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External Sector
Econ 102 _2013
External Sector
How is a country linked with other countries in the
global world?
1) There are exchange of Goods and Services
2) There are exchange of Assets
What is different?
We have Turkish Lira (TL), US has US dollars ($) and
European Union has Euro(€)
Foreign currency
• Exchange rate is the TL price of a foreign
currency in Turkey.
Eg. 1 $= 2.08 TL (TL price of one dollar) or
0.48 $ = 1 TL ( dollar price of one TL)
• If TL price of a $ increases, TL depreciates
• (TL becomes less valuable compared to $)
Exchange of Goods and Services
• Exports are the goods that we sell (and foreign
economies buy). Hence, it is a source of
foreign exchange.
Exports= F( Yforeign, exchange rate)
• Imports are the good that we buy (foreign sell
to us). Hence we use foreign exchange to
purchase imports
Imports= F( Ydomestic, exchange rate)
Net Exports
• Net Exports = value of Exports- value of imports
Net Exports = F( Y domestic , Yforeign, exchange rate)
This is also called the Trade Balance
Exchange of Financial Assets
• We exchange Bonds, Shares, other assets.
Asset demand depends on relative returns, i.e.
interest rates, hence investors compare
domestic interest rate < or > foreign interest rates
i < or > i*
Asset demand
• Example:
Turkish treasury TL bonds: i = 10%,
German treasury Euro bonds: i* = 8%
Which one will the investors prefer to buy?
Asset demand
• Example:
Turkish treasury TL bonds: i = 10%,
German treasury Euro bonds: i* = 8%
Which one will the investors prefer?
What if during this period it is expected that e will increase
by 5 %, that is TL depreciates by 5 %, will you still prefer to
buy Turkish Bonds.?
Asset demand
• Example:
Turkish treasury TL bonds: i = 10%,
German treasury Euro bonds: i* = 8%
Which one will the investors prefer?
iEURO = iTL - expected % change in e.
8% = 10 % - expected D % in e
How are the foreign transaction
recorded?
• Balance of Payments: (Ödemeler Dengesi)
Accounting method of all monetary
transactions, with double entry system. Every
transaction is recorded in different parts of the
Balance of Payments.
Balance of Payments
1.
2.
3.
4.
Current Account
Financial Account
Central Bank reserve positions
Errors and Omissions
All adds up to zero.
Current Account
- Exports of goods (+)
- Imports of goods (-)
- Balance of trade
- Exports of services(+)
- Imports of services(-)
- Balance of services
- Income received on investment (+)
- Income payments on investment (-)
- Net income on investment
- Net transfers (+) (-)
- Balance on current account
Financial Account
- Increase in foreign holdings of assets in Turkey (+)
- Increase in Turkey’s holding of assets in foreign countries ()
- Balance on Financial Account
Capital Account
- Statistical Discrepancy
- Balance of Payments
BOP of Turkey
Foreign Exchange Market
• Systems of Foreign Exchange:
1. Fixed Exchange Rate System: Central Bank
determines the rate at which domestic currency is
exchanged in to foreign currency.
2. Flexible Exchange Rate System: market
determines the the rate at which domestic currency
is exchanged in to foreign currency
Foreign Exchange Market
TL price of foreign currency
Demand for foreign currency
Supply of Foreign Currency
Quantity of Foreign Currency
Foreign Exchange Market
TL price of $
Demand for $
Supply of $
Quantity of $
The Change in Foreign Exchange Market
Equilibrium when Turkish Imports increase
TL price of foreign currency
Demand for foreign currency
Supply of Foreign Currency
Quantity of Foreign Currency
The TL price of US dollar increases, i.e. TL depreciates
The Change in Foreign Exchange Market
Equilibrium when Turkish residents
purchase Foreign Bonds
TL price of foreign currency
Demand for foreign currency
Supply of Foreign Currency
Quantity of Foreign Currency
The TL price of US dollar increases, i.e. TL depreciates
Current Account Balance
Current Account Balance
Foreign Trade Balance
Services Balance
TourismRevenues (net)
Income Balance
Current Transfers
Capital and Financial Accounts
Direct Investments (net)
Portfolio Investments (net)
Equity Securities
Debt Securities
Other Investments (net)
Assets
Currency and Deposits
Liabilities
Loans
Banking Sector
Non-bank Sectors
Deposits
Foreign Banks
Foreign Exchange
Turkish Lira
Non-residents
Reserve Assets (net)
Net Errors and Omissions
December
2012
-4,658
-5,403
804
897
-321
262
6,531
599
5,560
852
4,356
-390
-2,193
-2,535
1,803
2,173
1,230
944
-222
-308
-686
378
207
762
-1,873
(USD million)
January-December
%
2011
2012 Change
-77,219 -48,867
-36.7
-89,139
-65,602
-26.4
18,003
21,932
21.8
18,044
19,389
7.5
-7,841
-6,594
-15.9
1,758
1,397
-20.5
65,659
44,845
-31.7
13,698
8,301
-39.4
21,986
40,773
85.4
-986
6,274
20,284
31,858
57.1
28,187
16,628
-41.0
11,136
-1,152
12,852
657
-94.9
17,051
17,780
4.3
18,866
8,495
-55.0
12,527
4,267
-65.9
7,121
6,373
-10.5
-4,309
7,783
-5,841
7,113
1,759
5,229
197.3
-7,600
1,884
3,447
2,914
-15.5
1,813
-20,814
11,560
4,022
-65.2
12 Month
Cumulative
-48,867
-65,602
21,932
19,389
-6,594
1,397
44,845
8,301
40,773
6,274
31,858
16,628
-1,152
657
17,780
8,495
4,267
6,373
7,783
7,113
5,229
1,884
2,914
-20,814
4,022
Source: CBRT
Exports of Good and Services
t o 4 8 .9 billion USD
t ivit y during t he last
alized t o t he ext ent
rrent account def icit
riod. Mont hly current
market expect at ions
2 and annual current
lion USD in 2011 t o
ccount def icit t o GDP
m 9.9% at t he end of
2012. Excluding t he
ce gave a surplus of
t def icit t hroughout
est ic demand w hich
easures t aken by t he
in export s w it h t he
y and t he increase in
ost t o export s during
b-it ems of t he current
ade def icit narrow ed
o 2011 and realized as
s in services balance
ompared t o 2011 and
er support ing t he
ef icit . The increase in
he rise in t he net
nues during 2012. In
Current Account Balance
(USD billion)
40
11.2
20
0
-20
-23.1
-40
-60
-48.9
Current Account Balance
-80
Current Account Balance (energy import s exluded)
-77.2
-100
2005
2006
2007
2008
2009
2010
2011
2012
Financing of Current Account Deficit
(USD billion)
70
60
50
Ot her Invest ment s
Portf olio Invest ment s
Direct Investment s
40
30
20
10
0
-10
2005
2006
2007
2008
2009
2010
2011
2012
External Total Debt
External Debt
306.6
277.1
247.1
193.6
169
147.3
104
109
118.3
118.3
170.1
268.3
270.7