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CENTRAL BANK OF THE REPUBLIC OF TURKEY
Growth and Financial System
1
February, 2011
Durmu ş YILMAZ
Governor
Growth and Financial System
I. Recent Developments in the Turkish Economy
II. Monetary Policy
III. Policy Outcomes
Presentation Outline
2
III. Policy Outcomes
I. Recent Developments
in the Turkish Economy
3
in the Turkish Economy
4
6
8
10
Rapid Recovery …
75
80
85 8
9
10
11
Growth and Inflation Capacity Utilization and Unemployment Rates
Core Inflation* (y-y change) Capacity Utilization
-8
-6
-4
-2
0
2
12-08 03-09 06-09 09-09 12-09 03-10 06-10 09-10 12-10
4444
55
60
65
70
01-08 07-08 01-09 07-09 01-10 07-10 01-11
11
12
13
14
15
16
Growth (q-q change, SA)
Unemployment Rate(inverted, rhs)
Source:: TURKSTAT, CBRT* I indexSource:: TURKSTAT, CBRT
104
108
Turkey’s External Demand Index*(June 2008=100)
95
100
105
110
Domestic Demand and Exports(2008 Q1=100)
Domestic DemandGlobal Economic Activity
Index
… but unbalanced
92
96
100
2006 2007 2008 2009 2010 2011
5
* 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
75
80
85
90
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2005 2006 2007 2008 2009 2010
Source: TURKSTAT, CBRT
Goods and Services Exports
Turkey’s External Demand Index
40
60
80
100
120
20
30
40
50
Composition of Capital Flows (12-month rolling sum, billion USD)
Portfolio Investments+ Deposits
FDI
Composition of Capital Flows
Finance of Current Account Deficit (percentage of CAD)
Short Term Credit + Portfolio Investments + Deposits
-100
-80
-60
-40
-20
0
20
40
01-06 01-07 01-08 01-09 01-10-30
-20
-10
0
10
20
01-07 01-08 01-09 01-10
6
* After controlling for the effect of change in Decree No. 32Source: TURKSTAT, CBRT
Private Sector Credit*
Source: TURKSTAT, CBRT
FDI
80
100
120
140
Real Credit Volume
Real GDP and Credit Volume(2008 Q1=100)
10
12
14
16
Capital Flows and Credit Growth(percent)
Change in Credit/GDP
Accelaration in Credit Growth
0
20
40
60
80
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
2003 2004 2005 2006 2007 2008 2009 2010
GDP
Source: BRSA, TurkStat, CBRT
0
2
4
6
8
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
2004 2005 2006 2007 2008 2009 2010
Net Capital Flows/GDP
Source:TurkStat, CBRT
7
2
4
6
8
Current Account Deficit(ratio to GDP, percent)
Current Account Balance Excl. Energy
Widening Current Account Deficit
100
110
Exports and Imports(2008 Q1 = 100)
Exports
8
Source: TurkStat, CBRT
-8
-6
-4
-2
0
2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Current Account Balance
70
80
90
2005 2006 2007 2008 2009 2010
Imports
Source: TurkStat, CBRT
0
1
2
3
20
25
30
Strength of the Banking System
TurkeyTurkey
Capital Adequacy Ratio as of 2009 (percent)
Return on Assets as of 2009(percent)
-5
-4
-3
-2
-1
La
tvia
Lith
ua
nia
Es
ton
iaIr
ela
nd
De
nm
ark
Be
lgiu
mG
erm
an
yF
ran
ce
Ho
llan
dU
nite
dG
ree
ce
Slo
ve
nia
Au
str
iaS
we
de
nIta
lyP
ort
ug
al
Fin
lan
dL
ux
em
bo
Sp
ain
Ro
ma
nia
Slo
va
kia
Po
lan
dB
ulg
ari
aC
ze
ch
Hu
ng
ary
Ma
ltaT
urk
ey
0
5
10
15
Por
tuga
l
Gre
ece
Italy
Slo
veni
a
Spa
in
Fra
nce
Est
onia
Aus
tria
Sw
eden
Slo
vaki
a
Irel
and
Lith
uani
a
Pol
and
Latv
ia
Cze
ch R
ep.
Ger
man
y
Hun
gary
Fin
land
Uni
ted
Kin
gdom
Hol
land
Rom
ania
Den
mar
k
Bul
garia
Bel
gium
Luxe
mbo
urg
Tur
key
Mal
ta
9
Source: Eurostat, CBT Source: Eurostat, CBT
Strength of the Banking System
10
12
14
16
18
200
250
300
Loan to Deposit Ratio as of 2009 (percent)
Non-Performing Loans Ratio as of 2009(percent)
TurkeyTurkey
10
Source: Eurostat, CBT Source: Eurostat, CBT
0
2
4
6
8
10
Fin
land
Mal
ta
Aus
tria
Por
tuga
l
Den
mar
k
Ger
man
y
Slo
vaki
a
Spa
in
Bel
gium
Fra
nce
Gre
ece
Tur
key
Rom
ania
Pol
and
Italy
Hun
gary
Est
onia
Bul
garia
Latv
ia
Lith
uani
a
0
50
100
150
Bel
gium
Luxe
m
Cze
chG
reec
e
Tur
key
Uni
ted
Pol
and
Ger
ma
Spa
inB
ulga
ri
Hol
land
Rom
ani
Mal
ta
Hun
gar
Por
tuga
Aus
tria
Fra
nce
Slo
vaki
Fin
land
Italy
Slo
veni
Irel
and
Est
onia
Lith
uani
Latv
ia
Sw
ede
Den
mar
Turkey
12
16
Ratio of FX-Indexed Consumer Loansto Total Consumer Loans
(percent)
5556 56
53
50
60
70
Ratio of Household Liabilities to GDP(percent)
EuropeanUnion
Eastern
Household Debt Remains Low
8.6
6.4
4.8
3.6 3.94.7
3.3
1.6 1.5
0
4
8
2003 2004 2005 2006 2007 2008 2009 2010 Jan2011
Source: CBT
810
12 13
17
23
2824
0
10
20
30
40
2005 2006 2007 2008
EasternEurope
Turkey
Source: European Central Bank, CBT
11
Budget Deficit
PortugalPolandGreeceFranceIceland
SpainUnited Kingdom
United StatesIreland
2010 Budget Deficit Estimates(percent of GDP)
12
-3.6
-35-30-25-20-15-10-50
SwitzerlandSwedenFinlandTurkey
HungaryGermanyDenmark
AustriaBelgium
ItalyNetherlands
RomaniaPortugal
Source: Terasury, IMF, CBRT
Maastricht Criterion (3%)
70
80
90
100
110
120
70
80
90
100
110
120
Fiscal Discipline
Public Debt Stock(Ratio to GDP)
Developed G-20 Countries
20
30
40
50
60
70
2000 2002 2004 2006 2008 2010 2012 2014
20
30
40
50
60
70
Developing G-20 Countries
*Medium-Term Program (2011 -2013) TargetsSource: IMF WEO October 2010, Treasury, BRSA, CBT
Turkey*
13
II. Monetary Policy
14
II. Monetary Policy
• Phase-1: Full liquidity support (after the collapse of Lehman
Brothers, September 2008)
• Phase-2: Exit Strategy (April 2010)
Phases in Monetary Policy
15
• Phase-3: New Policy Mix (starting from November 2010)
15
20
25
The Policy Rate and Interest Rate Corridor
Policy Rate and Interest Rate Corridor(percent)
Interest Rate Corridor
0
5
10
15
01-08 05-08 09-08 01-09 05-09 09-09 01-10 05-10 09-10 01-11
16
Policy Rate
Source: CBRT
Reserve Requirements as a Macroprudential Tool
10
12
14
Demand deposit
Up to 1 Month
1-3 Months
Reserve Requirement Ratios(percent)
End of remuneration
17
2
4
6
8
07-09 10-09 01-10 04-10 07-10 10-10 01-11
1-3 Months
3-6 Months
6-12 Months
Longer than 1 year
Source: CBRT
Change Since the Start of the Crisis (percentage point)
Reserve Requirements as a Macroprudential Tool
2
4
6
8
Increases20.0 19.5
15
20
25
Current Rates (percent)
18
-6
-4
-2
0
Bra
zil
Tur
key
(TR
Y)
Chi
na
Per
u
Indo
nesi
a
Rus
sia
Tur
key
(FX
)
Indi
a
Pol
and
Decreases
Source: Central Banks, CBT
9.3
3.52.8
9.4
6.0
11.0
8.0
0
5
10
Bra
zil
Chi
na
Tur
key
(FX
)
Tur
key
(TR
Y)
Per
u
Indo
nesi
a
Indi
a
Pol
and
Rus
sia
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
19
• 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.
III. Policy Outcomes
20
III. Policy Outcomes
Liquidity
Central Bank Liquidity(billion TRY)
20
30
Weekly Repo Funding 3-month Repo Funding
Sterilization through ON Borrowing Net Liquidity Provided
21
Source: ISE, CBRT
-20
-10
0
10
01-09 04-09 07-09 10-09 01-10 04-10 07-10 10-10 01-11
7
8
9
10
11
Volatility in Overnight Rates
CBT Lending Rate
Policy Rate
Overnight Interest Rates(percent)
Volatility in Overnight Interest Rates(2-week standard deviation)
1.2
1.4
1.6
1.8
1
2
3
4
5
6
7
08-10 09-10 10-10 11-10 12-10 01-11 02-11
22
Source: ISE, CBRT
CBT Borrowing Rate
Overnight Interest Rate
Source: ISE, CBRT
0.0
0.2
0.4
0.6
0.8
1.0
09-10 10-10 11-10 12-10 01-11 02-11
Yield Curve and Inflation Expectations
Yield Curve*(percent)
Inflation Expectations*(percent)
8.5
9.0
9.5
Feb 2, 2011
8
9
10
12-month forward
23
* Calculated from the compounded returns on bonds quoted in ISE Bills and Bonds Market by using ENS method.Source: ISE, CBRT
6.5
7.0
7.5
8.0
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Oct. 1, 2010
4
5
6
7
12-07 06-08 12-08 06-09 12-09 06-10 12-10
24-month forward
* CBRT Expectations Survey results from the second survey period.Source: ISE, CBRT
1.05
1.10
1.15
TRY and Other EM Currencies against USD*(4 Jan 2010=1)
TRY
Initial Impact on Currency
0.90
0.95
1.00
01-10 03-10 05-10 07-10 09-10 11-10 01-11
*Average of emerging market currencies, including Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea and Colombia.Source: Bloomberg, CBRT
EM Average
24
40
60
80
Household Loans
Household Loans(year-on-year change, percent)
Housing Loans
Other Consumer Loans
-40
-20
0
20
01-08 07-08 01-09 07-09 01-10 07-10 01-11
25
Source: CBRT
Auto Loans
Measures by Other Authorities
1. Fiscal discipline
2. No FX loans to households
3. Domestic currency bond market
4. Loan/value restrictions
26
5. Tax hikes on certain consumer loans
6. Restrictions on credit card borrowing
Outlook for Inflation and Economic Activity
Inflation and Output Gap Forecasts
10
12
Forecast Range* Uncertainty Band Year-End Inflation Targets Output Gap
Control Horizon
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.
27
-10
-8
-6
-4
-2
0
2
4
6
8
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Per
cent
Source: CBRT
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 2010.
� The new monetary policy strategy envisions the use of multiple
28
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.
CENTRAL BANK OF THE REPUBLIC OF TURKEY
Growth and Financial System
29
February, 2011
Durmu ş YILMAZ
Governor
Growth and Financial System