Turalay Kenç: Emerging market policies in a volatile global environment – the case of Turkey Remarks by Mr Turalay Kenç, Deputy Governor of the Central Bank of the Republic of Turkey, at the National Asset-Liability Management Europe Symposium, London, 3 March 2016. *  *  *  Accompanying charts can be found at the end of the speech. Good morning, ladies and gentlemen. I would like to thank Central Banking Publications for the honor of being invited to deliver the keynote address at this European Meeting of National Asset-Liability Management. I am delighted to be back. The first time I did this was back in 2011 in Istanbul. In my remarks today, I will focus on policies of emerging market central banks in a volatile global environment with a particular focus on Turkey. I will begin with an overview of the challenges facing emerging market central banks in an increasingly interconnected world. I will then discuss resilience of emerging economies (EMEs) to global financial conditions together with their macroeconomic and prudential policy responses. I will finish my talk with the Central Bank of Turkey’s roadmap of policy actions before and after global monetary policy normalization. Heightened global financial market volatility The volatile global environment mostly likely stems from the gradually worsening global economic and financial problems and the increasingly interconnected world through production, financing and communication technology channels. The former is essentially related to growth, stock balances and policy uncertainty problems. The latter underscores higher degree of external shocks’ transmission across globe.

2  OECD (2016), Economic Policy Reforms 2016: Going For Growth Interim Report, OECD Publishing, Paris. BIS central bankers’ speeches  1  The weak recovery is also very much related to the problem of demand deficiency – a situation associated with aggregate demand being less than the aggregate supply corresponding to full employment level of output in the economy. And this is probably driven by high indebtedness levels in government and private balance sheets across the world including both advanced and emerging market economies. As a matter of fact, the impaired private balance sheets caused the so-called balance sheet recession of 2008–2009 in AEs as in the USA during the great depression and in Japan during the years following the Japanese financial crisis of 1991. Now, not only the private sectors – financial, non-financial and households – of AEs but also their governments and more importantly EME private sectors suffer from high indebtedness levels. For example, some EME households have debt as large as 75 to 95 percent of GDP. Moreover, EME private balance sheets largely consist of external liabilities as opposed to domestic currency denominated assets, which expose them to increases in the cost of debtservicing foreign currency – denominated external obligations in cases of real exchange rate depreciation. Recent research suggests that agents tend to cut back their spending when their debt reaches certain levels.3,4 Going forward, we are likely to see only a gradual improvement in this stock balances problem as they take longer time to heal than flow balances problems.