evaluation of macroeconomic developments in turkey

Kibritçioğlu, November 8, 2004, (1/81)

Evaluation of Macroeconomic Evaluation of Macroeconomic Developments in TurkeyDevelopments in Turkeywith special focus on the real exchange rate with special focus on the real exchange rate misalignmentmisalignment

Aykut KibritçioğluAykut KibritçioğluAssociate Professor of EconomicsAnkara University, TurkeyTel.: (+90-312) 319 77 20, ext. 340Fax: (+90-312) 319 77 36E-Mail: [email protected] Homepage: http://dialup.ankara.edu.tr/~kibritci/wiiw.html

Vienna, November 11, 2004


The 1980-1989 TransformationThe 1980-1989 TransformationThe 1980-1989 TransformationThe 1980-1989 Transformation

1978 - 1980:1978 - 1980: Balance-of-payments crisis, productivity slowdown and accelerating inflation

January 1980:January 1980: Announcement of a substantial stabilization and structural adjustment program in order to gradually liberalize the economy

1980 - 1982:1980 - 1982: Domestic financial liberalization

May 1981:May 1981: Abandonment of the fixed exchange-rate regime

June 1984 June 1984 -- August 1989: August 1989: Capital account liberalization and convertibility of the Turkish lira

Post-1989 Macroeconomic DevelopmentsPost-1989 Macroeconomic DevelopmentsPost-1989 Macroeconomic DevelopmentsPost-1989 Macroeconomic Developments

December 1993 - April 1994:December 1993 - April 1994: A major currency crisis and acceleration in the inflation

August 1999:August 1999: Negative macroeconomic impacts of the Marmara earthquake

December 1999:December 1999: Announcement of an exchange-rate-based stabilization program for 2000-2002

November 2000 & February 2001:November 2000 & February 2001: Two successive banking and currency crises and political instability in Turkey

May 2001:May 2001: Announcement of the new economic program


““Turkey suffers from severe macroeconomic Turkey suffers from severe macroeconomic imbalances since late 1970s.”imbalances since late 1970s.”

MACROECONOMIC MACROECONOMIC ENVIRONMENTENVIRONMENT

(1978 – 2001)(1978 – 2001)

Political instability

Volatile economic growth

High and persistent inflation

Inflation-depreciation spiral

Strong “currency substitution”

Volatile short-term capital flows

Large current account deficits

Fragile banking sector

Public sector deficits

External shocks (oil prices, etc.)

Moral hazard problems

REAL SECTOR,REAL SECTOR,BANKING &BANKING &CURRENCYCURRENCYCRISESCRISES

January 1980

1982-1985

Early 1994

November 2000 – February 2001


Research Visit to the WIIW(Vienna, Austria, November 1-15, 2004)Research Visit to the WIIW(Vienna, Austria, November 1-15, 2004)

“An Analysis of Early Warning Signals of Currency Crises in Turkey, 1986-2004”

“Real Exchange Rate Misalignment in Turkey, 1987-2003”

“An Overview of Macroeconomic Developments in Turkey”(with special reference to the AK-Party Era, 2002-04)

http://dialup.ankara.edu.tr/~kibritci/http://dialup.ankara.edu.tr/~kibritci/wiiw.htmlwiiw.html


Particularly the following signals are the most important

early warning signals of currency crises that may occur

within coming 12 months: a falling ratio of exports to imports below 56

percent a sharp worsening in order-expectations of

Turkish exporters a significant (more than 6.8, 5.8 or 5.1 percent)

real appreciation of the Turkish lira against foreign currencies

a real interest rate differential more than –5.1 percent

an annual increase in crude-oil prices which is higher than 55.6 percent

a sharp fall in ISE’s National 100 index that exceeds 17.5 percent per month

Signals Approach for TurkeySignals Approach for Turkey


Real Exchange Rate MisalignmentReal Exchange Rate Misalignmentin Turkey, 1987-2003in Turkey, 1987-2003

Policy makers and many researchers are interested in predicting and monitoring misalignment (M) in the foreign exchange market, because, in many cases, it is closely related to possible current account problems or impending currency crises.

M = ? Definition?



Real exchange rate misalignment (M) measures deviations of actual real exchange rate (A) from its long-run, or equilibrium, level (E): M = (A – E) / E

M > 0 => TL is depreciated in real termsM = 0 => A is a “realistic” exchange rateM < 0 => TL is appreciated in real terms

Attention: A is an “observable” variable, while E is a “non-observable” one!


T w o -G o od sIn ternal Real

Exchan geRate

T hree-G oo dsIn ternal Real

Exchan geRate

In ternalReal ER

Bilateral

M u ltilateral

PPP-BasedExternal Real ER

M u nd ell-F lem ing -T yp e Real ER

(T erm s-o f-T rade)

ExternalReal ER

A ctua lRea l E R

T im e-In d epen den t(co nstan t)

T im e-Varying(variab le)

PPP-BasedEqu ilib rium RER

F BERERDerived from a

S in g le-Eq uationM o del

F BERERDerived from aM u lti-Equ atio n

M o del

F un dam en tals-BasedEqu ilib rium RER

L ong-RunRea l E R

Real Exchange Rates: Conceptual Classification



This study mainly aims to discuss the sensitivity of estimation results to the alternative combinations of actual real exchange rate indices (A) and equilibrium definitions (E), by using quarterly data from 1987 to 2003 for Turkish lira.

The 16 measures of misalignment employed in this study show that the differences between these alternative measures vary between 6.5 and 36.5 percent points, which actually is a very strong indication for high sensitivity of the degree of misalignment to the selected combination of the A and E values.


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1995 = 100

A1 (K&K)

A2 (TNT)

A3 (Reuters)

A4 (SPO)

CBRT-CPI

CBRT-WPI

JPM

Increase: DepreciationDecrease: Appreciation

notincludedin thesampleperiod

Actual Real Exchange Rates (A): Alternatives

1995=100, 1995.I – 2003.III


1995=100, 1987.I – 2003.III

Actual Real Exchange Rates (A): Selected A’s

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1995 = 100A1 (K&K)

A2 (TNT)A3 (Reuters)

A4 (SPO)

Increase: DepreciationDecrease: Appreciation


A1: Trade-Weighted Real Effective Real Exchange Rate 1995=100; for 8 countries; PT Σ eWPIf , PN CPId ; A1 =

PT/PN . Source: SIS, CBRT and IMF’s IFS; authors’ calculations.

A2: Internal (TNT) Real Exchange Rate Index1995=100; derived by using implicit price deflators calculatedfrom GDP accounts: PT ( Px+ Pm) and PN Py-x+m ;A2 = PT / PN .Source: SIS and CBRT; authors’ calculations; deseasonalized.

A3: Reuters’ TRTWIN IndexJune 1999 = 100; for four countries; trade-weighted.Source: Reuters; the inverse of the original index; base year adjusted as 1995=100.

A4: SPO’s Real Effective Real Exchange Rate IndexJan. 1982 = 100; USD: 75% & Euro: 25%; for USA & Euro areaPPI and for Turkey WPI.Source: SPO; the inverse of the original index; base year adjusted as 1995=100.

Actual Real Exchange Rates (A): Properties


Real Exchange Rate Misalignment (M)

A1 A2 A3 A4

E1 M11=(A1–E11)/E11

M12=(A2–E12)/E12

M13=(A3–E13)/E13

M14=(A4–E14)/E14

E2 M21=(A1–E21)/E21

M22=(A2–E22)/E22

M23=(A3–E23)/E23

M24=(A4–E24)/E24

E3 M31=(A1–E31)/E31

M32=(A2–E32)/E32

M33=(A3–E33)/E33

M34=(A4–E34)/E34

E4 M41=(A1–E41)/E41

M42=(A2–E42)/E42

M43=(A3–E43)/E43

M44=(A4–E44)/E44

16 Different Measures of Misalignment According to 4 Different Actual Real Exchange Rate Indices and 4 Different Equilibrium Definitions


-35

-30

-25

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q1

Maximum Misalignment

No Misalignment (Equilibrium)

Minimum Misalignment

M > 0 => Real DepreciationM < 0 => Real Appreciation

Degree of Differences between 16 M Measures


Degree of Real Appreciation of the Turkish liraprior to 1994 & 2001 Currency Crises (%)

Negative signed figures above indicate the degree of real appreciation of the Turkish lira, while positive ones imply a real depreciation. That is, negative-signed figures show to what extent the relevant A index is below its equilibrium level, and vice versa.

M11 M12 M13 M14

1993 (annual average) -18.0 -16.2 -11.1 -12.4

2000 (annual average) -24.1 -16.1 -9.7 6.0

2003.I -12.9 -13.1 -9.7 0.6

2003.II -22.7 -24.3 -17.9 -10.4

2003.III -29.7 -32.6 -22.9 -15.2

2003 (annual average) -21.8 -23.3 -16.8 -8.3

M21 M22 M23 M24

1993 (annual average) -12.5 -10.5 -6.2 -6.3

2000 (annual average) -10.2 -5.0 -5.2 -3.1

2003.I 5.6 6.3 -0.4 -4.5

2003.II -6.0 -6.6 -8.7 -14.2

2003.III -14.1 -16.0 -13.7 -18.1

2003 (annual average) -4.8 -5.4 -7.6 -12.3

M31 M32 M33 M34

1993 (annual average) -15.4 -14.2 -5.8 -4.5

2000 (annual average) -14.0 -8.1 -6.1 -3.2

2003.I -1.4 -4.8 -5.3 -8.4

2003.II -14.7 -18.2 -12.4 -13.9

2003.III -22.0 -26.8 -17.2 -18.5

2003 (annual average) -12.7 -16.6 -11.6 -13.6

M41 M42 M43 M44

1993 (annual average) -15.1 -13.8 -5.2 -4.9

2000 (annual average) -14.5 -8.7 -6.5 -2.9

2003.I -1.6 -4.4 -4.0 -6.7

2003.II -12.8 -16.8 -12.4 -16.7

2003.III -20.7 -25.9 -17.6 -21.1

2003 (annual average) -11.7 -15.7 -11.3 -14.8

The Relation between Misalignment and Currency Crises


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Areu

Aspo

Ajpm

Acbcpi

Acbwpi

Actual Real Exchange Rates (A): Monthly Data


Real Exchange Rate Misalignment (M): Monthly Data

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3.1

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MSPO

MCBC

MCBW

MREU

MJPM

M > 0 => Real DepreciationM < 0 => Real Appreciation


RecentRecentMaMacroeconomiccroeconomicDevelopmentsDevelopments

in Turkeyin Turkey


Governments & Political InstabilityGovernments & Political Instabilityin Turkeyin Turkey, 1969-2004, 1969-2004

1969-2004 = 36 years = 432 months Average period between two general elections = 48

months = 4 years Average life of governments = 15.4 months = 1.3 years

(ICRG=International Country Risk Guide; a declining PR index indicates an increase in the political risk.)

The Frequency of General Elections and Government Changes in Turkey (Jan. 1969 - Dec. 2004)

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Government Changes (28 times) ICRG's Political Risk Index for Turkey General Elections (9 times)


Market for Goods:Market for Goods:Inflation & DisinflationInflation & Disinflation


Turkey suffered from high and persistent inflation since more than three decades. But, finally, it’s declining now...

Annual & Monthly Consumer Price Inflation (%, Feb.1969-Sep.2004)

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monthly

annual


Annual inflation rates fell below 15 percent as end of September 2004. (Official target for Dec. 2004: 12 percent)

Inflationary expectations in the country are also changing in a positive direction.

Annual Changes in Wholesale and Consumer Price Indices (SIS, percent)

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Selected Events WPI CPI


Market for Goods:Market for Goods:Production & Production & ProductivityProductivity


Indicators of Long-Run Growth in Turkey

Turkey’s economic growth performance was highly volatile since 1950.

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Growth in Real GDP ($) Per Capita, %

Population Growth, %

Real GDP (TL) Growth, %

Real GDP ($) per Capita [right axis]

PWT6.1


GDP per capita ($): Turkey & Selected Countries

In an international context, however, Turkey’s economic growth performance is relatively poor.

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UK

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South Korea

Greece

Hungary

Turkey

Romania

PWT6.1


In recent years, growth rate of the real GDP has significantly fluctuated.

The Turkish real sector is recovering from the 2000-2001 crisis, which is one of the four deepest economic crises after 1950.

Annual Real GDP Growth (SIS, percent)

13.4

-12-9-6-30369

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South Korea

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Israel

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Cyprus

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Japan

UK

Industrial Countries

Germany

Greece

Romania

Industrial Production Index (1980=100)

Turkish industrial sector demonstrated a remarkable growth performance since 1980.


Annual increases in the industrial production index sharply fluctuate around an average annual growth of 10 percent, during the AK-Party era.

Annual Increases in the Industrial Production Index (SIS, %)

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mov.ave.


Capacity utilization ratio in manufacturing industry also increased up to the pre-crisis level in recent months.

Capacity Utilization Ratio in Manufacturing Industry (SIS, %)84.8

68707274767880828486

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The manufactuing industry exhibits a remarkable increase in labor productivity.

The reasons for that are still not investigated by economists sufficiently.

Partial Productivity per Worker in Manufacturing Industry (1997=100)

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Labor Market:Labor Market:Employment &Employment &

Real WagesReal Wages


The increases in manufacturing production are not fully accommodated by increases in employment.

Turkey has still to solve the unemployment problem that has been deepened after the 2000-2001 financial crisis.

Employment Index for the Manufacturing Industry (1997=100)

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mov.ave.


Real wages in manufacturing industry declined significantly following the 2000-2001 crisis.

They shrinked about 18 percent during the crisis.

Real-Wage per Hour-Worked in Manufacturing Industry (1997=100)

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Foreign Exchange Foreign Exchange Market:Market:

Exchange Rates, and Exchange Rates, and Currency SubstitutionCurrency Substitution


Since May 1981, Turkey has a relatively flexible exchange rate system. This gradually removed the “black-market” for FX in Turkey.

In 2000, the monthly growth rates of nominal exchange rates were pre-determined to gradually disinflate the economy.

0

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1

66.0

1

68.0

1

70.0

1

72.0

1

74.0

1

76.0

1

78.0

1

80.0

1

82.0

1

84.0

1

86.0

1

88.0

1

90.0

1

92.0

1

94.0

1

96.0

1

98.0

1

00.0

1

02.0

1

04.0

1

-35

0

35

70

105

140

175

210

245BMER / OER (left axis) Annual Increases in OER (right axis)

“Black-Market” Exchange Rates (BMER) vs. Official Exchange Rates (OER)and Annual Increases in OER (1950-2004)


Note that annual growth rate of nominal USD exchange rates turned to negative values between May 2003 and April 2004.

Annual Changes in Nominal Exchange Rates (percent)

5.4

9.9

-30

-15

0

15

30

45

60

75

90

105

120

135

150

1998

.01

1998

.04

1998

.07

1998

.10

1999

.01

1999

.04

1999

.07

1999

.10

2000

.01

2000

.04

2000

.07

2000

.10

2001

.01

2001

.04

2001

.07

2001

.10

2002

.01

2002

.04

2002

.07

2002

.10

2003

.01

2003

.04

2003

.07

2003

.10

2004

.01

2004

.04

2004

.07

2004

.10

Selected Events TL/USD Exchange Rate TL/Euro Exchange Rate


Following the 2000-2001 crisis, gross FX reserves of the Turkish Central Bank increased significantly.

They are now about 38 percent higher than the level of reserves prior to the crisis.

Central Bank's Gross Foreign Exchange Reserves (billion USD)

33.7

15

18

21

24

27

30

33

36

19

98

.01

19

98

.04

19

98

.07

19

98

.10

19

99

.01

19

99

.04

19

99

.07

19

99

.10

20

00

.01

20

00

.04

20

00

.07

20

00

.10

20

01

.01

20

01

.04

20

01

.07

20

01

.10

20

02

.01

20

02

.04

20

02

.07

20

02

.10

20

03

.01

20

03

.04

20

03

.07

20

03

.10

20

04

.01

20

04

.04

20

04

.07

20

04

.10

October 2000 level


There is a tendency towards reverse currency substitution during the AK-Party era.

Government’s success in disinflating the economy and its increasing credibility may significantly be contributing to this process.

Two Indicators of Currency Substitution in Turkey (%)

30

50

70

90

110

130

15019

98.0

1

1998

.04

1998

.07

1998

.10

1999

.01

1999

.04

1999

.07

1999

.10

2000

.01

2000

.04

2000

.07

2000

.10

2001

.01

2001

.04

2001

.07

2001

.10

2002

.01

2002

.04

2002

.07

2002

.10

2003

.01

2003

.04

2003

.07

2003

.10

2004

.01

2004

.04

2004

.07

2004

.10

Selected Events Foreign Exchange Deposits / TL-denominated Deposits (M2Y - M2) / M2


Balance of Balance of Payments and Payments and External DebtsExternal Debts


0

10

20

30

40

50

60

70

80

90

100

110

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Custom Duties / Imports (%) Taxes on Foreign Trade / Imports (%)

History of Taxation in Turkish International Trade in Goods (1925-2002)

Ken

ned

y (196

7)

To

kyo

(1979)

Uru

gu

ay (1986-

1993)

GA

TT

(194

7)

Cu

stom

s Un

ion

with

the E

U

(1996)

Foreign trade liberalization in Turkey is closely associated to Turkey’s relations to the GATT/WTO and the European Union (EU).


Exports to Imports Ratio in Turkey (1950-2004, monthly)

The share of the agricultural products on exports decreased in Turkey, and the volatility of exports to imports ratio in Turkey declined since early 1980s.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

50.0

1

52.0

1

54.0

1

56.0

1

58.0

1

60.0

1

62.0

1

64.0

1

66.0

1

68.0

1

70.0

1

72.0

1

74.0

1

76.0

1

78.0

1

80.0

1

82.0

1

84.0

1

86.0

1

88.0

1

90.0

1

92.0

1

94.0

1

96.0

1

98.0

1

00.0

1

02.0

1

04.0

1

mov.ave.


The developments in the exports to imports ratio show that foreign trade deficits are increasing since early 2002.

Exports to Imports Ratio (SIS, percent, as of 12-monthly totals)

64.4

73.6

4550556065707580859095

19

98

.01

19

98

.05

19

98

.09

19

99

.01

19

99

.05

19

99

.09

20

00

.01

20

00

.05

20

00

.09

20

01

.01

20

01

.05

20

01

.09

20

02

.01

20

02

.05

20

02

.09

20

03

.01

20

03

.05

20

03

.09

20

04

.01

20

04

.05

20

04

.09

manufacturing

total


Export and Import Price Indices(1982=100, monthly averages)

70

80

90

100

110

120

130

1982

.12

1983

.12

1984

.12

1985

.12

1986

.12

1987

.12

1988

.12

1989

.12

1990

.12

1991

.12

1992

.12

1993

.12

1994

.12

1995

.12

1996

.12

1997

.12

1998

.12

1999

.12

2000

.12

2001

.12

2002

.12

2003

.12

2004

.12

External Terms of Trade Export Price Index Import Price Index 1982=100


Goods Composition of Turkish Exports and Imports(1969-2003, ISIC, percent)

Exports Imports

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Agriculture

ManufacturingMining &

Quarrying

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Agriculture

Manufacturing

Mining & Quarrying


0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

Consumption Goods

Intermediate Goods

Inv.G.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

Consumption Goods

Intermediate Goods

Investment Goods

Goods Composition of Turkish Exports and Imports(1969-2003, BEC, percent)

Exports Imports


0

10

20

30

40

50

60

70

80

90

100

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Other Countries

Developing Western Hemisphere

Developing Middle East

Developing Europe

Developing Asia

Developing Africa

EU15

Industrial Countries (excl. EU15)

Country Composition of Turkish Exports (1980-2003, percent)


Country Composition of Turkish Imports (1980-2003, percent)

0

10

20

30

40

50

60

70

80

90

100

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Other Countries

Developing Western Hemisphere

Developing Middle East

Developing Europe

Developing Asia

Developing Africa

EU15

Industrial Countries (excl. EU15)


The increasing deficit in net exports of goods is eliminated by an increasing surplus in net exports of services, and hence the CAB deficits are declining since March 2004.

Current Account Balance: Selected Indicators (SIS, billion USD, monthly)

-2.60

-1.95

-1.30

-0.65

0.00

0.65

1.301

99

8.0

1

19

98

.05

19

98

.09

19

99

.01

19

99

.05

19

99

.09

20

00

.01

20

00

.05

20

00

.09

20

01

.01

20

01

.05

20

01

.09

20

02

.01

20

02

.05

20

02

.09

20

03

.01

20

03

.05

20

03

.09

20

04

.01

20

04

.05

20

04

.09

Selected Events Net Exports of Goods (billion TL)

Net Exports of Goods and Services (billion TL) Current Account Balance (billion TL)


Current Account Balance: Selected Indicators (SIS, billion USD, cumulative)

-21.9

-9.8

-12.3

-24

-20

-16

-12

-8

-4

0

4

8

1998

.01

1998

.04

1998

.07

1998

.10

1999

.01

1999

.04

1999

.07

1999

.10

2000

.01

2000

.04

2000

.07

2000

.10

2001

.01

2001

.04

2001

.07

2001

.10

2002

.01

2002

.04

2002

.07

2002

.10

2003

.01

2003

.04

2003

.07

2003

.10

2004

.01

2004

.04

2004

.07

2004

.10

Selected Events Net Exports of Goods (billion TL)

Net Exports of Goods and Services (billion TL) Current Account Balance (billion TL)

However, the cumulative BoP data shows that the recent improvements have not fully translated into the annual data yet.

In 2003, the CAB/GDP ratio amounted to -2.8%. However, it will possibly climb to -4% in 2004.


-12

-10

-8

-6

-4

-2

0

2

4

6

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Erratic Nature of Net Short-Term Capital Inflows(billion USD, annual data)

capitalcapitalaccountaccount

liberalizationliberalization

capitalcapitalaccountaccount

liberalizationliberalization

19941994crisiscrisis19941994crisiscrisis

2000-012000-01crisiscrisis

2000-012000-01crisiscrisis


The effects of both current and capital account liberalizations realized in the 1980s can roughly be followed by the fluctuations in the CAB to GDP and net short term capital inflows to GDP ratios.

Current Account Balance to GDP & Net Short-Term Capital Inflows to GDP (%)

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

CAB to GDP Net Short-Term Capital Inflows to GDP

currentaccountliberalization

capitalaccount

liberalization


The monthly data shows that the volatility of the CAB to nominal industrial output is significantly lower than that of the net short-term capital inflows to output ratio.

Current Account Balance to Output & Net Short-Term Capital Inflows to Output(January 1999 = 1.0; as of 12-monthly cummulatives)

-2.8

2.11.0

-25

-20

-15

-10

-5

0

5

10

19

98

.01

19

98

.05

19

98

.09

19

99

.01

19

99

.05

19

99

.09

20

00

.01

20

00

.05

20

00

.09

20

01

.01

20

01

.05

20

01

.09

20

02

.01

20

02

.05

20

02

.09

20

03

.01

20

03

.05

20

03

.09

20

04

.01

20

04

.05

20

04

.09

Selected Events Current Account Balance to Output Net Short-Term Capital Inflows to Output


Political Process(Voters, Political Parties &

Bureaucrats)

Political Process(Voters, Political Parties &

Bureaucrats)

““Hot Money” Mechanism in Hot Money” Mechanism in TurkeyTurkey

High Public Sector Deficits

High Public Sector Deficits

High Real International Interest

Rate Differential

High Real International Interest

Rate Differential

Decreasing or Stable Nominal Exchange

Rates

Decreasing or Stable Nominal Exchange

Rates

Net Short-TermCapital Inflows from Abroad

Net Short-TermCapital Inflows from Abroad

interest rate parityinterest rate parity

......

It‘s not only “capital account

liberalization” itself which caused

macroeconomic problems in Turkey

after 1989.

It‘s not only “capital account

liberalization” itself which caused

macroeconomic problems in Turkey

after 1989.

But everything changes,if there is a CC at the door…

But everything changes,if there is a CC at the door…

high inflationhigh inflation

upward pressure on FX rates

upward pressure on FX rates


Years

Cumulative FDI Permits

(million USD)

Annual FDI Permits (million

USD)

Share of Manufacturing

Industry on Authorized FDI

(%)

Number of Foreign Capital

Companies

Total Capital of Foreign Capital

Companies (bill. TL)

Realized FDI Inflows (million

USD)

Realized FDI Outflows (million

USD)

Net FDI Inflows (million

USD)

1980 97 97 91.5 78 283901981 435 338 73.0 109 47400 141 46 951982 602 167 59.0 147 100196 103 48 551983 704 103 86.6 166 147109 87 41 461984 976 271 68.5 235 254775 113 0 1131985 1210 234 60.9 408 464981 99 0 991986 1574 364 53.2 619 707164 125 0 1251987 2229 655 44.9 836 960035 115 0 1151988 3050 821 59.8 1172 1597103 354 0 3541989 4562 1512 62.8 1525 4847832 663 0 6631990 6423 1861 65.2 1856 7943775 684 0 6841991 8390 1967 55.7 2123 13101036 907 97 8101992 10210 1820 70.0 2330 23441214 911 67 8441993 12274 2063 76.0 2554 36737050 746 110 6361994 13751 1478 74.9 2830 62449964 636 28 6081995 16690 2938 68.0 3161 113013790 934 49 8851996 20525 3836 16.7 3582 235971182 914 192 7221997 22204 1678 52.0 4068 458968459 852 47 8051998 23850 1646 61.8 4533 823560554 953 13 9401999 25550 1700 66.1 4950 1446503 813 30 7832000 29027 3477 31.8 5328 3063464 1707 725 9822001 31752 2725 45.7 5841 6184411 3288 22 32662002 33995 2243 39.8 6280 10092737 590 5 585

2003 * 35203 1208 58.8 6511 12605285 414 8 406

FDI inflows into Turkey are far from being sufficient to improve the economy: Only 16.1 billions of USD within 23 years...


In 2003, Turkey’s GDP amounted to 240 billion USD, while its total external debts reached to 147 billion USD.

95 out of 147 billion USD amounting total debts are created solely by the public sector.

Selected Indicators of External Debts of Turkey (percent)

61.9

53.9

17.6

0102030405060708090

1998

Q1

1998

Q2

1998

Q3

1998

Q4

1999

Q1

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

2003

Q3

2003

Q4

2004

Q1

2004

Q2

2004

Q3

2004

Q4

Selected Events Public Sector's Share on Total Debts Total External Debts to GDP Short-Term to Total Debts


The ratio of international reserves to short-term external debts increased significantly after the 2000-2001 financial crisis, but in the AK-Party era it declined again slightly.

Reserves vs. External Debts (percent)

30.729.4 36.8

113.3

250.5

174.1

020406080

100120140160180200220240260280

1998

Q1

1998

Q2

1998

Q3

1998

Q4

1999

Q1

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

2003

Q3

2003

Q4

2004

Q1

2004

Q2

2004

Q3

2004

Q4

Selected Events Net International Reserves to Total External Debts

Central Bank's FX Reserves to Public Sector's External Debts Net International Reserves to Short-Term External Debts


Public Sector:Public Sector:Deficits and DebtsDeficits and Debts


The PSBR is a better indicator of the public sector in Turkey because it also covers the non-CB public institutions.

The PSBR is diminishing since three years, while the non-interest PSBR is improving.

Public Sector Borrowing Requirement (PSBR) and Consolidated Budget Balance (CBB)

-18

-15

-12

-9

-6

-3

0

3

6

9

1219

75

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Non-interest PSBR to GDP PSBR to GDP

Non-interest CB to GDP CB to GDP


Non-interest (primary) consolidated budget balance (CBB) seems to be stabilized with respect to nominal output growth, while the CBB (incl. interest payments) is diminishing since late 2003 again.

Cumulative Consolidated Budget Balance / Average Nominal Industrial Production

-150

-125

-100

-75

-50

-25

0

25

50

7519

98.0

1

1998

.04

1998

.07

1998

.10

1999

.01

1999

.04

1999

.07

1999

.10

2000

.01

2000

.04

2000

.07

2000

.10

2001

.01

2001

.04

2001

.07

2001

.10

2002

.01

2002

.04

2002

.07

2002

.10

2003

.01

2003

.04

2003

.07

2003

.10

2004

.01

2004

.04

2004

.07

2004

.10

Selected Events Primary Balance to Nominal Output CB Balance to Nominal Output


As a result of both the successful disinflationary policies and the Government’s increasing political credibility, Turkish Treasury pays now lower interest rates in domestic borrowing.

Compound, Weighted Auction Interest-Rates (Treasury, percent) & Confidence Index

25.4

193.7

15.1

-20

0

20

40

60

80

100

120

140

160

180

200

1998

.01

1998

.04

1998

.07

1998

.10

1999

.01

1999

.04

1999

.07

1999

.10

2000

.01

2000

.04

2000

.07

2000

.10

2001

.01

2001

.04

2001

.07

2001

.10

2002

.01

2002

.04

2002

.07

2002

.10

2003

.01

2003

.04

2003

.07

2003

.10

2004

.01

2004

.04

2004

.07

2004

.10

Selected Events Nominal Reel (ex ante) Reel (ex post) Real Sector Confidence Index


Public sector’s domestic debts increased sharply following the 2000-2001 crisis, both in nominal and real terms.

Domestic Debt Stock of the Public Sector (billion TL)

0

50000000

100000000

150000000

200000000

25000000019

98.0

1

1998

.05

1998

.09

1999

.01

1999

.05

1999

.09

2000

.01

2000

.05

2000

.09

2001

.01

2001

.05

2001

.09

2002

.01

2002

.05

2002

.09

2003

.01

2003

.05

2003

.09

2004

.01

2004

.05

2004

.09

Selected Events nominal, billion TL real, billion TL


Public sector’s domestic debts in terms of USD are also increasing sharply...

Domestic Debt Stock of the Public Sector (billion USD)

20

40

60

80

100

120

140

160

19

98

.01

19

98

.05

19

98

.09

19

99

.01

19

99

.05

19

99

.09

20

00

.01

20

00

.05

20

00

.09

20

01

.01

20

01

.05

20

01

.09

20

02

.01

20

02

.05

20

02

.09

20

03

.01

20

03

.05

20

03

.09

20

04

.01

20

04

.05

20

04

.09


Public sector’s domestic debts seem to be stabilized with respect to changes in industrial production index within the last two years.

Ave. Domestic Debt Stock of the Public Sector to Ave. Industrial Output (%)

80100120140160180200220240260

19

98

.01

19

98

.05

19

98

.09

19

99

.01

19

99

.05

19

99

.09

20

00

.01

20

00

.05

20

00

.09

20

01

.01

20

01

.05

20

01

.09

20

02

.01

20

02

.05

20

02

.09

20

03

.01

20

03

.05

20

03

.09

20

04

.01

20

04

.05

20

04

.09


Since the latest general elections in November 2002, the public sector’s domestic debts increased more than 65 percent in terms of USD, while its external debts expanded only around 15 percent.

Domestic and External Debts of the Public Sector (billion USD)

45.2

84.9

140.4

53.4 79.9

92.2

0

20

40

60

80

100

120

140

160

180

1998

Q1

1998

Q2

1998

Q3

1998

Q4

1999

Q1

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

2003

Q3

2003

Q4

2004

Q1

2004

Q2

2004

Q3

2004

Q4

Selected Events Domestis Debts of the Public Sector External Debts of the Public Sector


Financial SectorFinancial Sector


Feb. '02

Aug. '97

Feb

. '01

Sep. '88

Feb. '87

Nov. '83

Aug. '82

May '80

Jun. '79

Dec. '82

Jan. '86

Nov. '90

No

v. '9

1

Oct. '93

Apr. '94

Oct. '94

Jul. '99

Oct

. '00

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5Ja

n-79

Jan-

80

Jan-

81

Jan-

82

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

High Fragility BSF3 BSF2

Banking Sector Fragility in TurkeyBanking Sector Fragility in TurkeyBanking Sector Fragility in TurkeyBanking Sector Fragility in Turkey

Turkish banking sector experienced difficulties many times within the last 25 years, as a result of their own excessive risk-taking behavior in the past.

For Methodology: see Kibritçioğlu (2003), “Monitoring ...”.


The Turkish banking sector is recovering from the 2000-2001 crisis, and according to the BSF index, it is taking excessive risk again...

(The BSF3 index is a weighted average of real annual changes in foreign liabilities,

claims on private sector, and total deposits.)

Banking Sector Fragility Index

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

19

98

.01

19

98

.05

19

98

.09

19

99

.01

19

99

.05

19

99

.09

20

00

.01

20

00

.05

20

00

.09

20

01

.01

20

01

.05

20

01

.09

20

02

.01

20

02

.05

20

02

.09

20

03

.01

20

03

.05

20

03

.09

20

04

.01

20

04

.05

20

04

.09

For Methodology: see Kibritçioğlu (2003), “Monitoring ...”.


The recent developments in the FL to FA ratio indicate that the external open (short) position of Turkish banking system is decreasing now...

Deposit Banks: Foreign Liabilities to Foreign Assets (percent)

708090

100110120130140150160

19

98

.01

19

98

.05

19

98

.09

19

99

.01

19

99

.05

19

99

.09

20

00

.01

20

00

.05

20

00

.09

20

01

.01

20

01

.05

20

01

.09

20

02

.01

20

02

.05

20

02

.09

20

03

.01

20

03

.05

20

03

.09

20

04

.01

20

04

.05

20

04

.09

Banking Sector Fragility in TurkeyBanking Sector Fragility in TurkeyBanking Sector Fragility in TurkeyBanking Sector Fragility in Turkey


The ratio of 1-month to 12-month deposit interest rates exhibits a different pattern after the 2000-2001 financial crisis: It is very close to 100 percent now...

Weighted Deposit Interest Rates: Ratio of 1-Month to 12-Months Interest Rates (percent)

75

95

115

135

155

175

195

215

235

19

98

.01

19

98

.05

19

98

.09

19

99

.01

19

99

.05

19

99

.09

20

00

.01

20

00

.05

20

00

.09

20

01

.01

20

01

.05

20

01

.09

20

02

.01

20

02

.05

20

02

.09

20

03

.01

20

03

.05

20

03

.09

20

04

.01

20

04

.05

20

04

.09


1

10

100

1000

10000

10000019

86.0

1

1987

.01

1988

.01

1989

.01

1990

.01

1991

.01

1992

.01

1993

.01

1994

.01

1995

.01

1996

.01

1997

.01

1998

.01

1999

.01

2000

.01

2001

.01

2002

.01

2003

.01

2004

.01

January 1986 = TL 1 January 1986 = USD 1

Istanbul Stock Exchange’s National 100 Istanbul Stock Exchange’s National 100 IndexIndex

Istanbul Stock Exchange’s National 100 Istanbul Stock Exchange’s National 100 IndexIndex


-100

0

100

200

300

400

500

600

700

800

900

1987

.01

1988

.01

1989

.01

1990

.01

1991

.01

1992

.01

1993

.01

1994

.01

1995

.01

1996

.01

1997

.01

1998

.01

1999

.01

2000

.01

2001

.01

2002

.01

2003

.01

2004

.01

January 1986 = TL 1 January 1986 = USD 1

Annual Increases in ISE’s National 100 IndexAnnual Increases in ISE’s National 100 IndexAnnual Increases in ISE’s National 100 IndexAnnual Increases in ISE’s National 100 Index


Inflation and interest rates are still declining gradually.

In the Turkish manufacturing industry, the labor productivity is increasing and real wages remain low, while the industrial production index is rising again.

There is still a deep unemployment problem in Turkey. Production increases are not fully translated into employment increases yet.

Excessive risk taking behavior of the banking system (in terms of the BSF index) is expected to decline towards historical averages.

Real effective exchange rates indicate a slight depreciation of the Turkish lira.

Further structural reforms, stronger privatization efforts and continuity in political stability are needed in the country.

In Turkey, it is expected that a decision of the heads of EU governments next month in favor of the start of the accession talks for full-membership in early 2005 will positively affect the Turkish economy, particularly in terms of the FDI inflows.

Concluding RemarksConcluding RemarksConcluding RemarksConcluding Remarks

evaluation of macroeconomic developments in turkey

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