macroeconomic outlook and monetary policy in turkey remarks by murat cetinkaya governor central bank of the republic of turkey at j. p. morgan turkey macro and credit conference london 9 february 2017 dear participants, my speech will try to elaborate on the recent macroeconomic outlook, monetary policy framework and the coordinated policy actions to support the fundamentals of the turkish economy. 1. macroeconomic outlook turkish economy was hit by concurrent shocks in recent years. geopolitical tensions, global shocks, security related issues and a failed coup attempt have created significant policy challenges. despite the intensity and size of the shocks in recent years, the growth rate has been quite robust until recently, outpacing emerging market average by a large margin ( figure 1 ). the resilience of growth in recent years can be attributed to factors such as prudent macroprudential policies reducing the sensitivity of economic activity to capital flow volatility, dynamic domestic market, market flexibility of exports, and the fall in energy prices. figure 1. growth rates in turkey and emerging economies ( percentage change, annual ) developing countries excluding china and india turkey * - 2 12. 16 09. 16 06. 16 03. 16 12. 15 09. 15 06. 15 03. 15 12. 14 09. 14 06. 14 03. 14 12. 13 09. 13 06. 13 03. 13 12. 12 09. 12 06. 12 03. 12 - 4 * forecast for 2016 q4. developing countries excluding china and india : brazil, chile, colombia, czechia, hungary, indonesia, malaysia, mexico, morocco, peru, philippines, poland, romania, russia, s africa, thailand, turkey, ukraine. source : bloomberg, cbrt. however, the growth has posted a marked slowdown in the third quarter of 2016, following the failed coup attempt. gdp has contracted year - on - year terms for the first time since the global financial crisis. the weakness in economic activity was driven by a sharp fall in domestic demand and the sizeable drop in tourism revenues ( figure 2 ). figure 2. annual gdp growth and contributions ( percentage points ) net exports final domestic demand other * gdp - 1 - 3 09. 16 06. 16 03. 16 12. 15 09. 15 06. 15 03. 15 12. 14 09. 14 06. 14 03. 14 12. 13 09. 13 06. 13 03. 13 12. 12 09. 12 06. 12 03. 12 12. 11

creation of a european currency will powerfully affect the turkish economy from now on. assuming that the euro is accepted by the international financial markets as a stable reserve currency, the medium and long term will see the euro ’ s share in turkey ’ s financial accounts continue to increase. i personally think that acceptance of the euro in daily life and financial transactions will come faster in turkey than in other countries, for three reasons : the large numbers of turkish citizens living in europe, the large volume of trade and tourism transactions with europe, and the consistent stability of the deutsche mark for 20 years and more. the introduction of the euro has reduced transaction costs and removed the risks connected with more volatile currencies, increasing the incentives for european capital markets to rely more on direct financing. a deep, liquid, and efficient euro bond market will be welcomed by turkish sovereign and private bond issuers. moreover, the volume of transactions in the euro bond market is expected to be much larger than today. increased acceptance of euros in turkish trade and financial transactions, of course combined with an environment of low inflation, will make direct investments in turkey more attractive to european firms. turkey ’ s presently very small total of direct foreign investments from european investors would surely be encouraged to grow by the disappearance of foreign exchange risks. under such circumstances, both turkish and european banks could be expected to increase their merger and acquisition activities. for the short term, the most important goal is to promote the euro as an international currency. success will crucially depend on the new currency ’ s acceptance by the people of the emu countries and other countries as well. the faster this acceptance can be achieved, the greater will be the euro ’ s strength as a currency in the medium and longer term. unfortunately, we cannot say this has already happened. its depreciation against the us dollar has not promoted increased confidence in the euro. this is probably a good moment to describe how the fluctuations in the euro / dollar exchange rate have affected the turkish economy. a low valuation of the euro would affect our economy through two channels : first, through the euro ’ s role in our new exchange rate system ; and second, through the large share of eu countries in our foreign trade. at the beginning of the year 2000, turkey launched a comprehensive disinflation program based on a preannounced path of the turkish lira against a currency basket consisting of “ 1 us dollar plus 0. 77 euros. ” mainly by taking advantage of the remarkable pass - through