CENTRAL BANK OF THE REPUBLIC OF TURKEY Growth and Financial System Durmuş YILMAZ Governor February, 211 1
Presentation Outline I. Recent Developments in the Turkish Economy II. III. Monetary Policy Policy Outcomes 2
I. Recent Developments in the Turkish Economy 3
Rapid Recovery Growth and Inflation Capacity Utilization and Unemployment Rates 1 85 8 8 Core Inflation* (y-y change) 8 Capacity Utilization 9 6 1 4 75 11 2 7 12-2 65 13-4 -6-8 12-8 3-9 6-9 9-9 12-9 3-1 6-1 9-1 12-1 * I index Source:: TURKSTAT, CBRT Growth (q-q change, SA) 6 55 1-8 7-8 1-9 7-9 1-1 7-1 1-11 Source:: TURKSTAT, CBRT Unemployment Rate (inverted, rhs) 14 15 16 4
but unbalanced Domestic Demand and Exports (28 Q1=1) Turkey s External Demand Index* (June 28=1) 18 11 Global Economic Activity Index 15 Domestic Demand 14 1 95 1 9 85 96 Turkey s External Demand Index 8 75 Goods and Services Exports 92 26 27 28 29 21 211 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 25 26 27 28 29 21 Source: TURKSTAT, CBRT * The shares of countries within the exports of Turkey and weighted GDP data are employed in the calculation of the external demand index of Turkey. Source: Bloomberg, Consensus Forecasts, IMF WEO, TURKSTAT, CBRT 5
Composition of Capital Flows Composition of Capital Flows (12-month rolling sum, billion USD) Finance of Current Account Deficit (percentage of CAD) 5 12 4 Portfolio Investments+ Deposits 1 Short Term Credit + Portfolio Investments + Deposits 8 3 FDI 6 2 4 2 1-2 -1-4 FDI -2-3 1-7 1-8 1-9 1-1 * After controlling for the effect of change in Decree No. 32 Source: TURKSTAT, CBRT Private Sector Credit* -6-8 -1 1-6 1-7 1-8 1-9 1-1 Source: TURKSTAT, CBRT 6
Accelaration in Credit Growth Capital Flows and Credit Growth (percent) Real GDP and Credit Volume (28 Q1=1) 16 14 14 Change in Credit/GDP 12 Real Credit Volume 12 1 1 8 8 6 4 6 4 GDP 2 Net Capital Flows/GDP 2 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 24 25 26 27 28 29 21 23 24 25 26 27 28 29 21 Source:TurkStat, CBRT Source: BRSA, TurkStat, CBRT 7
Widening Current Account Deficit Exports and Imports (28 Q1 = 1) Current Account Deficit (ratio to GDP, percent) 11 8 1 Exports 6 4 Current Account Balance Excl. Energy 2 9-2 8 Imports -4-6 Current Account Balance 7 25 26 27 28 29 21-8 2 21 22 23 24 25 26 27 28 29 21 Source: TurkStat, CBRT Source: TurkStat, CBRT 8
3 25 2 Strength of the Banking System Capital Adequacy Ratio as of 29 (percent) Return on Assets as of 29 (percent) Turkey 3 2 Turkey 1-1 -2-3 -4-5 Portugal Greece Italy Slovenia Spain France Estonia Austria Sweden Slovakia Ireland Lithuania Poland Latvia Czech Rep. Germany Hungary Finland United Kingdom Holland Romania Denmark Bulgaria Belgium Luxembourg Turkey Malta Latvia Lithuania Estonia Ireland Denmark Belgium Germany France Holland United Greece Slovenia Austria Sweden Italy Portugal Finland Luxembo Spain Romania Slovakia Poland Bulgaria Czech Hungary Malta Turkey 15 1 5 Source: Eurostat, CBT Source: Eurostat, CBT 9
3 25 2 Strength of the Banking System Loan to Deposit Ratio as of 29 (percent) Non-Performing Loans Ratio as of 29 (percent) 18 16 14 Turkey 12 1 Turkey 8 6 4 2 Lithuania Belgium Luxem Czech Greece Turkey United Poland Germa Spain Bulgari Holland Romani Malta Hungar Portuga Austria France Slovaki Finland Italy Sloveni Ireland Estonia Lithuani Latvia Swede Denmar Finland Malta Austria Portugal Denmark Germany Slovakia Spain Belgium France Greece Turkey Romania Poland Italy Hungary Estonia Bulgaria Latvia 15 1 5 Source: Eurostat, CBT Source: Eurostat, CBT 1
Household Debt Remains Low 16 Ratio of FX-Indexed Consumer Loans to Total Consumer Loans (percent) 7 Ratio of Household Liabilities to GDP (percent) 12 6 5 European 55 Union 56 56 53 8.6 4 Eastern Europe 8 4 6.4 4.8 3.6 3.9 4.7 3.3 1.6 1.5 3 2 1 8 17 Turkey 23 1 12 28 13 24 23 24 25 26 27 28 29 21 Jan 211 25 26 27 28 Source: CBT Source: European Central Bank, CBT 11
Budget Deficit 21 Budget Deficit Estimates (percent of GDP) Ireland United States United Kingdom Spain Iceland France Greece Poland Portugal Romania Netherlands Italy Belgium Austria Denmark Germany Hungary Turkey Finland Sweden Switzerland -3.6 Maastricht Criterion (3%) -5-1 -15-2 -25-3 -35 Source: Terasury, IMF, CBRT 12
Fiscal Discipline Public Debt Stock (Ratio to GDP) 12 11 1 9 8 7 6 5 4 3 2 Developed G-2 Countries Turkey* Developing G-2 Countries 2 22 24 26 28 21 212 214 12 11 1 9 8 7 6 5 4 3 2 *Medium-Term Program (211-213) Targets Source: IMF WEO October 21, Treasury, BRSA, CBT 13
II. Monetary Policy 14
Phases in Monetary Policy Phase-1: Full liquidity support (after the collapse of Lehman Brothers, September 28) Phase-2: Exit Strategy (April 21) Phase-3: New Policy Mix (starting from November 21) 15
The Policy Rate and Interest Rate Corridor 25 Policy Rate and Interest Rate Corridor (percent) 2 15 Interest Rate Corridor 1 5 Policy Rate 1-8 5-8 9-8 1-9 5-9 9-9 1-1 5-1 9-1 1-11 Source: CBRT 16
Reserve Requirements as a Macroprudential Tool 14 Reserve Requirement Ratios (percent) 12 Demand deposit 1 8 6 4 End of remuneration Up to 1 Month 1-3 Months 3-6 Months 6-12 Months Longer than 1 year 2 7-9 1-9 1-1 4-1 7-1 1-1 1-11 Source: CBRT 17
8 6 4 2-2 -4-6 Reserve Requirements as a Macroprudential Tool Change Since the Start of the Crisis (percentage point) 25 Current Rates (percent) Increases 2. 19.5 2 15 11. 9.4 9.3 1 8. 6. 5 3.5 Decreases 18 Brazil Turkey (TRY) China Peru Indonesia Russia Turkey (FX) India Poland Brazil China Turkey (FX) Turkey (TRY) Peru Indonesia India Poland Source: Central Banks, CBT 2.8 Russia Source: Central Banks, CBT
The New Policy Mix A lower policy rate, a wider interest rate corridor and higher reserve requirements The framework we adopt in spirit is not significantly different from the conventional inflation targeting framework. The only difference is that, previously our policy instrument was the one week repo rate, but now our instrument is a policy mix We seek to use these instruments in the right combination in order to cope with both inflation and macro-financial risks. The monetary policy stance in this framework is not only determined by the path of policy rates, but as a combination of all the policy instruments. 19
III. Policy Outcomes 2
Liquidity Central Bank Liquidity (billion TRY) 3 Weekly Repo Funding Sterilization through ON Borrowing 3-month Repo Funding Net Liquidity Provided 2 1-1 -2 1-9 4-9 7-9 1-9 1-1 4-1 7-1 1-1 1-11 Source: ISE, CBRT 21
Volatility in Overnight Rates Overnight Interest Rates (percent) Volatility in Overnight Interest Rates (2-week standard deviation) 11 1.8 1 9 8 7 6 5 4 3 2 CBT Lending Rate Policy Rate Overnight Interest Rate CBT Borrowing Rate 1.6 1.4 1.2 1..8.6.4.2 1 8-1 9-1 1-1 11-1 12-1 1-11 2-11. 9-1 1-1 11-1 12-1 1-11 2-11 Source: ISE, CBRT Source: ISE, CBRT 22
Yield Curve and Inflation Expectations Yield Curve* (percent) Inflation Expectations* (percent) 9.5 1 9. Feb 2, 211 9 12-month forward 8.5 8 8. 7 7.5 Oct. 1, 21 6 7. 5 24-month forward 6.5.5 1. 1.5 2. 2.5 3. 3.5 4. 4 12-7 6-8 12-8 6-9 12-9 6-1 12-1 * Calculated from the compounded returns on bonds quoted in ISE Bills and Bonds Market by using ENS method. Source: ISE, CBRT * CBRT Expectations Survey results from the second survey period. Source: ISE, CBRT 23
Initial Impact on Currency 1.15 TRY and Other EM Currencies against USD* (4 Jan 21=1) 1.1 TRY 1.5 1..95.9 EM Average 1-1 3-1 5-1 7-1 9-1 11-1 1-11 *Average of emerging market currencies, including Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea and Colombia. Source: Bloomberg, CBRT 24
Household Loans 8 6 Household Loans (year-on-year change, percent) Housing Loans Other Consumer Loans 4 2-2 Auto Loans -4 1-8 7-8 1-9 7-9 1-1 7-1 1-11 Source: CBRT 25
Measures by Other Authorities 1. Fiscal discipline 2. No FX loans to households 3. Domestic currency bond market 4. Loan/value restrictions 5. Tax hikes on certain consumer loans 6. Restrictions on credit card borrowing 26
Outlook for Inflation and Economic Activity The Baseline Scenario envisages a gradual tightening by changing the mix of the policy rate and reserve requirement ratios. Such a tightening should not only aim at slowing down credit growth and domestic demand, but also reduce macroprudential concerns. Inflation and Output Gap Forecasts Forecast Range* Uncertainty Band Year-End Inflation Targets Output Gap 12 1 Control Horizon 8 6 4 Percent 2-2 -4-6 -8-1 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Source: CBRT 27
Overall Assessment Low interest rates across the globe, soaring imports driven by strong credit growth amid increased short-term capital inflows, and weaker foreign demand caused the current account deficit to widen rapidly in 21. The new monetary policy strategy envisions the use of multiple instruments to manage both internal and external balances. Given the economic situation, the combination of lower policy rates and higher reserve requirement ratios is the most appropriate policy mix in terms of jointly upholding financial stability and price stability. 28
CENTRAL BANK OF THE REPUBLIC OF TURKEY Growth and Financial System Durmuş YILMAZ Governor February, 211 29