Title: MEHMET Y
1GLOBAL FINANCIAL TURBULENCE AND ITS IMPACTS
MEHMET YÖRÜKOGLU CENTRAL BANK OF TURKEY DEPUTY
GOVERNOR
October 2008
2Contents
- Reasons behind the turbulence,
- Measures taken so far
- Impacts of the turmoil on
- III.1. Emerging markets,
- III.2. Turkey
- IV. Prospects.
3Reasons Behind the Turmoil
Real Policy Rate in USA (January 1981 September
2008, percentage)
- Loose Monetary Policies
- As a result of low real interest rates in the
developed economies, especially in USA, during
the period 2001 2005, investors initiated
leveraged transactions and used risky instruments
in order to gain high yields. - Lack of Transparency and Supervision Parallel
to the widespread use of originate-to-distribute
business models, financial innovation and
technolobical advancements, complex instruments
were used widely, which in turn complicated
tracing of the investments and risk analysis of
these investments. - Problems in the Housing Sector
- Decline in house prices in USA that began in the
first quarter of 2006 adversely affected
household consumption demand and brought about
increase in the mortgage foreclosure rate.
Soruce FED, Bureau of Labor Statistics
Housing Price Index (January 2001 July 2008,
annual percentage change)
OFHEO
CaseShiller
Source OFHEO, StandardPoors
4Reasons behind the Turbulence
- What triggered the crisis?
- Increased delinquency rate in sub-prime
mortgages and therefore decline in
mortgage-backed securities (MBS). - Big exposures of financial institutions which
also have high leverages to these MBS. - Increased risk appetite in the face of low real
interest rates - Creation of complex financial instruments in
search of higher profitability - Originate to distribute model and extensive use
of off-balance sheet instruments - Imprudent credit decisions
- Erosions of capital due to financial losses
- Cut back in loan supply
5Reasons behind the Turbulence
- Uncertainty in financial markets transformed
into a trust problem between financial
institutions -
- In spite of correcting actions of regulatory
bodies, arising financial weaknesses of large
financial institutions such as Lehman Brothers,
Bear Stearns, Merrill Lynch, Fannie Mae, Freddie
Mac, Washington Mutual Fund and AIG.
6Global Losses
- As of October total losses that the international
financial system has suffered reached 659 billion
US Dollars. - IMF revised its global loss forecast from 945
billion US Dollars to 1.4 trillion US Dollars. - During the same period banks were able to raise
up equity by 638 billion US Dollars. - Due to the financial turmoil banks faced
significant losses and hence they tightened the
credit standards significantly.
Losses in the Banking and Financial Sector
(billion US dollars)
Ratio of Banks Reporting Tightening Credit
Standards to the Total Banks (2006 Q1 2008
Q3, quarterly, percentage)
World
USA
Europe
Europe
USA
Asia
Source Bloomberg
Source FED, ECB
7Measures taken so far
- Coordinated response of Central Banks by
providing liquidity support - Bail outs from U.S. and European governments
- Intervention of US government by its fiscal
policy - Capital injection and assets expansion by
accepting as collateral, - Encouraging some banks to fund the troubled
banks by secured funding, - Paying interest on depository institutions
required and excess reserve balances (by Fed), - Guarantee on bank deposits and/or other
liabilities in USA and Europe
8Impacts of the Turmoil
- Volatility index (VIX) has reached its highest
level of the last 19 years, surpassing previous
highs seen during the Asian crisis, dot-com bust
and after the 11 September attacks. - TED spread, an indicator of credit risk in the
economy, used to range around 50 basis points
prior to the start of the turmoil but lately the
spread has widened to around 460 basis points.
Difference Between LIBOR and US Treasury Bill (3
month) (1 January 2007 6 October 2008, basis
points)
Volatility Index (2 January 1990 20 October
2008)
Long-term average
Source Bloomberg
Source Bloomberg
9 Foreign Exchange Rates and Risk Indicators
- Since the beginning of August fall in the value
of Turkish Lira against US Dollars is close to
the average depreciation rate of emerging
economies currencies. - In the second quarter of 2008 Turkeys risk
premium increased more than that of other
developing countries. Yet, a marked correction
has been observed since July 2008.
Change in the Spot Foreign Exchange Rate vs
USD (between 1 August 2008 and 16 October 2008,
percent)
Risk Indicators (2 January 2008 20 October
2008, basis points)
EMBI
EMBI Turkey
(Turkey) (EMBI)
Source JP Morgan
Source OANDA
10Potential Impacts on Turkish Economy
- Banking and Financial Sector
- Capital Inflows and Current Account Deficit
- Economic Activity
- Exchange Rate and Inflation
11Impacts on Turkish Banking and Financial Sector
- Until now, limited effects on banking and
financial sector due to, - Considerable improvement in macroeconomic
stability, - Prudent macroeconomic policies,
- Conservative Regulation and Supervision,
- Tools used by Central Bank of Turkey to calm the
markets, such as reintroduction of FX deposit
market, - Tight fiscal policy and monetary policies.
12 Banking Sector
Net FX Position of the Banking Sector (2000 Q1
2008 Q3, billion USD)
- Compared to earlier periods Turkish banking
sectors resilience has improved remarkably. - The sector does not hold a noteworthy FX short
position. - Net FX positions of the banks are at a low level
compared to their equity capital.
- The capital adequacy ratio is well above the
legal limit and the EU average of 12.1. - Banks short-term FX liquidity and total
short-term liquidity adequacy ratios remain above
the legal limits of 80 and 100, respectively. - Strong capital structure and high profit to
equity ratios curtail banking sectors
vulnerability to the financial turmoil.
- As of 19 September 2008
- Source BRSA, CBT
Capital Adequacy Ratio (December 2005 July
2008, percent)
Operational risk included
Target rate is 12
Legal limit is 8
Source BRSA, CBT
13 Banking Sector
Short-Term FX Liquidity Ratio (6 July 2007 12
September 2008, percent)
Total Short-Term Liquidity Ratio (6 July 2007
12 September 2008, percent)
0-7 days
0-7 days
Up to 1 month
Up to 1 month
Legal limit is 100
Legal limit is 80
Source BRSA, CBT
Source BRSA, CBT
14 Banking Sector
Ratio of Non-Performing Loans to Total Loans
(2003 vs. 2007, percent)
Developing Countries
Turkey
Developed Countries
Developing countries Argentina, Brazil,
Bulgaria, Czech Republic, Croatia, Hungary,
Latvia, Lithuania, Poland, Romania, Russia,
Slovakia, Ukraine Developed countries France,
Germany, Italy, United Kingdom, USA Source IMF,
CBT
15Bank Credits
Business Loans and Retail Loans(1 January 2006
5 September 2008, year-on-year percentage change)
Retail Loans
Business Loans
Source CBT
16 Households
FX Debt of Households ((2003 September
2008, percent of total consumer loans)
Total Household Liabilities (2004 2006, percent
of GDP)
European Union
Eastern Europe
Turkey
Source CBT
Source ECB, CBT
17Impacts on Turkish Banking and Financial Sector
Banking sector is still quite small with a strong
potential to grow.
- Turkey (A) shows the data of 2007 including
participation banks Turkey (B) shows the data of
June 2008 including participation banks. For EU
members, the data of 2007 is used. - Source Turkstat, BRSA-CBRT, ECB.
18Impacts on Turkish Banking and Financial Sector
Source BRSA,CBRT, Association of Capital Market
Intermediary Institutions, CMB (1) Figures are
as of June 2008.
- Financial system in Turkey is bank dominated
- No toxic financial instruments in banks
portfolio - Shallow markets for complex financial
derivatives.
19 Impacts on Turkish Banking and Financial
Sector Financial Stability Index
Source CBRT
- FSI is a composite index that is used as a
measure of the financial soundness. - It indicates a sound Turkish banking sector.
20Inflation Developments in Turkey
- Thanks to achievements in price stability,
Turkeys ranking in terms of inflation has
improved. - While in the 1997-2003 period, Turkey was among
the 10 countries with highest inflation in the
world, as of September she declined to the 62th
position.
Turkey in the Global Inflation Ranking (1997
2008)
Inflation in Turkey (1980 2008)
Inflation Targeting Regime
Most recent data as of September 2008 The total
number of countries is 155. The ranking is in
descending order. Source IMF, TURKSTAT, CBT
2008 forecast of the Central Bank of
Turkey Source IMF, TURKSTAT, CBT
21 Effects on the Turkish Economy Inflation
- As a result of global crisis commodity prices,
especially food and energy prices, declined
drastically. - Falling commodity prices, moderating domestic
demand and depreciation of Turkish Lira will have
favorable effects on the current account deficit
and an improvement in the current account deficit
is expected in the months to come.
Current Account Balance and The Effect of Energy
Prices on the Current Account Deficit (2002
2007, percent of GDP)
Wheat Price (1 January 2007 9 October 2008,
US Dollars/Bushel)
Source Chicago Board of Trade
Oil Prices (NYMEX WTI, 1 January 2007 9
OCtober 2008, US Dollars)
Current Account Deficit
Keeping energy prices constant at 2002 levels.
Source TURKSTAT, CBT
Source Bloomberg
22 Effects on the Turkish Economy Inflation
- Favorable developments in commodity prices and
deterioration in the domestic demand suggest that
inflation will improve in the following months. - However, recent depreciation of Turkish Lira may
create upward pressure on the inflation rate in
the short-run. - The items outside the domain of monetary policy
such as food prices, food and energy prices
prices contributed to annual inflation by 41 in
2004-2006 period, whereas their contribution rose
to 63 in September 2008.
Components of Annual Inflation (percentage share)
September 2008
2004 2006 Average
Food and Energy
Food and Energy
Other Goods and Services
Other Goods and Services
Food Food and Non-Alcoholic Beverages
Tobacco Tobacco Products and Alcoholic
Beverages Source TURKSTAT, CBT
23Balance of Payments Current Account
Domestic Savings and Investments (2001 2007,
percent of GNP)
Investments
Domestic Savings
1987 based series
Source SPO Program for 2008, CBT
24Balance of Payments Current Account
Current Account Balance and The Effect of Energy
Prices on the Current Account Deficit (2002
2007, percent of GDP)
Current Account Deficit Excluding the Effect of
Energy Prices
Current Account Deficit
Keeping energy prices constant at 2002 levels.
Source TURKSTAT, CBT
25Capital Flows
Financing of the Current Account (2000 2008,
percent of current account deficit)
Financing of the Current Account (2000 2008,
percent of current account deficit)
Long Term Credits 2
Non-Bank Private Sector Credits 2
Portfolio Investments 4
Foreign Direct Investment 3
Foreign Direct Investment 3
Bank Credits 1
Equities 5
Short Term Credits 1
Public Sector Borrowing 4
Last 12 months as of 2008 May 1 Short Term
Credits Net short term loans of the banking
sector, non-bank private sector and the public
sector, plus trade credits 2 Long Term Credits
Net long term loans of the banking sector,
non-bank private sector and the public sector 3
Foreign Direct Investment Foreign direct
investment inflows 4 Portfolio Investment
Purchases of equities and securities by
nonresidents and deposits of nonresidents
Last 12 months as of 2008 May 1 Bank Credits
Short and long-term borrowing of the banking
sector 2 Non-Bank Private Sector Credits Short
and long term borrowing of the non-bank private
sector, plus trade credits 3 Foreign Direct
Investment Foreign direct investment inflows 4
Public Sector Borrowing Purchases of government
securities (including Eurobonds) by nonresidents,
credits to central government and to the Central
Bank (including IMF credits) 5 Equaities
Purchases of equities by nonresidents
Source CBT
Source CBT
26 Foreign Direct Investment
Foreign Direct Investment (Annual, billion US
dollars)
Foreign Direct Investment Inflows (2006, billion
US dollars)
China 83.5
Hong Kong 60.0
Russia 52.5
Singapore 24.1
Turkey 22.0
Mexico 24.7
Brazil 34.5
India 22.9
Romania 9.7
Chile 14.4
Source UNCTAD
Source CBT
27Economic Growth
Cumulative GDP Growth (Percentage change,
2001-2007)
Source TURKSTAT, IMF World Economic Outlook
28Productivity and Wages
Productivity, Real Wages and Real Unit Wages in
the Manufacturing Industry(1998 Q4 2008 Q1,
per hour worked, 4-quarter moving average,
logarithmic scale)
Productivity Index (lhs)
Real Wages Index(rhs)
Real Unit Wages Index(rhs)
Source TURKSTAT, CBT
29Export Performance
Turkeys Share in World Exports (1950 2007,
percent)
Source WTO, CBT
30Foreign Trade
Real Imports and Real Exports Indices (1982
2007, 2003 100)
Imports and Exports Growth (January 2006 August
2008, 12-month rolling year-on-year change, in
USD, percent)
Exports
Imports
Imports
Exports
Exports
Imports (ex-oil)
SourceTURKSTAT, CBT
SourceTURKSTAT, CBT
31Export Performance
Composition of Turkeys Exports (top 8 export
sectors, billion USD)
Apparel and clothing
Textile yarn, fabrics
Food and live animals
Industrial Machinery
Chemicals and petroleum products
Iron and steel
Electrical machinery and appliances
Motor vehicles
12-month rolling as of May 2008 Source
TURKSTAT, CBT
32Public Sector
- Public sector has become more resilient to
external shocks due to tight fiscal policy that
has been implemented since 2001. - The Treasury maintains a high level of FX
reserves with the aim of minimizing any liquidity
risk that might arise in cash and debt
management.
Public Sector Net Debt Stock / GDP (2000 2008
Q2, percent of GDP)
EU Defined General Government Budget Deficit
(2001 2007, percent of GDP)
Total Net Debt Stock
Net Domestic Debt
Net Foreign Debt
Maastricht Criteria 3.0
Source Treasury
Source Treasury
33Central Bank Foreign Exchange Reserves
Ratio of Short Term Debt to Central Bank FX
Reserves (1996 2008 Q1, percent)
Central Bank FX Reserves (2002- September 2008,
billion USD)
Source CBT
Source CBT
34Prospects for World Economy
- Challenges for the world economic outlook
- Coupling,
- Further squeeze in liquidity and increase in
funding cost, - Further deterioration of expectations and
confidence in - international markets,
- Slowdown in world economic growth,
- Unemployment,
- New architecture of financial markets
- Consolidation
- Reshaping of financial institutions
- Need for effective regulation and supervision,
- Coordination and cooperation among both
- local and cross border authorities.
35Thank you.
MEHMET YÖRÜKOGLU CENTRAL BANK OF TURKEY DEPUTY
GOVERNOR
October 2008
36 Public Sector
General Budget Primary Expenditures and Tax
Revenues (March 2007 August 2008, year-on-year
change, 3-month moving average, percent)
Central Government Primary Balance (Program
defined, 3-month total, 2006 Q1- 2008 Q3, TRY
billion)
2008
2007
Tax Revenues
Primary Expenditures
July-August average Source Undersecretariat of
Treasury
Source Ministry of Finance
37 Corporate Sector
- The FX position of the non-banking sector was USD
73.8 billion as of the first quarter of 2008. - Short term net FX position of the real sector is
about 2 billion USD. - Maturity composition of the real sector debt has
extended considerably.
Maturity Composition of the Long-term External
Debt of the Corporate Sector (as of July 2008,
billion USD)
FX Position of the Corporate Sector (2005
2008 Q1, billion USD)
FX Liabilities
FX Assets
Net FX Position
Days to maturity Source CBT
Source CBT
38Households
- In Turkey, the practice of variable interest
rate for consumer loans is limited. FX
denominated loans are not extended to consumers
and companies with no FX income. FX-indexed
consumer loans make up only 4.1 of total amount
of consumer loans. - Household indebtedness is at a low level compared
to European Union and Eastern Europe countries..
Ratio of FX-indexed Consumer Loans to Total
Consumer Loans (2003 September 2008, percent)
Ratio of Household Liabilities to GDP
(2004-2006, percent)
European Union
Eastern Europe
Turkey
Source CBT
Source ECB, CBT
39Commercial Activities
- Parallel to the economic activities that gained
pace between 2002 and 2007, the number of bad
checks increased in line with the number of bank
checks used.The ratio of the amount of bad checks
to the total checks submitted to the clearing
house, which was 6.8 in 2003, declined to 5.5
in 2007. This ratio stood at 5.1 as of July
2008. - Likewise, the ratio of protested bills to
commercial loans (an indicator of commercial
activities) declined to 2.9 in Augustos 2008
after reaching 11 in 2002.
- Ratio of the amount of Protested Bills to (12
months, cumulative, real) Total Commercial Loans - (January 1999 August 2008, real, percent)
Ratio of Bad Checks to the Total Amount of
Checks Submitted to the Clearing House
(2003-2008, percent)
January-July average SourceCBT, ICHC
SourceCBT
40Inflation and Policy Rates
- Developing countries that followed a tight
monetary policy in 2007 were in better position
to resist inflationary pressures in 2008 as
compared to countries that followed accomodative
monetary policies.
Change In Inflation Rate and Real Policy Rates In
Developing Countries
Source Central Banks