CBRT Policy Mix. Devrim Yavuz Central Bank of the Republic of Turkey. April Jakarta

Transcription

1 CBRT Policy Mix Devrim Yavuz Central Bank of the Republic of Turkey April 2018 Jakarta

2 Outline Global Financial Crises: The lessons taken, the challenges faced and the need for policy mix How the trade-offs handled: The measures taken and the results Recent developments in global economy: New challenges and risks for emerging markets

3 T 2018 T Unorthodox Monetary Policy in the AEs,caused a vast flow of capital to the EMs Portfolio Flows to EMs (Net, Billion USD) EM EM excluding China Source:IIF

4 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May- Oct-07 Mar- Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May- Oct-12 Mar- Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Between start of QE and taper tantrum portfolio flows in terms of bonds equity has quadrupled Bond and Equity Flows to EMEs* (Adjusted for exchange rates and prices, stock, billion USD) Bonds Equities (secondary axis) QE1 by Fed: Nov Fed tapering: Source:EPFR

5 Post-crisis Dynamics and Spillovers to the EMs Historically low policy rates and quantitative easing (QE) policies across advanced economies had important implications for emerging markets: Surge in capital inflows Rapid credit expansion Real exchange rate appreciation Deteriorating current account balance Increased vulnerability against sudden reversals in global risk appetite (risk of sudden stop) Amplify macro-financial fluctuations

6 A self-feeding cycle amplifies the effects of capital inflows Amplifying effect of capital inflows

7 The pace of financial deepening since 2003 was extraordinary Private Credit/GDP Ratios (%) Upper income (OECD countries) Turkey Emerging Markets Source :World Bank

8 10/ / / / / / / / / / / / / /2011 Extending maturities were also instrumental in credit boom through higher affordability Average maturity of personal loans (months)

9 Rapid credit growth and currency appreciation after the QE Total Loan Growth Rates (13 Weeks Moving Average, Annualized, FX Adjusted, Percent) 60 Real Exchange Rate (2003=100) Beginning of QE by Fed QE Source:CBRT

10 2007: : : : : : : : : : : : : : : : : : : : :01 Sharp widening in the current account deficit, financed with short-term inflows Current Account Balance (Seasonally Adjusted, % of GDP ) Main Sources of External Financing* (12-months Cumulative, Billion USD) Portfolio and Short-Term* FDI and Long-Term** Current Account Deficit Source:Turkstat, CBRT *Short-term capital movements are sum of banking and real sectors' short term net credit and deposits in banks. Long-term capital movements are sum of banking and real sectors long term net credit and bonds issued by banks and the Treasury.

11 Challenge #1: Balance sheet effect ER is supposed to be shock absorber (via the trade channel) ER movements can be shock amplifier (via the balance sheet effect) ER appreciation during massive capital inflows may improve the net worth of FX indebted firms and ease their collateral constraints, leaving more room for credit expansion. expansionary factors at work through the confidence and risk taking channels if there are currency mismatches in the balance sheets, the impact will be even more significant.

12 Challenge #2: Exchange rate pass-through Rapid and high exchange rate pass-through effect. Currency appreciation lowers imported inflation, makes more room for expansionary policy Inflation and output move in opposite direction if pass-through is strong

13 Policy trade-off under standard IT When global liquidity shocks dominate, using single instrument under IT may exacerbate the trade-offs For example, during capital inflows there are two options: i => further appreciation => wider CA deficit, sudden stop risks increase i => easing financial conditions=>feeds credit growth =>overborrowing Multiple objectives, multiple instruments are needed

14 Benefits and Costs The use of macroprudential tools needs to trade-off benefits and costs benefits from lower systemic risks greater resilience, lower frequency and severity of crises adjustment costs to the financial sector balance sheet constraints may take time to phase-in efficiency costs for borrowers from a reduction in the provision of financial services costs to output growth vary across tools aggressive tightening of any one single tool can lead to output costs implies tighten gradually.

15 Monetary Policy Framework: Financial stability augmented IT

16 Turkey has implemented macroprudential measures to enhance the soundness of its financial sector. Macroprudential measures aimed to: smooth credit cycles, (set of MaP tools such as caps and provisions) improve the liability structure of the banks (RRR, remuneration rates) dampen the financial amplification mechanism caused by capital flows (flexible interest rate corridor and reserve option mechanism) and build liquidity cushions.

17 Turkey has gone through three main phases of macroprudential regulation to smooth credit cycle. First Round (2011) Higher risk weights and provisions for consumer loans. Limits to credit card payments LTV cap for housing loans Second Round ( ) Caps, limits, and higher risk weights on credit cards Maturity restrictions (36 months) for uncollateralized consumer loans LTV cap for vehicle loans More Recently (end-2016) Reversal of MaP, and introduction of Treasury-backed credit guarantees

18 01/10 01/11 01/12 01/13 01/14 01/15 01/16 01/17 Macroprudential policies have succeeded in smoothing credit cycles. Loan Growth Rates (Annual percentage change) I MaP Tightening II Commercial Retail MaP Easing III 5 0 Source:CBRT

19 Maturity of noncore liabilities has improved. Maturity Composition of FX Noncore Liabilities (Percentage Share) Up to 1 Year Longer than 3 Years 1-3 Years Source:CBRT

20 01/13 03/13 05/13 07/13 09/13 11/13 01/14 03/14 05/14 07/14 09/14 11/14 01/15 03/15 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/17 Average maturity of banks external liabilities has increased considerably. Average Maturity of Non-Core FX Liabilities (Months) RR Measures to encourage maturity extension Source: CBRT. CMB. PDP

21 Amplifying effect of capital inflows were contained Global Liquidity Flexible Interest Rate Corridor Capital Inflows Reserve Option Mechanism External Borrowing Currency Appreciation Rapid Credit Growth Balance sheet and collateral effects, further credit growth

22 Financial system has ample buffers to deal with short-term consequences of external shocks. Liquidity Coverage Ratios (Percent) FX Total Total Regulatory Ratio FX ragulatory Ratio

23 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 Asset quality of banks remains robust. Non-Performing Loan Ratios (Percent) TL FX Source: BRSA

24 The financial liabilities of the corporate sector as a percentage of GDP is at reasonable levels. Financial Liabilities of the Corporate Sector* (Percent of GDP) External TL Domestic FX Total Financial (rhs) Source: BRSA, CBRT. *Composed of loan liabilities and issues. External liabilites include resident banks foreign branches and affiliates data. External TL liabilities are included in total FX liabilities.

25 08/08 02/09 08/09 02/10 08/10 02/11 08/11 02/12 08/12 02/13 08/13 02/14 08/14 02/15 08/15 02/16 08/16 02/17 08/17 FX net open position of the corporate sector had an increasing trend until mid Open FX Position of the Corporate Sector (Billion USD) 50 6% 0 0% -50-6% % % Non Financial Firms' Net FX Position Short Term Net FX Position Net FX Position to GDP (rhs) -24% -30% Source: CBRT.

26 20/11 27/11 04/12 11/12 18/12 25/12 02/01 NDF One month auctions Source: Bloomberg, TCMB.

27 Attempts to enhance stability will contribute to building further resilience Attempts to increase the resilience of the corporate sector More effective monitoring of corporate balance sheets Roadmap of a possible regulation framework Project on FX risk management and the hedge opportunity onon-deliverable forward contracts Attempts to increase domestic saving rates An automatic enrollment mechanism to private pension schemes

28 Overview Recent global fluctuations create new challenges for emerging markets, especially for the ones with large external and FX debt. Portfolio flows directed to and the risk appetite towards emerging markets has stayed strong. But the likelihood of a sharp adjustment should not be overlooked. Policy makers in emerging markets should continue to act cautiously and adopt a prudent stance, while strengthening the policy coordination within and across national boundaries.