ahap Kavcolu: Recent economic and financial developments in
Turkey
Speech by Mr ahap Kavcolu, Governor of the Central Bank of the Republic of Turkey, at
the Istanbul Chamber of Industry Meeting, Istanbul, 29 July 2022.
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Distinguished Members of the Istanbul Chamber of Industry,
I would like to thank you for your invitation to the regular July meeting of your Assembly,
which is among the leading representative councils of our country's industrial sector
with its history of 70 years and more than twenty thousand members. I am pleased to
meet with you here today.
I will start my speech by giving a brief account of the developments regarding the
macroeconomic outlook. Then, I will talk about the structural transformation that our
country is going through. After sharing with you the Central Bank's contributions to this
important transformation, I will leave the floor to you.
Esteemed Participants,
Geopolitical risks that increased in the first half of the year, and energy problems,
supply constraints, and supply chain disruptions due to the lingering effects of the
pandemic have led to negative consequences on a global scale. However, recently,
there has been a partial improvement in energy and commodity prices as well as in
supply conditions and lead times. In this context, lead times in emerging economies
have improved considerably in recent months, and significantly converged to their
normal levels. Meanwhile, lead times in advanced economies have remained elevated
despite some decline.
Our country posted a very successful and strong economic activity performance during
the pandemic compared to other countries. As you know, economic activity in many
countries declined in that period, and growth in many economies remained close to
zero. However, the Turkish economy, which normalized rapidly in the succeeding
period, ranked among the top economies in terms of high growth rates. Accordingly, our
economy grew by 11% in 2021, posting a very strong growth performance compared to
other countries.
The conflict between Russia and Ukraine that started in the first quarter of 2022
aggravated the effects of ongoing negative supply shocks and increased the
uncertainties. Nevertheless, domestic economic activity remained strong in a
sustainable and uninterrupted framework despite negative supply shocks. Accordingly,
the annual growth rate stood at 7.3% in the first quarter of 2022. We expect that growth
will also be close to this rate in the second quarter.
Net exports and machinery-equipment investments have a very remarkable share in
this strong growth. On the expenditures side, net exports have contributed positively to
growth for the last five consecutive quarters. Machinery-equipment investments have
also made an uninterrupted positive contribution to growth in the post-pandemic period.
On the production side, the services and industrial sectors continued to contribute to
growth.
We see that machinery-equipment investments continue in a sound and sustainable
framework. Investments that support productive capacity, particularly
machineryequipment investments that drive industrial output, point to a stable and strong growth.
In this context, it is important that the investment need required for the continuation of
the supply-side contribution to sustainable growth and price stability is met with
accessible, long-term and low-cost Turkish lira financing.
Machinery-equipment investments and net exports are the pillars supporting the
economic performance of Türkiye centered on increasing investments, employment,
production and exports, and their share in national income has been rising consistently.
Their total share in national income reached the highest historical level at 18% as of the
first quarter of 2022. The stable increase of machinery-equipment investments will
enhance the supply capacity of our economy, thereby contributing to permanent price
stability.
The latest data indicate that industrial production remained on a favorable track in the
second quarter of the year with the help of sustainable components. Industrial
production has grown on an annual basis without interruption since the third quarter of
2020 and recorded an upsurge of 9.1% in May 2022. While this increase in production
spreads across the manufacturing industry, industrial production in exporting sectors
remains even stronger. Industrial turnover indices also indicate that external demand
has a positive impact on industrial production.
Strong economic growth is also apparent in capacity utilization rates. While capacity
utilization rates increased in all sectors, in some sub-sectors they even exceeded
historical averages. This points to a need for additional capacity, and supports the
investment demand. On the other hand, hovering above past averages, the
manufacturing industry capacity utilization rates indicate that the strong trend in
investments will continue by encouraging companies to opt for capacity expansion. In
this context, capacity increases are more pronounced in sectors that are composed of
companies with high investment appetite.
Survey data also show that as of July, investment expenditures of companies will rise
further in the coming periods. This trend grew stronger with a spillover into all sectors,
chiefly to those sectors producing investment goods as well as exporting ones. Given
the January-May average, increases in the import quantity of investment goods
accompanied by the rise in industrial production, with capital goods in the lead, confirm
that the demand for fixed capital goods remains strong.
The stable course of sustainable components such as investment and exports had a
positive effect also in employment. While employment participation rates increase
further, the trend of decline in the number of unemployed also continues. Thus, as of
May, the total number of people employed reached a historical high with 30.8 million
people. In addition, the relatively stationary course of the unemployment rate with
10.9% indicates that the employment gap is still high and the employment capacity will
increase further in the upcoming period.
Employment developments in the Turkish economy are very promising. Due to
investment expenditures and exports as well as the rapidly increasing industrial
production since the second quarter of 2020, the number of people employed rose by
2.7 million (1.3 million being in the services sector and more than 900,000 in the
industrial sector) as of the first quarter of 2022. In addition, employment has increased
by approximately 846,000 people since the beginning of the year. This increase in
employment is significantly larger than that of peer countries. Considering the
population and the sources of employment growth in these countries, our employment
performance becomes even more remarkable. Employment in the manufacturing
industry in particular, exhibits a notably strong performance.
In the pandemic period, many countries have not managed to compensate for the
losses in labor force participation. On the other hand, both the labor force participation
and employment indicators in our country have exceeded their pre-pandemic levels,
showing how brisk and robust the labor markets were in the normalization process.
Distinguished Members of the Chamber of Industry,
The Turkish economy is going through a process of structural transformation centered
on increasing investments, employment, production and exports, the focus of which is
you. Adjusted for cyclical effects, the Turkish economy had a current account surplus
for three consecutive quarters for the first time since this analysis began in 2004. In
other words, this new balance indicates that when global energy and commodity prices
start to normalize, our economy will reach its current account surplus capacity,
shortterm financing needs will be minimized, and growth will be driven by exports.
This points to the beginning of a new era for our country. Put differently, growing and
simultaneously generating a current account surplus will help the Turkish economy see
permanent growth and price stability on a sustainable path. Despite being
overshadowed by energy price hikes, we, as the Central Bank, are determined to seize
this historical opportunity that we proved with data and make it permanent through the
policies we are implementing.
In addition to being an important element in the external balance, the performance of
the tourism sector, which is a wide source of employment and revenues, has been
pleasing in the first five months. We see that the number of visitors increased on a
monthly basis compared to 2021 and converged to 2019 figures. The rising number of
visitors from European countries with high per capita spending and Middle Eastern
countries where incomes have been higher due to the rise in oil prices more than
compensated for the possible war-related losses in tourism revenues. Thus, travel
revenues not only increased compared to 2021, but also surged compared to the
prepandemic period.
Dear Guests,
I have emphasized that the growth structure of the Turkish economy is undergoing an
export-oriented transformation. Having grown steadily before the pandemic, our exports
accelerated and increased sharply after the pandemic, reaching USD 126 billion in the
first half of 2022, up nearly 20% year-on-year. This marks a historical high for our
exports in the first six months of any year.
We identify three main reasons for our record-breaking export performance despite the
armed conflict between our major trading partners. First, we see that Türkiye has
become a key trade hub thanks to its increased relative advantages in the reshaped
global market after the pandemic.
Second, we observe that our exporters have the capacity to adapt rapidly to changing
conditions by covering diverse products and destinations thanks to their resilient and
flexible structure. I would like to discuss this point with you in more detail. As you know,
Turkey has a much stronger export structure compared to many similar, neighboring or
regional economies. This is supported by the high share of manufacturing in exports
and the diversity of the number of destinations and exported products. The destination
and product diversity of our exports doubled in 2022 compared to 2006. Around 29% of
the increase in our exports between 2015 and 2022 was generated by new markets.
The flexible and dynamic structure of our exporters protects our economy against
external shocks. Our companies' flexibility in introducing new products and finding new
markets allows them to compensate for possible losses in adverse conditions, including
the current armed conflict.
The third reason is the favorable conditions provided by our financial system to our
exporters to increase their production, which is backed by the regulations of the Central
Bank. Accordingly, as of May, investment and export loans account for about 28% of
total commercial loans, the highest level of the last 20 years.
TRY-denominated export and investment loans have grown rapidly since the beginning
of 2022. Between December 2021 and May 2022, TRY commercial loans increased by
TRY 618 billion, of which TRY 154 billion stemmed from the rise in export and
investment loans. Likewise, the share of export and investment loans in total TRY
commercial loans was constant around 10.1% before 2022, but reached 13.9% as of
May 2022 thanks to new regulations.
Through the rediscount credit facility we offer as the Central Bank, exporting firms have
been provided with financing of USD 106 billion over the last five years. The costs of
the rediscount credits extended are well below the market rates, helping firms keep
their financing expenses at reasonable levels. Thanks to favorable interest rate
conditions offered to rediscount credit beneficiary firms by the Central Bank, a cost
advantage of up to USD 250 million per year has been provided since 2017.
Compared to the first half of the previous year, the number of firms that used rediscount
credits in the first six months of 2022 rose to 4,476 from 2,199, and the loan utilization
amount went up to USD 11.1 billion from USD 9.3 billion.
The key principle behind our targeted loan policy is to provide funding in a way that will
boost investment, employment, production and exports, and on reasonable terms.
Therefore, we attach great importance to making credits available to a broader
population and the easy access to loans by our industrialists.
Thanks to our efforts to expand the use of rediscount credits, the share of SMEs in total
credit utilization has steadily increased since early 2022. The share of SMEs was 6% of
rediscount credit utilization at the end of January 2022; this exceeded 20% in July 2022.
In this context, the regulations we have made regarding access to export credits have
affected SMEs positively. The share of SMEs saw an increase to 50% of TRY
rediscount credit utilization, which reached 90% on the back of our liraization strategy.
The net export status and rediscount credit shares of firms with a rediscount credit
balance since the beginning of the year indicate that the share of net-exporting firms in
rediscount credits has increased to 55% from 40%, and the ratio of net-exporting firms
that used credit has gone up to 68% from 59%.
Accordingly, the net foreign trade contribution of firms with a rediscount balance, and
their net FX contribution in the spot market improved significantly in the same period.
In our new economy model, we are focused on achieving the most efficient results for
the Turkish economy with our targeted loan policies that will support the current account
surplus. We make all our regulations and decisions accordingly.
Distinguished Representatives of the Business World,
Supply constraints that were triggered by the pandemic and gradually intensified due to
geopolitical risks, and heightened volatilities in global financial conditions caused
negative supply shocks, pushing global inflation to historic highs. The main
determinants of the inflation we face are strong and persistent supply shocks, exchange
rate developments and the resulting deterioration in pricing behavior. With the decisions
we take, we aim to ensure a permanent decline in inflation as soon as possible.
Accordingly, together with the interest rate policy, we have been effectively making use
of the policy mix composed of liquidity, collateral, reserve requirements and
management of international reserves. In the context of our integrated policy
framework, we will continue to use our instruments with a liraization perspective.
Additionally, while making our monetary policy decisions, we pay regard to the creation
of financial conditions that will help increase investments and production, and support
the sustainable current account balance objective. Our investment and export-targeted
loan programs that will lead the sector, as well as our macroprudential policies, are also
supportive of this process.
While concluding my remarks, I would like to extend my thanks to you, as the
representatives of the Turkish industry. The contributions of our industrialists will be of
significant importance in achieving the current account surplus on the back of
investment, employment, production, export gains that will lead our economy to
sustainable price stability and development goals. We, as the Central Bank, will
continue to stand by you with our industry-friendly targeted policies aiming to create the
financial conditions that will support continuity of supply as well as our current account
surplus capacity.
I will be pleased to answer your questions.