Durmuş Yilmaz: Recent economic and financial developments in Turkey
Opening speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of
Turkey, at the 79th Ordinary Meeting of the General Assembly, Ankara, 12 April 2011.
* * *
Introduction
1. Esteemed Shareholders, Distinguished Guests and Members of the Press,
Welcome to the 79th Ordinary Meeting of the General Assembly of the Central Bank of the
Republic of Turkey.
2. I would like to start my speech with a brief evaluation of the international economic
developments in the aftermath of the global economic crisis. Later on, I will summarize the
key macroeconomic developments that took place in Turkey in 2010. Finally, I will share my
evaluations pertaining to the recent monetary policy implementations of our Bank and their
effects.
Global economic developments
Distinguished Guests,
3. In 2010, the growth discrepancy between advanced and emerging economies
became more pronounced while the global economy continued to recover. In the post-crisis
period, economic growth in emerging economies has been robust, and mainly driven by
domestic demand. As a matter of fact, most of these economies have already surpassed
their pre-crisis production levels. Amid the fast recovery, output gaps in these economies
have tended to close, and employment conditions have significantly improved.
4. Meanwhile, advanced economies, the epicenter of the crisis, have continued to
exhibit a slow and gradual recovery. Downside risks regarding the pace of recovery in these
economies have yet to completely disappear, albeit having gradually waned. As a matter of
fact, the contribution of private consumption and investment spending to the recovery in
advanced economies has not currently reached the desired level. The ongoing
balancesheet restructuring across households and firms, and the consequent slow and protracted
recovery in employment and credit conditions put a cap on private consumption and
investment. Furthermore, persisting and mounting concerns over the sustainability of
sovereign debt continue to pose downside risks on global economic activity, especially in the
euro area. The growing discrepancy between advanced and emerging economies, which
became more pronounced in the post-crisis period, is expected to continue for an extended
period of time.
5. The divergence in the pace of recovery between these two country groups has
undoubtedly significant implications for inflation and monetary policy. Yet, before moving on
to global inflation and the monetary policy outlook, I find it useful to mention the upward trend
in commodity prices observed with the recovery process since this upsurge is becoming
even more significant for both the global inflation outlook and the monetary policy.
6. The recovery in global economic activity has also been manifested in commodity
prices, and the upward trend in commodity prices, which started following the peak of the
crisis, continued throughout 2010. In this period, the strong course of economic activity in
China and India, two countries that account for a significant share of global commodity
demand, reinforced the upward trend in commodity prices. This trend gained pace especially
in the second half of the year.
7. Crude oil and agricultural commodity prices which are critical for emerging
economies as well as Turkey, increased sharply amid the global economic recovery. The
reluctance of OPEC countries to raise quotas and reduction of over production by some
member countries bolstered the rise in oil prices. Moreover, recent political tensions in the
Middle East and North Africa accelerated the upward trend in oil prices. Adverse weather
conditions in major parts of the world in the second half of the year had affected the energy
and agricultural prices from demand and supply side respectively, posing additional upward
pressure on prices.
8. Besides increases in oil and agricultural commodity prices, 2010 was also marked
by ongoing price increases in industrial and precious metals. The upward trend in the prices
of precious metals in this period was primarily driven by the fact that investors use precious
metals as a hedge against inflation and economic risks. In addition to these factors, the
ample liquidity fuelled by the ongoing quantitative easing in 2010 by major central banks in
addition to the increased inflationary risks raised the investment demand for commodities by
underpinning price movements in the short term.
9. The upward trend in commodity prices poses an upside risk on inflation in both
advanced and emerging economies. As a matter of fact, the effect of the recent increases in
commodity prices has been materialized on inflation in many countries and more primarily in
emerging economies. One reason for this is the higher share of food and energy in the
consumption basket in emerging economies compared to that of advanced economies.
Another reason is the rapidly closing output gaps amid the strong course of economic activity
in emerging economies causing higher pass through of commodity driven supply-side shocks
to prices. Hence, advanced and emerging economies diverge significantly not only in terms
of economic activity, but also in terms of inflation outlook.
10. This divergence between growth and inflation outlook also led to differences in
monetary policy practices between advanced and emerging economies in 2010. In this
period, central banks of advanced economies focused on supporting the economic recovery
and speeding up the improvement in employment and credit conditions. Accordingly, the low
level of interest rates in advanced economies was maintained, and monetary easing
continued in 2010 as well.
11. Ample liquidity as a result of low interest rates and the ongoing quantitative easing
in advanced economies encouraged global investors to seek higher returns and demand
risky assets. Consequently, emerging economies experienced a surge of capital flows. The
divergence between the pace of recovery in advanced and emerging economies in favor of
emerging economies, as well as the permanent improvement of the risk sentiment for
emerging economies in the post-crisis period also supported these capital inflows. Indeed,
the fact that the risk premium indicators in many emerging economies including Turkey are
below pre-crisis levels, and the consequent upgrades by credit rating agencies indicate the
permanent change in risk sentiment for these countries.
12. As a result of capital inflows, emerging market currencies appreciated and asset
prices rose sharply. Furthermore, capital inflows in emerging economies raised concerns
over financial stability by fuelling domestic demand and thus causing rapid credit growth.
13. Under these circumstances, central banks of emerging economies focused on
containing upside risks on inflation amid the strong rise in domestic demand as well as
limiting financial risks due to massive capital flows. Accordingly, many central banks of
emerging economies withdrew the liquidity measures adopted during the crisis and
embarked on monetary tightening in 2010. Meanwhile, central banks of emerging economies
took additional measures against financial and macro financial risks such as excessive credit
growth due to accelerated capital inflows, widening current account deficits and the short
maturity of the foreign capital. Accordingly, in addition to using policy rates, they opted for a
tighter monetary policy stance through the active use of alternative instruments such as
required reserve ratios, reserve accumulation and capital controls.
14. The monetary tightening in emerging economies through policy rates and alternative
instruments is expected to continue in the upcoming period. Meanwhile, advanced
economies are expected to end their easing measures in 2011 and to start normalizing
policy. In fact, the European Central Bank took the first major step in this regard by raising
the policy rate to 1.25 percent in April by 25 basis points.
15. However, as I mentioned previously, it is impossible to claim that downside risks on
the global economy have completely faded away. As a matter of fact, recently mounting
concerns over debt sustainability in peripheral euro area countries indicate that these risks
still remain, albeit to a lower degree. Furthermore, the ongoing surge of commodity prices,
especially of oil, stands out as another risk factor that may slow down the global economic
recovery.
Distinguished Guests,
16. In this part of my speech, I would like to evaluate key macroeconomic developments
in Turkey in line with the global economic developments in 2010.
Developments in the Turkish economy
17. Adoption of additional easing measures in emerging economies led to growing
expectations that low interest rate and ample liquidity conditions in advanced economies
would be maintained for an extended period, which in turn increased the global risk appetite
in 2010. Consequently, capital inflows to emerging economies accelerated and risk
premiums of these countries declined. Meanwhile, risks regarding the debt sustainability of
peripheral euro area countries remained vigorous and continued to dominate the financial
markets. In fact, renewed concerns over sovereign debt since November increased risk
aversion and raised risk premiums across emerging economies.
18. However, what should be highlighted is that despite the volatile course of risk
sentiment across emerging economies, Turkey's risk premium indicators performed better
than many other countries and remained below pre-crisis levels. This positive development is
attributable to country-specific favorable conditions such as upgrades by credit rating
agencies, reduced political uncertainty in the aftermath of the referendum period and the
revised Medium Term Program (MTP) signaling further fiscal discipline.
19. On the other hand, risk premiums have recently increased due to current unrest in
the Middle East. Fear of spillover to peripheral countries and the expectations of persistence
in oil price hikes deteriorated the risk sentiment. Accordingly, Turkey's risk premium has also
increased.
Esteemed Guests,
20. In 2010, fiscal and monetary policies had growingly expansionary effects on
domestic demand. Although the weak recovery in advanced economies continued to curb
domestic economic activity, Gross Domestic Product (GDP) registered an 8.9 percent
increase amid the rapid recovery in domestic demand. Indeed, the main drivers of the GDP
growth in this period were private demand for investment and consumption.
21. The impact of the global financial crisis on the labor market has subsided and
nonfarm employment has started to recover rapidly starting from the first quarter of 2009. In
2010, the rise in non-farm employment compensated the crisis driven job losses, and
employment in all sectors surpassed the pre-crisis levels.
22. As I have previously mentioned on several occasions, sustainability of the favorable
labor market outlook in 2010 is contingent on implementation of the required reforms for
enhancing productivity and flexibility in the market. These reforms would also contribute to
Turkey's social security system by promoting registered employment.
23. Real labor costs, which have gradually been increasing since the second quarter of
2010, remained flat in the final quarter. Unemployment rates hovering above pre-crisis levels
continued to contain the rise in unit labor costs, becoming the primary factor restricting the
run-up in services prices in 2010.
Esteemed Guests,
24. In 2010, the foreign trade deficit soared amid weak external demand and the rapid
recovery in the domestic demand. In addition to the surge in the foreign trade deficit, the
runup in services expenditures further aggravated the current account deficit. In this period,
transportation costs also increased due to rise in imports. Thus, the current account deficit,
which was down to USD 14.3 billion in 2009, reached USD 48.6 billion in 2010.
25. Recent data indicate that the surge in imports continued in the January-February
period in line with the robust domestic demand, and exports continued to recover gradually
owing to weak external demand. However, the political unrest in North Africa slows down the
recovery in Turkey's exports, and also pushes up our imports through oil price hikes.
Therefore, we predict the upward trend in the current account deficit to persist in the short
run also taking into account the low base effect from last year. Yet, we also envisage that the
dampening effects of our recent policy measures on loans and imports will materialize as of
the second quarter of the year.
Distinguished Guests,
26. Domestic credit volume, which surged in 2010, accelerated further in the final
quarter of the year. As the effects of the crisis waned, the number of sectors utilizing loans
increased rapidly and maturities were extended. An analysis of the rise in real sector loans
by sub-categories reveals that this rise was supported by the rally in both consumer and
business loans. Meanwhile, loan utilization by small and medium-sized enterprises, which
were those hit most severely by the crisis, increased as well.
27. I would like to underline that the vigorous loan utilization was underpinned by
measures taken by the CBRT in the aftermath of the crisis with a view to maintain the
functionality of the credit markets, as well as by the consequent rapid recovery in economic
activity and the favorable economic outlook. Furthermore, ample global liquidity owing to the
monetary easing implemented by major central banks and the favorable economic outlook
providing low and foreseeable interest rates were also instrumental in stimulating loan
utilization. At this point, I would like to highlight that the measures that we adopted in 2010 to
contain the negative effects of the rapid credit growth created by ample global liquidity are
critical for maintaining financial stability and enhancing resilience to external shocks; yet,
their impacts on loans are expected to be observed with a lag. This matter deserves close
attention, which is why I will be returning to this issue in the upcoming parts of my speech.
Distinguished Guests,
28. The decline in public revenues due to global crisis driven economic contraction and
the comprehensive fiscal stimulus packages to alleviate the effects of the crisis led to large
fiscal deficits and rising debt stocks across the globe, especially in advanced economies.
Many emerging economies, including Turkey, are on a more stable fiscal footing, as they
entered the crisis with relatively low budget deficits and debt stock, adopted relatively less
comprehensive fiscal stimulus measures and recovered more swiftly.
29. The October 2010 MTP for the 2011-2013 period envisages a gradual decline in
non-interest expenditures to GDP ratio by 2010. In addition, interest expenditures are
expected to decrease amid falling domestic borrowing rates. Tax revenues are planned to be
raised by legal and administrative measures aiming to enhance tax audits and expand the
tax base. It is notable that the ratio of public debt to GDP has reverted to a downward track
amid the gradual reduction in the budget deficit.
30. As a matter of fact, the faster-than-expected economic recovery and falling interest
expenditures have helped to improve Turkey's fiscal outlook. The increase in tax revenues
amid rapid economic growth and tax adjustments were the major drivers of the improved
budget balances in 2010. Moreover, the relative slowdown in the growth of non-interest
expenditures as well as the significant decline in interest expenditures driven by falling
domestic borrowing rates contributed to the improvement in fiscal balances.
31. Fiscal indicators in the MTP suggest that the positive outlook, which was also
underpinned by the stronger-than-expected recovery in 2010, would continue in the
upcoming period. Indeed, the recent data imply that the favorable outlook persists in tandem
with the robust economic activity. Nevertheless, I would like to remind that in order to
maintain fiscal discipline and ensure that Turkey continues to have more positive readings
than other emerging economies, implementation of the institutional and structural reforms set
out in the MTP remains critical.
Esteemed Guests,
32. In the last part of my speech, I would like to mention monetary policy decisions in
2010 and the monetary policy strategy that we currently implement. In this context, I will first
summarize inflation developments, and then, I will move on to monetary policy
implementations within the inflation targeting framework.
Monetary policy decisions and implementations
33. Inflation was mainly determined by tax adjustments and the course of unprocessed
food prices in 2010. Core inflation indicators remained low and stable as unemployment
rates and capacity utilization rates hovered below pre-crisis levels. Thus, inflation came down
to 6.4 percent by the end of 2010, almost reaching the year-end inflation target of
6.5 percent. With the downward revision in food prices, the decline in inflation continued in
the first quarter of 2011, and inflation rate was down to 3.99 percent in March 2011.
34. Core inflation indicator SCA-H (consumer price index excluding energy,
unprocessed food, alcoholic beverages, tobacco and gold) increased 3.49 percent
year-onyear while SCA-I (SCA-H excluding processed food) registered an all-time year-end low of
2.99 percent. In the first quarter of 2011, despite a slight upward movement, the annual rate
of increase in core inflation indicators remained relatively low.
35. Although year-end inflation expectations fluctuated due to the volatile course of food
prices throughout 2010, medium-term expectations remained basically unchanged. As of the
first quarter of 2011, the 24-month ahead inflation expectation stands at 6.29 percent,
hovering slightly above our medium-term target of 5 percent.
36. Inflation may rise in the short term due to lagged effects of oil prices and base effect.
I would hereby like to remind you that we will be more extensively providing the public with
updated evaluations and forecasts on the medium-term inflation outlook along with possible
risks and policy measures, in the Inflation Report to be published on April 28, 2011.
Distinguished Guests,
37. Following the deepening of the global financial crisis, we focused on policies to
contain the adverse effects of the crisis on economic activity and financial stability, while also
overseeing price stability. Accordingly, our Bank slashed policy rates and kept them at low
levels for quite some time in addition to deploying supportive liquidity measures.
38. In view of the normalization in money and credit markets amid waning effects of the
global crisis on financial markets, we announced our exit strategy on April 14, 2010, which
encompasses the withdrawal of crisis measures and the normalization process of the
monetary policy. Unlike other emerging economies, Turkey entered the global crisis with a
strong and well-regulated banking system as well as a flexible and efficient liquidity
management tailored to previous crisis experience. Hence, our balance sheet deteriorated
only slightly due to anti-crisis measures and we were not forced to adopt radical measures
during the crisis. Thus, our exit strategy was simple compared to those of many other central
banks.
39. As part of the exit strategy and also considering the favorable developments in
credit markets and the recovery in economic activity, the CBRT started to withdraw the
temporary liquidity measures introduced during the crisis. Hence, the excess liquidity
provided to the market was gradually drained in tandem with the normalization process.
Moreover, as the first step of the technical rate adjustment process, the 1-week repo rate
was adopted as the key policy rate in May.
40. Euro area sovereign debt problems starting from May 2010 led to renewed
uncertainties regarding external demand. This outlook confirmed our projection that policy
rates should be kept at low levels for an extended period. Hence, the monetary policy stance
was maintained and policy rates were held fixed at low levels throughout May-August 2010.
41. After necessary conditions to implement the second step of the technical rate
adjustment process within the exit strategy were attained, overnight interest rates were
reduced by 25 basis points in September 2010. With the completion of the gradual technical
interest rate adjustment process in line with the exit strategy, 1-week repo auctions have
been the main funding instrument of the CBRT. However, with other short-term lending and
borrowing options being granted overnight and in order to harmonize maturities of similar
liquidity management tools, it was decided that the repo facility, which was extended to
primary dealers within the open market operations framework, would only be available at
overnight maturity starting from October 15, 2010, and 3-month repo auctions were
terminated.
42. Furthermore, with the objective to bring foreign exchange liquidity facilities orderly
and gradually back to pre-crisis levels as part of the exit strategy, the foreign exchange
reserve requirement ratio was raised by a total of 2 percentage points to 11 percent with the
adjustments in April, July and September. Moreover, in view of the improved international
liquidity conditions and the increase in foreign exchange liquidity of the banking system, our
Bank has terminated its intermediary role in the Foreign Exchange Deposit Market as of
October 15, 2010. In addition, the maturity of the foreign exchange deposits borrowed within
the pre-determined borrowing limits by banks from the CBRT was reduced to one week, as
was the case before October 2008.
Distinguished Guests,
43. The quantitative easing adopted in the last quarter of 2010 by some major central
banks and the consequent boost in capital flows to emerging markets have necessitated
significant changes to our monetary policy strategy. Short-term capital inflows feeding the
divergence between domestic and external demand caused current account deficit to widen
rapidly, thus necessitating macroprudential measures. Hence, we jointly use liquidity
management facilities and reserve requirements as well as policy rates in order to achieve
price stability and financial stability.
44. In line with the new policy design, the TL required reserve ratio was raised by
0.50 points each in September and November to 6 percent. Additionally, in order to more
effectively use the required reserve ratio as a tool to contain macroeconomic and financial
risks, interest payments on TL reserve requirements was terminated in September.
45. Due to the accelerated capital inflows, our Bank reduced its overnight borrowing rate
from 5.75 percent to 1.50 percent in November, and increased the lending rate by
0.25 points to 9 percent. Late liquidity window rates were accordingly revised. Besides these
measures, with an extensive arrangement made in December, the TL required reserve ratios
were differentiated by maturity and the reserve requirement base was expanded to include
certain foreign and domestic repo transactions which were formerly not subject to reserve
requirement. This arrangement aims to reduce maturity mismatch in banks' balance sheets
by extending the maturity of banking sector liabilities and also aims to encourage long-term
capital flows.
46. The ongoing strong course of credits as well as other domestic demand indicators in
March implied that additional monetary tightening would be necessary. The CBRT assessed
that implementing monetary tightening through reserve requirements, rather than using
policy rates, would be more effective in containing macro financial risks resulting from the
divergence of domestic and external demand. In this respect, the CBRT decided to deliver a
notable hike in the weighted average of required reserve rates on short term liabilities.
Accordingly, TL required reserve ratios for sight deposits and short-term
deposits/participation accounts and other liabilities were raised. Our measures regarding the
required reserves are displayed on the slide. With the last arrangement to be effective as of
April 15, 2011 in addition to prior adjustments since October 2010, a total of TL 38 billion
liquidity will have been withdrawn from the market.
47. Our measures are expected to have an impact on domestic demand and credits
starting from the second quarter. The adopted policy measures ultimately aim to contain
macro financial risks by inducing a more balanced growth path for aggregate demand
components. The recent outlook of export orders for domestic and foreign markets exhibiting
a more balanced pattern suggests that policy measures have started to become effective.
Distinguished Guests,
48. I would like to remind you that we continued to implement floating exchange rate
regime along with inflation targeting regime in 2010. In line with its general strategy to
maintain a strong foreign exchange position, the CBRT designs foreign exchange buying
auctions at times when supply is higher than the demand for foreign currency, and also
assuring to affect the free market conditions at the minimum level. Accordingly, the daily
amount to be purchased in foreign exchange auctions was increased in August on the back
of a stable increase in capital inflows to Turkey as well as to other emerging economies. With
a view to strengthen foreign exchange reserves, the CBRT modified its method of foreign
exchange buying auctions effective as of October 4, 2010 in order to benefit more effectively
from capital inflows and to enhance resilience against volatility in these capital flows. In this
regard, the CBRT may raise the amount to be bought at regular foreign exchange auctions in
order to accelerate foreign exchange purchases if liquidity conditions ease on global financial
market developments and capital inflows remain strong. In case the CBRT decides to
accelerate foreign exchange purchases, the additional amount that may be purchased will be
announced on the first working day of the week.
49. Given that the new method provides sufficient flexibility to build up reserves at times
when foreign exchange supply increases relative to foreign exchange demand, The CBRT
decided that banks would no more hold option at regular auctions starting from January 3,
2011. Moreover, the daily amount of purchase was raised to USD 50 million in order to avoid
a possible sharp decline in CBRT"s foreign exchange purchases due to termination of
options. The amount purchased through foreign exchange auctions totaled USD 14.9 billion
in 2010. Gross foreign exchange reserves excluding gold amounting to USD 80.7 billion at
end-2010, increased to USD 86.2 billion as of March 2011.
Distinguished Guests
50. The general framework of the monetary and exchange rate policy for 2011 was
disclosed to public by the release of the "Monetary and Exchange Rate Policy for 2011" on
December 21, 2010. Accordingly, the CBRT will continue with the inflation targeting and
floating exchange rate regimes in 2011. The inflation target for end-2011 has been set at
5.5 percent and the uncertainty band has been maintained at 2 percentage points in both
directions.
51. In line with our primary objective of achieving and maintaining price stability, we will
continue to monitor macroeconomic risks and financial stability, and hence, take measures
towards enhancing the effectiveness of the monetary policy and liquidity management in
2011. Accordingly, in the upcoming period, the CBRT may alter its liquidity management
strategy to meet the emerging needs and actively use additional policy tools, such as the
corridor between borrowing and lending rates and reserve requirements, to maximize the
effectiveness of the 1-week repo auction rate, the main policy tool, and to contain macro
financial risks.
52. In the period ahead, monetary policy will continue to focus on achieving price
stability on a permanent basis. To this end, the impact of the macroprudential measures
taken by the CBRT and other relevant institutions on the inflation outlook will be considered
carefully. Fulfillment of the commitments to fiscal discipline in the medium term and
strengthening the structural reform agenda will contribute to the improvement of Turkey's
sovereign risk, and thus, support macroeconomic stability as well as price stability.
Sustaining the fiscal discipline will also provide room for monetary policy maneuver,
supporting the social welfare by keeping interest rates permanently at low levels. In this
respect, I would like to conclude my remarks by underlining that timely implementation of the
structural reforms envisaged by the MTP and the European Union accession process
remains to be of utmost importance.
Thank you.