Balanced Growth Prospects in Turkey
Erdem Başçı
Governor
IMF – World Bank Autumn Meetings
Presentation to the U.S. Chamber of Commerce and other investor meetings
October 10, 2014
Washington DC
Overview

Exports remain supportive of balanced growth in spite of weakening global
demand.

Tight monetary policy stance and macroprudential measures are keeping
loan growth rates at reasonable levels.

Macroprudential measures taken at the beginning of the year and the tight
monetary policy stance started to have favorable impact on the core inflation
trend. However, elevated food prices continue to delay the improvement in
the inflation outlook.

Declining commodity prices are expected to limit upside risks on inflation.

Inflation expectations, pricing behavior and other factors that affect inflation
will be closely monitored and the tight monetary policy stance will be
maintained, by keeping a flat yield curve, until there is a significant
improvement in the inflation outlook.
2
Outline
1)
Balanced Growth Policies
2)
Balanced Growth Prospects
3
BALANCED GROWTH POLICIES
4
Structural reforms will be the main driver of growth.
 G20 Sydney: +2 pp by year 2018, Global
 10th Development Plan, Turkey
 Medium Term Program (2015-2017), Turkey
5
Policies in Turkey are geared towards a more balanced growth.
 Structural Reforms: Action Plans (1200 Actions)
 Central Bank Contribution: Price Stability, Balanced
Growth Policies
 FSC Contribution: Financial Stability, Macroprudential
Policies
6
Monetary Policy Stance

“[…] tight monetary policy stance will be maintained, by
keeping a flat yield curve, until there is a significant
improvement in the inflation outlook. ”
7
The CBRT maintains a tightening bias in liquidity policy.
13
13
Interest Rate Corridor
12
11
10
CBRT Average Fund Rate
BIST Interbank Market O/N Rates
One-Week Repo Rate
12
11
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
Source: TCMB.
Last Observation: 03 October 2014
8
Since the January tightening, slope of the yield curve has remained
low compared to historical averages.
Short Term versus Long Term Interest Rates
(Percent)
14
12
5 Year-BIST O/N Differential
BIST Interbank Market O/N Rates (10 Day MA)
5-year Market Rate
CBRT Average Funding Rate
14
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
Source: CBRT, Bloomberg.
Last Observation: 03 October 2014
9
The FED tapering episode has lead to increased US government bond
yields.
US 10 Year Government Bond Rate
(Percent)
3.5
After Tapering
Signal
3.0
2.5
2.0
1.5
1.0
Source: Bloomberg.
Last Observation: 7 October 2014
10
Long-term government bond rates have also increased in emerging
countries with high current account deficits,…
Emerging Markets Government Bond Rates*
(Percent)
11
11.0
India
10.0
10
South Africa
9.0
9
8.0
8
After Tapering
Signal
7
14
10
Brazil
8
12
11
9
8
Source: Bloomberg, Reuters
Indonesia
9
13
10
After Tapering
Signal
6.0
5.0
6
15
7.0
7
After Tapering
Signal
6
After Tapering
Signal
5
*10 year domestic government bond yields .
Last Observation: 7 October 2014
11
… including Turkey.
Turkey 10 Year Government Bond Rate
(Percent)
12.0
After Tapering
Signal
10.0
8.0
3,3 pp
6.0
4.0
2.0
0.0
Source: Bloomberg.
Last Observation: 3 October 2014
12
Equilibrium real interest rates are significantly below the GFC levels,
with the help of macroprudential meaures.
2-Year Real Interest Rates of Turkish Treasury Securities*
(Percent)
25
25
20
20
15
15
10
5
Budgetary
Discipline
(Public)
Budgetary
Discipline
(Private)
10
5
0
0
-5
-5
Source: CBRT, BIST.
* Calculated as the difference between 2-year bond returns derived from the yield curve and the inflation expectations derived from the CBRT
Survey of Expectations. Inflation expectation is 12-months ahead inflation expectation before April 2006. Thereafter, inflation expectation is the
compound value of 12-months ahead and 24-months ahead inflation expectations for 24 months.
Last Observation: 3 October 2014
13
Risk premium indicators for emerging countries have fallen down to
pre-GFC levels.
CDS for Emerging Economies and Turkey
(5-year, Basis Points)
900
Turkey
Emerging Economies*
Selected Emerging Economies**
900
800
800
700
700
600
600
500
500
400
400
300
300
200
200
100
100
0
Source: CBRT, Bloomberg.
0
*Emerging Economies include Brasil, Chile, Colombia, Czech Rep., Hungary, Indonesia, Mexico, Poland, Romania and S. Africa.
** Selected Economies include Brasil, Indonesia and S. Africa.
Last Observation: 7 October 2014.
14
Turkish lira performed relatively well after the front-loaded
monetary tightening in January.
Nominal FX Rates
(Percentage change against USD)
30
16.0
13
22.05.2013-17.12.2013
17.12.2013-27.01.2014
25
27.01.2014-08.10.2014
14.0
11
12.0
20
9
15
7
10
5
10.0
8.0
6.0
4.0
5
3
0
1
-5
-1
2.0
0.0
-2.0
-4.0
Source: Bloomberg, CBRT.
A positive value means the currency depreciates against US Dollar.
15
India
Malaysia
Brazil
Korea
Thailand
Turkey
Indonesia
Mexico
S. Africa
Colombia
Romania
Chile
Poland
Hungary
-6.0
Russia
Indonesia
India
Poland
Thailand
Romania
Hungary
Malaysia
Korea
Colombia
Chile
Mexico
Brazil
Rusia
Turkey
S. Africa
Poland
Korea
Hungary
Romania
Mexico
Colombia
Rusia
Thailand
Malaysia
Chile
Turkey
S. Africa
India
Brazil
-3
Indonesia
-10
Implied FX volatility has improved to some extent.
Implied FX volatility
(1 month, Percent)
31
27
31
27
Emerging Economies*
23
23
Turkey
19
19
15
15
11
11
7
7
3
3
Source: Bloomberg.
* Emerging market currencies include Brazil, Chile, Colombia, Czech Republic,
Indonesia, Mexico, Poland, Romania, South Africa, against USD.
Last Observation: 7 October 2014.
16
Commercial loan interest rates are significantly below consumer
loan rates.
Interest Rates
(Percent)
28
26
24
22
20
Commercial (4 Week MA)
Housing
Consumer
2 Year Bond Yield
CBRT Rate*
28
26
24
22
20
18
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
Source: CBRT.
* Before 10.20.2011 CBRT borrowing rate, CBRT Average funding rate after.
Last Observation: 26 September 2014
17
Loan growth continues at reasonable levels in response to the tight
monetary policy stance and the macroprudential measures.
Consumer and Commercial Loan Growth Rate
(YoY Change, Percent)
60
60
Consumer Loans
Commercial Loans (FX Adjusted)
50
50
40
40
30
30
20
20
10
10
0
0
-10
Source: CBRT.
-10
Total banking sector (including participation banks, excluding NPLs)
*Including credit card balances.
Last Observation: 19 September 2014
18
Central Bank contributes to balanced growth in line with its
mandate.
1)
Price stability
2)
Additional support to balanced growth

Funding for Exports


Sustainable Credit Growth


Lender of Last Resort Facilities


Support for Core Liabilities
New
19
The contribution from the funding for exports program to official
reserves is expected to reach 13 billion USD in 2014.
CBRT Reserves
Billion USD
(Billion USD )
CBRT Other FX Reserve
FX for FX RR
ROM FX
CBRT Other Gold Reserves
Gold for Precious Metal
ROM Gold
140
120
100
80
60
FX Sales
(-)
Export Credit
(+)
January 2014*
5.8
0.57
February 2014
1.0
0.30
March 2014
1.05
0.48
April 2014
1.02
0.36
May 2014
0.50
2.06
June 2014
0.42
1.54
July 2014
0.38
1.46
August 2014
0.21
1.38
September 2014
0.31
1.42+
0,08**
1.32+
October 2014
40
November 2014
0.77+
December 2014
1.27+
TOTAL
20
8,09
12,93
Amount (Billion USD)
0
Source: CBRT.
Last Observation: 26 September 2014.
ROM FX
38.5
FX Required Reserves
33.6
Total
72.1
*Includes the direct currency intervention of January 2014.
** FX Sales are as of 08 October 2014.
+Provisional.
20
Sustainable Credit Growth
Total Loan Growth Rate
(YoY Change, Percent)
40
35
30
25
20
15
10
5
0
Source: CBRT.
Last Observation: September 19, 2014.
Total loan is inclusive of all types of banks (deposit banks, participation banks, and
development/investment banks) and credit cards.
Adjusted for exchange rate.
21
Lender of Last Resort Facilities

While ending quantitative easing, the U.S. Federal Reserve stated that it
would keep policy rates low for a considerable time.

Moreover, the expectations of the level that policy rates will reach in
the long run is lower than the pre-crisis level.

In this context, the Monetary Policy Committee was briefed on limits,
interest rates and past implementations of the Foreign Exchange
Deposit Market.
Summary of the Monetary Policy Meeting on September 25, 2014
22
Lender of Last Resort Facilities

Applied to one week borrowing from the Central Bank.

Turkish lira government bonds are accepted as collateral.

Simultaneous use with Reserve Options will not be allowed

Projected rates over the MTP period are:

2015
2016
2017
USD
7.5
8.5
9.0
Euros
6.5
6.5
6.5
Further details will be announced on the press conference on
December 10, 2014.
23
Support for Core Liabilities

For the purposes of financial stability, it is important to further
strengthen the current healthy state of the banking sector.

In this context, the Monetary Policy Committee was informed about the
preparations on remunerating the Turkish lira portion of required
reserves, on a basis to encourage improving the deposit and equity
ratios of the banking sector.
Summary of the Monetary Policy Meeting on September 25, 2014
24
BALANCED GROWTH PROSPECTS
25
Global growth rates are moderate.
Global Growth Rates*
Unemployment Rates in Advanced Economies
(Annual Change, Percent)
(Percent)
Advanced Countries
US
Developing Countries
10
14
8
12
Eurozone
UK
6
10
4
8
2
6
0
-2
4
-4
2
-6
Source: Bloomberg, CBRT.
0
*Aggregated data is calculated
according to countrys’ GDP weights.
Last Observation: 2014 Q2.
Source: Bloomberg, CBRT.
Last Observation: June 2014 for UK, July 2014 for
Euro area, August 2014 for US.
26
Growth in Turkey also weakened in the second quarter,…
GDP
(Seasonally Adjusted, Natural Logarithm)
4.85
4.80
4.75
4.70
4.65
4.60
4.55
4.50
4.45
4.40
1
2
3
4
2005
1
2
3
2006
4
1
2
3
2007
4
1
2
3
2008
4
1
2
3
2009
4
1
2
3
2010
4
1
2
3
2011
4
1
2
3
2012
4
1
2
3
2013
4
1
2
2014
Source: TURKSTAT, CBRT.
27
…but positive contribution from exports is encouraging.
Contribution to Annual GDP Growth
(Percentage Points)
25
20
15
10
5
0
-5
-10
-15
Change in Inventories
Net Exports
Final Domestic Demand
GDP
-20
-25
Source: TURKSTAT.
Last Observation: 2014Q2.
28
Leading indicators point to a continuation of balanced growth.
Industrial Production and Capacity Utilization
(Seasonally and Calender Adjusted)
Expected Manufacturing Orders
(Seasonally Adjusted)
125
80 32
120
78
76
115
74
110
27
22
72
105
70 17
100
68
95
66
90
Industrial Production
85
Capacity Utilization (rhs)
80
Source: TURKSTAT, CBRT.
64
7
Exports
Domestic
62
60
Last Observation: July 2014 for Industrial Production,
September 2014 for Capacity Utilization.
12
2
Source: CBRT Business Tendency Survey.
Last Observation: September 2014.
29
Real exports continue to increase, despite downside risks to external
demand.
Exports and Imports
(Seasonally Adjusted, 2011Q1=100)
140
130
120
110
100
90
80
Exports (excluding gold)
Imports (excluding gold)
70
60
3
4
1
2007
Source: TURKSTAT, CBRT.
2
3
2008
4
1
2
3
2009
4
1
2
3
2010
4
1
2
3
2011
4
1
2
3
2012
4
1
2
3
2013
4
1
2
3*
2014
*Last Observation: July 2014.
30
Surveys indicate a continuation of balanced growth.
Manufacturing PMIs
(Seasonally Adjusted)
60
Global
Eurozone
Turkey
58
56
54
52
50
48
46
44
42
40
Source: MARKIT.
Last Observation: September 2014.
31
Consumer confidence and investment tendency remain subdued.
Investment and Employment Prospects
Consumer Confidence
CNBC-e
(Seasonally Adjusted)
Investment Tendency
TURKSTAT-CBRT (rhs)
100
35
95
25
90
15
85
5
90
80
-5
80
75
-15
70
-25
65
-35
60
-45
55
-55
120
110
Employment Tendency
100
70
60
50
Source: CNBC-e, TURKSTAT, CBRT.
Last Observation: September 2014
Source: CBRT Business Tendency Survey
Last Observation: September 2014.
32
Source: IMF.
-5
Colombia
Turkey
Malaysia
Chile
Peru
Indonesia
Brazil
Philippines
Mexico
-3
South Africa
-2
Egypt
0
Thailand
2
Poland
5
Russian Federation
3
Czech Republic
Advanced Countries And Turkey
Hungary
Turkey
Switzerland
Australia
Korea, Republic of
Canada
Germany
Austria
Belgium
Sweden
United Kingdom
France
United States
Japan
Italy
Ireland
5
Portugal
Spain
Greece
Job creation has been remarkable.
Annual Average Growth of Employment
(Percent Growth, 2007-2013)
Developing Countries and Turkey
4
4
3
1
2
-1
1
0
-4
-1
Source: IMF.
33
18
Unemployment Rate (percent)
16
Non-farm Unemployment Rate
(percent)
52
27
Participation Rate (%)
Employment (millions, right axis)
26
50
25
14
48
24
23
12
46
10
44
22
21
20
8
42
Source: TURKSTAT, Household Labor Force Survey, CBRT.
19
Last Observation: June 2014.
34
Thousands
However, employment growth has slowed down somewhat
in recent months.
Rebalancing process has been continuing as expected.
GDP and Final Domestic Demand
(Seasonally Adjusted, 1998 Constant Prices)
34
32
GDP
Final Domestic Demand
30
28
26
24
22
20
1
2
3
2005
4
1
2
3
2006
4
1
2
3
2007
4
1
2
3
2008
4
1
2
3
2009
4
1
2
3
2010
4
1
2
3
2011
4
1
2
3
2012
4
1
2
3
2013
4
1
2
2014
Source: TURKSTAT, CBRT
35
The improvement of the export - import coverage ratio continues.
Export/Import Coverage Ratio
(12-Month Rolling*, Percent)
74
72
70
Macroprudential
Policies
68
66
65,1
Period Average: 63.9
64
62
60
58
Coverage Ratio (Excl. Gold)
56
54
Source: TURKSTAT, CBRT.
* 12-month cumulative exports /12-month cumulative imports.
Last Observation: August 2014
36
Exports grow faster than imports.
Exports and Imports
(Nominal y-o-y percentage change, 6-month MA)
60
Export (excluding gold)
Import (excluding gold)
40
20
0
-20
-40
-60
Source: TURKSTAT.
Last Observation: July 2014.
37
...which is also visible in the global market share of Turkish
exports,…
Global Market Share of Turkish Exports
(Excluding Gold, 12-month Moving Average, Percent)
0.95
0.90
0.85
0.80
0.75
Source: Turkstat, World Trade Organization.
Last Observation: July 2014
38
...and the global market share of Turkish imports.
Global Market Share of Turkish Imports
(Excluding Gold, 12-month Moving Average, Percent)
1.40
1.35
1.30
1.25
1.20
1.15
1.10
Source: Turkstat, World Trade Organization.
Last Observation: July 2014
39
EU-27 has been consistently contributing to export growth.
Contribution to Export Growth
(Percent)
20
Other
MEA
CIS
EU-27
Exports
15
10
5
0
-5
Source: TURKSTAT.
Last Observation: August 2014.
40
Export growth is mainly driven by demand from the European
Union, …
Total Exports and Exports to EU-27
(Excluding gold, Nominal y-o-y percentage change, 6-month MA)
50
30
10
-10
Total
-30
EU-27
-50
Source: TURKSTAT, CBRT.
Last Observation: August 2014.
41
… which is also reflected in the market shares.
Exports (exc. gold) Market Share
(6-month cumulative, percent)
60
50
EU-27
Other Europe
North America
40
Asia
Middle East & Africa
30
20
10
0
Source: TURKSTAT.
Last Observation: August 2014.
42
Geopolitical developments have changed the ranking of major trade
partners.
Exports*
(3 Months Cumulative, Thousand USD)
September 2013
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Source: TIM.
Germany
Iraq
UK
Russia
France
Italy
USA
Spain
China
Azerbaijan
Nederlands
Egypt
UAE
Saudi Arabia
Romania
Iran
Israil
Belgium
Libya
Ukrain
3.308.896
2.939.880
2.274.199
1.815.612
1.516.362
1.505.824
1.300.079
1.013.544
922.839
816.798
785.796
777.049
765.104
677.729
665.221
657.177
656.543
576.672
555.582
543.493
September 2014
Germany
UK
Iraq
USA
Italy
Russia
France
Spain
Iran
Egypt
Nederlands
Azerbaijan
Romania
Saudi Arabia
Belgium
China
UAE
Israil
Turkmenistan
Poland
3.727.764
2.508.581
2.074.384
1.604.840
1.580.113
1.566.768
1.554.171
1.207.322
1.092.954
864.711
800.656
765.275
758.388
731.736
709.377
704.923
670.445
659.277
627.733
583.798
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
* Turkish Exporters Assembly (TIM) Data.
43
Share of the US in total exports is on the rise in recent months.
Exports to Trade Partners*
(3-months Cumulative, Annual Change, Percent)
30
20
10
0
-10
August 2014
September 2014
-20
-30
-40
USA
Source: TIM, CBRT.
Spain
Germany
UK
Italy
France
Russia
Iraq
*Turkish Exporters Assembly (TIM) Data.
Last Observation: September 2014.
44
Current account deficit is expected to improve further.
Current Account Balance (CAB)
(12-Month Cumulative, % GDP)
0.0
Macroprudential
Policies
-2.0
-4.0
-6.0
-8.0
CAB/GDP
CAB/GDP (Excluding gold)
-10.0
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
2003
Current Account
Deficit (Billion USD)
Current Account
Deficit/GDP (Percent)
Source: CBRT.
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014*
0.6
7.6
14.2
21.4
31.8
37.8
40.4
12.2
45.4
75.1
48.5
65.0
46.0
0.3
2.5
3.6
4.5
6.0
5.7
5.4
2.0
6.2
9.7
6.2
7.9
5.7
Last Observation: 2014 Q2.
* Medium Term Program (2015-2017) projection.
45
Quality of external finance is improving,…
Current Account Deficit Financing Sources
(12-Months Cumulative, Billion USD)
100
Portfolio
Short Term*
Long Term**
FDI
CAD
80
60
40
20
0
-20
Source: 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.
Last Observation: July 2014.
46
…as well as the external debt maturity of non-financial corporations.
Real Sector External Debt Maturity
(Percent)
100
90
80
5+ Years
70
5 Years
60
4 Years
50
40
3 Years
30
1-2 Years
20
10
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
Source: CBRT.
47
Headline and core inflation are significantly above the target.
Headline and Core Inflation
(Annual Percentage Change)
14
CPI
H
I
12
10
8
6
4
2
0
Source: TURKSTAT.
Last Observation: September 2014.
48
Exchange rate pass-through has been the main driver of inflation in
the past year.
Import Price Indices
(2010=100)
170
Import Prices (in USD)
Import Prices (in TL)
150
130
110
90
70
50
Source: TURKSTAT.
Last Observation: July 2014.
49
The adverse impact of past exchange rate developments on annual
inflation is gradually tapering off.
Contribution of Exchange Rate to Consumer Prices
6
Contribution of Exchange Rate to Inflation (Percentage Points)
Exchange Rate (Yearly Percent Change, right axis)
5
45
35
25
3
15
2
5
0
-5
-2
-3
Source: CBRT.
-15
-25
Last Observation: August 2014.
50
Macroprudential measures taken at the beginning of the year and the tight
monetary policy stance started to have favorable impact on the core inflation trend.
Core Inflation Indicators H and I
18
16
14
12
(Seasonally adjusted, Annualized 3-Month-Average, Percent)
H
I
Monetary
Tightening
10
8
6
4
2
0
Source: TURKSTAT, CBRT.
Last Observation: September 2014.
51
Elevated food prices delayed the improvement in the inflation
outlook.
Annual Inflation
(Percent)
16
14.22
14
12
10
8
6.58
6
4
2
Food and Catering Services
CPI Excluding Food and Catering Services
0
Source: TURKSTAT, CBRT.
Last Observation: September 2014.
52
Drought had a negative impact on food prices.
Drought Analysis Between 1972-2014*
HUMID
(12-Month)
ARID
NORMAL
Source: Turkish State Meteorological Service
*It shows the deviation of last 12 months’ cumulative precipitation from the period average as of June.
53
Unprocessed food prices have diverged from historic trends since the
beginning of the year.
Unprocessed Food Price Index
(Level, Seasonally Adjusted)
290
240
190
140
90
Source: TURKSTAT, CBRT.
Last Observation: August 2014.
54
Domestic food prices differed significantly from the international
food prices.
Domestic and International Food Prices
Domestic and International Wheat Prices
(Indices, January 2012=100)
(Indices, January 2012=100)
130
130
140
Wheat Producer Prices
Food excluding Fresh Fruits and Vegetables
FAO (TL)
120
110
100
130
FAO Cereals (TL)
130
120
120
120
110
110
100
100
90
90
80
80
110
100
90
90
80
80
Source: FAO, TURKSTAT, CBRT.
140
Last Observation: August 2014.
55
Inflation expectations have worsened recently due to high level of
realized inflation.
Inflation Expectations
(Percent)
10
9
8
12 months
6.8
7
1,0 pp
6
24 months
5.8
5
4
3
Source: CBRT.
Last Observation: September 2014.
56
Declining commodity prices are expected to limit upside risks on
inflation.
S&P GS Indices
(01.01.2010=100)
150
140
Headline
Energy
Industrial Metals
Agriculture
July 2014
Inflation
Report
130
120
110
100
90
80
70
Source: Bloomberg.
Last Observation: September 25, 2014.
57
Upside risks to the inflation outlook are monitored closely.
Inflation Report Forecasts
(Percent)
Forecast Range*
Uncertainty Band
Year-End Inflation Targets
Output Gap
Realization
12
12
10
10
8
Percent
6
Control
Horizon
8
6
4
4
2
2
0
0
-2
-2
-4
-4
* Shaded region indicates the 70 percent confidence interval for the forecast.
Last Observation: September 2014.
58
Overview

Exports remain supportive of balanced growth in spite of weakening global
demand.

Tight monetary policy stance and macroprudential measures are keeping
loan growth rates at reasonable levels.

Macroprudential measures taken at the beginning of the year and the tight
monetary policy stance started to have favorable impact on the core inflation
trend. However, elevated food prices continue to delay the improvement in
the inflation outlook.

Declining commodity prices are expected to limit upside risks on inflation.

Inflation expectations, pricing behavior and other factors that affect inflation
will be closely monitored and the tight monetary policy stance will be
maintained, by keeping a flat yield curve, until there is a significant
improvement in the inflation outlook.
59
Balanced Growth Prospects in Turkey
Erdem Başçı
Governor
IMF – World Bank Autumn Meetings
Presentation to the U.S. Chamber of Commerce and other investor meetings
October 10, 2014
Washington DC