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Türkiye Cumhuriyet Merkez Bankası II. Domestic Economic Outlook2 Economic activity presented a more positive outlook in the second quarter of 2013 compared to the first quarter. The revival in domestic demand and the base effect in gold trade led to a slight deterioration in the current account deficit. Increased volatility in global financial markets after May caused fluctuations in capital flows and exchange rates in emerging market economies including Turkey. Increased uncertainties over global monetary policies as of the second quarter of 2013 have led to capital outflows from emerging market economies including Turkey. The recent tightening in financial conditions is expected to curb the increase in loans and the current account deficit in the upcoming period. Although financial and non-financial sectors had no trouble in borrowing from abroad, during the period from May to July, Turkey posted a capital outflow of approximately USD 10 billion. However, with the postponement of the expectations over Fed tapering, recovery of global risk appetite made capital flows rebounded again. The recent volatility in portfolio flows to Turkey was higher than that experienced after the Euro area debt crisis in 2011 (Chart II.1). The current account deficit (CAD) makes the domestic economy more vulnerable to capital flows. Even if a slight deterioriation was observed in current account deficit due to the increase in imports demand as a result of revival in domestic demand as of the first quarter of 2013, this deterioriation was mainly driven by gold trade. The domestic demand and loans that are expected to display a moderate increase in the upcoming period might restrain the increase of imports. Furthermore, the signs of recovery in the Euro area economic activity also support the positive expectations regarding imports. In light of these developments, the recovery in the CAD excluding gold is expected to continue in the period ahead. Factors other than portfolio flows did not display a notable change in financing the CAD, which alleviates concerns over financing it (Chart II.2). 2 This chapter has been prepared by E. Özgü Özen Çavuşoğlu. Financial Stability Report | November 2013 15 Türkiye Cumhuriyet Merkez Bankası Chart II.1 Chart II.2 Cumulative Portfolio Flows1 Current Account Deficit and Financing Items1 (Billion USD) (12-Month Cumulative Billion USD) 2011 2012 2013 30 30 25 25 20 20 15 15 10 10 5 5 0 0 Foreign Direct Investment Other Portfolio Investment Current Account Deficit 100 80 60 40 20 01/07 05/07 09/07 01/08 05/08 09/08 01/09 05/09 09/09 01/10 05/10 09/10 01/11 05/11 09/11 01/12 05/12 09/12 01/13 05/13 09/13 -40 Dec Nov Oct Sep Jul Aug Jun May Apr Mar Jan Feb 0 -20 (1) Calculated by weekly net portfolio flows. Includes the data of repo, GDDS and securities portfolio as well as banks' off-balance sheet FX position. Source: BRSA, CBRT (1) Portfolio includes equities and government domestic debt securities. Other is composed of the total of short and long-term net loans of banks and other sectors, bonds issued abroad by banks and the Treasury, and deposits at banks. Source: CBRT Increased uncertainties over global monetary policies led to repricing of all financial assets including exchange rates. The real effective exchange rate that had gradually increased since mid-2011 depreciated after May 2013 due to nominal exchange rate developments. In September, though, the depreciation in the real effective exchange rate subsided amid developments that reduced concerns in global financial markets (Chart II.3). The course of the real effective exchange rate after May is considered to contribute to the economic rebalancing process. Chart II.3 Real Effective Exchange Rate (CPI-based, 2003=100) Real Effective Exchange Rate Depreciation Periods of TL 135 130 130 125 125 120 120 115 115 110 110 105 105 100 100 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 04/13 07/13 10/13 135 Source: CBRT The relative deterioration in the risk outlook of emerging market economies has exacerbated the volatility of exchange rates. The Turkish lira, with the lowest exchange rate volatility among currencies of emerging market economies posting current account deficits, started to display higher volatility in the post-May period (Chart II.4). While Turkey's 16 Financial Stability Report | November 2013 Türkiye Cumhuriyet Merkez Bankası susceptibility to external financing was instrumental in increasing the implied exchange rate volatility relatively further, the Turkish lira displayed the lowest volatility compared to four other emerging market currencies that recorded the highest depreciation in the same period (Chart II.5). Chart II.4 Chart II.5 Implied Volatility of Exchange Rates1 Implied Volatility of Exchange Rates1 (12-Month Ahead) (12-Month Ahead) 30 30 30 30 CAD-posting EMEs Selected EMEs 27 27 24 24 24 24 21 21 21 21 18 18 18 18 15 15 15 15 12 12 12 12 9 9 9 9 6 6 6 6 (1) Emerging market economies posting current account deficits include Brazil, Chile Colombia, Czech Republic, Hungary, Indonesia, Mexico, Poland, Romania, South Africa and Turkey. Source: Bloomberg 27 10/13 07/13 04/13 01/13 10/12 07/12 04/12 01/12 10/11 07/11 04/11 01/11 10/10 07/10 Turkey 04/10 10/13 07/13 04/13 01/13 10/12 07/12 04/12 01/12 10/11 07/11 04/11 01/11 10/10 07/10 04/10 01/10 Turkey 01/10 27 (1) Selected emerging market economies include Brazil, India, Indonesia, South Africa and Turkey. Source: Bloomberg Economic activity gained pace in the second quarter of 2013. After significant growth in the first quarter of 2013, the final demand displayed a limited increase in the second quarter, compared to the previous one. The private sector’s investment and consumption demand recorded a moderate increase on a quarterly basis, while the public demand that played an important role in the first quarter growth recorded a decline. On the other hand, the largest contribution to the second quarter growth came from the change in inventories. While net foreign trade had a negative contribution to growth after the boost of the imports demand, the contribution of net imports to growth is expected to increase in view of the recent developments (Chart II.7). Chart II.6 Chart II.7 GDP and Final Domestic Demand Contributions to Quarterly GDP Growth (Seasonally Adjusted, Billion TL, Deflated by 1998 prices) (2013Q2, Seasonally Adjusted, Percentage Points) GDP Final Domestic Demand 2.5 33 33 31 31 2.1 2 1.5 29 29 27 27 25 25 23 23 1 0.5 0.3 0.5 0.4 0 0 -0.5 -1 2010 2011 2012 2013 Import Export Inventories Public Investment 2009 Public Consumption 2008 Private Investment 21 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 -1.2 Private Consumption 21 -0.7 -1.5 Source: CBRT, TURKSTAT Financial Stability Report | November 2013 17 Türkiye Cumhuriyet Merkez Bankası The recovery trend in public debt indicators has been continuing in line with the favorable outlook in the budget performance. The significant increases in tax and non-tax revenues in 2013 became the main determinant of the favorable outlook in the budget performance. The recovery trend in public debt stock indicators that started in 2010 on the back of the improvement in budget performance has continued in 2013 as well (Chart II.2.8). In line with these developments, internal debt rollover ratios have continued to hover below 100 percent throughout the year. Maintenance of the positive outlook of public finance and the fact that its susceptibility to the level of public debt stock as well as to interest rate and exchange rate movements is limited are essential for macroeconomic stability and for the stability of the Turkish banking system that bears significant amounts of GDDS on its balance sheet. Chart II.8 Chart II.9 Central Government Budget Balance-Debt Stock Composition of Central Government Debt Stock and Average Days to Maturity 1 (Month) (Annualized, Ratio to GDP, %) Primary Balance FX Denominated Floaing Rate Fixed Rate Average Maturity of Domestic Debt Stock (Right Axis) Average Maturity of External Debt Stock Total Debt Stock (Right Axis) 6 48 5 45 4 42 3 39 2 36 100% 120 114 80% 80 60% 45 40% 2008 2009 I III 2010 I III 2011 I III 2012 * GDP data related to the third quarter of 2013 is an estimate. Source: Undersecretariat of Treasury, Ministry of Finance I III* 0 2013 2012 III 2011 I 2010 III 2013 Q3 2007 I 2009 III 2008 30 I 20 0% 2007 0 40 2006 33 60 20% 2005 1 100 (1) Data of days to maturity pertains to October 2013. Source: Undersecretariat of Treasury In the repricing process of financial assets, domestic interest rates soared in response to the increase in U.S. bond interest rate and in risk premiums of emerging markets. Interest rates on GDDS that had decreased to historic lows on the back of sovereign rating upgrades increased more than those of other emerging market economies during the postMay fluctuation (Chart II.10). Although the volatility in bond rates declined slightly due to the CBRT's predictability-enhancing actions and the recovery in global risk appetite, it remained above pre-May levels (Chart II.11). 18 Financial Stability Report | November 2013 Türkiye Cumhuriyet Merkez Bankası Chart II.10 Chart II.11 Change in Market Rates of Selected Countries with a 5-Year- Volatility of Interest Rates on U.S. and Turkish Treasury Bonds Maturity with a 10-Year-Maturity1 (Percentage Point) 2009 December-2013 April 2013 May-2013 October US Turkey (Right Axis) 120 4 0.8 110 2 Bernanke's Remarks 100 0 FED's September 0.7 Meeting 0.6 90 0.5 -4 80 0.4 -6 70 0.3 -8 60 -10 50 Turkey Brazil Indonesia India China Colombia Philippines Thailand Poland S. Africa Mexico S. Korea Malesia Peru Chile Czech Rep. Israel Hungary Romania -2 0.2 Governor Başçı's Remarks 0.1 11/13 10/13 10/13 09/13 08/13 07/13 07/13 06/13 05/13 05/13 04/13 03/13 03/13 02/13 01/13 0 01/13 40 (1) The Move Index has been used for the volatility of US Treasury bond with a 10year-maturity. A 22-day standard deviation has been calculated for the yields on Turkish Treasury bond with a 10-year-maturity. Source: Bloomberg Source: Bloomberg In the bond market, transaction volumes, particularly of bond with a two-yearmaturity, declined significantly during the period of intensive sales by foreign investors, hence bond rates drastically moved. Although transaction volumes recovered slightly after July, the bond market could not gain the depth it used to have before the fluctuation (Chart II.12). On the other hand, the GDDS yield curve that flattened out after the fluctuation has returned to normal levels in the recent period (Chart II.13). Chart II.12 Chart II.13 Transaction Volume of Bonds with a Maturity of 2 - 10 Years GDDS Yield Curve1 (Million TL) (%) 2-Year 10-Year May.21 July 30 October 31 1,000 10 900 9 800 Yield (Percent) 700 600 500 400 8 7 6 300 5 200 100 4 0.5 Source: Bloomberg Financial Stability Report | November 2013 09/13 10/13 04/13 05/13 06/13 07/13 08/13 12/12 01/13 02/13 03/13 08/12 09/12 10/12 11/12 06/12 06/12 07/12 0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Maturity (Year) (1) Calculated from the compounded returns on bonds quoted in BIST Bonds and Bills Market by using Extended Nelson-Siegel (ENS) method. Source: BIST, CBRT 19