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CENTRAL BANK OF

THE REPUBLIC OF TURKEY

2010-III
Contents
1. OVERVIEW 1

1.1. Inflation Developments 2

1.2. Monetary Policy 4

1.3. Outlook for Inflation and Monetary Policy 5

1.4. Risks and Monetary Policy 11

2. INTERNATIONAL ECONOMIC DEVELOPMENTS 13

2.1. Global Growth 14

2.2. Commodity Prices 16

2.3. Global Inflation 17

2.4. Financial Conditions and Risk Indicators 18

2.5. Global Monetary Policy Developments 21

3. INFLATION DEVELOPMENTS 29

3.1. Inflation 29

3.2. Expectations 35

4. SUPPLY AND DEMAND DEVELOPMENTS 39

4.1. Gross Domestic Product Developments and Domestic Demand 39

4.2. External Demand 43

4.3. Labor Market 46

5. FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION 59

5.1. Financial Markets 59

5.2. Financial Intermediation and Loans 68

6. PUBLIC FINANCE 75

6.1. Budget Developments 76

6.2. Developments in Debt Stock 80

7. MEDIUM TERM PROJECTIONS 87

7.1. Current State of the Economy, Short-Term Outlook and Assumptions

7.2. Medium-Term Outlook

7.3. Risks and Monetary Policy

Boxes
Box 2.1. Determinants of the Monetary Stance in Emerging Economies During the Second
Quarter of 2010 25

Box 3.1. Underlying Inflation 37

Box 4.1. Capacity Utilization Rates for Domestic and External Markets 49

Box 4.2. Observations on Employment Conditions 52

Box 4.3. A Comparison of Non-Farm Employment and Production During Two Crisis Episodes:
2000-2001 and 2008-2009 54

Box 6.1. Developments in Budget Deficit and Public Debt Stock: An International Comparison 84

Box 7.1. Monetary Policy Stance During September 2008 – July 2010 96
Central Bank of the Republic of Turkey

1. Overview
Global economic activity continued to recover in the second quarter.
However, recent developments confirmed that the global recovery remains
fragile. Rising concerns regarding the debt sustainability of several Southern
European countries have caused risk appetites to follow a volatile and
downward trajectory, which in turn, have triggered capital outflows from
emerging markets and increased risk premiums. While risk premium indicators
have increased, particularly across some European countries, during this period,
the increases in emerging market risk premiums—especially in Turkey—were
limited (Graph 1.1).

Graph 1.1. Risk Premium Indicators


5-Year CDS Rat e Changes 1000
(Augus t 20 08=1)
900
6,5 EMBI+ Turkey
800
5,5 Turkey EMBI+
700
Latin America
4,5 Asia 600
Europe 500
3,5

400
2,5
300
1,5
200
0,5
100
08 08

100 8

02 09

0 609

08 09

100 9

1 209

02 10

0 610
1208

0409

0410

0208

0608

0209

0210
1007

1008

0609

1009

0610

Source: Bloomberg, CBRT.

The sovereign debt-related problems in Europe have once again


confirmed that downside risks regarding global economy activity remain. This
development led many central banks to adopt a monetary policy stance with an
increased emphasis on downside risks, especially in advanced countries.
Accordingly, the central banks of the advanced economies have underscored
that the current monetary policy stance would be kept accommodative for a
long period, while emerging economies have also adopted similar changes in
their rhetoric through policy statements. These developments have postponed
the expectations regarding the timing of policy normalization (Graph 1.2).

Inflation Report 2010-III 1


Central Bank of the Republic of Turkey

Graph 1.2. Expected Policy Rates at 2010 Year-end

12
G3 Asia-Pacific Latin America CEEMEA

10

0
Philippines
Thailand

Colombia

S. Africa
China

Brazil
India

Indonesia

Hungary
Mexico

Turkey

Poland
USA

Japan

Czech Rep.
Euro Area

S. Korea

Peru
March 16 July 23

Source: Bloomberg.

1.1. Inflation Developments

Developments during the second quarter of 2010 have confirmed the


CBRT’s assessment that the increase in inflation since the last quarter of 2009
was temporary. The April Inflation Report stated that aggregate demand
conditions would support disinflation and that the rise in inflation can be
attributed to factors beyond the control of monetary policy such as increases in
food, energy and administered prices. In fact, with the reversal of these adverse
factors, consumer prices declined by 0.33 percentage points, bringing the
annual inflation down to 8.37, which was the first decline ever in consumer
prices in a given quarter (Graph 1.1.1).
Graph 1.1.1. CPI by Categories Graph 1.1.2. Contribution to Annual CPI Inflation
(Second Quarter Percentage Change)

10 14 Food and Energy ** Tobacco and Gold***


2006-2008 Average
8 Services Core Goods*
12
2009
6
4 2010 10

2 8
0
6
-2
-4 4
-6
2
-8
Food Energy Tobacco Core Services CPI 0
0307

0607

0907

1207

0308

0608

0908

1208

0309

0609

0909

1209

0310

0610

and Gold Goods*

*Core Goods: Goods excluding food, non-alcoholic beverages, energy, alcoholic beverages, tobacco and gold.
**Food and Energy: Food, non-alcoholic beverages and energy.
***Tobacco and Gold: Alcoholic beverages, tobacco and gold.
Source: TURKSTAT, CBRT.

2 Inflation Report 2010-III


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During the second quarter, the dynamics of inflation were mainly


determined by unprocesessed food prices (Graphs 1.1.3 and 1.1.4). The fall in
fruit and vegetable prices, which was envisaged to materialize towards the last
quarter of the year, came sooner and stronger than expected, owing to the
marked increase in supply. Moreover, regulations that loosened meat import
restrictions have contributed to the stronger-than-expected drop in unprocessed
food prices.

Graph 1.1.3. Food Prices Graph 1.1.4. Prices of Animal Products


(Annual Percentage Change) (Annual Percentage Change)

32 45 Unprocessed Meat
Processed Food
28 Unprocessed Food 40 Processed Meat
24 35 Cheese and Dairy Products
29.9
20 30
25 28.0
16
20
12
8.2 15 18.7
8
10
3.2
4 5
0 0
-4 -5
0308

0608

0908

1208

0309

0609

0909

1209

0310

0610

0308

0608

0908

1208

0309

0609

0909

1209

0310

0610
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

The favorable developments in inflation during the second quarter were


not confined to food prices, as the inflation rates of core goods and services
also displayed a significant deceleration. Seasonally adjusted data suggest that
inflation in both services and core goods (goods excluding food, energy, gold,
alcoholic beverages and tobacco) have been slowing down compared to the
previous quarter (Graphs 1.1.5 and 1.1.6 ).
Graph 1.1.5. Prices of Core Goods Graph 1.1.6. Prices of Services
(Adjusted for Seasonal and Tax Effects, 3-Month Average, Annualized) (Seasonally Adjusted, 3-Month Average, Annualized)

10 20 Rent
18 Services excl. Communication
8
16
6 14

4 12
10
2
8

0 6
4
-2
2
-4 0
0607
0907
1207

0308
0608

0908
1208
0309

0609
0909

1209
0310
0610

0307
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610

Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

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Central Bank of the Republic of Turkey

1.2. Monetary Policy

Anticipating that inflation would decrease sharply following the last


quarter of 2008, the CBRT focused on alleviating the harsh impact of the global
financial crisis on the domestic economy. In this respect, the CBRT has
delivered sizable cuts in policy rates, while providing liquidity support to
facilitate the smooth operation of credit markets. Accordingly, policy rates
were cut by 1025 basis points between November 2008 and November 2009.
Considering the favorable developments in credit markets and the moderate
recovery in the economic activity, the Monetary Policy Committee (the
Committee) has ended the easing cycle in December 2009. Notwithstanding the
rapid increase in inflation during the last quarter of 2009 and the first quarter of
2010, the Committee, highlighting the persisting downside risks regarding the
gobal economy and the consistency of core inflation indicators with the
medium-term inflation targets, expressed that policy rates would stay at low
levels for a long period.

During the second quarter, the fall in inflation and the increased
downside risks regarding global economy have vindicated the monetary policy
stance of the Committee—that it may be necessary to maintain policy rates at
current levels for some time, and to keep them at low levels for a long period.
Accordingly, market expectations regarding future policy rates were revised
downwards (Graph 1.2.1).

Graph 1.2.1. Expected Policy Rate Changes

Expected Policy Rate Hikes Until Year-End Expected 12-month Ahead Simple Interest Rate*
(Basis Point)
9.00
200

180 8.80

160 8.60
140
8.40
120

100 8.20

80 8.00
60
7.80
40
7.60
20

0 7.40
1209

0110

0210

0310

0410

0510

0610

0710

April May June July

* CBRT Survey of Expectations, first survey period results.


Source: Reuters, CBRT.

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Central Bank of the Republic of Turkey

1.3. Outlook for Inflation and Monetary Policy

Monetary and Credit Conditions

Despite the increase in risk premiums during the second quarter of 2010,
with the decline in inflation and growing expectations that policy rates will stay
low for a long period, longer-term market interest rates continued on a
downtrend and the yield curve flattened out (Graph 1.3.1).

Graph 1.3.1. Term Structure of Market Interest Rates


Spread between Long-term and Short-term Interest Rates**
Yield Curve*
3.5
Issue of the July
10 2009 Inflation
3 Report

2.5
9
Yield

April 08, 2010 1.5


8
July 08, 2010
1

7 0.5
0409

0609

0809

1009

1209

0210

0410

0610
0.5 1 1.5 2 2.5 3 3.5 4
Term

* Calculated from the compounded returns on bonds quoted in ISE Bonds and Bills Market by using Extended Nelson-Siegel (ENS) method.
**The spread between the 4-year and 6-month yields derived from the ENS yield curve, 5-day moving average.
Source: CBRT, ISE.

During the second quarter, bank lending rates stayed at low levels, while
lending standards continued to ease, leading to an acceleration in credit growth.
Both consumer and commercial loans continued to increase, implying that
credit markets are supporting domestic activity. Therefore, similar to the
previous Report, it is envisioned that the tightness in financial conditions would
disappear over time.

Despite heightened uncertainty regarding the global economic recovery,


the soundness of the Turkish banking system provides a favorable climate to
support the recovery in credit volumes. Accordingly, assuming that the fiscal
stance does not crowd out domestic funding, credit volumes should continue to
expand in the short term. However, ongoing problems in the global financial
markets pose downside risks to external financing, and thereby, to credit supply
over the medium term. Moreover, the elevated levels of unemployment
continue to be a potential factor that might restrain credit demand in the
forthcoming period.

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Central Bank of the Republic of Turkey

Outlook for Aggregate Demand

The first-quarter GDP release was mostly in line with the outlook
presented in the April Inflation Report. Over this period, weak global activity
has continued to restrain output and employment growth in export-oriented
sectors, and the contribution of government expenditures to GDP growth
declined considerably. Meanwhile, the recovery in private demand has gained
traction as anticipated.

Coincident indicators regarding consumption and investment demand


suggest that final domestic demand continued to recover during the second
quarter of 2010. Improving employment conditions and the low level of bank
lending rates are supporting the recovery in consumption demand. Yet,
investment demand remains significantly below the pre-crisis levels, despite the
rebound in the first half of the year.

The uncertainty caused by the fiscal problems in the euro area in May,
and the consequent sharp depreciation of the euro have led to a weaker external
demand in the second quarter than envisaged in the April Inflation Report.
Accordingly, output gap estimates for the second quarter of 2010, the starting
point for medium-term projections, have been revised slightly downward.

Although weak external demand has continued to dampen industrial


activity, there has been a significant increase in non-farm employment during
the past year, with the recovery in construction and services. Leading indicators
suggest that non-farm employment would continue to recover, albeit at a
decelerating pace. However, unemployment rates are expected to remain at
higher than pre-crisis levels, suggesting that no significant upside pressures on
unit labor costs are envisioned.

The global growth forecasts remain basically unchanged compared to


April Inflation Report. However, euro area growth forecasts have been revised
slightly downwards, reflecting the change in the outlook owing to the problems
in Greece, Portugal, and Spain spreading throughout the financial systems of
the euro area—our largest export destination. In this respect, the export-
weighted global economic activity index constructed by the CBRT implies
weaker external demand than that envisaged in April (Graph 1.3.2).

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Central Bank of the Republic of Turkey

Graph 1.3.2. Export-Weighted Global Economic Activity*

5 April Inflation Report


4 July Inflation Report

3
2
1
0
-1
-2
-3
-4
-5
-6
2007 2008 2009 2010 2011

* For the methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”.
Source: CBRT, Bloomberg, Consensus Forecasts, April and July 2010 Bulletins.

When assessing the external demand outlook, it is important to consider


our trading partner’s headline growth forecasts as well as the composition of
growth In this respect, it is noteworthy that the latest Consensus Forecasts
release indicates a noticeable change in the composition of the euro area 2011
growth forecasts. More specifically, along with the depreciation of the euro
owing to the financial distress and weaker growth outlook, the euro area private
consumption and investment forecasts have been revised downwards, thereby
standing out as a potential factor to affect our external demand prospects
adversely (Table 1.3.1). In other words, despite the absence of a major revision
in the euro area growth forecasts, the change in the composition of GDP growth
indicates a weaker external demand outlook for Turkey compared to the
previous Report.

Table 1.3.1. Revision of Euro Area 2011 Growth Forecasts


(Percent)
Private Public
Growth Consumption Consumption Investment Exports Imports
April 2010 1.5 1.0 1.1 2.6 4.9 4.8
July 2010 1.4 0.7 0.5 2.1 5.3 4.4
Source: Consensus Forecasts, April 2010 and July 2010 Bulletins.

In light of these assessments, our expectations are based on an outlook


with weaker external demand conditions compared to the previous Report,
while domestic demand continues to recover as anticipated. Therefore, our
revised forecasts envisage that the resource utilization would stay at low levels
and the contribution of aggregate demand conditions to disinflation would
increase slightly.

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Central Bank of the Republic of Turkey

Fiscal Policy and the Risk Premium

Another global reflection of the fiscal problems in Europe has been the
decline in investor risk appetites. Increasing risk premiums, particularly for the
highly-indebted European countries, have generally spilled over to emerging
markets. Heightened risk premiums could be mainly attributed to concerns
regarding debt sustainability, which in turn, could jeopardize financial stability.
The rise in the risk premium of Turkey has been relatively limited, owing to
comparatively low debt ratios and sound debt sustainability indicators.

Regarding fiscal policy, in line with the MTP projections, it is envisioned


that the fiscal stance will remain expansionary throughout 2010, albeit less
strongly than in 2009, and that fiscal consolidation would gradually ensue
starting from 2011 as guided by the fiscal rule set out in the MTP. In this
respect, it is assumed that the fiscal space created by the stronger-than-expected
economic activity leading to better-than-expected performance in budget
revenues, would be used mostly to reduce the government debt stock, and
hence fiscal adjustment in 2011 and onwards will be implemented through
institutional and structural improvements. In other words, tax adjustments
would be consistent with the inflation targets and automatic pricing
mechanisms throughout the forecast horizon according to our outlook for fiscal
policy.

Consequently, it is envisaged that the rising debt-to-GDP ratios would


reverse course gradually starting in 2011, while the risk premium would not
display any significant changes throughout the forecast horizon.

Revisions on the Assumptions of the Forecast

Important developments since the April Inflation Report warranted a


downward revision in the 2010 inflation forecast:

ƒ The April Inflation Report envisaged food inflation to be 9


percent at end-2010 and 7 percent for 2011 and 2012. However,
better-than-expected outcomes regarding unprocessed food prices
led to a downward revision in the assumption for food inflation
from 9 percent to 7.5 percent for 2010, which had a 0.4
percentage point downside impact on the end-2010 inflation

8 Inflation Report 2010-III


Central Bank of the Republic of Turkey

forecast. Assumptions for food inflation for 2011 and 2012 are
maintained at 7 percent.

ƒ With the increased dowside risks regarding global economic


activity, oil price outturns in the second quarter were below the
levels assumed in the April Inflation Report. In this context, the
previous assumption of oil prices are revised down from 85 USD
per barrel to 80 USD for 2010, and from 90 USD to 85 USD for
2011. Oil price assumptions for 2012 are maintained at 90 USD.
This revision shifted the 2010 inflation forecast down by 0.2
percentage point.

ƒ The deceleration in the core goods and services inflation


(underlying trend of inflation) during the second quarter have
been stronger than envisaged. This development has contributed
to the downward revision in our end-year inflation forecast by 0.2
percentage point.

ƒ The contribution of aggregate demand conditions to disinflation


in the revised forecast is slightly higher than envisaged in the
previous Report due to the weaker external demand outlook,
yielding 0.1 percentage point downward revision in end-2010
inflation forecast.

Overall, the mid-point of the end-2010 inflation forecast has been revised
down by 0.9 percentage point, owing to the downward revisions in food and
energy prices assumptions and the recent slowdown in core inflation.

Inflation Outlook

Against this background, assuming that the measures outlined in our exit
strategy are completed to a large extent during rest of the year, and that policy
rates are kept constant at current levels for some time followed by limited
increases in 2011, with policy rates staying at single digits throughout the 3-
year forecast horizon, the medium-term forecasts suggest that, with 70 percent
probability, inflation will be between 6.5 and 8.5 percent with a mid-point of
7.5 percent at end-2010, and between 3.6 and 7.0 percent with a mid-point of
5.3 percent by the end of 2011. Furthermore, inflation is expected to decline to
5.0 percent by the end of 2012 (Graph 1.3.3).

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Central Bank of the Republic of Turkey

Graph 1.3.3. Inflation and Output Gap Forecasts*

Forecast Range* Uncertainty Band End-Year Inflation Targets Output Gap


12
Control
10
Horizon
8
6
4
Percent

2
0
-2
-4
-6
-8
-10
Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13
* The shaded region indicates the 70 percent confidence interval for the forecast.

In sum, our revised forecast indicates that the monetary tightening


required to keep inflation in line with medium-term targets would start later and
would be more limited than implied by the previous forecast.

Our output gap estimates have been revised slightly downwards


compared to the April Inflation Report, owing to the anticipated impacts of the
problems in euro area on aggregate demand (Graph 1.3.4A.). However, there is
no significant revision in the pace of the recovery, as the downward revision in
monetary policy stance is expected to partially compensate for the adverse
impact of weaker external demand. Accordingly, there have been no significant
revision in the inflation forecasts for 2011 and onwards (Graph 1.3.4B).

Graph 1.3.4. Comparison of April and July 2010 Inflation Report Forecasts
A. Output Gap Forecast B. Inflation Forecast

0 11
10
-1 April 2010 9 April 2010
8
-2 7
6 Realization
-3 July 2010
5 July 2010
4
-4
3
-5 2
1 2 3 4 1 2 3 4 1 2 3 4 1 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2010 2011 2012 2013 2009 2010 2011 2012 2013

Source: CBRT. Source: TURKSTAT, CBRT.

Although trend inflation is expected to remain consistent with the


medium-term targets and follow a stable path, the exact course of headline

10 Inflation Report 2010-III


Central Bank of the Republic of Turkey

inflation until mid-2011 would depend on the base effects driven by the volatile
unprocessed food prices in the past year and the tax hikes implemented at the
beginning of 2010. Therefore, in order to help the economic agents to better
interpret the developments in headline inflation, these base affects are described
in detail in the final chapter of the Report.

It should be emphasized that any new data or information regarding


the inflation outlook may lead to a change in the monetary policy stance.
Therefore, assumptions regarding the future policy rates underlying the
inflation forecast should not be perceived as a commitment on behalf of the
CBRT.

1.4. Risks and Monetary Policy

By influencing commodity prices and external demand conditions, global


economic activity would continue to be the main factor driving inflation
dynamics and the monetary policy outlook. In this respect, the timing and the
extent of monetary tightening to be implemented during 2011 under the
baseline scenario may change depending on the course of the economic
activity.

Recently, rising concerns regarding debt sustainability in several euro


area countries and the spillover effects to the financial system have led to a
renewed turmoil across financial markets, underscoring the downside risks to
the global economic recovery. Furthermore, ongoing problems in credit, real
estate and labor markets across advanced economies, with little policy options
left in case of another disruption to global economic activity, suggest that the
downside risks regarding the pace of global growth are likely to persist for
some time. Should the global economy face a longer-than-anticipated period of
anemic growth, which would consequently delay the domestic recovery
significantly, the monetary tightening envisaged in 2011 under the baseline
scenario may be postponed towards the end of 2011. Moreover, an outcome
whereby global economic problems intensify and contribute to a contraction of
domestic economic activity, may trigger a new easing cycle. By contrast,
monetary tightening may be implemented in an earlier period during 2011,
should the recovery in economic activity turn out to be faster than expected.

Despite the increased downside risks pertaining to external demand,


domestic demand remains strong. Although problems regarding the global
economy have the potential to restrain domestic demand through confidence

Inflation Report 2010-III 11


Central Bank of the Republic of Turkey

and financing channels, countercyclical monetary policy and the ongoing


improvement in employment conditions are likely to support the recovery in
domestic demand. On the other hand, given the relative improvement in the
creditworthiness of Turkey during the post-crisis period, a possible
strengthening in capital inflows in the forthcoming period stands out as another
factor that may lead to a faster recovery in the domestic demand in contrast to
external demand. Should the divergence in the growth rates between domestic
and external demand continue in the forthcoming period, it would be necessary
to utilize other policy instruments such as reserve requirement ratios and
liquidity management facilities more effectively. Accordingly, if the
composition of strong domestic demand and weak external demand continue as
envisaged, and if this pattern of growth co-exists with rapid credit expansion
and a deterioration in the current account balance, consequently leading to
financial stability concerns, than the CBRT may bring forward the measures
outlined in the exit strategy that are expected to be implemented until the end of
2010.

The CBRT will continue to monitor fiscal policy developments closely


while formulating monetary policy. Since the second half of 2009, economic
activity has been stronger than envisaged in the MTP, leading to a better-than-
expected performance in budget revenues. Using this fiscal space mostly to
reduce the government debt would facilitate demand management and reduce
any need for indirect tax hikes, therefore providing more flexibility regarding
the conduct of countercyclical monetary policy. In this respect, should the fiscal
discipline be implemented through institutional and structural improvements,
such as enacting and establishing the fiscal rule, it would be possible to keep
policy rates at single-digit levels over the medium term.

Since the last quarter of 2008, the CBRT, without conflicting with its
primary objective of maintaining price stability, has focused on containing the
adverse effects of the global crisis on the domestic economy—which has been
achieved to a large extent. Monetary policy will continue to focus on price
stability in the period ahead. Strengthening the commitment to fiscal discipline
and the structural reform agenda would support the improvement of Turkey’s
sovereign risk, and thus facilitate macroeconomic and price stability. In this
respect, timely implementation of the structural reforms envisaged by the MTP
and the EU accession process remains to be of utmost importance.

12 Inflation Report 2010-III


Central Bank of the Republic of Turkey

2. International Economic Developments


The global economy continued to recover during the second quarter of
2010. However, the recent financial turmoil, particularly in European
economies, has added to the fragility of the economic recovery, raising
concerns about increased downside risks to the global economic outlook.

The discrepancy between growth in advanced and emerging economies


has become more evident, while growth performances have varied across
regions (Box 2.1). Among advanced economies, the United States and Japan
experience a relatively moderate growth, while European economies falter. On
the emerging economies side, Eastern European countries are suffering from
the developments in the euro area, whereas China continues to be the key driver
of the global growth.

Likewise, monetary and fiscal policies have been differing widely across
country groups. Due to concerns about the global growth outlook, there has
been a growing consensus that the US and the European central banks are
unlikely to raise policy rates in coming months. Yet, rising inflationary
pressures have led to a gradual monetary tightening in some countries. For
example, Canada and New Zealand hiked policy rates during the second
quarter, following Australia and Norway. Among emerging economies, Brazil,
Chile and Peru have tightened monetary policy in recent months. The rebound
in commodity prices and the high growth performances of their trading partners
has mainly caused these countries to differ from the others.

During the past three months, fiscal policy responses have varied
significantly across advanced economies. There have been concerns that the
early exit from fiscal support may hinder growth, particularly in the US. On the
other hand, there is a consensus among most European countries, especially in
Germany, that maintaining fiscal support would heighten concerns about public
debt sustainability and thus add to the financial instability.

The main reason for fiscal policy to stand out in the past few months is
the concerns over to what extent some European countries would manage to
roll over their debt. The spillover of sovereign risks to the financial system has
deepened these concerns. For example, banks have faced a growing pressure of
financing in Spain, the fourth biggest economy in Europe. The contagion has

Inflation Report 2010-III 13


Central Bank of the Republic of Turkey

spread to other countries via banks, leading to a mass depreciation of the euro
against other currencies.

There are two main reasons behind the recent financial collapse that first
emerged as a debt crisis in Greece and spilled over into several other countries.
Firstly, some European banks that bought bonds from Greek, Portuguese and
Spanish governments have been exposed to serious risks. In fact, according to
data from the Bank for International Settlements (BIS), German, Belgian,
French, Dutch and Italian banks hold 17 percent of all outstanding Greek bonds
as of end-2009.1 Secondly, policy options against another financial crisis seem
to have been exhausted. In fact, interest rates have already been down to record
lows in major advanced economies and central bank balance sheets have
expanded to unprecedented levels (Box 6.1). Moreover, escalating deficits and
debt levels in many countries have been the root cause of financial troubles,
thus leaving no fiscal space to allow for new policy measures.

In sum, highlights of the second quarter were the fragile global economy
and rising downside risks. The US housing market has yet to stabilize, thus
continuing to depress banks that are exposed to commercial real-estate risks.
Moreover, credit demand remains weak even though the tight lending
conditions in the euro area and the US seem to have relatively eased. In
addition, ongoing high levels of unemployment in advanced economies is
another factor clouding the growth outlook.

The weakening growth outlook for advanced economies feeds concerns


about deflation in those countries and restricts hikes in commodity prices. On
the other hand, massive food and energy price fluctuations place upward
pressure on costs.

2.1. Global Growth

According to annual growth figures for the first quarter of 2010,


emerging economies, especially China and India, continued to grow faster than
advanced economies (Graph 2.1.1). With the deepening financial distress, the
euro area experienced a weaker growth than other advanced economies, pulling
down the growth rate for advanced economies.

1
80th Annual Report of BIS.

14 Inflation Report 2010-III


Central Bank of the Republic of Turkey

The comparison between the GDP-weighted and export-weighted global


growth, where weights are assigned according to each country’s share in
world’s GDP and Turkey’s exports, respectively, shows that the export-
weighted growth points to a relatively slower recovery, mainly due to high
share of euro area countries in Turkey’s exports.

Graph 2.1.1. Aggregated Growth Rates Graph 2.1.2. Unemployment in Advanced Economies
(Percent) (Percent)

10 11
USA Euro Area
8

6 9

2 7

0
Advanced (GDP-weighted)
-2 Emerging (GDP-weighted) 5

-4 Global (Export-weighted)
Global (GDP-weighted)
-6 3
0100

0102

0104

0106

0108

0110
0397

0399

0301

0303

0305

0307

0309

Source: Bloomberg, CBRT. Source: Bloomberg.

While growth in advanced economies is on the rebound, labor markets


have yet to improve. In fact, euro area unemployment rate remained flat at 10
percent in May (Graph 2.1.2). In the US, 0.2-percentage point drop of
unemployment rate to 9.5 percent in June, mainly owing to the falling labor
force participation rate, does not sufficiently imply a recovery in the market.
High unemployment rates continue to be detrimental to sustainable recovery in
these countries.

Graph 2.1.3. Industrial Production in Advanced and Emerging Graph 2.1.4. JP Morgan Global PMI
Economies
(Annual Percentage Change)

20 65

15 60

10
55
5
50
0
45
-5
40
-10
Advanced Economies Manufacturing Industry
-15 35
Emerging Economies Services
-20 30
0101

0102

0103

0104

0105

0106

0107

0108

0109

0110

0105

0106

0107

0108

0109

0110

Source: Bloomberg. Source: Bloomberg.

Inflation Report 2010-III 15


Central Bank of the Republic of Turkey

Industrial production indices for both advanced and emerging economies


continued to recover in May, albeit more slowly (Graph 2.1.3). Similarly, the
JP Morgan Global PMI index continued to hover above the neutral level of 50
points during the second quarter of 2010, but displayed a slight drop
(Graph 2.1.4).

Table 2.1.1. Growth Forecasts


(Annual Percentage Change)
2010
April July
Consensus Economics
World 3.2 3.5
United States 3.2 3.1
Euro Area 1.2 1.1
Eastern Europe 3.3 3.9
Latin America 4.0 4.9
Asia-Pacific 5.7 6.3
Source: Consensus Forecasts.

Growth forecasts for 2010 have been revised upwards since the April
Inflation Report (Table 2.1.1). However, euro area growth forecasts are revised
downward due to the economic downturn in the periphery, particularly in
Greece, and the resulting deterioration in expectations. Given its strong links to
the euro area, Eastern Europe is likely to grow at a slower pace than the Asia-
Pacific in 2010. Thus, our forecasts in the final chapter are based on a slightly
weaker outlook for external demand, compared with the previous Inflation
Report.

2.2. Commodity Prices

Global growth prospects continue to have a key impact on commodity


prices. Commodity prices hit their peak early in the second quarter, while oil
and metal prices fell sharply amid euro area’s financial troubles and mounting
fears of a slow down in the Chinese economy (Graphs 2.2.1 and 2.2.2).
Accordingly, futures prices have also trended down. On the other hand,
agricultural prices remained relatively flat. Supply and demand forecasts for
2010 and 2011 by the US Department of Agriculture have also placed
downward pressure on prices.

16 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 2.2.1. S&P Goldman Sachs Commodity Prices* Graph 2.2.2. Crude Oil (Brent) Prices
(USD/bbl)

Headline Energy 160 Spot


300 Industrial Metals Precious Metals
Agriculture Futures (1-15 April, 2010)
140
250
Futures (1-8 July, 2010)
120
200
100
150
80

100
60

50 40

0 20
0107

0707

0108

0708

0109

0709

0110

0710

0106

0107

0108

0109

0110

0111

0112
*The average for January 2007 is indexed at 100.
Source: Goldman Sachs. Source: Bloomberg.

Even though metal and oil prices might rise slightly in coming months,
the uncertainty surrounding global growth balances the upside risks to prices.
Growth performances of emerging economies may undoubtedly have a
significant effect on oil and metal prices. Inventories of agricultural products
are expected to be robust over the upcoming harvest season. Hence, agricultural
prices are unlikely to soar unless there is a sudden supply shock.

Accordingly, our forecasts in the final chapter are updated based on an


outlook where oil prices are revised downwards compared to the previous
Inflation Report, and commodity and thus import prices rise modestly
throughout the forecast horizon.

2.3. Global Inflation

The year-on-year inflation in consumer prices has been flat in both


advanced and emerging economies during the second quarter, while core
inflation continued to diverge between both groups of economies. Core CPI
inflation fell to 0.7 percent year-on-year in advanced economies, sparking fears
of deflation, whereas inflation increased, especially in Asia, to 3.1 percent year-
on-year in emerging economies. Thus, after having narrowed to 0.9 percentage
points in September 2009, the core inflation spread between two groups
widened to 2.4 percentage points in May (Graphs 2.3.1 and 2.3.2).

Inflation Report 2010-III 17


Central Bank of the Republic of Turkey

Graph 2.3.1. CPI Inflation in Advanced and Emerging Economies Graph 2.3.2. Core CPI Inflation in Advanced and
(Annual Percentage Change) Emerging Economies
(Annual Percentage Change)

5 8 5

4 7
4
6
3
5 3
2
4
1
2
3
0
2
Advanced Economies 1 Advanced Economies
-1 1
Emerging Economies (right axis) Emerging Economies

-2 0 0

0107

0707

0108

0708

0109

0709

0110
0107

0707

0108

0708

0109

0709

0110

*The average for January 2007 is indexed at 100.


Source: Goldman Sachs. Source: Bloomberg.

According to Consensus Forecasts figures, inflation expectations hover


around inflation targets in advanced economies. In emerging economies,
inflation forecasts for Eastern Europe have been revised downward following
the financial distress in the euro area, while those for the fast-growing Asia-
Pacific and Latin America were revised upwards (Table 2.3.1).

Table 2.3.1. Inflation Forecasts


(Annual Percentage Change)
2010
April July
Consensus Economics
World 2.7 2.7
USA 2.1 1.7
Euro Area 1.2 1.5
Emerging Economies
Eastern Europe 6.0 5.8
Latin America 7.5 7.7
Asia-Pacific 2.1 2.2
Source: Consensus Forecasts.

2.4. Financial Conditions and Risk Indicators

Higher sovereign risk in the euro area due to mounting concerns over
public debt rollover also fueled concerns about European banking system and
financial stability in the second quarter. Amid economic uncertainty, financial
conditions deteriorated, while Interbank rates increased (Graph 2.4.1).
Moreover, the new issuance of asset-backed securities and commercial papers
financed by short-term money markets slowed, hardly showing signs of a
sustainable financial recovery (Graph 2.4.2).

18 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 2.4.1. Money Market Rates Graph 2.4.2. Asset-Backed Securities in the US
(Percent) (Billion USD)
New Issuance
3-m onth OIS Spread for the USA
Redem ption
4 3-m onth OIS Spread for the Euro Area Asset-Backed Securities (right axis)
Asset-Backed Commercial Paper (right axis)
100 3.500
3 75 3.000
50 2.500
25
2 2.000
0
1.500
-25
1 -50 1.000

-75 500
-100 0
0

2003

2004

2005

2006

2007

2008

2009

*2010
0107

0707

0108

0708

0109

0709

0110

0710 * As of June.
Source: Bloomberg. Source: Bloomberg.

The financial distress from the euro area debt crisis has spread across
other countries via banks where European banks holding Greek, Portuguese
and Spanish bonds have been exposed to serious risks, raising unease over
banks in some already weak euro area countries. Stress tests for assessing the
resilience of the European banks are critical in order to reduce the uncertainty
surrounding the markets.

Fears that China’s monetary and fiscal tightening would drag global
growth, and ongoing concerns over debt rollover in the euro area dampened
risk appetite in the second quarter. With the debt crisis having already spilled
over into the banking system, the European Stabilization Mechanism
announced in early May has been perceived as a late attempt to ease the strain
on banks, and therefore failed to boost the risk appetite (Graphs 2.4.3 and
2.4.4).

Graph 2.4.3. Global Risk Appetite Graph 2.4.4. CDS Rates


Credit Suisse Risk Appetite Index European 500 European
VIX (right axis-reversed) Stabilization Stabilization
6 1.8 450
Mechanism Mechanism
400
4 1.5
350
2 1.2 300
250
0 0.9
200
-2 0.6 150
100 USA
-4 0.3
50 Euro Area
-6 0 0
0108

0408

0708

1008

0109

0409

0709

1009

0110

0410

0710

0109

0309

0509

0709

0909

1109

0110

0310

0510

0710

Source: Bloomberg. Source: Bloomberg.

Inflation Report 2010-III 19


Central Bank of the Republic of Turkey

After the second-quarter fall, the current level of global risk appetite
curbs the demand for high-yielding assets of advanced and emerging
economies (Graphs 2.4.5 and 2.4.6). Growing at a more rapid pace and offering
higher yields than advanced economies, emerging economies attract relatively
more capital flow under current circumstances. Yet, ongoing global fragilities
and resulting fluctuations in risk appetite may prevent the permanence of these
flows.
Graph 2.4.5. Global Stock Markets Graph 2.4.6. Exchange Rate and Risk Premium Indicators for
Emerging Economies*

MSCI - Emerging Economies EMBI+


MSCI - Advanced Economies
300 1000 Compounded Exchange Rate 160
(right axis)
250 800
140

200 600
120
150 400

100
100 200

50 0 80
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410
0710
0107

0707

0108

0708

0109

0709

0110

0710

*Arithmetical average of the exchange rates of emerging market currencies


against the currency basket of 1 euro and 1 US dollar. Equals 100 on June
2007 and an upward movement denotes depreciation in emerging market
currencies.
Source: Bloomberg. Source: Bloomberg.

The second-quarter expansion in global credit markets point to an easing


in credit squeeze. The ongoing contraction since the onset of the crisis has
gradually eased in the US credit market which is less dependent on bank
lending and therefore more sensitive to changes in the economic activity in
investment financing. Meanwhile, the euro area credit volume started to expand
year-on-year (Graphs 2.4.7 and 2.4.8).
Graph 2.4.7. US Credit Developments Graph 2.4.8. Euro Area Credit Developments

Credit Volum e (trillion USD) Credit Volume (trillion euro)


Annual Percentage Change (right axis) Annual Percentage Change (right axis)
8 20 12 15

11
7 15 12
10
6 10 9
9
5 5
8 6
4 0
7
3
3 -5 6
0
2 -10 5

1 -15 4 -3
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: Bloomberg. Source: ECB.

20 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Bank lending surveys in April 2010 by Fed and ECB announcing first-
quarter loan developments reveal that US commercial banks have generally
ended tightening on loans to businesses, whereas lending standards tightened
further in the euro area (Graphs 2.4.9 and 2.4.10). Loan supply varies between
regions, while loan demand remains weak in both regions. However, the recent
uncertainty surrounding the euro area and the increased cost of funding as well
as difficulties in finding a financing source added to the pressure on banks,
which would cause European banks to tighten loan standards and pose a
downside risk to loan supply in coming months.
Graph 2.4.9. Lending Survey by the FED Graph 2.4.10. Lending Survey by the ECB
(Percent) (Percent)
Lending standards, large/medium firms Lending standards, all firms
Lending standards, small firm s 80 Dem and, all firm s 80
Demand, large/m edium firm s
60 60
100 Demand, sm all firms 100
80 80 40 40
60 60
40 20 20
40
20
20 0 0
0
0
-20 -20 -20
-40 -20
-60 -40 -40 -40
-80 -60
-60 -60
-100 -80
0103

0104

0105

0106

0107

0108

0109

0110
0400

0402

0404

0406

0408

0410

Source: Fed. Source: ECB.

2.5. Global Monetary Policy Developments

Amid concerns about increased downside risks to global economic


outlook, most central banks continued to keep policy rates low in the second
quarter of 2010 and signaled that policy rates may remain low longer than
anticipated a quarter earlier. Thus, there have been stronger expectations about
central banks in both advanced and emerging economies to be more prudent
than in the previous quarter and to postpone the policy normalization process.

In the second quarter, most central banks continued to support economic


recovery by leaving policy rates low. Yet, a small number of central banks
hiked policy rates and tightened their monetary stance. Among advanced
economies, Australia continued to tighten monetary policy in the second
quarter after the hike in the fourth quarter of 2009, and raised the policy rate by
25 basis points in April and May. Norway, New Zealand and Canada hiked
their policy rates by 25 basis points in the second quarter (Graph 2.5.1).

Inflation Report 2010-III 21


Central Bank of the Republic of Turkey

Graph 2.5.1. Policy Rate Changes in Advanced Economies Graph 2.5.2. Policy Rate Changes in Emerging Economies
(Basis Point) (Basis Point)

100 400

0 200

-100 0

-200 -200

-300 -400

-400 -600

-500 April 2010 - June 2010 -800


April 2010 - June 2010
-600 September 2007 - March 2010
-1000 September 2007 - March 2010
-700
-1200
Norway

Czech Rep.
Sweden
UK

USA

EU
N. Zealand

S. Korea
Israel

Japan
Canada

Australia

Mexico
Colombia
Turkey

Hungary
S. Africa

Russia

Romania
Peru

Poland
Chile

Brazil

Indonesia
India

Thailand
Source: Fed. Source: ECB.

Among emerging economies, Latin American central banks switched to


monetary tightening earlier than elsewhere in the group due to rising
inflationary pressures amid rapid economic recovery. Accordingly, Brazil,
Chile and Peru raised policy rates in the second quarter. Similarly, in the Asia-
Pacific region, India continued to tighten monetary policy for the second
consecutive quarter on climbing inflation and raised key rates by 25 basis
points in April and June. The Reserve Bank of India hinted at another rate hike
in coming months. On the other hand, Hungary, Romania and Russia, which
follow the global monetary easing cycle with a lag, continued to cut policy
rates in the second quarter, albeit more moderately than in the first quarter
(Graph 2.5.2).

As of the mid-year, some central banks in advanced economies seem to


have altered their monetary policy stance for the period ahead. In the first
quarter, the Fed and the ECB were expected to start hiking rates towards the
end of 2010, whereas, policy rate hikes are now expected to be unlikely before
mid-2011. In fact, policy rate forecasts for end-2010 are revised down from the
April Inflation Report round (Graph 2.5.3). The main reason for central banks
in advanced economies to remain on hold is the rising downside risks to global
economic activity due to the uncertainty surrounding Europe.

22 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 2.5.3. Expected Policy Rates at 2010 Year-end

12
G3 Asia-Pacific Latin America CEEMEA

10

0
Philippines
Thailand

Colombia

S. Africa
China

Brazil
India

Indonesia

Hungary
Mexico

Turkey

Poland
USA

Japan

Czech Rep.
Euro Area

S. Korea

March 16 Peru
July 23

Source: Bloomberg.

Likewise, in emerging economies, most central banks have delayed


raising interest rates for a while and are now expected to increase rates very
moderately. Expectations of a prolonged period of low policy rates in advanced
economies, reduced inflation risk, and increased downside risks to global
economic outlook caused emerging economies to postpone policy rate hikes. In
fact, end-2010 policy rate forecasts for all emerging economies, except Brazil,
Thailand and India, are revised down from the April Inflation Report round
(Graph 2.5.3).

In aggregated indices, global policy rates remained flat during the second
quarter of 2010. As most central banks of advanced economies kept policy rates
low and only a few central banks raised rates during the second quarter, the
composite policy rate for advanced economies remained virtually unchanged
quarter-on-quarter, ending June at 0.61 percent (Graph 2.5.4). Meanwhile, a
number of emerging market central banks hiked policy rates, and hence the
composite policy rate for these economies edged up slightly for the first time
during the second quarter to 5.98 percent at end-June (Graph 2.5.5).

Inflation Report 2010-III 23


Central Bank of the Republic of Turkey

Graph 2.5.1. Policy Rate Changes in Advanced Economies Graph 2.5.2. Policy Rate Changes in Emerging Economies
(Basis Point) (Basis Point)

5 20
Emerging Economies Turkey

4 17

3 14

2 11

1
8

0
5
0106
0506
0906
0107
0507
0907
0108
0508
0908
0109
0509
0909
0110
0510

0106
0506
0906
0107
0507
0907
0108
0508
0908
0109
0509
0909
0110
0510
Source: Bloomberg, CBRT calculations. Source: Bloomberg, CBRT calculations.

24 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Box Determinants of the Monetary Stance in Emerging Economies


2.1 During the Second Quarter of 2010

Some emerging market central banks started normalizing monetary policy during
the second quarter by raising policy rates, while others maintained their
expansionary policy stance (Graph 1). This Box focuses on the divergence in the
monetary policy stance across emerging economies, and assesses the relative
position of Turkey.

Graph 1. Policy Rate Changes during the Second Quarter*


(Basis Point)

200

150

100

50

-50

-100
Israel
India

Indonesia
Malaysia

Turkey

Mexico

Hungary
Brazil

Peru

Chile

Philippines

Thailand

Poland

Russia
Czech Rep.
S. Korea

Romania

Colombia
S. Africa

* April-June 2010.
Source: Bloomberg.

Capacity utilization rates are one of the indicators frequently used by central
banks to assess future inflationary pressures. Graph 2 shows the deviation in
second-quarter capacity utilization rates of selected emerging economies from
their long-term averages.2 This graph reveals that the level of capacity utilization
in emerging European and advanced economies are well below their long-term
averages in the second quarter. On the other hand, the level of capacity in Latin
American and Asia-Pacific emerging economies differs from the EU, with Brazil,
Peru and the Philippines in the lead, having capacity utilization rates above their
long-term averages as of the second quarter.

2
Long-term average capacity utilization rate is calculated as the average capacity utilization rate from early 2005 until the onset of
the crisis.

Inflation Report 2010-III 25


Central Bank of the Republic of Turkey

Graph 2. Deviation in Capacity Utilization Rates from Long-Term Averages

-2

-4

-6

-8
USA

Romania

Mexico
EU

Czech Rep.

Hungary

S. Africa

Poland

Colombia

Peru
Turkey

Indonesia

Brazil
Thailand

Chile

Philippines
Source: Bloomberg, Datastream.

Moreover, core inflation indices that provide useful information on underlying


inflation also point to a similar divergence across emerging economies. As shown
in Graph 3, core inflation rates in the EU, excluding Hungary, ended the second
quarter well below their year-end inflation targets. While there is barely an
inflationary pressure on EU economies, a majority of Latin American emerging
economies face inflationary pressures, with core inflation rates surpassing targets
and trending upwards.

Graph 3. Deviation in Core Inflation Rates from Targets*

-2

-4

-6

-8
Romania

Mexico
USA
EU

Czech Rep.

Hungary

Turkey
Colombia

Peru
S. Africa

Poland

Indonesia

Brazil
Thailand

Chile

Philippines

* For Romania, CPI excluding energy, food, alcohol and tobacco.


Source: Bloomberg, Datastream.

26 Inflation Report 2010-III


Central Bank of the Republic of Turkey

capacity utilization and inflation rate are considered to be essential to central


banks’ monetary policies and hence assessing both simultaneously provides
valuable insight for the monetary policy stance. For selected countries, Graph 4
shows the deviation of capacity utilization rate and core inflation from long-term
average capacity utilization rate and inflation target, respectively. As illustrated in
the graph, all countries with capacity utilization rates lower than long-term
averages maintained expansionary policies in the second quarter by either
cutting policy rates or keeping rates low. Some countries hardly faced an
inflationary pressure against their expansionary policies, while the others
continued to implement expansionary monetary policies prioritizing the objective
of stimulating the economy even though their core inflation figures hovered
above their targets. For example, Hungary and Colombia lowered policy rates in
the second quarter, although their core inflation rates exceeded their targets.
Meanwhile, economies with no inflation risk but with high idle capacity, such as
Poland, Czech Republic, Thailand and Turkey, maintained low policy rates.

Graph 4. Determinants of Monetary Policies during the Second Quarter

1.5
Mexico
Hungary
1.0
Core Inflation -Target

S. Africa 0.5 Brazil


Colombia
0.0
Romania
-8 -6 -4 -2 0 Peru 2 4
Poland Turkey -0.5
Thailand Philippines
USA -1.0 Indonesia
EU
-1.5

-2.0

-2.5

-3.0
Chile
Czech Rep.
-3.5

-4.0
Deviation in Capacity Utilization Rate from the Long-Term Average

Economies with capacity utilization rates exceeding their long-term averages in


the second quarter and inflation rates above or close to targets, such as Brazil
and Peru, raised policy rates during the second quarter. However, despite having
a capacity utilization rate above long-term averages, the Philippines kept its
policy rate low during the second quarter owing to the increasing downside risks
to the global economic outlook.

In sum, many emerging economies, including Turkey, operating at a capacity


below their long-term averages continued to cut policy rates or kept rates low
during the second quarter.

Inflation Report 2010-III 27


Central Bank of the Republic of Turkey

28 Inflation Report 2010-III


Central Bank of the Republic of Turkey

3. Inflation Developments
3.1. Inflation

Consumer prices decreased by 0.33 percent during the second quarter of


2010, bringing annual inflation down to 8.37 percent. Thus, consumer prices
dropped quarter-on-quarter for the first time since the inception of the index
amid lower food prices and easing commodity prices. Yet, despite the relatively
stable recovery in domestic demand, aggregate demand conditions continued to
restrain core inflation indicators. Hence, underlying inflation remained
consistent with medium-term targets.

Prices had a favorable outlook across all subcategories during the second
quarter of 2010. After having climbed dramatically in the past two quarters and
prompting consumer prices to soar, food prices plunged sharply during the
second quarter (Graph 3.1.1). Energy prices, on the other hand, remained
relatively flat amid lower oil prices. Thus, the contribution of food and energy
prices to annual inflation has declined to 3.48 percentage points as of mid-2010
(Graph 3.1.2). The benign inflation outlook hinges not only on food and energy
prices, but also on slowing prices for core goods and services. Seasonally
adjusted data also indicate that prices of services were down quarter-on-quarter
for the first time. Likewise, prices of core goods moderated owing to the euro
depreciation as well as the easing commodity prices.

Graph 3.1.1. CPI by Categories Graph 3.1.2. Contribution to Annual CPI Inflation
(Second Quarter Percentage Change)

10 14 Food and Energy* Tobacco and Gold***


2006-2008 Average
8 Services Core Goods
12
6 2009
4 2010 10
2
8
0
-2 6
-4 4
-6
-8 2
Food Energy Tobacco Core Services CPI 0
and Goods**
0307
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610

Gold*

*Core goods: Goods excluding food, energy, alcoholic beverages, tobacco and gold.
**Food and energy: Food, non-alcoholic beverages and energy.
***Tobacco and gold: Alcoholic beverages, tobacco and gold.
Source: TURKSTAT, CBRT.

Inflation Report 2010-III 29


Central Bank of the Republic of Turkey

Food prices plummeted during the second quarter amid lower


unprocessed food prices (Graphs 3.1.1 and 3.1.3). With the significantly
growing supply of products, fruit and vegetable prices saw a sooner and sharper
downward correction than envisioned in the April Inflation Report. In addition,
the adoption of import regulations for red meat at the end of April brought red
meat prices down. White meat prices also dropped during this period, thus
causing unprocessed meat prices to fall by 3.7 percent (Graph 3.1.4).
Accordingly, the direct contribution of meat prices to annual CPI inflation fell
to 1.4 percentage points at the end of the second quarter.

Processed food prices also decreased during the second quarter, pushing
food prices further down (Table 3.1.1). The decline in processed food prices
was driven by the drop in the prices of liquid fats, bread and cereals, and milk
products. On the other hand, the outlook for processed meat prices remained
negative despite the recent drop in unprocessed meat prices due to the
cumulative effect of previous hikes (Graph 3.1.4).

Graph 3.1.3. Food Prices Graph 3.1.4. Prices of Animal Products


(Annual Percentage Change) (Annual Percentage Change)

32 Processed Food 45 Unprocessed Meat


28 Unprocessed Food 40 Processed Meat
24 35
Cheese and Dairy Products
29.9
30
20
25 28.0
16
20
12
8.2 15 18.7
8
10
3.2
4 5
0 0
-4 -5
0308

0608

0908

1208

0309

0609

0909

1209

0310

0610

0308

0608

0908

1208

0309

0609

0909

1209

0310

0610

Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

To sum up, food inflation plunged from 11.21 to 5.62 percent year-on-
year during the second quarter, undershooting the April Inflation Report
forecast. The fall in food inflation has largely been owed to the temporary
abundance of fruits and vegetables due to early summer harvest. In this respect,
fruit and vegetable prices are expected to see a more moderate year-on-year
decline in the third quarter. Yet, food inflation forecasts for end-2010 are likely
to be revised downward given the high possibility of observing low meat prices
for a prolonged period (Table 7.1.1).

30 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Table 3.1.1. Prices of Goods and Services


(Quarterly and Annual Percentage Changes)
2009 2010
II III IV Annual I II
CPI 0.77 0.34 4.26 6.53 3.93 -0.33
1. Goods 0.60 -0.22 5.32 7.01 4.50 -0.38
Energy -1.90 2.32 4.54 4.64 5.08 0.21
Unprocessed Food -3.68 -4.90 15.00 19.35 13.40 -12.76
Processed Food 0.09 0.61 1.27 1.04 1.93 -0.62
Goods excl. Energy and Food 4.21 0.17 3.65 6.15 1.81 5.07
Core Goods 5.55 -2.32 4.08 2.56 -3.27 6.16

Durable Goods -2.76 2.70 4.18 3.76 1.32 1.30


Durable Goods excl. Gold -2.23 2.83 3.25 1.22 1.32 0.36
Semi-Durable Goods 4.55 -1.65 5.33 4.55 -0.73 6.20
Non-Durable Goods -1.22 0.04 5.62 9.80 9.17 -5.08

2. Services 1.27 1.96 1.28 5.13 2.32 -0.17


Rents 1.14 1.43 1.10 5.28 0.96 0.65
Restaurants and Hotels 1.19 1.73 2.32 7.31 3.30 2.28
Transportation 1.43 1.15 1.25 2.53 2.44 1.32
Other 1.31 2.57 0.87 4.96 2.42 -2.13
Source: TURKSTAT, CBRT.

Energy prices have been flat in the second quarter (Graph 3.1.5). While
tap water rates and solid fuel prices were up, the resulting upward pressure on
domestic fuel prices was counterbalanced by lower international oil prices
(Graph 3.1.6). Despite the flattening of energy prices, energy price inflation
rose to 12.63 percent year-on-year on the back of the low base effect from a
year earlier. Annual energy price inflation is expected to slow down in the
second half of 2010 unless international oil prices rise dramatically.
Graph 3.1.5. Energy and Oil Prices Graph 3.1.6. Energy Prices
(Index and Price Level) (Annual Percentage Change)

Energy Prices 40
200 Oil Prices (Brent, right axis) 150
195 30
130
190
185 20
110
180
10
175 90
170
0
70
165
Energy (general)
160 -10
50 Housing*
155
Fuel
150 30 -20
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610
0308

0608

0908

1208

0309

0609

0909

1209

0310

0610

* Home utilities include electricity, water, natural gas, bottled gas and solid fuel.
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

The year-on-year rate of increase in core goods (goods excluding food,


energy, alcoholic beverages, tobacco and gold) was up by 0.6 percentage points
from the previous quarter to 4.38 percent mainly owing to the base effects from
the previous year’s tax incentives on durable goods. In fact, adjusted for tax
changes, core goods inflation fell by 0.5 percentage in the second quarter to 2.4

Inflation Report 2010-III 31


Central Bank of the Republic of Turkey

percent year-on-year. Seasonally adjusted data even point to a lower underlying


inflation in core goods for the second quarter (Graph 3.1.7). Falling import
prices and the depreciation of the euro also support the benign outlook in core
goods prices.

Graph 3.1.7. Prices of Core Goods


(Adjusted for Seasonal and Tax Effects, 3-Month Average, Annualized)

10

-2

-4
0607

0907

1207

0308

0608

0908

1208

0309

0609

0909

1209

0310

0610
Source: TURKSTAT, CBRT.

Table 3.1.2. Prices of Core Goods


(Quarterly and Annual Percentage Change)
2009 2010
II III IV Annual I II
Core Goods 5.55 -2.32 4.08 2.56 -3.27 6.16
Clothing 23.00 -11.91 10.27 3.39 -12.62 23.73
Durable Goods Excl. Gold -2.23 2.83 3.25 1.22 1.32 0.36
Furniture -7.61 1.03 7.86 -2.51 1.41 3.76
Electrical and Non-Electrical Appliances -2.54 3.53 -1.11 -4.47 -0.16 -1.01
Automobiles -0.11 3.20 4.72 6.49 2.17 -0.11
Other Durable Goods 0.20 1.81 0.41 2.79 0.56 2.17
Pharmaceuticals 7.65 0.00 -1.51 6.02 -1.77 0.00
Other 0.86 0.72 0.34 3.14 -0.86 0.12
Source: TURKSTAT, CBRT.

During the second quarter, prices of services recorded a quarter-on-


quarter drop of 0.17 percent for the first time since the inception of the index,
bringing annual services inflation down by 1.53 percentage points to 5.48
percent (Graph 3.1.8, Table 3.1.1). The decrease was attributable to the sizable
fall in mobile call rates. Pursuant to the decision of the Information and
Communication Technologies Authority (ICTA), postpaid rates are reduced,
while prepaid plans are now quoted in Turkish lira terms, thus allowing mobile
telecommunications providers to offer more competitive prices. Accordingly,
services inflation fell by about 1 percentage point quarter-on-quarter.

32 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 3.1.8. Prices of Services Graph 3.1.9. Prices of Services by Subcategories


(Annual Percentage Change) (Annual Percentage Change)

14 Services 21 Other Services

12 Services excl.Catering and Transportation 18 Transportation

10 15 Rent

Restaurants and Hotels


8 7.0 12

6 5.5 9

4 3.9 6

2 3

0 0
0308

0608

0908

1208

0309

0609

0909

1209

0310

0610

0308

0608

0908

1208

0309

0609

0909

1209

0310

0610
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

The rate of increase in other subcategories of services also slowed during


the second quarter. Seasonally adjusted data indicate that price increases were
slower quarter-on-quarter across all services subcategories (Graph 3.1.10).
Although employment conditions continue to improve, currently high level of
unemployment rates puts a cap on price hikes in services (Graph 3.1.11).
Specifically, the annual rental inflation continued to fall steadily during the
second quarter to an all-time low of 4.21 percent (Graph 3.1.9). However,
rising catering prices contained the downtrend in services inflation. Despite the
recent fall in meat prices, catering prices continued to soar during April and
May due to lagged effects of cumulative increases in meat prices. Yet, the rate
of increase in catering prices slowed rapidly in June. Prices of services are
unlikely to face a major inflationary pressure in the second half of 2010, while
the annual rate of increase in services is expected to stay at current levels.

Graph 3.1.10. Prices of Services Graph 3.1.11. Prices of Services and Change in Unemployment
(Seasonally Adjusted, 3-Month Average, Annualized) (Seasonally Adjusted, 3-Month Average, Annualized)*

1.6 Rent Change in Unemployment (right axis)


Services excl. Communication 1.2 1.0
1.4 Services excl. Communication
0.8
1.0
1.2
0.6
1.0 0.8
0.4
0.8 0.6 0.2
0.6 0.0
0.4
0.4 -0.2
0.2
0.2 -0.4

0.0 0.0 -0.6


0307
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610

0308

0608

0908

1208

0309

0609

0909

1209

0310

0610

*Change in unemployment for each period is the 4-month ago reading.


Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

Inflation Report 2010-III 33


Central Bank of the Republic of Turkey

Annual inflation in core prices decreased during the second quarter


(Graph 3.1.12). Underlying inflation is believed to be better gauged by
analyzing 3-month averages of monthly changes in seasonally adjusted core
CPI measures (Box 3.1). In this regard, underlying inflation appears to have
slowed dramatically in the second quarter (Graph 3.1.13). Therefore, core
inflation indicators are expected to remain consistent with medium-term targets
in the upcoming period.

It should be reminded that the tax incentives in 2009 would put


downward pressure on the annual rate of increase in core price indicators
during July and October. This base effect may account for –0.2 and –0.5
percentage points of the H inflation, and for –0.3 and –0.7 percentage points of
the I inflation in the respective months.

Graph 3.1.12. Core CPI Indices H and I Graph 3.1.13. Core CPI Indices H and I
(Annual Percentage Change) (Adjusted for Seasonal and Tax Effects, 3-Month Average, Annualized)

12 1.6
H
11 H I 1.4
10 1.2 I
9
1.0
8
0.8
7
0.6
6
4.95 0.4
5
4 4.56 0.2

3 0.0

2 -0.2
0606
1006
0207

0607
1007
0208

0608
1008
0209
0609

1009
0210
0610
0608

0808

1008

1208

0209

0409

0609

0809

1009

1209

0210

0410

0610

Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

Developments in producer prices, one of the determinants of inflation,


indicate that cost pressures have significantly moderated compared to the
previous quarter. Agricultural prices rose slightly less during the second quarter
than in previous years, while plummeting international commodity prices
curbed the rise in manufacturing industry prices. Accordingly, producer prices
increased by a mere 0.67 percent in the second quarter. Lower fruit and
vegetable prices and the resulting slowdown in CPI inflation spilled over into
agricultural prices (Graph 3.1.14). On the other hand, despite having declined
in May after the newly adopted import regulation, livestock prices were back
on the rise in June, albeit modestly.

34 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Manufacturing industry prices remained mainly unchanged during the


second quarter, while prices for intermediate goods increased slightly. In
particular, although prices for base metals were significantly down amid lower
commodity prices during the past two months, the massive increase in prices
for textile fibers (fuelled by rising cotton prices) drove prices for intermediate
goods higher. Therefore, cost factors are likely to exert pressure on clothing
prices in coming months. Meanwhile, producer prices for meat and meat
products were down for the past two months, placing downward pressure on
manufacturing industry prices. Overall, the second quarter of 2010 was marked
by the weakening of the upward producer price pressure on CPI inflation.

Graph 3.1.14. Agricultural Prices Graph 3.1.15. Manufacturing Industry Prices and PMI Output
(Annual Percentage Change) Prices Index
(3-Month Average, Annualized)

40 Agriculture 3.0 Manufacturing Industry 70


Prices excl. Petroleum
35 Crops, Vegetables and Fruit 2.5 Products 65
30 Livestock and Livestock Products PMI- Output Prices Index
2.0 (right axis) 60
25
1.5
20 55
1.0
15 50
0.5
10
45
5 0.0

0 -0.5 40

-5 -1.0 35
0308
0508
0708
0908
1108
0109
0309
0509
0709
0909
1109
0110
0310
0510

0308

0608

0908

1208

0309

0609

0909

1209

0310

Source: TURKSTAT. Source: TURKSTAT, Markit.

3.2. Expectations

The uptrend in medium-term inflation expectations that started in the


final quarter of 2009 slowed during the second quarter of 2010 (Graph 3.2.1).
In fact, following the better-than-expected price developments during May and
June and the return of annual inflation to single digits, near-term inflation
expectations were revised down markedly quarter-on-quarter. Longer-term
expectations, though, remained virtually unchanged quarter-on-quarter (Graph
3.2.2). Currently, 12 and 24- month ahead inflation expectations hover slightly
above year-end targets of 5.5 and 5 percent for 2011 and 2012, respectively.

Inflation Report 2010-III 35


Central Bank of the Republic of Turkey

Graph 3.2.1. 12 and 24-Month Ahead CPI Expectations* Graph 3.2.2. Inflation Expectations Curve*
(Annual Percentage Change) (Annual Percentage Change)

12 11 0710 April 2010

11 10 Inflation Target Uncertainty Band


12-Month 24-Month
9
10
8
9
7
8 6

7 5
4
6
3
5
2
4 1
0707

1007

0108

0408

0708

1008

0109

0409

0709

1009

0110

0410

0710

0710

0910

1110

0111

0311

0511

0711

0911

1111

0111

0311

0511

0711
*Calculated by linear interpolation of expectations at different maturities in the
CBRT Survey of Expectations. Expectations are from the second survey period
*CBRT Survey of Expectations, Second survey period results. of the CBRT Survey of Expectations.
Source: CBRT. Source: CBRT.

In July, the dispersion of participants’ 12-month ahead inflation


expectations rose from April (Graph 3.2.3), while that of 24-month ahead
inflation expectations remained unchanged (Graph 3.2.4).
Graph 3.2.3. Distribution of 12-Month Ahead Inflation Expectations* Graph 3.2.4. Distribution of 24-Month Ahead Inflation Expectations*

July 2010 July 2010


0.72 0.72
April 2010 April 2010
0.63 0.63

0.54 0.54

0.45 0.45

0.36 0.36
0.27 0.27
0.18 0.18
0.09 0.09
0.00
0.00
2 4 6 8 10 12 14
2 4 6 8 10 12 14

*Horizontal axis shows inflation rate, vertical axis indicates Kernel forecast. CBRT Survey of Expectations, Second survey period results.
Source: CBRT.

36 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Box
Underlying Inflation
3.1

Having adopted the inflation-targeting regime, the CBRT closely monitors the
developments regarding inflation, the point target, and publicly shares the
extensive analyses on these developments. Short-term inflation developments
may arise due to sector-specific seasonal or period-specific temporary effects,
and therefore may signal an inflation process independent from the underlying
inflation. In other words, it is difficult to properly analyze the changes in the
consumer price index when such effects are prevalent. Thus, to monitor the
underlying inflation, the CBRT uses and regularly follows core inflation indicators by
excluding subcategories that exhibit temporary changes and show extreme
volatility, and thus, are relatively outside the scope of monetary policy.1

In evaluating the underlying inflation, the choice of indicators to be monitored is


as equally important as how these indicators should be analyzed. Taking the
annual percentage change of the index is a common method for analyzing core
inflation indicators. This method relatively eliminates seasonal variations that
cause price fluctuations, but fails to fully reflect the information that is contained
in the recent trend of indicators. In fact, in cases where seasonality changes by
years (for example, shifts in discounts or new season, early or late summer harvest
of fresh fruits and vegetables), annual percentage changes in indicators can
display temporary fluctuation. Moreover, in some cases, annual changes may
contain less information on recent price dynamics. For example, in a case where
monthly inflation rates soar sharply on several shocks during the first 9 months over
a 12-month period and remain flat during the last 3 months as these shocks fade
out, annual inflation at the end of 12-month horizon would be far too high to
reflect the slowdown in the last 3 months.

Similarly, in case of a strong base effect, the annual percentage change of the
indicator may hint at an incidental effect from 12 months earlier rather than a
recent change.2 Therefore, an assessment depending merely on annual changes
may provide limited information.

1 To this end, SCA-H (CPI excluding energy, unprocessed food, alcoholic beverages, tobacco and gold) and SCA-I (SCA-H
excluding processed food) are widely used in Turkey.
2 For further information on the definition of base effects, see Inflation Report 2010-I Box 3.2. “Base Effects and Their
Implications for the 2010 Inflation Outlook”.

Inflation Report 2010-III 37


Central Bank of the Republic of Turkey

For an inflation-targeting central bank, recent trends are more essential in terms
of their implications for future than past trends. However, short-term price changes
over a month or a few months may be widely subject to seasonal effects. Thus, it is
very common to seasonally adjust recent price changes in evaluating the
underlying inflation. As monthly changes in seasonally adjusted data may also
fluctuate due to month-specific factors, it is useful to smooth out these fluctuations
by taking the moving average of monthly changes over a certain period (2, 3 or
6-month, etc).3

CBRT adopts a similar approach and frequently refers to seasonally adjusted


values for recent core price movements. Yet, in order to determine the underlying
trend, it is critical to avoid the mechanical use of this method, and to be able to
detect one-time temporary price changes in core price indicators. In this sense,
CBRT’s statement on underlying services inflation following the changes in prices
of services during April 2010 sets a useful example. The Information and
Communication Technologies Authority’s decision to lower the ceiling for
postpaid rates and enable prepaid plans to be quoted in Turkish lira increased
the competition among mobile
Graph 1. Prices of Services
network operators, leading to a (Seasonally Adjusted, 3-Month Average, Annualized)

significant decrease in mobile call


1.2
rates. In such a case, it has been 1.0
more instrumental to analyze the 0.8

underlying services inflation by 0.6

excluding communication from 0.4


Services
0.2
general services price index. In fact, Services excl. Communication
0.0
seasonally adjusted data for services -0.2
excluding communication prices
0307
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610

provide a clearer insight into the


Source: TURKSTAT, CBRT.
underlying services inflation (Graph
1). From this perspective, it can clearly be seen that communication prices have
accounted for most of the recent slump in prices of services, and excluding
communication prices, the slowdown in the underlying trend has been more
limited.

In sum, in assessing the underlying inflation, CBRT refers to seasonally adjusted


averages of recent monthly increases in core price indicators (SCA-H, SCA-I,
services, core goods, etc). In case of a one-time effect that contradicts with the
general pattern, these effects are removed from the relevant items in analyzing
the underlying trend. Thus, handling underlying trends is usually judgmental, yet,
there is no absolute standard to be applied. Hence, monetary policy is shaped by
a broad set of data based on various approaches.

3 The longer the time horizon, the flatter the underlying trend, which may cause to miss the turning points in the underlying trend.
Therefore, in determining the time horizon, there is a trade-off between smoothness and the timely detection of turning points.

38 Inflation Report 2010-III


Central Bank of the Republic of Turkey

4. Supply and Demand Developments


The first-quarter national accounts data are consistent with the outlook
presented in the April Inflation Report. While annual GDP growth has been
robust due to low base effect from the previous year, quarterly GDP remained
virtually flat in seasonally adjusted terms, growing by a mere 0.1 percent.
Domestic demand continued to recover solidly, except for the public sector,
whereas exports remained sluggish amid ongoing problems in the global
economy.

Recent data releases indicate that economic activity continues to recover.


Yet, the European debt crisis that emerged in May added to the aggregate
demand uncertainty for the rest of the year. Accordingly, the pace of economic
recovery is likely to face greater downside risks, while aggregate demand
conditions are expected to further support disinflation for a while.

4.1. Gross Domestic Product Developments and Domestic


Demand

According to the national accounts data released by TURKSTAT, GDP


expanded by 11.7 percent year-on-year during the first quarter of 2010 (Graph
4.1.1). In seasonally adjusted terms, GDP growth has been by 0.1 percent
quarter-on-quarter (Graph 4.1.2).

Graph 4.1.1. Annual GDP Growth by Quarters Graph 4.1.2. GDP


(Percent) (Seasonally Adjusted, 2008 Q1=100)

15 11.7 105

10 7.0 6.0 100


4.7
5 2.6
0.7 0.9
0
95

-5 -2.9 90
-4.7
-10 -7.0 -7.7
85
-15
-14.5
-20 80
1 2 3 4 1 2 3 4 1 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

200720082009 2008 2009 2010 2005 2006 2007 2008 2009 2010

Source: TURKSTAT. Source: TURKSTAT, CBRT.

Inflation Report 2010-III 39


Central Bank of the Republic of Turkey

On the spending side, private consumption spending and inventory


changes were the primary drivers of the annual GDP growth in the first quarter
also owing to the low base effect from a year earlier (Graph 4.1.3). Seasonally
adjusted data indicate that private demand has increased at a solid pace, with
private consumption demand regaining pre-crisis levels. Among subcategories
of resident and nonresident household spending, furniture, household
appliances and maintenance, and transportation and communication services
provided the largest contribution to the annual consumption growth during the
first quarter of 2010. The moderate recovery in the consumption demand for
spending categories that are sensitive to current income continued into the first
quarter of 2010 (Graph 4.1.4).

Graph 4.1.3. Contribution to Annual GDP Growth from Spending Graph 4.1.4. Resident and Non-Resident Household Spending
(Percent) (Seasonally Adjusted, 1998 Prices, Billion TL)

14 20 14
11.7
12
19
10
7.4 13
8 6.4 18
6
3.9 17
4 12
2 16 Consumption Spending
0.0
0 15
-2 -0.8
11
14
-4
-6 13 Consumption Spending excl.
-5.3 Furniture, Household 10
-8 Appliances and Maintenance,
12
Inventory
Consumption

Public Spending

Investment

Imports
Exports
GDP

Changes

Transportation and
Private
Private

Communication (right axis)


11 9
123412341234123412341234123412341

2002 2003 2004 2005 2006 2007 2008 20092010

Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

Economic recovery that started in the second quarter of 2009 has


relatively suspended mostly due to public sector demand. As stated in the April
Inflation Report, the advance payment of health care expenditures for 2010
boosted quarterly GDP growth during the final quarter of 2009. However,
massive cutbacks in public spending on construction during the first quarter of
2010 slowed the pace of quarterly GDP growth. In fact, underlying economic
activity can be better gauged by excluding public demand. Accordingly, having
turned around quickly during the second and third quarters of 2009 amid fiscal
stimulus measures, the economy now recovers at a slower yet steady pace
following the gradual withdrawal of these measures (Graphs 4.1.5 and 4.1.6).

40 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 4.1.5. GDP Graph 4.1.6. GDP and Non-Government GDP


(Seasonally Adjusted, 2008Q1=100) (Seasonally Adjusted, Quarterly Percentage Change)

105 8 GDP
6 GDP (excl. Public Sector)
100
4

2
95
0

-2
90
-4
GDP
85 -6
GDP (excl. Public Sector)
-8
80
-10
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
1 2 3 4 1 2 3 4 1
2005 2006 2007 2008 2009 2010
2008 2009 2010

Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

The recent outlook for domestic demand shows that private consumption
demand continues to grow. April-May data on production and imports indicate
that the demand for consumption goods is running above the previous quarter’s
average (Graph 4.1.7). In the second quarter, private consumption demand is
expected to exceed pre-crisis levels, but slow down year-on-year due to the
fading low base effect of the first quarter (Graph 4.1.8).

Graph 4.1.7. Production and Import Quantity of Consumption


Graph 4.1.8. Aggregated Index* and Private Spending
Goods (Annual Percentage Change)
(Seasonally Adjusted)

115 160 15
113 150
111
10
140
109
5
107 130

105 120 0
103 110
-5
101 Production
100 Aggregated Index
99 -10
Imports (right axis) 90 Realization
97
95 80 -15
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2* 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2**

2005 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

*Aggregates data on production, imports and exports of consumption goods.


* April-May figures. ** Forecast.
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

Investment demand continues to recover, but remains below pre-crisis


levels. The production of capital goods excluding motor vehicles continues to
grow steadily, while imports of capital goods also remain on the rise.
Production and import data suggest that private investment may increase
significantly year-on-year during the second quarter of 2010 (Graphs 4.1.9 and
4.1.10).

Inflation Report 2010-III 41


Central Bank of the Republic of Turkey

Graph 4.1.7. Production and Import Quantity of Consumption Goods Graph 4.1.10. Aggregated Index* and Private Machinery-
(Seasonally Adjusted) Equipment Investments
(Annual Percentage Change)

145 40
30
135
20
125
10
115 0

105 -10

Production -20
95
-30 Aggregated Index
Imports
85 -40 Realization
Production (excl. Motor Vehicles)
75 -50
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2* 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2**

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

*Aggregates data on production, imports and exports of capital goods.


* April-May figures. ** Forecast.
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

In light of figures on consumption and investment demand, total final


domestic demand is expected to grow further and at a faster pace in the second
quarter (Graph 4.1.11). The slow yet steady growth in the labor market as well
as lower loan rates and improving financial conditions boost consumer
confidence, helping domestic demand increase at a relatively more stable pace
(Graph 4.1.12). Nevertheless, external demand may face more downside risks
in the remainder of the year due to the financial distress in the euro area that
has come up since May. June and July surveys show signs of decline in new
export orders, particularly in the manufacturing industry (Graph 4.1.13).

Graph 4.1.11. Final Domestic Demand Graph 4.1.12. Consumer Confidence


(Seasonally Adjusted, 1998 Prices, Billion TL) (Seasonally Adjusted)

28 105 CBRT 120

27 100 CNBC-e (right axis) 110

26 95 100

25
90 90

85 80
24
80 70
23
75 60
22
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2* 70 50

2005 2006 2007 2008 2009 2010 65 40


0710*
0107

0707

0108

0708

0109

0709

0110

*Forecast. *Tentative data for CNBC-e index.


Source: TURKSTAT, CBRT. Source: CNBC-e , CBRT.

42 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Although recent expectations for new orders have been slightly weaker,
June figures are insufficient to determine whether weaker expectations imply a
permanent shift in the pace of economic recovery. The European debt crisis
currently seems to have minor implications for economic activity. 12-month
ahead forecasts for investment spending, another indicator for expectations of
manufacturing firms, remained upbeat during May, June and July, signaling
that firms’ expectations on aggregate demand outlook have barely deteriorated
(Graph 4.1.14). However, global economic problems have the potential to
restrain domestic demand through external demand and expectations channel in
the second half of 2010. Thus, recent developments are believed to have
increased the downside risks to the growth outlook.

Graph 4.1.13. 3-Month Ahead BTS Expectations for Orders Graph 4.1.14. 12-Month Ahead BTS Expectations for Investments
(Seasonally Adjusted, Up-Down) (Seasonally Adjusted, Up-Down)

50 Domestic Market 30
Exports 20
40
Total
30 10
0
20
-10
10
-20
0
-30
-10 -40
-20 -50
-30 -60
0107

0507

0907

0108

0508

0908

0109

0509

0909

0110

0510
0107

0507

0907

0108

0508

0908

0109

0509

0909

0110

0510

Source: CBRT. Source: CBRT.

4.2. External Demand

During the first quarter, exports of goods and services were down by 0.1
percent 2010 year-on-year, whereas imports of goods and services were up by
21.1 percent year-on-year. Thus, external demand outlook has been compatible
with the April Inflation Report forecasts and net exports contributed –5.3
percentage points to annual GDP growth (Graph 4.2.1). In seasonally adjusted
terms, exports fell quarter-on-quarter due to weaker external demand, while
imports continued to rise amid improving final domestic demand. Therefore,
net external demand made a negative contribution to the quarterly GDP during
the first quarter (Graph 4.2.2).

Inflation Report 2010-III 43


Central Bank of the Republic of Turkey

Graph 4.2.1. Contribution to Annual GDP Growth from Exports, Graph 4.2.2. Exports and Imports of Goods and Services
Imports and Net Exports
(Seasonally Adjusted, 1998 Prices, Billion TL)
(Percent)

12 8.5
Exports Imports
10
8.0
8 Exports
Net Exports
6 7.5
4 Imports
7.0
2
0 6.5
-2
6.0
-4
-6 5.5
-8
5.0
1 2 3 4 1 2*
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2*
2009 2009 2010
2005 2006 2007 2008 2009 2010

* Forecast. * Forecast.
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

Recent data releases indicate that exports have grown markedly during
the second quarter. Excluding gold, the quantity index for exports rose for the
fourth consecutive month in May (Graph 4.2.3). The index increased by 17.8
percent year-on-year during April-May, exceeding the first-quarter level.
Exports of goods and services are expected to soar sharply during the second
quarter and make a positive contribution to quarterly GDP growth, unlike the
first quarter (Graph 4.2.2).

Graph 4.2.3. Quantity Index for Exports Excluding Gold Graph 4.2.4. 3-Month Ahead BTS Expectations for Orders and
Capacity Utilization
(Seasonally Adjusted, 2003=100) (Seasonally Adjusted)

200 50 85

40
80
180
30

20 75
160
10
70
0
140
-10 65

120 -20
Total Orders 60
-30
100 CUR (right axis)
-40 55
0105

0705

0106

0706

0107

0707

0108

0708

0109

0709

0110

0107

0607

1107

0408

0908

0209

0709

1209

0510

Source: TURKSTAT, CBRT. Source: CBRT.

Recent readings suggest that the rapid increase in exports in the second
quarter may not be permanent. According to the figures by the Turkish
Exporters Assembly (TEA), despite having expanded by 13.1 percent year-on-
year in June, exports were down month-on-month in seasonally adjusted terms.
As of July, manufacturing firms that mostly serve external markets are
operating at lower capacity than domestic market-oriented firms (Box 4.1).

44 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Moreover, recent survey indicators for the manufacturing industry signal


slowing export orders (Graph 4.2.4). In view of the lag of 2-3 months for the
changes in order expectations to pass through to capacity utilization rates, the
strains in external markets are expected to weigh on resource utilization in
coming months (Graph 4.2.4). In fact, the downside risks to the pace of external
demand growth have risen amid the fiscal crisis in the euro area – Turkey’s
largest export destination. July forecasts for euro area growth remain basically
unchanged from April, but point to significant changes in the composition of
demand. With the depreciation of the euro, the growth outlook has improved
for exporters such as Germany and Italy, fueling expectations of an increased
contribution from net external demand to growth across the euro area. These
developments imply a weaker external demand outlook for Turkey despite the
absence of a substantial deterioration in the global growth outlook (Graph
4.2.5, Table 7.1.2).
Graph 4.2.5. GDP Forecasts for Advanced Economies
(Seasonally Adjusted, 2008Q2=100)

106

104

102

100

98

96

94
USA (June) USA (March)
92 Euro Area (March) Euro Area (June)

90
2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2008 2009 2010 2011

Source: Consensus Forecasts, March and June 2010.

Imports of goods and services continued to recover in the second quarter


amid improved final domestic demand. The quantity index for imports
increased by 22 percent year-on-year during April-May, running above the
first-quarter average in seasonally adjusted terms (Graph 4.2.6). Across main
industrial subcategories, capital and intermediate goods remained below pre-
crisis levels, whereas imports of consumption goods were relatively more
robust (Graph 4.2.7).

Inflation Report 2010-III 45


Central Bank of the Republic of Turkey

Graph 4.2.6. Quantity Index for Imports Graph 4.2.7. Quantity Index for Imports by Subcategories
(Seasonally Adjusted, 2003=100) (Seasonally Adjusted, 2003=100)

180 250 170

170 230 160

160 210 150

150 190 140

140 170 130

130 150 120


Capital Goods
120 130 Consumption Goods 110
Intermediate Goods (right axis)
110 110 100
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2* 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2*

2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010

* April-May figures. * April-May figures.


Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

Imports of goods and services are expected to grow further quarter-on-


quarter and sharply year-on-year, and therefore, continue to make a negative
contribution to annual GDP growth. Yet, with the relative recovery in exports,
net external demand may have a smaller negative contribution to annual GDP
growth than in the previous quarter (Graphs 4.2.1 and 4.2.2).

In sum, domestic demand is expected to maintain its ongoing recovery


during the second half of 2010, albeit more slowly, while external demand may
decrease due to problems in the euro area. Accordingly, imports are expected to
increase faster than exports, while net external demand may continue to make a
negative contribution to GDP growth.

4.3. Labor Market

Although employment conditions improved during the first quarter,


rising labor force participation rates limited the fall in unemployment.
Unemployment rates fell markedly during April-May amid increased
employment and reduced labor force participation (Graph 4.3.1). In this period,
non-farm employment continued to grow across all sub-sectors in seasonally
adjusted terms, and exceeded the pre-crisis levels. Excluding services sectors
that are relatively less sensitive to business cycles, non-farm employment has
just restored to pre-crisis levels in crisis-struck sectors (Graph 4.3.2).

46 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 4.3.1. Unemployment Graph 4.3.2. Non-Farm Employment


(Seasonally Adjusted, Percent) (Seasonally Adjusted, Million)

20 Labor Force Participation Rate 50 Non-Farm Employment (excl.


(right axis) 12.0 Community, Finance, Insurance, Real 16.9
18 Non-Farm Unemployment Rate Estate and Business Services)
49 11.8 Non-Farm Employment (right axis) 16.7

16 Unemployment Rate 11.6 16.5


48 11.4 16.3
14
11.2 16.1
47
12 11.0 15.9

46 10.8 15.7
10
10.6 15.5
8 45 10.4 15.3
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2*
10.2 15.1

0906
0107
0507
0907
0108
0508
0908
0109
0509
0909
0110
2006 2007 2008 2009 2010

* As of April.
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

Household labor force data show that employment continues to recover


in the industrial sector that suffered the largest employment loss (Graph 4.3.3).
Industrial production figures and the PMI employment index indicate that
industrial employment continued to recover during the second quarter (Graph
4.3.4). However, as stated in the previous section, the increased downside risks
to external demand also concern industrial employment.

Graph 4.3.3. Industrial Employment and Production Graph 4.3.4. Manufacturing Industry and PMI Employment
(Seasonally Adjusted) Index
(Seasonally Adjusted)

Million 2005=100 4 60
4.6 125
2 55
4.5 120
0 50
4.4 115

-2 45
4.3 110

-4 40
4.2 105
Industrial Employment
Manufacturing Industry
4.1 100 -6 Employment 35
Industrial Production
(right axis) PMI (right axis)
4.0 95 -8 30
0106

0706

0107

0707

0108

0708

0109

0709

0110
0106
0506
0906
0107
0507
0907
0108
0508
0908
0109
0509
0909
0110
0510

Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT, Markit.

The Household Labor Force Survey points to a marked recovery in post-


crisis employment rates, with non-farm employment rebounding to higher than
pre-crisis levels. Yet, indicators for the quality of employment and other
employment-related data resources signal that employment conditions are yet to
recover completely (Box 4.2). In fact, figures on employment and wages, as
derived from the business survey, are well below pre-crisis levels (Graph
4.3.5).

Inflation Report 2010-III 47


Central Bank of the Republic of Turkey

Graph 4.3.5. Household Spending, Real Wages* and Non-Farm Graph 4.3.6. Non-Farm Value Added and Employment
Employment (Seasonally Adjusted)
(Seasonally Adjusted, 2007=100)

106 1998 Prices


Billion TL Million
104
22.0 17.0
102 21.5
21.0 16.5
100
20.5
16.0
98 Real Wage Payments 20.0
19.5 15.5
96
Consumption Spending (excl. Furniture, 19.0
Household Appliances and Maintenance, 15.0
94 18.5
Transportation and Communication) Value Added
Non-Farm Employment-Household Labor 18.0
92 14.5
Force Survey 17.5 Employment (right axis)
90 17.0 14.0
1 2 3 4 1 2 3 4 1 2 3 4 1 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2*

2007 2008 2009 2010 2005 2006 2007 2008 2009 2010

*Calculated by the weighted average of total wages paid in industrial,


construction, trade, restaurant and hotels, and transportation and communication
sectors. Converted to a real index by using the household consumption deflator. * Forecast.
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT, Markit.

In sum, weak external demand postponed the recovery in industrial


employment, while non-farm employment returned to pre-crisis levels amid the
recovery in construction and services sectors. Second-quarter indicators reveal
that non-farm employment continues to recover (Graph 4.3.6). However,
unemployment is likely to remain well above pre-crisis levels for a long while,
and therefore, will exert no significant pressure on unit labor costs in the
upcoming period.

48 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Box
Capacity Utilization Rates for Domestic and External Markets
4.1

The global economic crisis that erupted in the final quarter of 2008 led to a sharp
drop in world trade volume, severely affecting export-oriented manufacturing
firms. New indicators are required to make a well-founded assessment of the
spillover effects into Turkish economy. This Box introduces such new indicators
derived from the BTS and Company Accounts data of the CBRT’s Department of
Statistics in order to measure capacity utilization rates of manufacturing firms
producing for both external and domestic markets.

Business Tendency Survey

BTS is conducted monthly, querying firms on their assessment of recent


developments, current economic climate and their future expectations. Thus, the
survey helps develop new indicators to capture short-term changes in the
manufacturing industry. To meet international standards, the scope of the
questions was revised and the survey was fully harmonized with the EU Industry
Survey. As a further step in the harmonization process, the scope of enterprises
was expanded in 2006. The survey covers the same set of units surveyed for
deriving TURKSTAT’s Industrial Production Index, with base 2005. The harmonized
survey with expanded set of enterprises was initially conducted in January 2007.
The harmonized monthly survey seeks opinions on production, orders,
employment, inventories, selling prices, unit costs, producer price inflation, loan
rates and general business climate, and also asks questions about participants’
capacity utilization rate. Data on capacity utilization rates have been released
monthly during the final week of each month along with the BTS since January
2010.

Company Accounts

In order to monitor real sector developments, data on annual financial


statements and identification of real-sector firms has been compiled since 1990
and disseminated annually in aggregated form covering 13 main sectors and 26
sub-sectors as “Company Accounts”. The database for the Company Accounts
contains income tables of firms. Income tables include data on gross sales as well
as details of gross sales with a breakdown for domestic sales and external sales.
These figures help understand which markets firms mostly serve.

Inflation Report 2010-III 49


Central Bank of the Republic of Turkey

Methodology

Firms included in Company Accounts database and the BTS are paired and
grouped as firms producing for domestic markets and firms producing for external
markets. Firms with a ratio of sales to external markets to total gross sales less than
0.4 are classified as firms producing for domestic markets, while those with a ratio
equal to or higher than 0.4 are classified as firms producing for external markets.
Capacity utilization rates for both categories are derived using weights of firms
and sectors. In the first stage, firms are weighted according to their annually
reported data on average number of employees in the previous year. The
weighted responses of the firms are aggregated in the 3-digit activity level. In the
transition from 3-digit level to 2-digit level, data are weighted with production
values1, and in transition from 2-digit level to overall manufacturing industry, data
are weighted with the value-added figures in the overall Turkish manufacturing
industry.2

Graph 1. Monthly Capacity Utilization Rates of Manufacturing Graph 2. Capacity Utilization Rates of Manufacturing Firms
Firms and Export Quantity Index Excluding Gold
(Seasonally Adjusted) (Seasonally Adjusted)

Firms Producing for Domestic Market Export Quantity Index (3-month moving average,
excl. gold)
90
Firms Producing for External Market CUR of Firms Producing for External Market (right
180 axis) 90
85
175
85
80 170
165 80
75
160
70 75
155

65 150 70
145
60 65
140
55 135 60
01 07

05 07

09 07

01 08

05 08

09 08

01 09

05 09

09 09

01 10

05 10

05 07
08 07
11 07
02 08
05 08
08 08
11 08
02 09
05 09
08 09
11 09
02 10

Source: CBRT. Source: CBRT.

1
Production value weights at 3-digit level are calculated using the production data provided by the enterprises for the compilation
of the industrial production index for the previous year.
2
Value-added weights are calculated by extrapolating the latest available value-added ratios by using the manufacturing industry
production index. Weights are updated annually by using the most recently released data on value-added figures and annual
industrial production index data for the previous year.

50 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Conclusion

The newly derived indices show that manufacturing firms producing for external
markets were operating at higher capacity than those producing for domestic
markets during the pre-crisis period (Graph 1). However, spilling over into the
export market, the global crisis caused a major slump in capacity utilization rates
of manufacturing firms producing for external markets (Graph 2). During the exit
from the crisis, domestic demand recovered more robustly than external demand
on the back of policy rate cuts and fiscal stimulus measures. In fact, capacity
utilization rates remain recently flat for manufacturing firms producing for external-
markets, but continue to grow for those producing for domestic markets (Graph
3). Yet, capacity utilization rates of domestic-market-oriented manufacturing firms
are still below pre-crisis levels, confirming the low level of resource utilization in the
overall economy.

Graph 3. Quarterly Capacity Utilization Rates of Manufacturing Firms Producing for


Domestic and External Markets
(Seasonally Adjusted)

85

80

75

70 Firms Producing for


External Market
65
Firms Producing for
60 Domestic Market

55
1 2 3 4 1 2 3 4 1 2 3 4 1 2

2007 2008 2009 2010

Source: CBRT.

Inflation Report 2010-III 51


Central Bank of the Republic of Turkey

Box
Observations on Employment Conditions
4.2

The primary source of data on employment is TURKSTAT’s Household Labor Force


Survey and Statistics. According to recent household data, non-farm employment
has rebounded above pre-crisis levels. On the other hand, different data sources
on employment do not suggest a strong recovery.

Another source of data that enables to monitor employment is the industrial labor
input index compiled and disseminated quarterly by TURKSTAT. These indicators
point to a slower recovery in industrial employment than implied by the
Household Labor Force Survey (Graph 1). Understanding the difference between
these data sources is essential to gain insight into the trend of employment. Labor
input indicators are derived using data on firms above a certain size, and this can
potentially explain why these two sources of data have different implications
regarding employment.3 However, industrial employment growth has been
modest, according to the SSA data on registered employment as well, indicating
that the difference between household labor force statistics and industrial labor
input indicators can largely be explained by unregistered employment (Graph
2).4

Graph 1. Industrial Employment Graph 2. Industrial Employment Registered with the SSA
(Seasonally Adjusted, Thousand) (Thousand)

Industrial Employment-Household 3500


Labor Force Survey
4600 Industrial Labor Input Indicators (right 115 3400
axis)
4500
3300
4400 110
3200
4300
105
4200 3100

4100 3000
100
4000
2900
3900 95
2800
3800
3700 90 2700
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2006 2007 2008 2009 2010 2008 2009 2010

Source: TURKSTAT, CBRT. Source: SSA, CBRT.

3
Labor input indicators are derived using data on enterprises with 20 or more employees and that represent 80 percent of the value
added. Firms with 1 to 19 employees are not included.
4
Household data may provide information on unregistered employment, while firms only report registered employees.

52 Inflation Report 2010-III


Central Bank of the Republic of Turkey

In fact, the post-crisis growth in non-farm employment party reflects unregistered


employment (Graph 3). Moreover, hours worked per capita in the industrial sector
run below pre-crisis levels, pointing to a decline in the use of employment (Graph
4). Therefore, although non-farm employment regained pre-crisis levels,
employment conditions have yet to fully improve.

Graph 3. Non-Farm Salary or Daily Wage Workers Graph 4. Industrial Employment and Hours Worked Per Capita
(Seasonally Adjusted, Million) (Seasonally Adjusted, 2005=100)

4.5 10.5 102 110


Unregistered

Registered (right axis) 10.0 101


105
4.0
9.5 100
100

3.5 9.0 99
95
8.5 98
3.0 Hours Worked Per Capita
90
8.0 97
Industrial Employment Index (right axis)

2.5 7.5 96 85
2006 2007 2008 2009 2010 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2005 2006 2007 2008 2009 2010

Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.

Inflation Report 2010-III 53


Central Bank of the Republic of Turkey

Box A Comparison of Non-Farm Employment and Production During


4.3 Two Crisis Episodes: 2000-2001 and 2008-2009

Production and employment slowed markedly during 2000-2001 and 2008-2009 in


the Turkish economy. A comparison of the contraction and the following recovery
in employment and production may provide valuable insight into the implications
of the recovery in the production on labor markets amid Turkey’s impending exit
from the recession. Therefore, this Box analyzes the correlation between changes
in production and employment during economic contractions of 2000-2001 and
2008-2009, and the preceding expansions.

This analysis is based on three alternative datasets. The first dataset is quarterly
available since 2000 and obtained from the Household Labor Force Survey,
including non-farm employment and unregistered employment.5 In order to
better gauge the fluctuations of employment around its long-term trend during
2000-2010, semi-annual data from the Household Labor Force Survey for 1989-1999
is also included in the analysis for calculating the long-term trend.6 Alternatively,
same analysis is repeated using annual data from the Household Labor Force
Survey for 1989-2009 merged with data for 1968-1988 obtained from Bulutay (1995)
study.7 Thirdly, Industrial Production Indices with base 2005 and TURKSTAT’s Annual
Industry and Service Statistics are used in order to analyze labor/capital intensity
of industries contributing to the industrial production growth observed since
March 2009.

This statistical analysis studies production and employment dynamics in Turkey


from two different aspects. Firstly, changes in non-farm value-added and
employment are compared for economic contractions of 2000-2001 and 2008-
2009. Secondly, relation between non-farm value-added and employment is
compared for 1994-2000 and 2002-2008 with the aim to find out about the extent
of expansion in employment prior to the contraction periods. Unlike 2002-2008,
1994-2000 is not an uninterrupted expansion period. Therefore, absolute values are
used instead of using deviations from their initial and final values.

5
As farm employment includes disguised unemployment and follows a very dissimilar pattern to business cycles due to the
measurement method, our analyses are based on non-farm employment and non-farm value added.
6
All data in the study are seasonally adjusted using Tramo-Seats method by the Demetra software. Semi-annual data are quarterly
interpolated by the standard Kalman filter using Tramo-Seats. The long-term trend of non-farm GDP and employment indicators
are calculated by Hodrick-Prescott (HP) filter with the smoothing parameter of 1600 for quarterly data and 100 for annual data.
7
See Bulutay, Tuncer, (1995), “Employment, Unemployment and Wages in Turkey”, International Labour Organization, Ankara
Office. Two data sets are merged using annual percentage changes by industries.

54 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Table 1 shows the relation between deviations of Household Labor Force Survey’s
non-farm employment and non-farm GDP from their long-term trend. Non-farm
GDP contracted by 12.8 percentage points from its peak in 2000Q1 to the trough
in 2001Q4, while non-farm employment fell by 6.2 percentage points. Similarly,
non-farm GDP narrowed by 18.3 percentage points from its peak in 2008Q1 to the
trough in 2009Q1, whereas non-farm employment decreased by only 4.3
percentage points. These findings show that employment contraction in response
to a one-unit fall in value added was more moderate in 2008-2009 than in 2000-
2001 (Graphs 1 and 2).

Graph 1. 2000-2010 Non-Farm GDP and Employment Graph 2. 2000-2010 Non-Farm Production Per Worker
(Percent Deviation from Long-Term Trend) (Percent Deviation from Long-Term Trend)

Non-Farm GDP
10 10
Non-Farm Employment
6 6
2
2
-2
-2
-6
-6
-10
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

-10
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
Findings obtained from annual data for 1968-2009 and illustrated in Table 2 show
that non-farm GDP and employment fell by 9.4 and 5.4 percentage points,
respectively, between 2000 and 2001, and by 9.8 and 3.4 percentage points,
respectively, between 2008 and 2009. In other words, the fact that production fell
more sharply and employment contracted more moderately in 2008-2009,
compared to 2000-2001, is also confirmed by annual data (Graphs 3 and 4).

Graph 3. 1968-2009 Non-Farm GDP and Employment, Graph 4. 1968-2009 Non-Farm Production Per Worker
(Percent Deviation from Long-Term Trend) (Percent Deviation from Long-Term Trend)

Non-Farm GDP
10 10
Non-Farm Employment
6 6

2
2

-2
-2
-6
-6
-10
1968

1972

1976
1980

1984

1988
1992

1996
2000

2004

2008

-10
1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

Inflation Report 2010-III 55


Central Bank of the Republic of Turkey

Table 1. Peak-to-Trough Fall in Non-Farm GDP and Non-Farm Employment during Crisis
Episodes 2000-2001 and 2008-2009 Using Quarterly Data*
2000-2001
Non-Farm Employment Non-Farm GDP
Peak (2000Q2) 4.9 3.8
Trough (2001Q4) -1.3 -9.0
Total Fall from Peak to Trough 6.2 12.8

2008-2009
Non-Farm Employment Non-Farm GDP
Peak (2008Q1) 1.4 8.3
Trough (2009Q1) -2.9 -10.0
Total fall from peak to trough 4.3 18.3
*Percent deviation of non-farm GDP and employment from their long-term trend using Household
Labor Force Survey for the period between 1989Q1-2010Q1.

Table 2. Peak-to-Trough Fall in Non-Farm GDP and Non-Farm Employment during Crisis
Episodes 2000-2001 and 2008-2009 Using Annual Data*
2000-2001
Non-Farm Employment Non-Farm GDP
Peak (2000) 3.9 0.7
Trough (2001) -1.5 -8.7
Total Fall from Peak to Trough 5.4 9.4

2008-2009
Non-Farm Employment Non-Farm GDP
Peak (2008Q1) 1.4 3.9
Trough (2009Q1) -2.0 -5.9
Total Fall from Peak to Trough 3.4 9.8
*Percent deviation of non-farm GDP and employment from their long-term trend for the period
between 1968-2009.

Table 3 shows the correlation between production growth and employment


growth during 1994-2000 and 2002-2008. Accordingly, employment grew by 0.58
percent quarter-on-quarter and 0.68 percent year-on-year during 1994-2000, and
by 0.44 percent both quarter-on-quarter and year-on-year during 2002-2008 in
response to a 1-percent increase in production. In other words, the employment
growth that corresponded to a one-unit increase in production during 2002-2008
was more modest during 1994-2000. This is mainly due to the fact that economic
growth has mostly been driven by labor-intensive industries in 1990s, whereas, it is
now mostly driven by capital-intensive industries, especially since mid-2000s.

Table 3. Changes in Non-Farm GDP and Non-Farm Employment during and before Crisis
Episodes 2000-2001 and 2008-2009*
Household Labor Force Survey, Non-Farm Value Added-Employment: 1987Q1-2010Q1

1994Q4-2000Q3 2000Q3-200Q2 2001Q2-2008Q1 2008Q1-2009Q1


Value Added 33.48 -7.21 63.38 -14.80
Employment 19.35 -3.71 27.92 -1.86
Employment/Production 0.58 0.51 0.44 0.13

Household Labor Force Survey, Non-Farm Value Added-Employment: 1968-2009


1994-2000 2000-2001 2001-2008 2008-2009
Production 34.39 -5.39 53.73 -5.59
Employment 23.50 -2.68 23.72 -0.96
Employment/Production 0.68 0.50 0.44 0.17
* Figures are percentage change deviation of seasonally adjusted series from their initial and final values for
each sub-period.

56 Inflation Report 2010-III


Central Bank of the Republic of Turkey

The labor-intensity ratios of industries contributing to economic growth are


significant for economic recovery to feed into labor markets. The recent recovery
in economic activity, which is largely driven by labor-intensive industries, is also
believed to foster non-farm employment growth. In fact, capital-intensive
industries contributed remarkably less in March 2009-May 2010 than in February
2005-March 2008 (Graphs 5 and 6).8
Graph 5. Percent Contribution to Industrial Production Growth and Capital Intensity Ratios by Industries during
February 2005-March 2008*

4.0

Energy
3.5

3.0
Tobacco Basic Metals

Chemicals
2.5 Motor Vehicles
Capital Intensity

2.0 Mining
Radio/TV Non-Metallic Products
Paper Electrical Machinery
1.5 Of f ice Machinery
Other Transport Machinery /Equipment
Food
Medical/Optical Rubber/Plastics
1.0
Textiles Publishing/Printing
Metal Products
Wood Furniture
0.5 Apparel Leather

0.0
-1.0 0.0 1.0 2.0 3.0 4.0 5.0
Contribution to Growth

* Data from Industrial Production Index with base 2005 and TURKSTAT’s Annual Industry and Service Statistics. Capital Intensity
Index is calculated using per capita value-added.

Graph 6. Percent Contribution to Industrial Production Growth and Capital Intensity Ratios by Industries during
March 2009-May 2010*

4.0

Energy
3.5

3.0
Tobacco Basic Metals

Chemicals
2.5
Capital Intensity

Motor Vehicles

2.0 Mining
Radio/TV Non-Metallic Products

1.5 Of f ice Machinery Paper Electrical Machinery


Food
Other Transport Machinery /Equipment
Rubber/Plastics
1.0 Medical/Optical Publishing/Printing
Textiles
Wood Metal Products
Furniture
0.5 Leather Apparel

0.0
-1.0 0.0 1.0 2.0 3.0 4.0 5.0
Contribution to Growth

* Data from Industrial Production Index with base 2005 and TURKSTAT’s Annual Industry and Service Statistics. Capital Intensity
Index is calculated using per capita value-added.

8
March 2008 and March 2009 correspond to the peak of the industrial production index before the onset of the crisis and the
trough of the index after the onset of the crisis, respectively.

Inflation Report 2010-III 57


Central Bank of the Republic of Turkey

58 Inflation Report 2010-III


Central Bank of the Republic of Turkey

5. Financial Markets and Financial Intermediation


5.1. Financial Markets

The second-quarter data on the global economy point to a continuing


global recovery. However, capacity utilization rates and labor market indicators
are well below pre-crisis levels in many economies, contributing to maintain
the moderate global inflation outlook. Meanwhile, the ongoing uncertainty over
the balance sheets of financial institutions in advanced economies as well as
high levels of corporate, household and sovereign debts continue to pose risk to
the financial system and the global economic activity. Thus, the developments
in the second quarter clearly confirmed the requirement to adopt a protracted,
cautious and gradual exit from the crisis.

During this period, perceptions about sovereign debt problems were the
main determining factor over the financial market dynamics. In particular, the
growing concerns over sustainability of the Southern European sovereign debt
caused the global risk appetite to follow a volatile and downward trend over the
second quarter. As a result, investor sentiment has tilted towards less-risky
assets, prompting a relatively slight portfolio outflow from emerging markets
when compared to the crisis period, and a rise in risk premiums in these
economies. Although risk premiums have increased sharply especially in
European economies, risk premiums for most emerging economies, with
Turkey in the lead, have seen a relatively more moderate rise, running below
both mid-crisis and pre-crisis levels (Graph 5.1.1).

Graph 5.1.1. Risk Premium Indicators for Emerging Economies


5-Year CDS Rat e Changes 1000
(Augus t 20 08=1)
900
6,5 EMBI+ Turkey
800
5,5 Turkey EMBI+
700
Latin America
4,5 Asia 600
Europe 500
3,5

400
2,5
300
1,5
200
0,5
100
08 08

100 8

02 09

0 609

08 09

100 9

1 209

02 10

0 610
1208

0409

0410

0208

0608

0209

0210
1007

1008

0609

1009

0610

Source: Bloomberg, CBRT.

Inflation Report 2010-III 59


Central Bank of the Republic of Turkey

The main reason for sovereign debt contagion to have a less marked
impact on Turkey than many other countries is Turkey’s relatively lower debt
burden and debt risk. In fact, the recent measures to enhance fiscal discipline
has improved the risk sentiment towards Turkey, placing Turkey among
countries with lower debt risk. With the growing impact of debt dynamics on
sovereign risk assessments, risk premiums of European economies with a
higher debt burden have increased remarkably (Graph 5.1.2)

Graph 5.1.2. Sovereign Debt and Changes in Risk Premium*

Risk Premimum and Sovereign Debt Relation Public Debt Stock/GDP


140 140

GR
120 120

100 100
Public Debt Stock/GDP

PT
80 HU 80
ES
BR
60 60
PL
TH
MX TR
40 KR RO 40
ZA CZ
ID
20PE 20
CL

0 0
Greece

India

Latvia

Litvania

Romania
S. Africa
Colombia
S. Korea
Indonesia

Chile
USA

UK
Portugal

Israel

Brazil

Philippines

Czech Rep.
Japan

Hungary

Spain

Poland

Thailand
Mexico
Turkey

Peru
-20 80 180 280 380 480 580
Changes in CDS

* Public debt stock/GDP figures are IMF forecasts for 2010.


Source: Bloomberg, IMF, CBRT.

The sovereign debt crisis in Europe has shown that the downside risks to
global economic recovery have yet to completely disappear, prompting a
majority of central banks, especially in advanced economies, to adopt a
monetary stance that highlights downside risks in the face of a moderating
global inflation outlook. Accordingly, central banks in advanced economies
have highlighted in their statements that expansionary monetary policies would
be maintained for a prolonged period. This was followed by changes in
emerging market central banks’ prior statements. Against this background,
expectations have grown that the process of monetary policy normalization
would be postponed (Graph 5.1.3).

Likewise, there are growing expectations that Turkey would also


postpone the tightening process and raise policy rates more slowly. In addition
to the changes in global monetary policies, the increased external demand
uncertainty driven by the sovereign debt crisis in Europe as well as the benign
inflation outlook helped change expectations about the course of monetary

60 Inflation Report 2010-III


Central Bank of the Republic of Turkey

policy in Turkey. As a result, many financial institutions have revised their


policy rate forecasts for end-2010 and 2011 downwards in June and July.
Moreover, markets also expect the rate-hike cycle to be launched at a later date
(Graph 5.1.3).

Graph 5.1.3. Policy Rate Expectations

Expected Policy Rate Hikes until Year-end Distribution of the Expected Timing of the Policy
(Basis Point) Rate Hikes
200 0.7

180 0.6 May


160
June
0.5
140 July
120 0.4
100
0.3
80

60 0.2
40
0.1
20

0 0
1209

0110

0210

0310

0410

0510

0610

0710

0610

0810

1010

1210

0211

0411

0611

0811
Source: Reuters, CBRT.

For a better understanding of monetary policy implementations in


Turkey, it is essential to fully grasp the motivation behind CBRT’s monetary
policy actions. CBRT’s successful mid and post-crisis monetary policy actions
were intended to minimize the damage of the crisis on the economic activity .
However, these policy actions not only addressed the changing economic
climate but also reflected consistency in adapting to the downtrend in Turkey’s
risk premium. Given the economy’s sound financial structure, the declining
sovereign risk and the crisis-induced monetary policy space, the CBRT was
able to bring policy rates down to unprecedented lows during the crisis. With a
permanent fiscal discipline, both policy and market rates may remain well-
anchored at lower than pre-crisis levels. Correspondingly, Turkey may join
countries delivering the most aggressive policy rate cuts compared with the pre-
crisis period. In fact, policy rate expectations for end-2011 appear to be
significantly lower than pre-crisis levels. Moreover, the long-term Turkish lira
interest rate on CCS points to an expectation of a permanent fall in interest rates
in Turkey (Graph 5.1.4).

Inflation Report 2010-III 61


Central Bank of the Republic of Turkey

Graph 5.1.4. Policy Rates in Comparison with Pre-Crisis Levels


(Percent)

Spread Between Expected Policy Rate in 2011Q2 CCS Rate


and Pre-Crisis Policy Rate 19
0
-1 17
-2 15.19
-3 15

-4 09.01.2008
13 06.30.2010
-5
-6
11
-7
8.96
-8 9
-9
Turkey
Malaysia

Hungary

S. Africa
Thailand
Brazil
Philippines

Czech Rep.

China
Mexico

Chile
Romania
India

Colombia
Russia
Indonesia
Poland

Peru
S. Korea

1-year

2-year

3-year

4-year

5-year

6-year

7-year

8-year

9-year

10-year
Source: Bloomberg, CBRT.

Market rates also reflect growing expectations of delay and moderation in


the rate-hike cycle. Accordingly, benchmark bond yields fell during the second
quarter and continued to hover around historic lows despite the increased risk
aversion (Graph 5.1.5).

Graph 5.1.5. Interest Rates


(Percent)

350
ISE Bills and Bonds Market Interest Rate 330
13 (benchmark, compounded)
310
EMBI+ Turkey (right axis) 290
270
11
250
230

9 210
190
170
7 150
0809

0909

1009

1109

1209

0110

0210

0310

0410

0510

0610

0710

Source: ISE, CBRT.

The downturn in market rates was also driven by the improved inflation
outlook. May and June inflation figures which were well below market
expectations while also confirming moderate course of inflation, led to a
marked fall in inflation expectations (Graph 5.1.6). As a result, market rates

62 Inflation Report 2010-III


Central Bank of the Republic of Turkey

declined, and following the release of inflation figures, the downslide gained
momentum.
Graph 5.1.6. Inflation Expectations
7.8 12-month ahead Inflation Expectations Inflation Expectations Derived from Inflation-Indexed
Bonds
24-month ahead Inflation Expectations
7.50
7.6

7.00
7.4

6.50
7.2
6.00

7
5.50

6.8
5.00

6.6 4.50 0110


0110
0110
0210
0210
0310
0310
0410
0410
0510
0510
0610
0610
0310

0410

0510

0610

0710

Source: CBRT, ISE.

The downtrend in market rates is more pronounced in longer maturities,


due to downward revisions to policy rate forecasts amid the improved inflation
outlook. In addition, Turkey’s improved risk perception and the confidence in
the fundamentals of the Turkish economy have also fueled the downturn in
long-term market rates. Accordingly, the yield curve flattened out during the
second quarter (Graph 5.1.7).

Graph 5.1.7. Term Structure of Market Interest Rates


Spread between Long-term and Short-term Interest Rates**
Yield Curve*
3.5
Issue of the July
10 2009 Inflation
3 Report

2.5
9
Yield

April 08, 2010 1.5


8
July 08, 2010
1

7 0.5
0409

0609

0809

1009

1209

0210

0410

0610

0.5 1 1.5 2 2.5 3 3.5 4


Term

* Calculated from the compounded returns on bonds quoted in ISE Bonds and Bills Market by using ENS method.
**Spread between 4-year and 6-month yields derived from the ENS yield curve, 5-day moving average.
Source: CBRT, ISE.

Inflation Report 2010-III 63


Central Bank of the Republic of Turkey

Furthermore, Turkey differs from many other emerging economies


regarding market interest rates. Although monetary tightening is expected to be
postponed in many countries, risk aversion and concerns over sovereign debt
sustainability drove market rates higher in these countries. This trend is more
notable in economies currently in the process of monetary policy normalization
or with higher sovereign debt (Graph 5.1.8). However, despite increased global
risk aversion, Turkish economy was able to attract a stable flow of foreign
capital into Bonds and Bills Market during the second quarter thereby
indicating an improved post-crisis investor sentiment towards Turkey. Recent
solid measures to strengthen fiscal discipline have also contributed to
maintaining low interest rates and the decline in Turkey’s relative riskiness.
Against this backdrop, fiscal discipline measures and debt indicators are
expected to have an increasingly more pronounced effect on market rates in the
future. Hence, further institutional improvements to strengthen fiscal discipline
is critical in order to maintain low interest rates.

Graph 5.1.8. Market Rates and Foreign Inflows


(Percent)

Changes in 2-y ear Market Interest Rates in Q2 Holdings of GDBS by Non-Residents


5.5

12
4.5

3.5
11
2.5

1.5
10

0.5

-0.5 9

-1.5
Brazil
Czech Rep.

Israel
Mexico

Thailand
Turkey
Greece

Chile

China
S. Korea

India

S. Africa

Indonesia
Philippines
Hungary

Peru

Poland
Romania

Malaysia

Colombia

8
1208

0209

0409

0609

0809

1009

1209

0210

0410

0610

Source: Bloomberg, CBRT.

The downslide was more significant in market rates than in inflation


expectations during the second quarter, pushing medium-term real rates down
to historic lows. Yet, real market rates are more plausible in Turkey than in
many other emerging economies (Graph 5.1.9).

64 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 5.1.9. Medium-term Real Interest Rates Derived from Yield on GDBS*
(Percent)
2-year Real Interest Rates 2-y ear Real Interest Rates (June 28, 2010)
18
7.5
16

14
5.5
12
3.5
10
8
1.5
6

4 -0.5

2
-2.5

Chile
Greece

Romania

Indonesia
Colombia

S. Africa

S. Korea
Malaysia

India
China
Brazil

Israel
Czech Rep.
Philippines
Hungary

Poland

Turkey

Mexico
Peru

Thailand
0
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410
0710

*2-year real interest rates, calculated using 2-year nominal interest rates from the yield curve and inflation expectations from CBRT’s Expectations Survey.
Source: ISE, Bloomberg, CBRT.

Despite the recent volatility in financial markets, economic activity


continues to recover amid lower policy rates and CBRT’s stabilizing liquidity
measures while also spreading to monetary indicators. In fact, the run-up in
consumer demand led to a year-on-year real increase in the currency in
circulation during the second quarter (Graph 5.1.10). Adjusted for the 1-
percentage point cut in the Turkish lira reserve requirement ratio in October
2009, bank deposits have also increased year-on-year. In sum, changes in the
monetary base indicate further economic recovery and a normalized risk
sentiment following the crisis.

Graph 5.1.10. Annual Growth of the Real Monetary Base


(Percent)
65
Net Impact of the Changes in Currency in Circulation
Net Impact of the Changes in Banks' Deposits
50
Annual Growth Rate of the Real Monetary Base

35

20

-10

-25
0106
0306
0506
0706
0906
1106
0107
0307
0507
0707
0907
1107
0108
0308
0508
0708
0908
1108
0109
0309
0509
0709
0909
1109
0110
0310
0510
0710

Source: CBRT.

Inflation Report 2010-III 65


Central Bank of the Republic of Turkey

In spite of the increased global risk aversion in the second quarter, the
value of the Turkish lira against the currency basket of US dollar and euro has
not significantly changed. On the other hand, currencies of emerging European
economies that were severely hit by the debt crisis have depreciated and the
Turkish lira did not significantly differ from emerging market currencies in
general (Graph 5.1.11).

Graph 5.1.11. Performance of the Turkish Lira


TL/Currency Basket (0.5 euro+0.5 US dollar) Emerging Market Currencies/USD*
2.1 1000 1.12 ( April 2010=1)
EMBI+Turkey (right axis)
900 1.1
2
800 1.08
1.9
700
1.06
1.8 600
1.04
1.7 500
1.02
400
1.6
1
300
1.5 0.98 TL
200
Emerging Market Currencies
1.4 100 0.96
0110

0210

0310

0410

0510

0610

0710
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610

*Average of emerging market currencies, including Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, South Korea and Colombia.
Source: Bloomberg, CBRT.

Having been historically volatile and extremely sensitive to global risk


appetite, the relatively stable course of the Turkish lira during the crisis
continued into the aftermath of the crisis. Country-specific conditions are likely
to unfold in coming months, and hence, currencies of economies with lower
risk ratings, positive debt dynamics, strong economic fundamentals and
prospects of rapid growth are expected to be more stable. The Turkish lira
therefore is likely to remain among the most stable currencies. This is in fact
confirmed by implied volatility figures - a gauge of expectations for future
currency swings - obtained from currency options. Being one of the currencies
with the highest implied volatility before the crisis, the Turkish lira is now
among currencies with the lowest implied volatility, mainly due to the
improved investor sentiment towards Turkey after the crisis (Graph 5.1.12).

66 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 5.1.12. Exchange Rate Stability Indicators


0.07 Exchange Rate Volatility * Implied Volatility of Exchange Rate Options
(percent)**
Exchange Rate 21
0.06
Volatility in
Emerging September 01, 2008
19
0.05 Economies July 09, 2010
17
0.04
Turkey 15

0.03
13

0.02
11

0.01 9

0 7
02.01.2006

02.07.2006

02.01.2007

02.07.2007

02.01.2008

02.07.2008

02.01.2009

02.07.2009

02.01.2010

02.07.2010

Czech Rep.

Colombia
Romania

S. Africa
Hungary

S. Korea

Mexico

Turkey
Poland

Brazil

Chile
* 50-day standard deviation: Brazil, Chile, Czech Republic, Hungary, Mexico, New Zealand, Poland, South Africa, South Korea, Colombia, Turkey (highest and
lowest values).
** Implied volatility on 1-year currency options.
Source: Bloomberg, CBRT.

With the easing of the global liquidity shortage and the restored stability
in foreign exchange markets, the CBRT continued with the foreign exchange
buying auctions that were resumed on August 4, 2009, in line with its general
strategy to maintain a strong foreign exchange position. Accordingly, the
CBRT purchased a total of 2.92 billion USD from the market in the second
quarter, generating a liquidity of 4.50 billion TL. In order to maintain diversity
of tools and operational flexibility, the CBRT also continued with the GDBS
buying auctions that were resumed on December 23, 2009, and has provided a
liquidity injection of 2.29 billion TL into the market, corresponding to a total
nominal value of 2.4 billion TL of GDBS. Both GDBS and foreign exchange
buying auctions boosted liquidity. In addition, despite its redemption of 5.5
billion TL, the Treasury’s account at the CBRT has increased. As a result, the
monetary base has grown dramatically, while the liquidity shortage remained
acute (Graph 5.1.13).

Inflation Report 2010-III 67


Central Bank of the Republic of Turkey

Graph 5.1.13. Market Liquidity


(Billion TL)

1-week Repo
40 3-month Repo
Interbank Money Market and Reverse Repo
30 Net Liquidity Injection

20

10

-10

-20

-30
0109

0209

0309

0409

0509

0609

0709

0809

0909

1009

1109

1209

0110

0210

0310

0410

0510

0610
Source: CBRT.

The highlight of the second quarter regarding CBRT’s liquidity


management was the use of the weekly repo auction rate as the primary
reference rate for the monetary policy, as stated in the previously announced
exit strategy. In the first step of the technical rate adjustment process, the
CBRT started gradually reducing the funds injected into the market and
conducted weekly repo auctions via quantity auctions with a fixed interest rate
of 7 percent as of May 20, 2010. Meanwhile, the CBRT continued to overfund
the market, which accordingly, narrowed the spread between the Interbank
overnight rate and CBRT’s overnight borrowing rate.

5.2. Financial Intermediation and Loans

Credit markets continued to rebound robustly in the second quarter,


leading to a rapid loan growth in the real sector. The rise in credit volume is
mainly attributable to the growing loan demand driven by economic recovery.
In addition, the improved credit risk perception, encouraging banks to lend
more, and the resulting easing in loan standards helped credit volume expand.
Meanwhile, growing expectations for a prolonged period of low policy rates
and signs of delay in monetary tightening contributed to maintaining loan rates
at low levels. In subcategories of real sector loans, business and household
loans appeared to follow a similar pattern (Graph 5.2.1).

68 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 5.2.1. Real Sector Loans


(2007=100)
Real Sector Loans
220 Household Loans
200 Business Loans
180
160
140
120
100
80
1 2 3 4 1 2 3 4 1 2 3 4 1 2

2007 2008 2009 2010

*Real sector loans are composed of household loans and business loans.
Source: CBRT.

The rate of increase in consumer loans converged to pre-crisis levels. The


key driver of the uptrend in consumer loans was the rise in other consumer
loans that account for about 50 percent of all consumer loans. The sharp
increase in this subcategory is the result and the evidence of the surge in
domestic demand and hence in consumer spending (Graph 5.2.2). Furthermore,
the uptrend in housing and automobile loans continued into the second quarter.
Moreover, amid rising sales of automobiles, automobile loans grew steadily over
the second quarter for the first time since the onset of the crisis (Graph 5.2.2).

Graph 5.2.2. Subcategories of Consumer Loans


(13-week Average, Percent)

1.5 Housing
Automobile
Other
0.5

-0.5

-1.5
0708
0808
0908
1008
1108
1208
0109
0209
0309
0409
0509
0609
0709
0809
0909
1009
1109
1209
0110
0210
0310
0410
0510

Source: CBRT.

Similarly, business loans continued to expand in the second quarter. Having


been affected the most by tight lending standards during the crisis, SME loans
continued to rise, reflecting better lending standards amid economic recovery,
as suggested by the lending survey (Graph 5.2.3). In addition to the stable
uptrend in business loans, the number of sectors benefiting from credit
expansion also followed a stable uptrend (Graph 5.2.3).

Inflation Report 2010-III 69


Central Bank of the Republic of Turkey

Graph 5.2.3. Business Loans and Loan Diffusion Index

Business Loans Loan Diffusion Index*


240 85

220 SME 80

200 Large Firms 75

180 70

160 65

140 60

120 55

100 50
0107
0407
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410

0107

0507

0907

0108

0508

0908

0109

0509

0909

0110

0510
*Derived from 12-month moving averages of the ratio of the number of sectors
with increased credit volume to the total number of sectors.
Source: CBRT. Source: CBRT.

The normalization of credit markets can also be observed via the CBRT
Lending Survey. In fact, the latest survey results indicate that the loan demand
for debt restructuring has an increasingly less effect on total loan demand,
while the demand for working capital loans has increased. Meanwhile, the drop
in the demand for investment loans has ended.

Current loan rates has continued to hover below pre-crisis levels.


Excluding the slight drop in housing loan rates, loan rates remained unchanged
amid the ongoing recovery in credit markets in the second quarter (Graph
5.2.4).
Graph 5.2.4. Loan Rates
(Annualized, Percent)

26

21

16

11 Housing Consumer
Business

6
0106

0506

0906

0107
0507

0907

0108

0508

0908

0109

0509

0909
0110

0510

Source: CBRT.

70 Inflation Report 2010-III


Central Bank of the Republic of Turkey

The improved credit risk perception helped keep loan rates at low levels.
Moreover, the increased competitiveness in the credit market also put
downward pressure on loan rates, as evidenced by the Lending Survey results
(Graph 5.2.5).

Graph.5.2.5. Business Loan Standards - Credit Market Competitiveness*

30

20

10

-10

-20

-30
0107
0307
0507
0707
0907
1107
0108
0308
0508
0708
0908
1108
0109
0309
0509
0709
0909
1109
0110
0310
*Positive/negative values denote easing/tightening in standards.
Source: CBRT.

The spread between consumer loan rates and the Turkish lira interest rate
on CCS that shows the cost of financing narrowed during the second quarter.
Yet, with changing policy rate expectations, this spread has recently increased
slightly amid falling CCS rates. Meanwhile, the spread between shorter-term
business loan rates and deposit rates remained volatile and unchanged from the
end of the first quarter around historic lows (Graph 5.2.6).

Graph 5.2.6. Spread Between Loan Rates and Cost of Financing


(Percent)

Business Loan Rate-Deposit Rate


Housing Loan Rate-5-year CCS Rate
11 Consumer Loan Rate-2-year CCS Rate

-1
0106
0406
0706
1006
0107
0407
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410

Source: Bloomberg, CBRT.

Inflation Report 2010-III 71


Central Bank of the Republic of Turkey

Credit risk, a key indicator of the spread between the cost of financing
and loan rates during the crisis, decreased further in the second quarter (Graph
5.2.7).
Graph 5.2.7. Past-Due Loans and Overdrafts
(Percent)

Past-Due Consumer Loans


9
8 Overdrafts

7 Past-Due Business Loans

6
5
4
3
2
1
0
0107

0507

0907

0108

0508

0908

0109

0509

0909

0110

0510
Source: CBRT.

On the balance sheet side, the rise in credit volume has been the major
driver of banks’ balance sheet expansion as Treasury’s domestic debt rollover
ratio went down from 100 percent and banks’ securities portfolio stopped
increasing due to the higher share of holdings of GDBS by non-residents.
During this period, the expansion in banks’ assets was largely financed by
borrowing from foreign banks while the deposits provided a smaller portion of
the financing of bank assets (Table 5.2.1).

Table 5.2.1. Developments in Banks’ Balance Sheet Items


(Billion TL)

2009/IV 2010/I Balance 2010/II Balance/II


Assets

Loans 383.7 405.4 21.7 438.6 33.3

Securities Portfolio 262.5 275.7 13.2 275.6 -0.1


Liabilities

Deposits 511.9 532.4 20.5 556.8 24.5

Due to Banks Abroad 70.9 72.3 1.4 78.9 6.6


Source: BRSA.

In sum, monetary and fiscal measures continued to relieve credit markets


during the second quarter. The falling credit risk perception of financial
institutions encouraged their lending, while loan standards continued to
normalize. As a result, credit volume expanded further. Given the recovery in
economic activity, loan demand is expected to remain robust in coming months.
The CBRT will closely monitor the possible implications of credit growth on

72 Inflation Report 2010-III


Central Bank of the Republic of Turkey

financial stability as well as asset prices, and will adjust the reserve requirement
ratio if necessary. Thus, as stated in the exit strategy, reserve requirement ratios
might be brought gradually back to their pre-crisis levels.

Although credit markets are expected to rebound further in the upcoming


period, the spread of the European sovereign debt crisis to global financial
markets has posed some downside risks. In view of the fact that the current
account deficit may particularly continue to widen in coming months, the
proper functioning of the credit market will critically depend on banks’ access
to external funds.

Inflation Report 2010-III 73


Central Bank of the Republic of Turkey

74 Inflation Report 2010-III


Central Bank of the Republic of Turkey

6. Public Finance
The massive fiscal stimulus packages and financial rescue plans adopted
by advanced economies during the global economic crisis caused budget
deficits to expand across these economies. Moreover, the global economic
contraction slashed government revenues, especially in advanced economies,
leading to larger fiscal deficits and debt stocks on a global scale (Box 6.1).

Due to the crisis-induced contraction in potential output and thus in tax


base, the recent relatively modest growth in advanced economies helped only
slightly to improve their fiscal outlook. Emerging economies, including
Turkey, entered the global crisis with relatively smaller budget deficits and debt
stocks, adopted more modest fiscal stimulus measures, and recovered more
swiftly, and hence, their fiscal outlook is more favorable (Graph 6.1).

Graph 6.1. Budget Deficit and Public Debt Stock Forecasts for 2010
Greece
Ireland Italy
UK Belgium
USA USA
Spain Portugal
Portugal France
France Hungary
Greece
Ireland
Poland
UK
Romania
Germany
Slovakia
Brazil
Germany
Spain
Italy
Czech Rep. Poland
Belgium Argentina
Hungary Turkey
Argentina Mexico
Turkey Czech Rep.
Mexico Slovakia
Russia Romania
Chile Russia
Brazil Chile

0 3 6 9 12 0 30 60 90 120

Source: IMF, Fiscal Monitor, May 2010.

The economic recovery that started in the fourth quarter of 2009


continued to improve Turkey’s fiscal outlook in the first half of 2010. Rising
tax revenues amid rapid economic growth and tax adjustments were the major
driver of the improved budget balance, while the slowdown in the rate of
increase in non-interest expenditures helped to maintain budget balance.

Inflation Report 2010-III 75


Central Bank of the Republic of Turkey

Owing to the faster-than-expected recovery in economic activity over the


past one year, budget balance has improved more significantly than projected in
the MTP that was launched in 2009. To ensure that Turkey continues to have
more positive readings than other economies, it is critical that the fiscal space
created by the economic climate be used for paying off debt instead of
allocating funding to new spending. In this respect, the continued
implementation of institutional and structural reforms to maintain fiscal
discipline, and therefore, the timely enforcement of the institutional
arrangements governing the introduction of the fiscal rule by 2011 remain of
utmost importance.

6.1. Budget Developments

The central government budget produced a deficit of 15.4 billion TL in


the first half of 2010, while the primary balance delivered a surplus of 12.1
billion TL (Table 6.1.1). Primary surplus rose sharply over the same period in
2009, while interest expenditures were up slightly, narrowing the central
government budget deficit during the first half of 2010. The surplus in primary
balance was largely driven by the recovery-induced rise in tax revenues.

Table 6.1.1. Central Government Budget Aggregates


(Billion TL)
January-June January-June Rate of Increase Actual/Target
2009 2010 (Percent) (Percent)
Central Government Expenditures 124.8 136.5 9.3 47.6
Interest Expenditures 27.2 27.6 1.2 48.6
Non-Interest Expenditures 97.6 108.9 11.6 47.3
Central Government Revenues 101.6 121.1 19.1 51.1
I. Tax Revenues 79.1 98.6 24.7 51.0
II. Non-Tax Revenues 19.2 18.2 -5.1 49.8
Budget Balance -23.2 -15.4 - 30.7
Primary Balance 4.0 12.1 200.4 184.8
Source: Ministry of Finance.

Despite having improved substantially year-on-year during the first half


of 2010, the central government budget balance and the primary budget balance
had a weaker performance than in the same periods of 2007 and 2008 (Graph
6.1.1). Higher tax revenues helped central government budget revenues
maintain the stable upward course, whereas the significant rate of increase in
non-interest expenditures slowed down slightly during the first half of 2010
(Graph 6.1.1).

76 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 6.1.1. Central Government Budget Balance


Budget Balance Budget Revenues and Non-Interest Expenditures
(January-June, Billion TL) (12-Month Cumulative, Billion TL)

Budget Balance Primary Balance Central Government Revenues Non-Interest Expenditures


30
21.0 22.7
240
20
12.1 220

10 200
4.0
1.9
180
0
160
-10 -5.9
140

-20 -15.4 120

-23.2 100
-30

1207
0208
0408
0608
0808
1008
1208
0209
0409
0609
0809
1009
1209
0210
0410
0610
2007 2008 2009 2010

Source: Bloomberg, CBRT.

Central government primary budget expenditures increased by 11.6


percent year-on-year during the first half of 2010. Among non-interest
expenditures, current transfers and personnel expenditures were up by 12.4 and
11.5 percent, respectively, while purchase of goods and services declined by
1.7 percent. This decline was mainly due to the fall in healthcare expenditures
of both public employees and green card holders, as these expenditures have
been covered by the government’s health insurance plan since January 2010.
Furthermore, government premiums to the SSA soared by a striking 55.6
percent due to premium payments of public employees under general health
insurance coverage. Shares reserved from revenues, a major component of
current transfers, rose by 24.8 percent amid rapidly increasing tax revenues
(Table 6.1.2).
Tablo 6.1.2. Non-Interest Expenditures
(Billion TL)
January-June January-June Rate of Increase Actual/Target
2009 2010 (Percent) (Percent)
Non-Interest Expenditures 97.59 108.94 11.63 47.32
1. Personnel Expenditures 28.47 31.74 11.48 52.59
2. Government Premiums to SSA 3.45 5.36 55.56 48.26
3. Purchase of Goods and Services 10.70 10.52 -1.71 41.74
a) Defense-Security 3.01 3.38 12.16 37.05
b) Healthcare Expenditures 3.51 2.46 -29.95 51.22
4. Current Transfers 46.10 51.82 12.42 50.72
a) Duty Losses 2.34 1.38 -41.09 32.05
b) Healthcare, Pension, Social Benefits 25.72 28.42 10.48 49.25
c) Agricultural Support 3.66 4.63 26.39 82.56
d) Shares Reserved from Revenues 10.29 12.84 24.75 53.69
5. Capital Expenditures 4.99 5.46 9.54 28.86
6. Capital Transfers 1.18 1.40 19.11 40.87
Source: Ministry of Finance.

Inflation Report 2010-III 77


Central Bank of the Republic of Turkey

General budget revenues grew by 18.9 percent year-on-year during the


first half of 2010. Tax revenues increased by 24.7 percent, while non-tax
revenues dropped by 5.1 percent. A strong growth was recorded in all main tax
categories, except for income tax (Table 6.1.3). The sharp rise in consumption-
related tax revenues, partly driven by the base effects from the contraction in
the first quarter of 2009, indicates that the economic recovery that started in the
fourth quarter of 2009 continued into the first half of 2010. On the other hand,
non-tax revenues remained behind their year-ago level owing to lower capital
revenues as well as falling enterprise and property revenues. The drop in non-
tax revenues can be attributed to the base effect from the 1.3 billion TL worth
of capital revenue transfer from the Unemployment Insurance Fund to the
general budget in February 2009.

Table 6.1.3. General Budget Revenues


(Billion TL)
January-June January-June Rate of Increase Actual/Target
2009 2010 (Percent) (Percent)
General Budget Revenues 98.29 116.84 18.88 50.81
I-Tax Revenues 79.08 98.62 24.71 51.01
Income Tax 18.97 19.32 1.81 46.53
Corporate Tax 7.12 10.08 41.41 56.09
Domestic VAT 9.52 12.28 29.01 54.24
SCT 19.31 25.64 32.80 46.93
VAT on Imports 11.66 16.49 41.39 54.76
II-Non-Tax Revenues 19.20 18.22 -5.12 49.75
Enterprise and Property Revenues 7.31 6.30 -13.82 93.31
Interests, Shares and Fines 9.80 10.06 2.66 56.46
Capital Revenues 1.40 0.63 -54.63 5.95
Source: Ministry of Finance.

In real terms, the year-on-year contraction in tax revenues that started in


the third quarter of 2008 lost pace by the second quarter of 2009 with the
recovery in private consumption demand, and has been replaced by a rapid
growth as of the fourth quarter of 2009. Following the marked growth in the
first quarter of 2010, tax revenues grew by 13.4 percent year-on-year in real
terms during the second quarter, owing both to the base effect from the poor tax
collection performance during the first half of 2009 and the tax adjustments in
early 2010 (Graph 6.1.2). In fact, SCT revenues and domestic VAT revenues
rose by 20.9 and 10.3 percent year-on-year, respectively, in real terms during
the second quarter of 2010 (Graph 6.1.2). The sharp increase in SCT revenues
was also triggered by the January hike in the lump-sum tax on fuel and tobacco.

78 Inflation Report 2010-III


Central Bank of the Republic of Turkey

Graph 6.1.2. Real Tax Revenues


Real Tax Revenues Real VAT and SCT Revenues
(Annual Percentage Change) (Annual Percentage Change)

20 40
13.4 Real SCT Revenues Real Domestic VAT Revenues
15 30

20.9
10
20

10.3
5
10
0
0
-5

-10 -10

-15 -20
1 2 3 4 1 2 3 4 1 2 3 4 1 2 1 2 3 4 1 2 3 4 1 2 3 4 1 2

2007 2008 2009 2010 2007 2008 2009 2010

Source: Bloomberg, CBRT.

The run-up in tax revenues in the first half of 2010 may moderate in
upcoming quarters once the base effects fade out, but remain robust over the
entire year. As the economic recovery has been more marked than envisioned
in the MTP, tax revenues are likely to soar well above the target set out in the
2010 Budget Law.

On a 12-month cumulative basis, the dramatic weakening of the public-


sector primary surplus performance that started in September 2008 has been
followed by an improvement since November 2009 amid the recovery-induced
increase in tax revenues and the stronger base effects (Graph 6.1.3). However,
the primary surplus of the SEE worsened year-on-year during the first quarter
of 2010. Moreover, the primary surplus performance of extra-budgetary funds
and social security institutions improved slightly year-on-year during the first
quarter of 2010, while that of the Unemployment Insurance Fund restored to
levels in previous years (Graph 6.1.3).
Graph 6.1.3. Primary Surplus
Program-Defined Primary Surplus Program-Defined Primary Surplus
(Annualized, Billion TL) (Annualized, Billion TL)

Central Government Primary Surplus 4


40 Consolidated Public Sector Primary Surplus 2008Q1
3
2009Q1
3
30
2010Q1 1.8
2
20 1.3
2
1
10 0.5
1
0 0
-2.2
-4.5 -1 -0.3
-10
-1
-20 Extra SEEs Social Unemployment
Budgetary Security Insurance Fund
0107
0307
0507
0707
0907
1107
0108
0308
0508
0708
0908
1108
0109
0309
0509
0709
0909
1109
0110
0310
0510

Funds Institutions

Source: Bloomberg, CBRT.

Inflation Report 2010-III 79


Central Bank of the Republic of Turkey

6.2. Developments in Debt Stock

The sharp drop in total public primary surplus that started in the final
quarter of 2008 led to a significant increase in the public sector borrowing
requirement and adversely affected public debt stock indicators during end-
2009. In 2010, however, the deterioration in public debt ratios have stopped,
the real cost of borrowing has fallen markedly, the average maturity of public
borrowing has extended, and the ratio of TL-denominated debt to overall debt
has increased.

The central government debt stock increased by a modest 3.9 percent


from end-2009 to 458.5 billion TL in the first half of 2010. Changes in net
domestic debt, net external debt and total exchange rate effect accounted for
13.1, 4.9 and 5.1 billion TL, respectively, of the increase in central government
debt. Meanwhile, parity changes put downward pressure on the central
government debt stock (Graph 6.2.1). Thus, debt ratios were slightly down
from end-2009 during the first quarter of 2010. The total net public debt to
GDP ratio and the EU-defined general government nominal debt to GDP ratio
dropped to 31.9 and 45 percent, respectively (Graph 6.2.1).

Graph 6.2.1. Public Debt Stock Indicators


Public Debt Stock Indicators Analysis of the Changes in Central Government Debt Stock
80 458.5 500 75

70 450
50
400
Billion TL

60 25
350
45.0

50
300 0

40 250
31.9

-25
200
30
-50
150
2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0/06 *
20
100
Parity Effect* * -4 .8 3.2 3.4 -1 .0 0.6 -5.9
10
50 -0 .8 6.4 -2 1.2 29 .9 -0 .1 5 .1
To tal Exch ang e Rate
Effect** *
0 0
Net Ex tern al Bo rrowing -0 .6 -0 .5 -2 .6 4.0 5.9 4 .9
2002 2004 2006 2008 2010/03
Net Domestic Bo rrowing 21 .1 6.7 8.9 13 .9 54 .8 1 3.1

Total Public Net Debt Stock/GDP Changes compared to end-2009.


** Changes from fluctuations in USD/EUR and USD/SDR.
EU-Defined General Government Nom inal Debt Stock/GDP
*** Changes from fluctuations in TL/USD.
Central Governm ent Total Debt Stock (right axis) Note: Changes in net debt denote changes adjusted for exchange rate and
Source: Treasury, CBRT. parity effect.
Source: Treasury, CBRT.

With the debt and risk management policies in place since 2003 as part of
the strategic criteria in addition to the macroeconomic stability maintained so
far, the vulnerability of the public debt portfolio to liquidity and exchange rate

80 Inflation Report 2010-III


Central Bank of the Republic of Turkey

risks has decreased considerably. Recently, the share of exchange-rate-sensitive


(FX-denominated and FX-indexed) instruments in central government debt
stock has declined, while the share of floating rate instruments has increased.
These patterns continued into June 2010 (Graph 6.2.2). Depending on market
conditions, the Treasury’s financing program for 2010 envisages to limit FX-
denominated domestic borrowing to a maximum of 50 percent of FX-
denominated domestic debt redemptions in 2010. Accordingly, the share of
exchange-rate-sensitive instruments in central government debt stock may
continue to fall throughout 2010, while the share of floating-rate and fixed-rate
instruments may rise.

Graph 6.2.2. Structure of the Central Government Debt Stock


Composition of the Central Government Debt Stock Vulnerability Indicators of the Central Government Debt Stock
(Percent) (Percent)

100 70 300

90
28.2
29.2

60 250
80
50
70 200

60 40
125.4 150
39.4
38.3

50 30
40 100
20
30
10 50
20
32.5

32.4

10 0 0
2000 2002 2004 2006 2008 2010/06
0
Public Deposits/Average Monthly Debt Service (right axis)
2000 2002 2004 2006 2008 2010/06
Debt Stock Sensitive to Interest Rate/Total Debt Stock*
Debt Stock Sensitive to Exchange Rate/Total Debt Stock**
Fixed-Rate Floating-Rate FX-Denominated/FX-Indexed

* Debt stock sensitive to interest rate includes discounted securities with a maturity less than 1-year and government securities with floating rates.
** Debt stock sensitive to exchange rate includes external debt stock, FX-denominated and FX-indexed domestic debt stock.
Source: Treasury, CBRT.

Following the financing strategy intended to reduce the liquidity risk, the
ratio of public deposits to average monthly debt service ended June 2010 at
125.4 percent (Graph 6.2.2). The average maturity of domestic cash borrowing
was longer from the 2009 average, driving the average maturity of total
domestic debt stock to 27.9 months in June 2010 (Graph 6.2.3). Furthermore,
bond issues yielded a 5 billion USD worth of long-term external debt in June
2010 with an average maturity of 18.4 years (Graph 6.2.3).

Inflation Report 2010-III 81


Central Bank of the Republic of Turkey

Graph 6.2.3. Maturity of Borrowing from Domestic and External Markets


Maturity of Domestic Cash Borrowing and Domestic Debt Stock Borrowing by Bond Issue
(Month)

50.0 35 9
45.4
45.0
30 8
40.0 7
25
35.0 6
30.0 27.9 20 5
25.0
15 4
20.0
3
15.0
10
2
10.0 5 1
5.0
0 0
0.0 2000 2002 2004 2006 2008 2010/06
2000 2002 2004 2006 2008 2010/06
External Borrowing (right axis, billion USD)
Average Maturity of Total Domestic Debt Stock
Average Maturity of External Borrowing (y ear)
Average Maturity of Domestic Cash Borrowing Maximum Maturity of External Borrowing (y ear)

Source: Treasury, CBRT.

Having fallen rapidly since early 2009, the monthly weighted-average


real interest rates realized in discount treasury bill auctions declined to 1
percent in July 2010 (Graph 6.2.4). Despite the increased domestic borrowing
requirement, the drop in domestic borrowing costs to recent historic lows has
substantially eased concerns about public debt sustainability.

Graph 6.2.4. Domestic Borrowing


Total Domestic Debt Rollover Ratio Average Maturity of Borrowing and Interest
(Percent) Rates at Discount Auctions

110 700 70

105 600 60
103.5
100 500 50

400 40
95
300 30
90
200 20
85
86.5
100 10
80
0 0
1202
0603
1203
0604
1204
0506
0512
0606
0612
0706
0712
0806
0812
0906
0912
1006

75 74.3

70
Maturity (day)
2002

2003

2004

2005

2006

2007

2008

2009

2010/05

Average Compounded Interest Rate (percent, right axis)


Real Interest Rate (percent, right axis)

Source: Treasury, CBRT.

Hovering below 100 percent since 2002, total domestic debt rollover
ratio declined to 74.2 percent in 2008. As the high budget deficit was mainly
financed by domestic borrowing, domestic debt rollover ratio climbed to 103.5
percent in 2009. Despite having fallen to 86.5 percent during the first five

82 Inflation Report 2010-III


Central Bank of the Republic of Turkey

months of 2010, domestic debt rollover ratio is expected to increase slightly by


the second half of 2010 (Graph 6.2.4).

Inflation Report 2010-III 83


Central Bank of the Republic of Turkey

Box Developments in Budget Deficit and Public Debt Stock: An


6.1 International Comparison

The substantial fiscal stimulus measures and financial rescue plans implemented
during the global crisis, particularly across advanced economies, caused budget
deficits and public debts to expand globally. The ratio of budget deficits-to-GDP
weighted by purchasing power parities was up from nearly 1 percent in 2007 to
8.8 percent in 2009 in advanced economies. Meanwhile, in emerging economies
with a nearly balanced budget, the ratio of budget deficit-to-GDP rose to around
5 percent (Graph 1). Moreover, the increased need to finance larger deficits led
to a sizable increase in debt stocks, especially in advanced economies. In fact,
the ratio of advanced economy debt stocks-to-GDP weighted by purchasing
power parities was up from 73 percent in 2007 to 91 percent in 2009, and is
expected to exceed 110 percent by 2015.1 Emerging economies are expected to
have slightly lower debt stocks compared to pre-crisis levels by 2015 (Graph 1).

Graph 1. Budget Deficit and Public Debt Stock in Advanced and Emerging Economies
Budget Deficit Public Debt Stock
(Percent of GDP) (Percent of GDP)

120 Average Advanced Economies


Average Advanced Economies Emerging Economies
10
110 Emerging Economies
9
100
8
90
7
80
6
70
5
60
4
50
3

2 40

1 30

0 20
2005 2006 2007 2008 2009 2010* 2011* 2014* 2015* 2005 2006 2007 2008 2009 2010* 2011* 2014* 2015*

* Forecast.
Source: IMF, Fiscal Monitor, May 2010.

Another important factor that accounted for the notable deterioration of the
fiscal balance in advanced economies is the significant loss in potential output
driven by the global crisis and the resulting fall in tax revenues. According to
OECD forecasts, the global crisis would cause potential output to decrease by
about 3 percent in OECD member states in the medium term.2 Across all OECD
countries, the ratio of tax revenues to GDP is expected to drop by 1.2 percent
from the 2000-2007 average in 2011.3

1
IMF, Fiscal Monitor, May 2010.
2
OECD Economic Outlook 85, June 2009.
3
OECD, Economic Policy Reforms: Going for Growth 2010, March 2010.

84 Inflation Report 2010-III


Central Bank of the Republic of Turkey

The potential output collapse and the related revenue loss hold up the economic
recovery to ease the pressures on public finances in advanced economies. By
2011, budget deficits and debt stocks would exceed the Maastricht criteria of 3
and 60 percent of GDP in most advanced economies (Graph 2). The large debt
stock in advanced economies heightens concerns over debt sustainability,
thereby causing interest rates to soar and bringing the possibility of adversely
affecting the already fragile global growth dynamics.

Graph 2. Budget Deficit and Public Debt Stock Forecasts for 2011 in Advanced Economies
Budget Deficit Public Debt Stock
(Percent of GDP) (Percent of GDP)

12 240

9 180

6 120

3 60

0 0
Denmark

Germany

UK

USA
Czech Rep.

Canada

France

Greece
Japan
Belgium
Portugal
N.Zealand

Netherland
Austria
Spain

Ireland

Italy
Slovakia

Finland
Denmark

Germany

USA

UK
Czech Rep.
Canada

France
Greece

Japan
Belgium

Portugal
N. Zealand

Austria
Italy

Netherland

Spain
Ireland
Finland

Slovakia

Source: IMF, Fiscal Monitor, May 2010.

The fiscal outlook is more favorable among emerging economies, including


Turkey. As emerging economies entered the global economic crisis with relatively
smaller budget deficits and debt stocks, adopted more modest fiscal stimulus
measures, and recovered more swiftly, their fiscal outlook is more stabilized. In a
majority of emerging economies, the ratios of budget deficits and debt stocks to
GDP are likely to fall below the Maastricht criteria by 2011 (Graph 3).

Graph 3. Budget Deficit and Public Debt Stock Forecasts for 2011 in Emerging Economies
Budget Deficit Public Debt Stock
(Percent of GDP) (Percent of GDP)

8 80

6 60

4 40

2 20

0 0
Romania
Mexico
Turkey
Peru

Hungary
Colombia
Russia
Estonia

China

Indonesia

S. Africa
Ukraine

Argentina
Poland
Malaysia

India
Brazil
Chile

Bulgaria
Mexico

Romania
Turkey
Peru

Hungary

Colombia
Indonesi

China
Ukraine
Russia

Estonia

Argentin
S. Africa

Malaysia

India
Poland
Brazil
Chile

Bulgaria

Source: IMF, Fiscal Monitor, May 2010.

Inflation Report 2010-III 85


Central Bank of the Republic of Turkey

The high post-crisis debt stocks may require a comprehensive fiscal adjustment
especially for advanced economies. According to IMF forecasts, lowering the
debt stock-to-GDP ratio back to 60 percent for advanced economies by 2030
would require increasing the cyclically adjusted primary balance-to-GDP ratio by
8.7 percentage points from 2010 to 2020. For emerging economies, the fiscal
adjustment to stabilize the debt stock-to-GDP ratio around 40 percent by 2030 (a
threshold beyond which fiscal risks are often considered to rise in emerging
economies) averages 2.7 percentage points of GDP from 2010 to 2020.4 Similarly,
the fiscal adjustment to stabilize the debt stock-to-GDP ratio around 40 percent
by 2030 in Turkey is 0.4 percent of GDP, well below the emerging market average
(Graph 4).

Graph 4. Required Fiscal Adjustment During 2010-2020 to Achieve Debt Target in 2030
(Cyclically Adjusted Primary Surplus As a Percent of GDP)
Advanced Economies Emerging Economies

14
7
12

10 5

8 3

6
1
4
-1
2

0 -3
Malaysia
Turkey
Brazil

Bulgaria

Indonesia

Mexico
Colombia

Chile

India
Germany

Denmark

Hungary

Estonia

Russia
Argentina

Romania
Ukraine

China
S. Africa

Poland
Peru
UK

USA
Czech Rep.

Canada

France

Greece

Japan
Belgium

Portugal
Italy

Netherlands
N. Zealand

Austria

Spain
Ireland
Slovakia

Finland

Source: IMF, Fiscal Monitor, May 2010.

To sum up, when compared with advanced economies, emerging economies,


including Turkey, face less requirement for fiscal adjustment. This, together with the
soundness of the financial system, explains the relative improvement in Turkey’s
sovereign risk in the post-crisis period. In the upcoming period, the adoption of
structural and institutional reforms to further strengthen fiscal discipline and the
establishment of the required legal and institutional framework for fiscal rule
implementation would ensure that Turkey continues to differ positively from other
emerging economies, and support the lowering of long-term interest rates even
further.

4
According to IMF’s debt sustainability analysis (Fiscal Monitor, May 2010), in order to stabilize the debt stock to GDP ratio
around 60 and 40 percent, respectively, in advanced and emerging economies by 2030, advanced economies are required to
improve the cyclically adjusted primary balance from a deficit of 4.9 percent of GDP in 2010 to a surplus of 3.8 percent of GDP in
2020 and maintain this level from 2020 to 2030, whereas emerging economies are required to improve the cyclically adjusted
primary balance from a deficit of 1.4 percent of GDP to a surplus of 1.2 of GDP and maintain this level for all respective periods.

86 Inflation Report 2010-III


Central Bank of the Republic of Turkey

7. Medium-Term Projections
This Chapter summarizes the underlying forecast assumptions, and
presents medium-term inflation and output gap forecasts and the monetary
policy outlook over a 3-year horizon.

7.1. Current State of the Economy, Short-Term Outlook and


Assumptions

The first-quarter data on GDP were largely consistent with the outlook
presented in the April Inflation Report. The weak global economy continued to
weigh on the economic activity and employment in external demand-oriented
sectors, while government spending made a much smaller contribution to GDP.
Excluding the public sector, domestic demand showed a stable recovery, as
expected.

The consumer price index fell quarter-on-quarter in the first quarter of


2010 for the first time since its inception, while inflation dropped by 1.9
percentage point from the April Inflation Report forecast. Lower-than expected
food prices accounted for about 1.3 percentage points of the decline in
inflation.

The annual rate of increase in unprocessed food prices fell sharply during
the second quarter. Fruit and vegetable prices dropped earlier and more rapidly
than expected amid rising supply. Moreover, the renewed import regulations
for meat brought meat prices down as of the end of April. As a result, food
inflation sunk below forecasts during the second quarter.

Prices for communication services had a major impact on services


inflation during the second quarter. The lowered ceiling for postpaid rates and
the prepaid plans now quoted in Turkish liras increased the competition among
mobile network operators and pushed services inflation down by about 1
percentage point. Similarly, the rate of increase in prices of core goods
decelerated considerably. Hence, core inflation indicators, and therefore
underlying inflation, slowed down remarkably during the second quarter.

In April, the price of Brent crude oil was assumed to average around 85
USD per barrel in 2010. Yet, in view of the recent changes in international

Inflation Report 2010-III 87


Central Bank of the Republic of Turkey

crude oil prices, Brent crude oil prices are expected to average 80 USD per
barrel in 2010 (Table 7.1.1).
Table 7.1.1. Sources of Revisions to Inflation Forecasts

April 2010 IR July 2010 IR


2009Q4:-6.0 2009Q4:-6.0
Output Gap 2010Q1:-4.7 2010Q1:-4.7
2010Q2: -3.1 2010Q2: -3.4
2010: 9% 2010: 7.5%
Food Prices 2011: 7% 2011: 7%
2012: 7% 2012: 7%

Administered Adding 1.9 percentage points to 2010 Adding 1.9 percentage points to 2010
Prices and Taxes inflation inflation

2010: 85 USD/bbl 2010: 80 USD/bbl


2011: 90 USD/bbl 2011: 85 USD/bbl
Oil Prices
2012: 90 USD/bbl 2012: 90 USD/bbl

Euro Area 2010 2011 2010 2011


Growth CF WEO CF WEO CF WEO CF WEO
Forecasts1 1.2 1.0 1.5 1.5 1.1 1.0 1.4 1.3
1 Consensus Forecasts, April and July 2010 Bulletins (average annual growth, percent);
WEO, April and July 2010 issues.

Assuming that the second-quarter drop in fruit and vegetable prices


reflects a temporarily increased supply, annual inflation may rise in this
subcategory over the second half of 2010. Furthermore, given the renewed
import regulations for meat, meat prices are unlikely to rise in coming months.
Therefore, our forecasts are based on the assumption that meat prices remain
flat. Accordingly, we revised our food inflation assumptions down from 9 to
7.5 percent for end-2010. Our assumptions for 2011 and 2012 are left
unchanged at 7 percent (Table 7.1.1).

Private consumption and investment demand is likely to grow further in


the upcoming period, albeit more slowly. Moreover, the uncertainty caused by
Europe’s sovereign debt crisis since May and the sharp deprecation in the euro
led to a weaker outlook for external demand during the second quarter,
compared with the April Inflation Report. In this respect, our output gap
forecasts, the starting point for our medium-term forecasts, are revised slightly
downwards by the second quarter, and the contribution of aggregate demand
conditions to disinflation is expected to be slightly higher than estimated in the
previous Report (Table 7.1.1).

As stated in the April Inflation Report, the global growth outlook remains
important for the assumptions underlying medium-term forecasts, due to its
implications on aggregate demand conditions over the medium term and on
international commodity prices. There has not been a major revision to the

88 Inflation Report 2010-III


Central Bank of the Republic of Turkey

global growth forecasts since April. However, euro area growth forecasts have
been revised slightly downwards, reflecting the change in the outlook owing to
the problems in Greece, Portugal, and Spain spreading throughout the financial
systems of the euro area—Turkey’s largest export destination. In this respect,
the export-weighted global economic activity index constructed by the CBRT
reveals weaker external demand than that envisaged in April (Graph 7.1.1).
Graph 7.1.1. Export-Weighted Global Economic Activity*
(Annual Percentage Change)

5
4
3
2
1
0
-1
-2
April Inflation Report
-3
July Inflation Report
-4
-5
-6
2007 2008 2009 2010 2011

* For the methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”.
Source: CBRT, Bloomberg, Consensus Forecasts, April and July 2010 Bulletins.

When assessing the external demand outlook, it is important to consider


our trading partner’s headline growth forecasts as well as the composition of
growth. In this respect, it is noteworthy that the latest Consensus Forecasts
release indicates a noticeable change in the composition of the euro area 2011
growth forecasts. Specifically, with the depreciation of the euro amid financial
distress and weaker growth outlook, the export outlook for the euro area has
improved, particularly in Germany and Italy, whereas forecasts for the
contribution of final domestic demand to GDP growth are revised down (Table
7.1.2). The fact that the euro area private consumption and investment forecasts
are revised downwards has the potential to affect Turkey’s external demand
prospects adversely. In other words, despite the absence of a major revision to
the euro area growth forecasts, the change in the composition of GDP growth
indicates a weaker external demand outlook for Turkey compared to the
previous Report.
Table 7.1.2. Revisions of Euro Area 2011 Growth Forecasts
(Percent)
Private Public
Growth Consumption Consumption Investment Exports Imports
April 2010 1.5 1.0 1.1 2.6 4.9 4.8
July 2010 1.4 0.7 0.5 2.1 5.3 4.4
Source: Consensus Forecasts, April and July 2010 Bulletins.

Inflation Report 2010-III 89


Central Bank of the Republic of Turkey

Against this background, we now envisage weaker external demand


conditions compared to the previous Report, while domestic demand continues
to recover as anticipated. Therefore, the revised forecasts envisage that the
resource utilization would stay at low levels and the contribution of aggregate
demand conditions to disinflation would increase slightly.

The global fragility induced by the financial distress in the euro area as
well as the emerging slowdown in the Chinese economy led to an increase in
downside risks to global growth. As a direct result, metal and oil prices in
international spot and futures markets are down from the April Inflation Report
as of July. Accordingly, our crude oil price assumptions underlying the
medium-term forecasts are revised down from 85 to 80 USD per barrel for
2010 and from 90 to 85 USD per barrel for 2011, and left unchanged for 2012
(Table 7.1.1).

Another global reflection of the fiscal problems in Europe has been the
decline in investor risk appetites. Increasing risk premiums, particularly for the
highly-indebted European countries, have generally spilled over into emerging
markets. Heightened risk premiums could be mainly attributed to concerns
regarding debt sustainability, which in turn, could jeopardize financial stability.
The rise in Turkey’s risk premium has been relatively limited, owing to
comparatively low debt ratios and sound debt sustainability indicators.

Despite the increased risk premium during the second quarter, both the
fall in inflation and the growing expectation that policy rates would remain low
for quite some time caused market rates to decrease further, and the yield curve
to flatten out (Graph 5.1.7). Credit markets continued to recover in the second
quarter, while lending standards eased further. The gap between commercial
loan rates and deposit rates remained narrow, and the increase in SME loans
steadied. Therefore, we have built our forecasts on a macroeconomic outlook of
financial easing.

7.2. Medium-Term Outlook

Against this background, assuming that the measures outlined in our exit
strategy are completed to a large extent during rest of the year, and that policy
rates are kept constant at current levels for some time followed by limited
increases in 2011, with policy rates staying at single digits throughout the 3-
year forecast horizon, the medium-term forecasts suggest that, with 70 percent

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probability, inflation will be between 6.5 and 8.5 percent with a mid-point of
7.5 percent at end-2010, and between 3.6 and 7.0 percent with a mid-point of
5.3 percent by the end of 2011. Furthermore, inflation is expected to decline to
5.0 percent by the end of 2012 (Graph 7.2.1).

Graph 7.2.1. Inflation and Output Gap Forecasts

Forecast Range* Uncertainty Band End-Year Inflation Targets Output Gap


12
Control
10
Horizon
8
6
4
Percent

2
0
-2
-4
-6
-8
-10
Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13
* The shaded region indicates the 70 percent confidence interval for the forecast.

In sum, the end-2010 inflation forecast has been revised down by 0.9
percentage points from April, owing to the downward revisions to food and oil
price assumptions, and the recent slowdown in underlying inflation (Graph
7.2.2B). Inflation is expected to remain volatile above the target in the short
run, drop to 7.5 percent at end-2010, fall further in 2011 and achieve the
medium-term target of 5 percent in early 2012 (Graph 7.2.1).

Our output gap forecasts based on the above assumptions are shown in
Graph 7.2.1. Due to the dampening effect of the euro area debt crisis on
aggregate demand, output gap forecasts are revised slightly down from the
previous Reporting period (Graph 7.2.2A). However, the downward revision to
monetary policy is expected to partially compensate for the adverse impact of
the weak external demand. Put differently, despite the relatively weak outlook
for external demand, estimates for the pace of economic recovery are left
unchanged. Our revised forecast indicates that the monetary tightening required
to keep inflation in line with medium-term targets would start later and would
be more limited compared to the previous forecast.

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It should be emphasized that any new data or information regarding the


inflation outlook may lead to a change in the monetary policy stance.
Therefore, assumptions regarding the future policy rates underlying the
inflation forecast should not be perceived as a commitment on behalf of the
CBRT.

Graph 7.2.2. Comparison of April and July 2010 Inflation Report Forecasts

A. Output Gap Forecast B. Inflation Forecast

0 11
10
-1 April 2010 9 April 2010
8
-2 7
July 2010 6 Realization
-3
5 July 2010
-4 4
3
-5 2
1 2 3 4 1 2 3 4 1 2 3 4 1 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2010 2011 2012 2013 2009 2010 2011 2012 2013

Source: CBRT. Source: TURKSTAT, CBRT.

Although underlying inflation is expected to remain consistent with the


medium-term targets, and follow a stable path, the exact path of inflation would
largely depend on base effects over the year ahead. Therefore, a clear
understanding of these effects would help economic agents better interpret the
developments in inflation, and enable the management of expectations:

Given the extreme volatility in unprocessed food prices and the tax
incentives in 2009, inflation is expected to remain volatile over the remainder
of 2010. Owing to the base effects resulting from the tax hike on tobacco in
2009 and the tax cuts on durable goods in March and April 2009, which began
to run out in June 2009, inflation is likely to fall markedly in July 2010.
Inflation is expected to rise in August due to the sharp drop a year ago, and
decline substantially in the final quarter with the reversal of base effects from
food prices.

The fact that the 1.9 percentage point contribution from tax hikes in early
2010 has largely disappeared, will affect inflation in the first two months of
2011. Although annual inflation may rise during the second quarter of 2011
amid very low base effects from food inflation, inflation is likely to fall
gradually in subsequent periods to stabilize around 5 percent by early 2012.

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Comparison of CBRT Forecasts with Inflation Expectations

It is critical that economic agents, with the awareness of temporary


factors, focus on medium-term inflation trends, and therefore, take the inflation
targets as a benchmark for their pricing plans and contracts. In this respect, to
serve as a reference guide, CBRT’s current inflation forecasts should be
compared to inflation expectations of other economic agents. Our inflation
forecasts for end-2010 are largely consistent with current inflation expectations.
However, longer term inflation expectations, particularly 24-month ahead
inflation expectations, are significantly above the revised inflation forecasts
(Table 7.2.1).

Table 7.2.1. CBRT Inflation Forecasts and Expectations


CBRT Forecast CBRT Survey of Expectations1 Inflation Target2
2010 year-end 7.5 7.7 6.5
12-month ahead 6.0 7.2 5.9
24-month ahead 5.1 6.9 5.2

1 July2010, Second survey period results.


2 Calculated by linear interpolation of year-end inflation targets for 2010, 2011 and 2012.
Source: CBRT.

7.3. Risks and Monetary Policy

By influencing commodity prices and external demand conditions, global


economic activity would continue to be the main factor driving inflation
dynamics and the monetary policy outlook. In this respect, the timing and the
extent of monetary tightening to be implemented during 2011 under the
baseline scenario may change depending on the course of the economic
activity.

Recently, rising concerns regarding debt sustainability in several euro


area countries and the spillover effects to the financial system have led to
renewed turmoil across financial markets, underscoring the downside risks to
the global economic recovery. Furthermore, ongoing problems in credit, real
estate and labor markets across advanced economies, with little policy options
left in case of another disruption to global economic activity, suggest that the
downside risks regarding the pace of global growth are likely to persist for
some time. Should the global economy face a longer-than-anticipated period of
anemic growth, which would consequently delay the domestic recovery
significantly, the monetary tightening envisaged in 2011 under the baseline

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scenario may be postponed towards the end of 2011. Moreover, an outcome


whereby global economic problems intensify and contribute to a contraction of
domestic economic activity, may trigger a new easing cycle. By contrast,
monetary tightening may be implemented in an earlier period during 2011,
should the recovery in economic activity turn out to be faster than expected.

Despite the increased downside risks pertaining to external demand,


domestic demand remains strong. Although problems regarding the global
economy have the potential to restrain domestic demand through confidence
and financing channels, countercyclical monetary policy and the ongoing
improvement in employment conditions are likely to support the recovery in
domestic demand. On the other hand, given the relative improvement in the
creditworthiness of Turkey during the post-crisis period, a possible
strengthening in capital inflows in the forthcoming period stands out as another
factor that may lead to a faster recovery in the domestic demand in contrast to
external demand. Should the divergence in the growth rates between domestic
and external demand continue in the forthcoming period, it would be necessary
to utilize other policy instruments such as reserve requirement ratios and
liquidity management facilities more effectively. Accordingly, if the
composition of strong domestic demand and weak external demand continue as
envisaged, and if this pattern of growth co-exists with rapid credit expansion
and a deterioration in the current account balance, consequently leading to
financial stability concerns, than the CBRT may bring forward the measures
outlined in the exit strategy that are expected to be implemented until the end of
2010.

The CBRT will continue to monitor fiscal policy developments closely


while formulating monetary policy. Since the second half of 2009, economic
activity has been stronger than envisaged in the MTP, leading to a better-than-
expected performance in budget revenues. Using this fiscal space mostly to
reduce the government debt would facilitate demand management and reduce
any need for indirect tax hikes, therefore providing more flexibility regarding
the conduct of countercyclical monetary policy. In this respect, should the fiscal
discipline be implemented through institutional and structural improvements,
such as enacting and establishing the fiscal rule, it would be possible to keep
policy rates at single-digit levels over the medium term.

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Since the last quarter of 2008, the CBT, without conflicting with its
primary objective of maintaining price stability, has focused on containing the
adverse effects of the global crisis on the domestic economy—which has been
achieved to a large extent. Monetary policy will continue to focus on price
stability in the period ahead. Strengthening the commitment to fiscal discipline
and the structural reform agenda would support the improvement of Turkey’s
sovereign risk, and thus facilitate macroeconomic and price stability. In this
respect, timely implementation of the structural reforms envisaged by the MTP
and the EU accession process remains to be of utmost importance.

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Box
Monetary Policy Stance During September 2008 - July 2010
7.1

The financial turmoil that initiated with the meltdown in the US sub-prime
mortgage market during the third quarter of 2007 deepened further by the fourth
quarter of 2008, and spread across the globe. Concurrently, monetary and fiscal
policy authorities called for coordinated action to tackle with the financial crisis
and to stimulate the economy. Following the deepening of the crisis, central
banks in advanced economies launched unconventional monetary policy
measures to restore the smooth functioning of credit markets, while those in
emerging economies slashed policy rates aggressively to contain the effects of
the global crisis on their economies. Meanwhile, the CBRT not only sought to
maintain price stability but also adopted measures to contain the adverse effects
of the crisis on economic activity and financial stability. This Box analyzes the
monetary policy decisions taken after the outburst of the crisis and the underlying
rationale.

The heightened global uncertainty immediately after the collapse of Lehman


Brothers in September 2008 prompted the CBRT to pursue a prudent monetary
policy. Therefore, the CBRT left policy rates unchanged in September and
October 2008, but adopted a series of measures to reduce the crisis-induced
uncertainty surrounding money markets and to counter the Turkish lira and foreign
currency squeeze in markets. Accordingly, the CBRT started to overfund the
markets in October 2008, and narrowed the gap between borrowing and lending
rates by lowering the lending rate by 50 basis points. In addition, the CBRT
suspended foreign exchange buying auctions on October 16, 2008 and, in the
face of non-competitive pricing in the foreign exchange market, conducted
foreign exchange selling auctions on October 24 and 27, 2008. In October 2008,
the CBRT resumed its intermediary role in its Foreign Exchange Deposit Market,
raised transactions limits, extended the respective maturities and cut lending rates
for transactions for which the CBRT is a party. On December 5, 2008, the CBRT
reduced the foreign exchange reserve requirement ratio and injected an
additional foreign currency liquidity to the markets. The CBRT also raised export re-
discount credit limits and provided an easier access to these credits (Table 1).

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Table 1: Policy Decisions and Liquidity Measures between October 2008 and July 2010

MONTHS
Basis Point Change

• The gap between borrowing and lending rates is


The maturity of foreign exchange
October 2008 narrowed by 50 basis points
deposits in the Foreign Exchange
Deposit Market is lengthened from 1 (0) • Intermediation in the Foreign Exchange Deposit
week to 1 month, lending rates are Market is resumed and transactions limits are raised
reduced November 2008 • Foreign exchange buying auctions are
(-50) suspended
• Foreign exchange selling auctions are resumed
• Foreign exchange reserve December 2008
requirements are lowered from 11 to (-125)
9 percent
• Export rediscount credit limits are
January 2009 The Liquidity Support Facility Regulation is
raised and credit standards are
(-200) announced on CBRT’s website
eased
February 2009
(-150) The maturity of foreign exchange deposits in the
Foreign Exchange Deposit Market is lengthened
Foreign exchange buying auctions from 1 month to 3 months, lending rates are
March 2009
are resumed reduced
(-100)

• Foreign exchange selling auctions April 2009


are suspended (-75)

• Export rediscount credit limits are May 2009


raised (-50)

June 2009 3-month repo auctions are launched


(-50)

July 2009
(-50)
Foreign exchange buying auctions
August 2009
are resumed
(-50)

September 2009
(-50)

October 2009 Turkish lira reserve requirements are


(-50) lowered by 1 point to 5 percent

November 2009
(-25)

December 2009
(0)

January 2009
(0)

February 2009
(0)

March 2009
• CBRT’s exit startegy is announced
(0)
• Foreign exchange reserve
April 2009 requirements are raised by 0.5 points
(0) to 9.5 percent
• Overfunding is gradually reduced
1-week repo auction rate is used as
May 2009
the reference rate for monetary policy
(0)

June 2009
(0)

July 2009
(0)

The economy plunged into a deeper contraction in November 2008, which was
confirmed by indices and data releases in December. Amid growing concerns
over a prolonged and deeper crisis in international credit markets and the world
economy in January 2009, the outlook for external demand deteriorated further
during the first quarter of 2009, while global growth forecasts were revised down in
March. The global crisis had a more severe impact on the labor market during the
first quarter, while domestic demand fell rapidly.

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Meanwhile, the CBRT envisaged that global credit problems would dampen
domestic and external demand for a long time and therefore downside risks to
inflation would become more pronounced. In this respect, the CBRT, without
conflicting with the primary objective of maintaining price stability, has pursued
policies focusing on economic activity and financial stability, and moved rate-cut
decisions forward in order to help alleviate the additional tightening in financial
conditions. Thus, the CBRT adopted a front-loaded monetary policy and
launched the monetary expansion process in November 2008. Unlike many
emerging economies, Turkey’s sound financial system in addition to its relatively
less deteriorated risk premium amid the global crisis enabled the CBRT to cut
policy rates more aggressively, by a cumulative 625 basis points from November
2008 to March 2009. In early March, with the deepening of the global economic
crisis, foreign exchange markets lost depth, leading to non-competitive pricing
behavior. Accordingly, the CBRT resumed daily foreign exchange selling auctions,
which continued until April 2, 2009 (Table 1).

The second quarter of 2009 was marked by growing signs that the worst of the
crisis was over, yet the post-crisis economic recovery would be slow and gradual.
In this period, domestic demand recovered largely due to fiscal measures, while
external demand remained weak. The lack of a major growth in the demand for
goods without tax incentives, ongoing de-stocking, absence of a solid recovery in
the labor market and the growing sense that it would take a long while for
employment conditions to improve, all signaled that weak demand conditions
are yet to end. Thus, aggregate demand conditions continued to support
disinflation during the second quarter, prompting the CBRT to take further
measures to contain the adverse effects of the global financial crisis. Accordingly,
the CBRT launched 3-month repo auctions on June 19, 2009 to ensure the smooth
functioning of the credit market (Table 1).

The policy rate cuts and other countercyclical measures had a major impact on
money and credit markets by the second quarter of 2009, and kept inflation from
undershooting the year-end target. The CBRT emphasized that the partially
prevalent additional tightening in financial conditions reflected ongoing
downside risks and that monetary policy would require downward flexibility for
quite some time. Accordingly, the CBRT continued to cut policy rates gradually
from April to June 2009, totaling 175 basis points (Table 1).

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Fiscal measures had a waning impact on domestic demand during the third
quarter of 2009, while external demand remained sluggish. Moreover, data
releases on inflation and economic activity since the launch of the rate-cut cycle
vindicated the CBRT’s monetary strategy, and thereby reinforced the impact of
the policy decisions on expectations. As a result, the CBRT lowered policy rates by
a total of 150 basis points in the third quarter (Table 1). The policy rate cuts and
the improved risk sentiment, and more importantly, the CBRT’s communication
policy1 played a key role in bringing market rates down, leading to an increase in
loan supply and consumer loans. In view of the favorable developments in the
credit market and the moderate economic recovery during the fourth quarter,
the CBRT slowed the pace of monetary easing, and lowered policy rates by 50
and 25 basis points, respectively, in October and November.

December 2009 was marked by growing expectations of a moderate economic


recovery. Yet, the continued uncertainty about aggregate demand as well as the
belief that it would take a long while for employment conditions to fully recover
indicated that domestic resource utilization would remain low for a prolonged
period and inflation would hover around low levels in the medium term.
Accordingly, although inflation was heading towards a base effect-driven jump,
in view of the ongoing problems in the global economy and the uncertainty
about the pace of economic recovery, the CBRT left policy rates unchanged in
December 2009, pausing the monetary easing cycle that had been effective for
over a year. Furthermore, in order to ensure that the temporary increase in
inflation would not pose a threat to inflation expectations and pricing behaviors,
the CBRT followed an effective expectations management strategy with a
stronger emphasis on the positive outlook for core inflation indicators.

In sum, the CBRT cut borrowing rates by a total of 1025 basis points from
November 2008 to November 2009 (Table 1), bringing Turkey’s policy rate closer to
the average of inflation-targeting emerging economies.

Higher energy and food prices and tax adjustments caused inflation to increase
dramatically in the fourth quarter of 2009. Having envisioned that the rise in
inflation would be temporary, the CBRT maintained an effective communication
strategy assuring that inflation was in line with medium-term targets, and focused
on limiting the deterioration in inflation expectations and pricing behaviors.

1
Specifically, the well-established medium-term perspective on monetary policy presented in the July 2009 Inflation Report
accelerated the downtrend in market rates.

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The imbalance between domestic and external demand increased remarkably


during and after February. While domestic demand was on a gradual and stable
rise, external demand remained uncertain. Besides, the increase in inflation led to
higher inflation expectations and heightened concerns about deterioration in
pricing behaviors. Against this background, the CBRT stated that it would revise its
monetary policy stance in case higher expectations would lead to a deterioration
in pricing behaviors, and hinted at an exit from crisis measures. In fact, on April 14,
2010, as money and credit markets started to normalize, the CBRT announced an
exit strategy that embodies the withdrawal of crisis measures and normalization
process of the monetary policy (Table 1).2

Unlike other emerging economies, Turkey entered the global crisis with a strong
and well-regulated banking system and a flexible and efficient liquidity
management tailored to previous crisis experience. Therefore, having only minor
deterioration in its balance sheet, the CBRT was not forced to launch radical
measures. Thus, the CBRT was able to design a clearer and easier exit strategy
than many other central banks. Firstly, as global markets returned to normal, the
CBRT raised the foreign exchange reserve requirement ratio by 0.5 percentage
points in April to bring foreign exchange liquidity facilities orderly and gradually
back to pre-crisis levels (Table 1). In May, the CBRT decided to use the 1-week
repo rate as the benchmark for policy rates (Table 1).

Domestic demand remained relatively stable, while the uncertainties surrounding


external demand were back on the rise in May 2010 due to the financial turmoil in
the euro area. Moreover, lower unprocessed food prices and easing commodity
prices contributed to a positive inflation outlook, which added to the optimism
about inflation, and therefore reduced risks pertaining to pricing behavior. This
outlook confirmed the CBRT’s prediction that it would be necessary to maintain
the current policy rate for some time and keep rates at low levels for a long
period. Accordingly, the CBRT maintained its monetary policy stance during May-
July 2010 and continued to keep policy rates fixed at low levels.

In conclusion, the CBRT’s post-crisis, front-loaded rate-cut strategy intended to


bring policy rates down to historic lows and keep rates at these levels for a long
time, has been confirmed by data releases. Without conflicting with the objective
of maintaining price stability, the CBRT has focused on containing the adverse
effects of the global crisis on the economy, which has been achieved to a large
extent. Monetary policy will continue to focus on price stability in the period
ahead.

2
For the full text, see: “Monetary Policy Exit Strategy”, http://www.tcmb.gov.tr/yeni/announce/2010/ANO2010-12.pdf

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Graphs
1. Overview
Graph 1.1. Risk Premium Indicators 1
Graph 1.2. Expected Policy Rates at 2010 Year-end 2
Graph 1.1.1. CPI by Categories 2
Graph 1.1.2. Contribution to Annual CPI Inflation 2
Graph 1.1.3. Food Prices 3
Graph 1.1.4. Prices of Animal Products 3
Graph 1.1.5. Prices of Core Goods 3
Graph 1.1.6. Prices of Services 3
Graph 1.2.1. Expected Policy Rate Changes 4
Graph 1.3.1. Term Structure of Market Interest Rates 5
Graph 1.3.2. Export-Weighted Global Economic Activity 7
Graph 1.3.3. Inflation and Output Gap Forecasts 10
Graph 1.3.4. Comparison of April and July 2010 Inflation Report Forecasts 10

2. International Economic Developments


Graph 2.1.1. Aggregated Growth Rates 15
Graph 2.1.2. Unemployment in Advanced Economies 15
Graph 2.1.3. Industrial Production in Advanced and Emerging Economies 15
Graph 2.1.4. JP Morgan Global PMI 15
Graph 2.2.1. S&P Goldman Sachs Commodity Prices 17
Graph 2.2.2. Crude Oil (Brent) Prices (USD/bbl) 17
Graph 2.3.1. CPI Inflation in Advanced and Emerging Economies 18
Graph 2.3.2. Core CPI Inflation in Advanced and Emerging Economies 18
Graph 2.4.1. Money Market Rates 19
Graph 2.4.2. Asset-Backed Securities in the US 19
Graph 2.4.3. Global Risk Appetite 19
Graph 2.4.4. CDS Rates 19
Graph 2.4.5. Global Stock Markets 20
Graph 2.4.6. Exchange Rate and Risk Premium Indicators for Emerging Economies 20
Graph 2.4.7. US Credit Developments 20
Graph 2.4.8. Euro Area Credit Developments 20
Graph 2.4.9. Lending Survey by the FED 21
Graph 2.4.10. Lending Survey by the ECB 21
Graph 2.5.1. Policy Rate Changes in Advanced Economies 22
Graph 2.5.2. Policy Rate Changes in Emerging Economies 22
Graph 2.5.3. Expected Policy Rates at 2010 Year-end 23
Graph 2.5.1. Policy Rate Changes in Advanced Economies 24
Graph 2.5.2. Policy Rate Changes in Emerging Economies 24

3. Inflation Developments
Graph 3.1.1. CPI by Categories 29
Graph 3.1.2. Contribution to Annual CPI Inflation 29
Graph 3.1.3. Food Prices 30
Graph 3.1.4. Prices of Animal Products 30
Graph 3.1.5. Energy and Oil Prices 31
Graph 3.1.6. Energy Prices 31
Graph 3.1.7. Prices of Core Goods 32
Graph 3.1.8. Prices of Services 33
Graph 3.1.9. Prices of Services by Subcategories 33
Graph 3.1.10. Prices of Services 33
Graph 3.1.11. Prices of Services and Change in Unemployment 33
Graph 3.1.12. Core CPI Indices H and I 34
Graph 3.1.13. Core CPI Indices H and I 34
Graph 3.1.14. Agricultural Prices 35
Graph 3.1.15. Manufacturing Industry Prices and PMI Output Prices Index 35
Graph 3.2.1. 12 and 24-Month Ahead CPI Expectations 36

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Graph 3.2.2. Inflation Expectations Curve 36


Graph 3.2.3. Distribution of 12-Month Ahead Inflation Expectations 36
Graph 3.2.4. Distribution of 24-Month Ahead Inflation Expectations 36

4. Supply and Demand Developments


Graph 4.1.1. Annual GDP Growth by Quarters 39
Graph 4.1.2. GDP 39
Graph 4.1.3. Contribution to Annual GDP Growth from Spending 40
Graph 4.1.4. Resident and Non-Resident Household Spending 40
Graph 4.1.5. GDP 41
Graph 4.1.6. GDP and Non-Government GDP 41
Graph 4.1.7. Production and Import Quantity of Consumption Goods 41
Graph 4.1.8. Aggregated Index and Private Spending 41
Graph 4.1.7. Production and Import Quantity of Consumption Goods 42
Graph 4.1.10. Aggregated Index and Private Machinery-Equipment Investments 42
Graph 4.1.11. Final Domestic Demand 42
Graph 4.1.12. Consumer Confidence 42
Graph 4.1.13. 3-Month Ahead BTS Expectations for Orders 43
Graph 4.1.14. 12-Month Ahead BTS Expectations for Investments 43
Graph 4.2.1. Contribution to Annual GDP Growth from Exports, Imports and Net Exports 44
Graph 4.2.2. Exports and Imports of Goods and Services 44
Graph 4.2.3. Quantity Index for Exports Excluding Gold 44
Graph 4.2.4. 3-Month Ahead BTS Expectations for Orders and Capacity Utilization 44
Graph 4.2.5. GDP Forecasts for Advanced Economies 45
Graph 4.2.6. Quantity Index for Imports 46
Graph 4.2.7. Quantity Index for Imports by Subcategories 46
Graph 4.3.1. Unemployment 47
Graph 4.3.2. Non-Farm Employment 47
Graph 4.3.3. Industrial Employment and Production 47
Graph 4.3.4. Manufacturing Industry and PMI Employment Index 47
Graph 4.3.5. Household Spending, Real Wages and Non-Farm Employment 48
Graph 4.3.6. Non-Farm Value Added and Employment 48

5. Financial Markets and Financial Intermediation


Graph 5.1.1. Risk Premium Indicators for Emerging Economies 59
Graph 5.1.2. Sovereign Debt and Changes in Risk Premium 60
Graph 5.1.3. Policy Rate Expectations 61
Graph 5.1.4. Policy Rates in Comparison with Pre-Crisis Levels 62
Graph 5.1.5. Interest Rates 62
Graph 5.1.6. Inflation Expectations 63
Graph 5.1.7. Term Structure of Market Interest Rates 63
Graph 5.1.8. Market Rates and Foreign Inflows 64
Graph 5.1.9. Medium-term Real Interest Rates Derived from Yield on GDBS 65
Graph 5.1.10. Annual Growth of the Real Monetary Base 65
Graph 5.1.11. Performance of the Turkish Lira 66
Graph 5.1.12. Exchange Rate Stability Indicators 67
Graph 5.1.13. Market Liquidity 68
Graph 5.2.1. Real Sector Loans 69
Graph 5.2.2. Subcategories of Consumer Loans 69
Graph 5.2.3. Business Loans and Loan Diffusion Index 70
Graph 5.2.4. Loan Rates 70
Graph.5.2.5. Business Loan Standards - Credit Market Competitiveness 71
Graph 5.2.6. Spread Between Loan Rates and Cost of Financing 71
Graph 5.2.7. Past-Due Loans and Overdrafts 72

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6. Public Finance
Graph 6.1. Budget Deficit and Public Debt Stock Forecasts for 2010 75
Graph 6.1.1. Central Government Budget Balance 77
Graph 6.1.2. Real Tax Revenues 79
Graph 6.1.3. Primary Surplus 79
Graph 6.2.1. Public Debt Stock Indicators 80
Graph 6.2.2. Structure of the Central Government Debt Stock 81
Graph 6.2.3. Maturity of Borrowing from Domestic and External Markets 82
Graph 6.2.4. Domestic Borrowing 82

7. Medium-Term Projections
Graph 7.1.1. Export-Weighted Global Economic Activity 89
Graph 7.2.1. Inflation and Output Gap Forecasts 91
Graph 7.2.2. Comparison of April and July 2010 Inflation Report Forecasts 92

Tables
1. Overview
Table 1.3.1. Revision of Euro Area 2011 Growth Forecasts 7

2. International Economic Developments


Table 2.1.1. Growth Forecasts 16
Table 2.3.1. Inflation Forecasts 18

3. Inflation Developments
Table 3.1.1. Prices of Goods and Services 31
Table 3.1.2. Prices of Core Goods 32

5. Financial Markets and Financial Intermediation


Table 5.2.1. Developments in Banks’ Balance Sheet Items 72

6. Public Finance
Table 6.1.1. Central Government Budget Aggregates 76
Table 6.1.2. Non-Interest Expenditures 77
Table 6.1.3. General Budget Revenues 78

7. Medium-Term Projections
Table 7.1.1. Sources of Revisions to Inflation Forecasts 88
Table 7.1.2. Revisions of Euro Area 2011 Growth Forecasts 89
Table 7.2.1. CBRT Inflation Forecasts and Expectations 93

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Boxes in Previous Inflation Reports


2010-II
2.1. Foreign Demand Index for Turkey
3.1. The Role of Meat Prices in Food Price Inflation Spike
4.1. Global Crisis, Foreign Demand Shocks and the Turkish Economy
5.1. The Impact of Monetary Policy Decisions on Market Returns
5.2. Post-Crisis Exit Strategy of Monetary Policy in Turkey
6.1. Fiscal Rule: General Framework and Planned Practice in Turkey
7.1. Communication Policy and Inflation Expectations Following Recent Inflation Developments

2010-I
1.1. A backward Glance on end-2009 Inflatİon Forecasts
3.1. Volatility of Unprocessed Food Inflation in Turkey: A Review of the Current Situation
3.2. Base Eeffects and Their Implications for the 2010 Inflation Outlook
5.1. The Impact of Central bank’s Purchases of Government Securities on Market Returns
5.2. Banks’ Loans Tendency Survey and Changes in Loans
5.3. The Financial Structure of a Firm and the Credit Transmission Mechanism
7.1. Inflation Expectations Before and After the Target Revision in 2008

2009-IV
2.1. Risk of Deflation in the US and the Euro Area
2.2. Capital Flows to Emerging Markets: IIF Forecasts for 2009-2010
3.1. The Course of Durable Goods Prices in 2009: The Impact of Tax Adjustments
4.1. Fınancial Stress and Economic Activity
5.1. Banks' Loans Tendency Survey and Changes in Loans
2009-III
2.1. Global Recessions and Economic Policies
3.1. The Impact of Temporary Tax Adjustments on Consumer Prices
4.1. Measuring Underlying Exports: Are Core Indicators Needed?
5.1. Mid-Crisis Impact of Country Risk on Policy Rates
6.1. The Fiscal Implications of the Global Crisis on Advanced and Emerging Economies
2009-II
1.1. Measures Taken by the Central Bank of the Republic of Turkey to Reduce the Impact of the
Global Crisis
1.2. The Front-Loaded Monetary Policy since November 2008 and Its Effects
2.1. Expectations About Global Economy
4.1. Monitoring the Trends in Employment: Do We Need Core Measures?
5.1. Changes in the Risk Premium for Emerging Markets and Policy Rate Decisions
5.2. Global Crisis and Financial Intermediation
2009-I
2.1. Expectations About Global Economy
7.1. Accountability Mechanisms in Inflation-Targeting Countries

2008-IV
3.1. Crop Production Forecasts and Price Developments
3.2. An Empirical Analysis of Oil Prices
4.1. Sources of Growth in the Turkish Economy
2008-III
2.1. Recent Developments in Global Inflation and Monetary Policy Measures
3.1. Medium-term Forecasts for Food Prices
4.1. Is There Any Increase in Economic Activity in the Fırst Quarter of 2008?
The Impact of Seasonal Variations and Working Days on National Accounts
5.1. Changes in Liquidity and Monetary Policy Reference Rate

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2008-II
2.1. Recent Developments in Global Inflation
3.1. Recent Food Price Developments
4.1. Update of National Accounts Data
5.1. An Overview on Risk remium Volatility and Risk Appetie Elasticity in
Emerging Economies
2008-I
2.1. A Brief Overview of the Appreciation of Yuan and Its Likely Results

2007-IV
5.1. Yield Curves and Monetary Policy Decisions
2007-III
3.1. Recent Price Developments in Agricultural Raw Materials
4.1. Structural Change in the Export Performance of Turkey After 2001
2007-II
3.1. Wages and Services Inflation
5.1. Information Contained in the Inflation-indexed Bonds about Inflation Expectations
2007-I
3.1. The Course of Durable Goods Prices after May
3.2. Chinese Effect on Domestic Prices
6.1. Treasury’s 2007 Financing Program

2006-IV
2.1. Results from a Structural VAR Analysis of the Determinants of Capital Flows into Turkey
2.2. Commodity Markets
7.1. Inflation Targeting Regime, Accountability and IMF Conditionality
2006-III
3.1. Behavior of Price Level and Inflation in Case of Likely Shocks
4.1. Results of the Survey on Pricing Behaviour of Firms
4.2. Rise in International Energy Prices and Its Effects on Current Account Deficit
5.1. Debt Structures of Companies in Turkey
2006-II
2.1. International Gold Price Developments and Their Effects on the CPI
3.1. Relative Price Differentiation, Productivity and the Real Exchange Rate
6.1. Inflation Targeting Regime, Accountability and IMF Conditionality
2006-I
2.1. The use of Special CPI Aggregates in the Measurement of Core Inflation
2.2. The Exchange Rate Pass-through in Turkey: Has the Pass-through Changed with the New CPI Index?
3.1. Productivity Developments in the Manufacturing Industry
5.1. Commitments about Fiscal Policy
6.1. Inflation Targeting Strategy and Accountability

Inflation Report 2010-III 105


Central Bank of the Republic of Turkey

Abbreviations
BTS Business Tendency Survey

CBRT Central Bank of the Republic of Turkey

CCS Cross Currency Swaps

CDS Credit Default Swap

CEEMEA Central Eastern Europe, Middle East and Africa

CF Consensus Forecasts

CUR Capacity Utilization Rate

ECB European Central Bank

EMBI Emerging Markets Bonds Index

EU European Union

GDBS Government Domestic Borrowing Securities

GDP Gross Domestic Product

IFS International Financial Statistics

IMF International Monetary Fund

ISE Istanbul Stock Exchange

MPC Monetary Policy Committee

MSCI Morgan Stanley Capital International

MTP Medium-Term Program

OECD Organization for Economic Co-Operation and Development

OPEC Organization of the Petroleum Exporting Countries

PMI Purchasing Managers Index

SCT Special Consumption Tax

SEE State Economic Enterprises

SME Small and Medium-Sized Enterprises

SSA Social Security Agency

TL Turkish Lira

TURKSTAT Turkish Statistical Institution

UK United Kingdom

US United States

USA United States of America

VAT Value Added Tax

WEO World Economic Outlook

106 Inflation Report 2010-III


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2010 Calendar of MPC Meetings, Inflation Reports and Financial Stability Reports

Inflation Report Financial Stability Report


Monetary Policy Meeting
(in Turkish) (in Turkish)

January 14, 2010 January 26, 2010


(Thursday) (Tuesday)

February 16, 2010


(Tuesday)

March 18, 2010


(Thursday)

April 13, 2010 April 29, 2010


(Tuesday) (Thursday)

May 18, 2010 May 26, 2010


(Tuesday) (Wednesday)

June 17, 2010


(Thursday)

July 15, 2010 July 27, 2010


(Thursday) (Thursday)

August 19, 2010


(Thursday)

September 16, 2010


(Thursday)

October 14, 2010 October 26, 2010


(Thursday) (Thursday)

November 11, 2010


(Thursday)

December 16, 2010 December 7, 2010


(Thursday) (Tuesday)

Inflation Report 2010-III 107