whereas the improvement in credit supply
conditions is gradual and limited in the USA as well, the low demand puts downward pressure on
credit growth.
Chart I.12. Development of Credits in the US
Banking Sector (Billion USD, %)
Chart I.13. Development of Credits in the Euro
Area Banking Sector (Billion Euro, %)
12,000
Credit Volume
Source: Fed, ECB
Credit Volume
Growth Rate (right axis)
Growth Rate (right axis)
Source: Fed, ECB
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03.11
03.11
04.10
05.09
06.08
07.07
08.06
09.05
10.04
11.03
12.02
01.02
0
0
04.10
1,000
2,000
05.09
2,000
06.08
3,000
4,000
07.07
4,000
08.06
5,000
6,000
09.05
6,000
8,000
10.04
7,000
11.03
8,000
10,000
12.02
14
12
10
8
6
4
2
0
-2
-4
-6
-8
9,000
01.02
10,000
14
12
10
8
6
4
2
0
-2
-4
-6
-8
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TÜRKİYE CUMHURİYET MERKEZ BANKASI
Another outcome of ample liquidity driven by expansionary monetary policies of
advanced economies is the acceleration of capital flows towards emerging economies due
to search for high yields. The slow recovery and low yields in advanced economies led to an
increase in capital flows to emerging economies with a relatively stronger economic and financial
structure. However, capital inflows slowed down in early 2011 on the back of increased geopolitical
risks and macroprudential monetary policy measures (Chart I.14). In the meantime, capital flows are
expected to continue for an extended period mainly because of, predictions that emerging economies
will maintain their rapid growth performance, and the relatively low weight of developing country
assets in the portfolios of institutional investors (Chart I.15).
Chart I.14. Flow of Funds Towards Emerging
Economies (Billion USD)
Chart I.15. Capital Flows Towards Emerging
Economies by Type and REER (Billion USD, index
2000=100) 1
1,200
130
8.00
2.00
1,000
125
6.00
1.50
800
4.00
1.00
2.00
0.50
0.00
0.00
-0.50
Investments on equity
and bonds decreased
respectively by 13,1 bln
and 2,2 billion USD.
-4.00
-6.00
12.10
01.11
02.11
03.11
09.10
10.10
11.10
06.10
07.10
08.10
03.10
04.10
05.10
Equity
110
400
105
200
100
-1.00
0
95
-1.50
-200
90
-2.00
01.10
02.10
-8.00
115
600
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-2.00
120
Direct Investment
Other Investment
Portfolio Investment
REER (right axis)
Government Bond (rhs)
Source: IMF
Source: IIF
(1) Forecast for 2010, Projections for 2011 and 2012
REER: Real effective exchange rate
Acceleration of capital flows increases the risks of developing countries that are
exposed to, and, in turn, these countries intensify macroprudential measures. Capital flows
caused appreciation of local currency, swelling in asset prices, rapid credit growth, increase of
leverage ratios and deterioration in the current account deficit. In line with the measures taken, many
countries launched policy mixes including reserve accumulation (such as Indonesia, Peru), increase of
reserve requirement ratios (such as Brazil, China, India, Turkey), change in policy rates and direct
capital controls (such as Brazil, Peru). On the heels of the crisis, emerging economies generally opted
for decreasing policy rates in order to underpin the economic recovery. With the economic recovery
and revival of international capital flows to these countries, their policy stances diverged. Accordingly,
while a number of emerging economies raised interest rates so as to prevent overheating of the
economy, others kept interest rates at low levels considering the rapid capital inflows. Additionally,
countries that underwent rapid credit expansion started to use required reserves as a more active
policy tool (Chart I.16 and I.17).
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TÜRKİYE CUMHURİYET MERKEZ BANKASI
Chart I.16. Change in Policy Rates in Emerging
Economies (Basis Points)
2
0
105
100
0
95
-200
90
China
Poland
Thailand
Malaysia
Hungary
Romania
Russia
Indonesia
Mexico
Brazil
S.Africa
Peru
Colombia
Chile
Turkey
115
200
Sept 2007 Dec 2010
-12
120
110
Jan 2011
-10
125
400
Feb 2011
-8
1,000
600
March 2011
-6
130
800
April 2011
-4
1,200
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-2
Chart I.17. Change in Reserve Requirement
Ratios in Emerging Economies and Their Level
(Points) 1
Direct Investment
Other Investment
Portfolio Investment
REER (right axis)
Source: Country Central Banks
(1) Each grade shows the change in ratio, values indicated above bars
show the current level.
Source: Country Central Banks
Ample global liquidity and high growth rates led to a rapid credit expansion in
emerging economies. Rapid credit expansion increases vulnerabilities of the banking sector in these
countries (Chart I.18). Banks resort to further wholesale funding in order to finance the credits
increasing parallel to high growth and domestic demand. As a matter of fact, with increased external
borrowing facilities, banks in developing countries issued dollar-indexed bonds at a record high of USD
110 billion in total throughout 20101. However, in the event of a massive capital outflow, banks in the
said countries may face rollover risk. Meanwhile, some emerging economies started to accumulate
reserves within the framework of macroprudential measures (Chart I.19).
Chart I.18. Credit Growth in Emerging
Economies (%)
Chart I.19. Current Account Balance and Official
Reserve Changes in Emerging Economies (%)1
45
60
40
50
35
30
40
25
30
20
Europe,
Middle East
and Africa
Asia
S.Africa
20
15
10
10
5
0
0
2002-2009 average
2010
Source: IMF
Israel
Poland
Turkey
S.Africa
Russia
Hunagry
Indonesia
China
Malaysia
Korea
India
Peru
Brazil
Mexico
Colombia
Chile
Israel
Malaysia
Thailand
Colombia
China
Argentina
Brazil
India
Turkey
-10
Change in Official Reserves (2010, %)
Current Account Balance (% GDP)
Source: IMF
(1) Annual change in gross international reserves excluding gold. Current
account balance data are 2009 data for some countries and 2010 data for
others.
Rapid credit expansion gave way to overheating signals in some economies. Certain
countries faced the risk of overheating parallel to narrowing the output gap due to the improvement in
economic activity and employment in emerging economies (Chart I.20). In countries, which were
exposed to accelerated capital flows, the inflation trend started to rise on the back of increased
domestic consumption against weak external demand (Chart I.21). Given the contribution of energy
1
IMF Global Financial Stability Report, April 2011.
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Financial Stability Report – May 2011
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cost to external deficit, the increase in global commodity prices adds to inflationary pressures.
Increased oil and energy prices driven by the political unrest in the Middle East and North Africa, blurs
the outlook for growth and inflation in these countries.
Chart I.20. Output Gap and Annual Credit
Growth Rate in Emerging Economies (%)1
Chart I.21. Inflation Rates in Country Groups
(%)
15
10
9
10
8
7
5
6
5
0
4
3
Output Gap
2010
2009
2008
2007
2006
2004
Central and Eastern Europe
Devoloping Asia
S.America
Annual Credit Growth (%)
Source: IMF Global Financial Stability Report, April 2011.
(1) Output gap is by 2010 and credit growth rate is by June 2010.
2005
2
Peru
Malaysia
Korea
Poland
Indonesia
Colombia
S.Africa
Russia
-5
Source: IMF
In a general sense, although global economic conditions still remain weak, they are
on a positive path owing to the measures taken to improve economic activity in advanced
economies. However, the policy measures taken in the face of the crisis caused a significant
deterioration in public finances; as a result, advanced economies resorted to fiscal discipline.
Narrowing fiscal room for manoeuvre and the low rate of increase in credits restrain growth
performance in advanced economies. According to international authorities, global growth, which
regained its pre-crisis levels thanks to emerging economies, is not likely to see a second dip.
Meanwhile, capital flows that have accelerated recently on the back of the decoupling among
countries in terms of interest rates and long-term growth potential feed the risk of overheating in
emerging economies. Considering potential setbacks in case of a sudden stop of capital inflows, policy
makers continued to implement macroprudential policy mixes to cool down the economy. In addition
to operational measures taken in the aftermath of the crisis, both advanced and emerging economies
embarked on some changes in their institutional framework2.
Advanced economies are expected to implement their exit strategies gradually in
the medium and long run, based on their growth and inflation indicators. This situation is
expected to have a limited impact on global growth rates; however, it might affect international
capital movements to the extent of uncertainty it would create in terms of investment decisions.
Furthermore, the increased default risk in PIIGS countries increases the risk of contagion especially to
those countries having PIIGS debt securities on their portfolio. Meanwhile, the impacts of the
developments in the Middle East and the North Africa countries on the global economy through the
channel of energy prices should be monitored carefully.
2
Please refer to:Special Topic V.8. Institutional Framework Regarding Macroprudential Policies.
Financial Stability Report – May 2011
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