erdem basci : global finance in transition keynote speech by mr erdem basci, governor of the central bank of the republic of turkey, at the conference on “ global finance in transition ”, istanbul, 7 may 2013. * * * esteemed participants, distinguished guests, welcome to the conference on “ global finance in transition ”, held under the russian g20 presidency and hosted jointly by the reinventing bretton woods committee ( rbc ) and the central bank of the republic of turkey ( cbrt ). in this conference, we will be analysing and discussing with experts, the structural changes in global finance experienced as of 2008. in these opening remarks, i would like to briefly point out the impact of these changes on emerging market economies. three fields have undergone significant changes in the aftermath of the 2008 crisis : fiscal policies, monetary policies and financial sector policies. these changes have had significant subsequent impacts on global finance. as for the fiscal policies ; those of the emerging market economies differ considerably from the fiscal policies of the advanced economies. automatic stabilizers did cause emerging market economies to have wider budget deficits temporarily in 2009. yet, eme ’ s sovereign debt has been very low compared to that of advanced economies, and still on a downward trend since 2010. emerging market and advanced economies diverge in terms of monetary policies as well. since there has been no deterioration in their money multipliers, central banks of emerging market economies have not felt the urge – experienced by their counterparts in advanced economies – for an unconventional broadening in their money bases. esteemed participants, distinguished guests, in emerging market economies, the gradual alleviation of the pressure on financing sources – caused by public sector demand – has provided significant room for the private sector to invest in physical capital. these investments have enabled – via capital markets and the banking system – the use of both domestic as well as foreign savings. these shed light on the importance and prominence of institutional capacity and financial infrastructure for financial stability. smoothly functioning payment and settlement systems is the first and foremost significant requisite for strengthening financial infrastructure in emerging market economies. the existence of both a stock market backed by a strong capital market and also a bond market in local currency is also essential. another important structural factor is a sound banking system. an adequate legal infrastructure, strong capital structure and confidence - based management are the prerequisites for such a system. distinguished guests, a strong infrastructure is a “ necessary - but - not sufficient ”

with the domestic and foreign demand outlook. consumer inflation undershot the forecasts in the last quarter of 2012 and stood within the uncertainty band ( 3 – 7 percent ) with 6. 2 percent at the year - end ( chart 15 ). this lower - thanenvisaged inflation rate was mainly driven by the developments in unprocessed food prices, which were stated to pose downside risk on inflation in the october inflation report. meanwhile, core inflation indicators were broadly consistent with expectations. chart 15. october 2012 inflation forecasts and realizations ( percent ) * shaded region indicates the 70 percent confidence interval for the forecast. source : turkstat, cbrt. bis central bankers ’ speeches cumulative effects of the previous year ’ s exchange rate and import price movements gradually waned. coupled with the ongoing slowdown in domestic demand, this led to a sustained fall in the annual rate of increase in core goods prices. meanwhile, prices of services remained on a mild track ( chart 16 ). against this backdrop, core inflation indicators maintained a downward trend ( chart 17 ). chart 16. chart 17. prices of core goods and services core inflation indicators sca - h and sca - i ( annual percent change ) ( annual percent change ) source : turkstat. source : turkstat. now, i will touch upon the developments in economic activity on which the inflation forecasts are based besides the short term outlook. third - quarter national income data point that domestic demand conditions remained weak due to private investment demand. private consumption, which displayed an increase for the first time in a protracted period, limited the slowdown in final domestic demand. nevertheless, demand conditions followed a slightly weaker course compared to the projections in the october inflation report ( chart 18 ). last - quarter data indicate a mild pick - up in consumption and investment demand as envisaged. accordingly, output gap forecasts regarding the second half of 2012 are slightly revised downwards compared to the previous report. chart 18. 2012q3 final domestic demand : forecast and realizations ( seasonally adjusted, 2008q1 = 100 ) source : turkstat, cbrt. meanwhile, we estimate that easing financial conditions due to the recent rise in capital inflows may result in a higher - than - expected growth in final domestic demand in the first half of 2013. indicators for orders, loans and other leading indices also support this outlook. bis central bankers ’ speeches accordingly, we based the projections on a stronger domestic demand outlook for the first half