recent developments in the world economy and implications for turkey

Recent Developments in the World Economy

and Implications for Turkey

Mark LewisIMF Senior Resident Representative to Turkey

Presentation at Atılım UniversityAnkara

May 27, 2013

RECENT DEVELOPMENTS IN THE GLOBAL ECONOMY

The risks have been reduced, but the global economy remains weak

Policies have addressed major risks but other risks remain Global economy in broadly three speeds

Emerging market and developing countries (EMDE): coping well US, other advanced economies (AE): shift from public to private

demand in train Euro area: the handover from public to private demand is still stuck

Priorities AE: achieving a better fiscal/financial/monetary policy mix EMDE: rebuilding policy room for maneuver and structural reforms

Activity is beginning to recover after the slowdown in 2012

2010 2011 2012 2013-10

-5

0

5

10

15

20

25

30

Advanced economies

Emerging market economies

CPB trade volume index

Feb. 2013

Industrial Production and World Trade(annualized percent change of three-month moving average over previous three-month moving average)

Source: Haver Analytics; Netherlands Bureau for Economic Policy Analysis for CPB trade volume index; and IMF staff calculations.

Financial conditions have also improved

Sources: Haver Analytics; EPFR Global; and IMF staff calculations.

00 02 04 06 08 10 120

20

40

60

80

100

120

140

DJ EURO STOXX PRC

S&P 500

Emerging Market

Japan - Topixx

Equity Markets(2007 = 100; national currency)

Apr. 13 2005 2006 2007 2008 2009 2010 2011 2012 2013-20

-10

0

10

20

30

40

Others LAC

Developing Asia

Net Portfolio Capital Flows to Emerging Markets(billions of US dollars; quarterly flows)

2006

2007

2008

2009

2010

2011

2012

-10

-5

0

5

10

15

United StatesEuro areaSpainItaly

However, bank lending conditions still tight, especially in the euro area

Nonfinancial Firm and Household Credit Growth 1\(year-over-year percent change)

12:Q4

2007 2008 2009 2010 2011 2012-20

0

20

40

60

80

100

U.S.

Euro area

12:Q2

Lending Conditions(Net percentage of domestic respondents tightening standards for loans)

Sources: Lending surveys by the Bank of England, European Central Bank, Bank of Japan, and the U.S. Federal Reserve for house holds and corporations; Haver Analytics; and IMF staff estimates. 1\ Flow of funds data are used for the euro area, Spain and the United States. Italian bank loans to Italian residents are corrected for securitizations.

7

Credit growth in Emerging Markets (EMs) has slowed

Sources: Haver Analytics; IMF, World Economic Outlook; and IMF staff calculations.

2010 2011 2012 2013-5

0

5

10

15

20

25

30

35

40BrazilIndiaChinaTurkey

Real Credit Growth(percent change from one year ago)

Jan. 132006

08

10

12:Q4

0

10

20

30

40

50

60

70

80

60

70

80

90

100

110

120

130

140

BrazilIndiaTurkeyChina (Left Scale)

Credit to GDP(percent)

World U.S. Euro Area Japan Brazil Russia India China Turkey

2013(April 2013) 3.3 1.9 -0.3 1.6 3.0 3.4 5.7 8.0 3.4

2013(Jan. 2013) 3.5 2.0 -0.2 1.2 3.5 3.7 5.9 8.2 3.4

2014(April 2013) 4.0 3.0 1.1 1.4 4.0 3.8 6.2 8.2 3.7

2014(Jan. 2013) 4.1 3.0 1.0 0.7 4.0 3.8 6.4 8.5 3.9

WEO Real GDP Growth Projections (percent change from a year earlier)

Source: IMF, World Economic Outlook.

The Outlook is still weak and uncertain. The forecast has been revised down

8

2000 02 04 06 08 10 12 14:Q4

-10

-5

0

5

10

15

Emerging Asia

Latin America

SSA

2000 02 04 06 08 10 12 14:Q4

-10

-5

0

5

10

15

United States

Euro area

Japan

The forecast suggests a three-speed global economyAdvanced Economies(percent change from a year earlier)

Emerging Economies(percent change from a year earlier)

Jan. WEO2013 2014

2.0 3.0

-0.2 1.0

1.2 0.7

April WEO

2013 2014

7.1 7.3

3.4 3.9

5.6 6.1

April WEO2013 2014

1.9 3.0

-0.3 1.1

1.6 1.4

Jan. WEO

2013 2014

7.1 7.53.6 3.9

5.8 5.7

LAC: Latin America and the Caribbean; SSA: Sub-Saharan Africa; data are interpolated from annual frequency valuesSource: IMF Staff Estimates.

Euro area

• Accommodative monetary policy (2014 inflation < < 2% !!) and working on better pass through

• Restructuring weak banks, with help of ESM if needed• Stronger EMU: banking union and capital market integration

• More entitlement reform and more structural reform

What to do? Work on medium-term policies and don’t overburden monetary policy!

U.S and Japan

• Medium-term fiscal plans and entitlement reform• U.S. needs to durably address debt ceiling• Japan needs a strong medium-term growth strategy• Accommodative monetary policy, including BoJ reforms

EMDC

• Rebuild policy space• Watch for legacies of past credit growth or ongoing expansions

• Structural reforms: to reaccelerate potential output, absorb inflowing capital productively, rebalance growth

FINANCIAL STABILITY RISKS REMAIN

In the U.S, corporations are building more debt

10

0

20

40

60

80

100

120

0

5

10

15

20

25

30

35Cov-lite loan issuance (left scale)

Share of institutional leveraged loans (right scale)

(Billions of U.S. dollars ) (Percent)

U.S. high-yield covenant-lite loans

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

17.00

18.00

19.00

20.00

80

90

100

110

120

130

140(100 = start of cycle)

Quarters from start of cycle

U.S. corporate debt-to-earnings

1997:Q1

2000:Q4

2007:Q4

Current cycle (2011:Q4)

’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’12

Emerging Markets are also accumulatingdebt

12

0 20 40 60 80 100 1200

20

40

60

80

100

120

2007

2012

Philip-pines

Thailand

TurkeyChina

Brazil

India

Chile

Malaysia

Poland

Mexico

Indonesia

Peru

Hungary

South AfricaRussia

Korea

ColombiaRomania

Emerging Market nonfinancial corporate leverage (percent, debt-to-equity)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

500

1,000

1,500

2,000

2,500

Equities

Loans

Bonds

Selected emerging market bond, equity and loan issuance (U.S. dollar, bn)

132007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

35

40

Nonresident holdings of local currency government debt (share of total; in percent)

Yield External Factors Domestic Factors

-500

-450

-400

-350

-300

-250

-200

-150

-100

-50

0

-465

-323

-142

Local currency yield tightening (Dec 08-Dec 12) (in basis points)

Hungary

Poland

Indonesia

Mexico Turkey

Korea

Brazil

Malaysia

South Africa

Very sensitive to external factors

15

Euro Area

U.S. & Japan

• Safer global financial systemGlobal

• Avoid financial excesses

• Smooth exitU.S.

• Avoid bad releveraging

• Keep the guard up

Emerging Markets

Remaining Old Risks New Challenges

• Stronger integration

• Make banks, corporates and sovereigns safer

• Keep sovereigns safe

For financial stability, dealing with old risks and new challenges

16

TURKEY ACHIEVED A “SOFT LANDING”

17

Turkey: a welcome slowing of growth and domestic demand

Mar-08

May-08

Jul-08

Sep-0

8

Nov-08

Jan-09

Mar-09

May-09

Jul-09Se

p-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-1

0

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-1

1

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-1

2

Nov-12

-30

-20

-10

0

10

20

30

Net Exports Domestic Demand Real GDP growth

Contributions to Growth(Percent, contribution to real GDP)

18

Lower imports reduce the current account deficit; although financing still is short term

Jan-08Apr-

08Jul

-08Oct-

08Jan

-09Apr-

09Jul

-09Oct-

09Jan

-10Apr-

10Jul

-10Oct-

10Jan

-11Apr-

11Jul

-11Oct-

11Jan

-12Apr-

12Jul

-12Oct-

12Jan

-13-100

-80

-60

-40

-20

0

20

40

Total Non-fuel

Current Account(Billion of U.S. dollar)

Jan-08Apr-

08Jul

-08Oct-

08Jan

-09Apr-

09Jul

-09Oct-

09Jan

-10Apr-

10Jul-1

0Oct-

10Jan

-11Apr-

11Jul

-11Oct-

11Jan

-12Apr-

12Jul-1

2Oct-

12Jan-1

3-30

-10

10

30

50

70

90

ST Debt MLT debt Non-debt flows CAD

Current Account Financing (12-m rolling, billions of U.S. dollar)

Inflation is not high

Jan-100.0

2.0

4.0

6.0

8.0

10.0

12.0

Headline CORE,I Services

Inflation (Percent)

20

Unemployment has increased, but not much

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 46

8

10

12

14

16

6

8

10

12

14

16Unemployment Rate

(Percent)201020112012

Short-term model suggests momentum in Q1

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Actual growth

Estimated growth

Actual and Estimated GDP Growth(q/q sa, non-annualized)

22

Reflecting, among other things, faster credit growth

23

A soft landing is a new achievement

24

THE GLOBAL ECONOMY AND TURKEY

Domestic savings are low, which means:

Pakista

nTu

rkey

S. Afri

ca

Poland

Brazil

Colombia

Hungary

Argentina

Chile

Mexico

Russia

Thaila

nd

Malaysi

aIndia

Indonesia

China0

10

20

30

40

50

60

Savings, 2012(% of GDP)

There is a high current account deficit

Turke

y

S. Afri

caIndia

Poland

Chile

ColombiaBraz

il

Indonesia

Pakista

n

Mexico

Thaila

nd

Argentina

China

Hungary

Russia

Malaysi

a-8

-6

-4

-2

0

2

4

6

8

Current Account Balance, 2012(% of GDP)

27

Making Turkey dependent on foreign capital inflows

Brazil India Poland Turkey0

5

10

15

20

25

30

0

5

10

15

20

25

30

35

External Financing Requirement(2011, percent of GDP)

There has been trade diversification, but the EU still important

0

10

20

30

40

50

60

Turkey Total Trade (excl. Gold, 3MMA, %)

CIS EU MENA Developing ASIASource: IMF DTS and Turk-stat

A challenge is to preserve and expand market share

Dec-00

Apr-01

Aug-01

Dec-01

Apr-02

Aug-02

Dec-02

Apr-03

Aug-03

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

0

50

100

150

200

250

300

350

Market Share Developments(Turkey's exports in % of region's Imports, 2000=100, 6MMA)

CIS EU MENA Developing AsiaSource: IMF

30

Turkey will benefit from more Foreign Direct Investment

Pakista

n

S. Afri

ca

Argentina

India

Mexico

Turke

y

Indonesia

Thaila

ndRussi

aBraz

ilChina

Colombia

Malaysi

a

Hungary

Chile0

1

2

3

4

5

6

7

8

FDI, 2011 (Net Inflows, % of GDP)

Source: World Bank

Thank You!

For more information:

IMF Website: www.imf.orgIMF Turkey Website: www.imf.org/Ankara