Download I. INTERNATIONAL DEVELOPMENTS

TÜRKĐYE CUMHURĐYET MERKEZ BANKASI
I. INTERNATIONAL DEVELOPMENTS
A limited recovery has been observed in global growth and advanced economies do not offer a
homogenous picture in terms of growth performance. In fact, the USA and Japan have a more favorable
economic outlook compared to the Eurozone. Despite the monetary policy measures taken by the European
Central Bank and the structural reform decisions taken by policy-makers, the fragmented financial structure
remains the same in the Eurozone. Expansionary monetary policy measures adopted by advanced
economies have considerably boosted capital inflows to emerging economies via encouraging the search for
yield. To establish and maintain global financial stability, it is critical to closely monitor capital flows and
exchange rate volatility as well as the level of indebtedness of households and firms. Likewise, it is
important for emerging economies to take necessary policy measures against systemic risk factors from
domestic and foreign origins.
Although some important short-term risks to the global economic outlook seem to
be controlled, the weak growth performance observed in advanced economies continues
particularly due to Eurozone-related problems. Global financial markets have been relatively
relieved by the steps taken by the authorities in advanced economies in the second half of 2012 and
onwards. However, efforts to reduce the public debt burden, weaknesses in balance sheets of firms
and households, problems in the credit mechanism and the failure to establish an environment of
confidence in a real sense stand as factors hampering a strong and sustainable growth. Under the
assumption that there will be no new financial or political risks in the upcoming period and that the
authorities will continue to implement growth-boosting policies, the growth performance in advanced
economies is expected to improve only in a gradual manner (Chart I.1).
Growth performance of emerging economies that displayed a marked slowdown in
2012 due to weak external demand conditions and prudent policies against global risks is
expected to register a recovery in the forthcoming period. This recovery is expected to come
mainly from low public debt and strong domestic demand of countries (Chart I.2). In the current
conjuncture where global liquidity is abundant and interest rates are low, sudden changes in risk
appetite that may occur due to new problems in advanced economies may be dangerous for growth
dynamics of emerging economies that are sensitive to capital flows.
Chart I.1. Annual Growth Rates in Selected
Advanced Economies (%)
Chart I.2. Annual Growth Rates in Selected
Emerging Economies (%)
6
11
4
9
2
7
0
-2
5
-4
3
Japan
UK
USA
Source: IMF
(*) Prediction
Financial Stability Report – May 2013
2014*
2013*
2012
1
2011
2014*
2013*
2012
2011
2010
2009
2008
2007
2006
2005
-8
2010
-6
Central and Eastern Europe
Emerging Asia
Latin America and the Caribbean
Developing countries
Euro Area
Source: IMF
(*) Prediction
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Automatic spending cuts and tax hikes that were put in place in the USA in the first
quarter of 2013 stand as significant factors impeding growth. Although a great portion of
temporary tax cuts was left intact in the US Congress and thus “fiscal cliff” concerns were dispelled,
spending cuts are expected to draw the growth for 2013 down by approximately 0.6 points according
to Congressional Budget Office estimates1. Other factors negatively affecting growth are the
uncertainties caused by the problems in the Eurozone, weak external demand conditions, political
controversy over the raising of the public debt ceiling and concerns arising from the failure to
introduce a medium-term fiscal plan. Nevertheless, the recovery in the housing sector, increased
access to loans and the strong course of private consumption due to the recent optimistic atmosphere
in financial markets stand as factors supporting growth despite the fiscal tightening in the USA (Chart
I.3, Chart I.4, Chart I.5).
Chart I.3. Effect of Avoiding Fiscal Cliff on the
Budget in the USA (Ratio to GDP)
Chart I.4. US Housing Sector Developments1,2
(Thousand, index value)
1600
210
3,5
1400
200
3,0
1200
190
1000
180
800
170
600
160
400
150
1,0
200
140
0,5
0
130
2,5
2,0
1,5
0,0
Fiscal cliff
Expenditures
2013 predictions
Revenues
Source: IMF
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
06.10
09.10
12.10
03.11
06.11
09.11
12.11
03.12
06.12
09.12
12.12
03.13
4,0
Housing Starts
S&P Case-Shiller 20-City Home Price Index
(right axis)
Source: Fed
(1) New housing constructions data show the number of house
constructions that started in the last one-year period.
(2) S&P Case-Chiller index initial value: 2000=100
As unemployment rates are still high and the inflation threat is weak, the Fed
continues its accommodative monetary policy backed by quantitative easing. The Fed,
which set the third round of quantitative easing in motion in September 2012 and announced that it
would continue the low interest rate policy at least until mid-2015, expressed its commitment in
December to stick to the current interest rate policy unless unemployment rates fall below 6.5 percent
and medium-term inflation expectations rise above 2.5 percent (Chart I.6). The Fed also gives signals
that it may slow the quantitative easing until the end of this year depending on the recovery in
economic activity. However, the monetary policy is believed to have only a limited amount of
contribution to sustainable growth in the long run if it is not supported with a well-designed and
efficient fiscal policy.
1
http://www.cbo.gov/publication/43961
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12000
14
12
10
8
6
4
2
0
-2
-4
-6
-8
10000
8000
6000
4000
2000
12,0
3500
10,0
3000
8,0
2500
6,0
2000
4,0
1500
2,0
0,0
1000
-2,0
500
-4,0
0
01.02
10.02
07.03
04.04
01.05
10.05
07.06
04.07
01.08
10.08
07.09
04.10
01.11
10.11
07.12
0
Chart I.6. Change in US Inflation, Unemployment
and Fed Balance Sheet Size (%, Billion USD)
04.03
10.03
04.04
10.04
04.05
10.05
04.06
10.06
04.07
10.07
04.08
10.08
04.09
10.09
04.10
10.10
04.11
10.11
04.12
10.12
04.13
Chart I.5. US Banking Sector Loans (Billion USD,
%)
Loans
Fed Balance sheet (right axis)
Unemployment rate
Growth rate (right axis)
Source: Fed
Annual inflation
Source: Fed
Abundant and cheap liquidity that emerged due to unconventional monetary
policies in the USA encourages firms to increase their indebtedness via bond issues and
also boosts investors’ demand for risky assets. This situation, which may cause credit risk to
shift from the banking system to other sectors and be inaccurately priced in an environment where
banks under a more strict supervision after the crisis try to reduce their balance sheets and improve
their asset quality, is seen as a threat to financial stability when combined with the market risk
created by the probability of a sudden rise in long-term interest rates that are presently kept under
pressure (Chart I.7, Chart I.8).
Chart I.7. Change in Debt of the US Households,
Firms and Financial Sector (Trillion USD)
17,5
16,5
Chart I.8. High-Risk Bond Issues of Firms in the
US (Basis points, Billion USD)
2500
50
45
2000
40
35
1500
30
25
1000
20
15
10
15,5
14,5
13,5
12,5
11,5
500
5
0
10,5
01.07
04.07
07.07
10.07
01.08
04.08
07.08
10.08
01.09
04.09
07.09
10.09
01.10
04.10
07.10
10.10
01.11
04.11
07.11
10.11
01.12
04.12
07.12
10.12
01.13
9,5
Firms
Household
Source: Fed
04.02
10.02
04.03
10.03
04.04
10.04
04.05
10.05
04.06
10.06
04.07
10.07
04.08
10.08
04.09
10.09
04.10
10.10
04.11
10.11
04.12
10.12
04.13
0
Monthly issue (right axis)
Interest Rate Differential for High Yield
Bonds
Financial Sector
Source: IMF
In the Eurozone where banking and public debt crises have led to deterioration in
the credit mechanism and have urged a strong fiscal consolidation to be implemented, the
contraction trend in economic activity has decelerated as a consequence of policy
decisions taken in the second half of 2012. Yet, weak demand conditions in periphery countries
especially like Spain and Italy, the ongoing fiscal tightening and limited access to credit are the most
significant factors that hamper economic growth in the Eurozone (Chart I.9). Concerns over the
collapse of the monetary union, which is a serious risk for the regional and global economy, eased
after the conditional outright bond-buying program announced by the ECB in August 2012 and the
public borrowing costs of especially periphery countries started to decline (Chart I.10). However, still
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high levels of firm and household indebtedness in these countries, ongoing operations of the banking
system to reduce balance sheets and the financial disintegration between core and periphery
countries prevent loan growth and thus the financing of investment and consumption expenditures.
For all these reasons, it seems difficult for periphery countries to free themselves from the loop of low
growth, high interest rates and high budget deficit in the near future.
12.000
14
12
10
8
6
4
2
0
-2
-4
-6
-8
10.000
8.000
6.000
4.000
2.000
Loans
Source: ECB
01.13
02.12
03.11
04.10
05.09
06.08
07.07
08.06
09.05
10.04
11.03
12.02
01.02
0
Chart I.10. Bond Yield Spreads Between
Selected EU Countries and Germany (Basis
Points)
1600
1400
1200
1000
800
600
400
200
0
04.10
06.10
08.10
09.10
11.10
01.11
03.11
05.11
06.11
08.11
10.11
12.11
02.12
03.12
05.12
07.12
09.12
11.12
12.12
02.13
04.13
Chart I.9. Banking Sector Loans in the Eurozone
(Billion Euro, %)
Growth Rate (right axis)
Italy
Portugal
Spain
Belgium
France
Source: Bloomberg
Although the ongoing fiscal tightening in Eurozone countries has helped reduce
budget deficits recently, the ratio of public debt to GDP continues to rise in many
countries (Chart I.11, Chart I.12). The increase in indebtedness rates is more apparent particularly in
periphery countries which experience a contraction in economic activity and are obliged to pay high
interests at the same time. Nevertheless, the bond-buying program announced by the ECB has
dispelled concerns over the sustainability of public debt for now. Meanwhile, the Fiscal Compact
introduced by the European Commission to avoid a repeated experience of the same problems
originating from public indebtedness in the future and signed by 25 of 27 EU countries2 was put into
effect at the start of 2013. This treaty sets an upper limit for budget deficits of member countries and
calls for automatic adjustment mechanisms and fiscal sanctions in case of breach of this limit.
Enforcement of this treaty after the necessary changes are made in national legislations is important
for building the fiscal unity among EU countries in the medium term.
2
The United Kingdom and the Czech Republic did not sign the agreement.
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Chart I.11. Ratio of Structural Budget Deficit to
GDP in Eurozone Countries (%)
13,0
19.1
Chart I.12. Ratio of Gross Public Debt to GDP in
Eurozone Countries (%)
180
11,0
160
9,0
140
7,0
120
5,0
100
3,0
80
1,0
60
-1,0
40
2009
2010
2011
2012
2013**
Source: IMF
(*) Estimate
(**) Prediction
2009
2010
2011
2012
2013**
Source: ECB
(*) Estimate
(**) Prediction
Firms in the periphery Eurozone countries that undertook a heavy debt burden in
the favorable conditions of the pre-crisis period started to have problems about the
sustainability of their debt in an environment of low growth and high interest rates in the
aftermath of the crisis (Chart I.13). The fragmented financial structure has also played a role in
this situation that comes in the form of rapid NPL increases in firm loans especially in Spain, Italy and
Portugal, posing a threat to financial stability (Chart I.14). International institutions frequently
emphasize the importance of making firms in bad condition sound and reducing the debt of firms in
good condition in a controlled manner by enhancing their access to credit in order to avoid firms’
insolvency in the upcoming period.
Chart I.13. Indebtedness Rates of Eurozone
Firms (2002 Q1=100)
France
Ireland
Portugal
Source: IMF
Germany
Italy
Spain
France
Germany
Italy
Spain
12.12
08.12
04.12
12.11
08.11
06.02
12.02
06.03
12.03
06.04
12.04
06.05
12.05
06.06
12.06
06.07
12.07
06.08
12.08
06.09
12.09
06.10
12.10
06.11
12.11
06.12
12.12
90
04.11
110
12.10
130
08.10
150
04.10
170
12.09
190
08.09
210
04.09
310
290
270
250
230
210
190
170
150
130
110
90
230
12.08
250
Chart I.14. NPL Ratios of Eurozone Firm Loans
(2008 Q4=100)
Source: Supervisory authorities of countries
The ECB continues to ease its monetary policy as inflationary risks are low, but the
fragmented financial structure in the Eurozone reduces the effectiveness of the monetary
transmission mechanism. Actually, the difference between the loan rates of core and periphery
countries increased in the last two-year period (Chart I.16). Measures taken by the ECB have reduced
the risk perception in the financial system. Yet, the impact of these measures on the real economy
may remain limited if not backed by structural reforms, due to the problems in the transmission
mechanism (Chart I.15). To solve this problem, some reformist decisions were made in 2012 for the
establishment of a bank association so as to strengthen the monetary union. Among these decisions
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are gathering the surveillance and supervision activities of banks in the Eurozone under one roof
within the ECB, developing a common deposit insurance system and establishing a bank resolution
framework that will enable direct capital injection to banks from European Stability Mechanism
resources. Once these reforms are implemented, the risk perception in financial markets is expected
to fall, banks are expected to reduce their dependence on total funding and strengthen their capital
structures by improving both their asset quality and profitability over time. These reforms have been
on the agenda for a long time but they have not been put into practice yet and this has made it
difficult to achieve financial stability in the Eurozone. The banking crisis experienced in South Cyprus
in March 2013 and its repercussions can be viewed as an example in this sense.
Chart I.15. EURIBOR-OIS Spread (Basis Points)
Chart I.16. Fragmented Financial Structure –
Changes in Interest Rates on Eurozone Bank
Loans1 (Basis Points)
80
100
Italy
Center
60
80
40
60
Ireland 20
-50
Finland
20
Netherlands
Portugal
0
France
-100
40
Spain
S. Cyprus
-20
0
50
Housing Loans
100
120
100
Belgium
Austria
-40
-60
01.10
03.10
05.10
06.10
08.10
10.10
12.10
02.11
03.11
05.11
07.11
09.11
11.11
12.11
02.12
04.12
06.12
08.12
10.12
11.12
01.13
03.13
05.13
0
Source: Bloomberg
Germany
Periphery -80
-100
Firm Loans
Source: IMF Global Financial Stability Report, April 2013
(1) Changes in interest rates for the related loan type in the December
2010 – January 2013 period.
Another issue on the agenda of the Eurozone is the structural reform of the banking
sector. The European Commission issued the Liikanen Report on the reform of the EU banking
system in October 2012. The Report, which introduces various policy suggestions to avoid similar
banking crises in the EU in the future, principally offers the categorization of risk-bearing treasury
transactions that banks conduct on their own behalves and accounts under a distinct legal entity and
separation of these transactions from deposit banking activities. In this way, the “universal banking”
model that gathers the prevailing investment and deposit banking activities in Europe under one and
the same legal entity will have been abandoned (See Special Topic V.3). The Report, which includes
suggestions similar to the Volcker Rule put into legislation with the Dodd-Frank Act in the USA and the
Vickers Commission Report that forms the basis for the banking reform law waiting for enactment in
the UK, has received immense reactions from the sector. Taking into view the criticisms to the Report,
the EU Commission is expected to announce its plan on this issue in the upcoming period.
The new government in Japan, where has been a struggle with disinflation and
stagnation for many years, has made radical changes in its monetary and fiscal policies to
achieve sustainable growth. In addition to various structural reforms, the new policy set that
stipulates an inflation target of 2 percent, a strong quantitative easing and significant increases in
public expenditures is expected to revive the country’s economy especially by boosting domestic and
external demand in the short run. Yet, it is believed that this financial revival package introduced
without a medium-term budget plan in the country where the public debt burden is already very high
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may increase the borrowing costs of the country and thus lead to concerns over debt sustainability
(Chart I.18). This situation poses a significant risk to Japanese banks that have a considerably higher
sovereign bond position compared to banks in all other advanced countries. Another risk factor in
question is the potential of the depreciation of the Japanese yen due to the full-scale quantitative
easing in place to cause global competitive devaluations (Chart I.17).
Chart I.18. Ratio of Gross Public Debt to GDP in
Japan and Other Advanced and Emerging
Economies (%)
Chart I.17. BoJ Balance Sheet Size and the
USD/Yen Parity (Trillion yens)
180
115
170
110
160
105
150
100
140
95
130
90
120
85
110
80
100
75
300
250
200
150
100
50
08.08
11.08
02.09
05.09
08.09
11.09
02.10
05.10
08.10
11.10
02.11
05.11
08.11
11.11
02.12
05.12
08.12
11.12
02.13
05.13
0
Balance sheet
2007
2008
USD/JPY (right axis)
2009 2010 2011 2012 2013*
Japan
Developed Countries
Developing countries
Source: IMF
(*) Prediction
Source: Bloomberg
Growth performances of emerging economies have improved compared to 2012 due
to domestic demand that has strengthened parallel to weakened global risk perception,
favorable financing conditions and the recovery in external demand (Chart I.19). In fact,
asset prices have started to climb in most of the emerging economies due to the improvement in
global conditions (Chart I.20). “Hard landing” concerns referring to sudden and great falls in growth
performance of some emerging economies like China, India and Brazil have also eased considerably.
However, the lower-than-expected growth performance of these economies is likely to be related to
declines in potential growth rates rather than provisional factors and this likelihood stands as an
important risk factor in terms of global economic activity in the medium and long run.
Chart I.20. Changes in MSCI Equity Index
(31.12.2010 =100)
Chart I.19. VIX Index
50
120
115
40
110
105
30
100
95
20
90
85
Source: Bloomberg
Financial Stability Report – May 2013
04.13
12.12
02.13
10.12
07.12
08.12
05.12
01.12
03.12
11.11
08.11
10.11
06.11
02.11
04.11
80
12.10
04.13
02.13
12.12
10.12
08.12
06.12
04.12
02.12
12.11
10.11
08.11
06.11
04.11
02.11
12.10
10
Source: Bloomberg
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Despite a slight deterioration in the budget performance of emerging economies in
2012 due to the slowdown in economic activity, the downtrend in public indebtedness
continues in general (Chart I.21). This downtrend provides emerging economies with more room to
maneuver in fiscal policy compared to advanced economies. Yet, the cautious stance in fiscal policy
remains critical as, depending on changes in the global conjuncture, a slowdown in growth in the
medium term and a rise in borrowing costs may reverse the course and rapidly increase indebtedness
rates.
The recent favorable trend of energy and food prices supports price stability in
emerging economies (Chart I.22). However, inflationary pressures may increase in the forthcoming
period due to the revival in external demand observed as a result of strong domestic demand and the
recovery in advanced economies. Exchange rate volatilities caused by capital inflows to emerging
economies stand as another factor making it difficult to control inflation.
Chart I.22. Inflation in Selected Emerging
Economies (%)
30
20
20
10
10
0
0
7
6
6
5
5
4
4
3
3
2
2
Central and Eastern Europe
Emerging Asia
Latin America and the Caribbean
Developing Countries
Source:IMF
(*) Prediction
2014*
40
30
7
2013*
40
8
2012
50
8
2011
50
2013*
60
2012
60
2011
70
2010
80
70
2009
80
2010
Chart I.21. Ratio of Public Debt to GDP in
Emerging Economies (%)
Central and Eastern Europe
Emerging Asia
Latin America and the Caribbean
Developing Countries
Source: IMF
(*) Prediction
Real policy rates in emerging economies still remain well below the pre-crisis
levels but the improvement in global financial conditions from the second half of 2012
onwards has stimulated an uptrend in capital inflows to these countries again (Chart I.24).
Macroprudential policies mostly successfully implemented by authorities in recent years have
controlled credit expansion in most of the emerging economies and thus helped reduce risks such as
deterioration in the current account balance, excessive increases in asset prices and overheating of
the economy. However, intensified capital flows and low borrowing costs boost indebtedness rates
and foreign currency positions in emerging economies (Chart I.23). This situation, which increases
sensitivity to likely sudden movements in interest rates and exchange rates, stands out as a risk to
financial stability in emerging countries and enhances the need for macroprudential measures.
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Chart I.23. Securities Issues of Firms in
Emerging Countries (Billion USD)
Chart I.24. Capital Flows to Emerging
Countries1 (Billion USD)
60
700
20
50
600
15
40
500
30
400
20
10
5
10
300
0
200
-10
100
-20
0
-5
2008
2009
Bond
2010
2011
2012
Equity
-10
03.10
05.10
07.10
09.10
11.10
01.11
03.11
05.11
07.11
09.11
11.11
01.12
03.12
05.12
07.12
09.12
11.12
01.13
03.13
05.13
-30
0
Equity
Source: IMF Global Financial Stability Report, April 2013
Government Bond (right axis)
Source: IMF
(1) Data derived from the sum of previous quarters.
Flexible monetary policies implemented by central banks in advanced economies
lead to a rise in the risk appetite of investors and a global search for yield even though
the global economic activity has not yet recovered fully. The search for yield creates concerns
that the risks are not priced accurately in an environment where asset purchase programs of central
banks exert pressure on rates of return and reduce the amount of quality assets on the market. A
consistent rise in issues of high-yield bonds and the uptrend in the share of issues with low credit
rates in total issues in advanced economies show that these concerns are not in fact irrelevant.
The distorting effect of the search for yield on risk pricing is also true for emerging
economies. Recently, the weight of portfolio investments in capital inflows to emerging economies
and the weight of bond purchases in portfolio investments have increased. Accordingly, bond issues,
predominantly issues of foreign currency bonds, have increased rapidly. Declines in bond prices to be
observed in the medium term as a result of back-to-normal monetary policies in advanced economies
and the uptrend in interest rates are likely to have a distorting effect on debt sustainability of firms
both in advanced and emerging economies.
To conclude, though expansionary monetary policies in advanced economies have contained
the deterioration in the economic outlook of these countries due to structural problems like flaws in
money and credit channels, they fell short of bringing about the desired level of improvement in
economic activity. These policies have led international investors to search for yield, accelerating
capital inflows to emerging economies whereas returns on risk-bearing assets in advanced economies
have fallen to levels before the global crisis for the first time. Moreover, in this period, external
borrowings of firms have displayed a rapid rise on a global scale. Increased indebtedness levels and
volatile capital movements have strengthened the need for measures to safeguard financial stability in
emerging economies. In this context, countries should closely monitor firm and household
indebtedness by taking into account systemic risk factors from domestic and external origins, banks
should act with due diligence to maintain their strong financial structures, particularly their capital
adequacies and liquidity positions, and back these measures with mechanisms to increase the
resistance of the economy against likely shocks.
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