Republic of Turkey Undersecretariat of Treasury GROWTH, EXTERNAL BALANCE and FISCAL POLICY İbrahim H. Çanakcı Undersecretary of Treasury J.P. Morgan Investor Seminar London May 18, 2012
Outline I. Macroeconomic Performance in 2010-2011 II. Policies and Structural Reforms to Address the Challenges in External Balance III. Recent Developments in Growth and Current Account Balance IV. Fiscal Policy 2
I. MACROECONOMIC PERFORMANCE IN 2010-2011 3
GDP Growth Rate (%) 4 Source: TURKSTAT
Unemployment Rate (seasonally adjusted, %) 5 Source: TURKSTAT
Consumer Price Index (% change) 6 Source: TURKSTAT
Current Account Deficit/GDP (%) 7 Source: CBRT, TURKSTAT
Key Factors Affecting Current Account Deficit Domestic Demand Oil and Other Energy Prices Non-Energy Terms of Trade Real Exchange Rate Competitiveness Domestic Saving Ratio 8
Total Domestic Demand and Imports (%, YoY) 9 Source: TURKSTAT, CBRT
Credit Growth and Current Account Deficit (%) (*) ratio of annualized CAD to annualized GDP (**) ratio of annual change in credit stock to annualized GDP 10 Source: TURKSTAT, CBRT, BRSA
Current Account Balance – Energy Impact (% GDP) 11 Source: TURKSTAT, CBRT
Terms of Trade (12-month average, $) 12 Source: TURKSTAT, Undersecretariat of Treasury
Real Exchange Rate (2003=100) 13 Source: CBRT
Global Competitiveness Index Year Number of Countries Turkey’s Rank Turkey’s Rank (Percentile) (*) 2004 104 66 63.5 2005 117 66 56.4 2006 125 59 47.2 2007 131 54 41.2 2008 134 63 47.0 2009 133 61 45.9 2010 139 61 43.9 2011 142 59 41.5 (*) Ratio of Turkey’s rank to the number of countries in respective reports 14 Source: The Global Competitiveness Reports, World Economic Forum
Product Diversification in Exports Herfindahl-Hirschman Index (HHI, 1996=100) (*) 2012 January–March period Note: The Herfindahl–Hirschman Index (HHI) is a measure of the market concentration and an indicator of the level of competition. In this study, it is defined as sum of squares of n sectors’ shares in total exports of Turkey. If the total share of sectors are defined as 100, the HHI can be 10,000 at maximum (indicating a single sector/product based exports). Increases in the HHI indicate an increase in the concentration of exports on certain products/sectors, whereas decreases indicate the opposite. 15 Source: TURKSTAT, Undersecretariat of Treasury
Market Diversification in Exports (%) 100 90 80 44.7 46.0 46.3 46.2 48.0 56.0 56.6 56.3 56.3 58.0 57.9 70 60 50 25.4 28.7 40 24.6 28.0 28.3 14.5 17.8 18.0 18.9 16.5 16.6 30 7.2 11.1 7.1 7.1 8.0 9.7 9.3 11.9 10.0 9.6 20 10.1 4.7 4.5 4.7 4.9 5.3 9.9 8.4 5.6 6.9 7.7 10.9 8.2 10 9.0 9.1 8.1 7.4 5.2 4.9 5.9 6.2 4.8 5.3 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Other Countries USA Africa Other European Countries (Excluding EU) Asia EU 27 (*) Annualized as of March 2012 16 Source: TURKSTAT
Market Diversification in Exports Herfindahl-Hirschman Index (HHI, 1996=100) 110 100 90 80 Decreasing trend shows increasing market diversification. 70 60 50 40 30 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Export Concentration Ratio (*) 2012 January–March period Note: The Herfindahl–Hirschman Index (HHI) is a measure of the market concentration and an indicator of the level of competition. It is calculated as the sum of squares of the market shares of all firms within the industry. In this study, the HHI is the sum squares of the market shares of countries in total exports. If the total market shares are defined as 100, the HHI can be 10,000 at maximum (indicating all exports to a single country). Increases in the HHI indicate an increase in market concentration of exports, whereas decreases indicate an increase in the number of partner country or a decrease in market concentration. 17 Source: TURKSTAT, Undersecretariat of Treasury
Current Account Deficit and Saving-Investment Gap Current Account PRIVATE SECTOR Domestic Saving- SAVING- Investment Gap INVESTMENT Deficit GAP = = PUBLIC SECTOR SAVING- INVESTMENT GAP 18
Saving-Investment Balance (% GDP) (E) Estimation (P) Projection 19 Source: Ministry of Development
Domestic Savings Ratio (E) Estimation (P) Projection 20 Source: Ministry of Development
II. POLICIES AND STRUCTURAL REFORMS TO ADDRESS THE CHALLENGES IN EXTERNAL BALANCE 21
Policy Measures Macro Policy Measures Monetary policy Macro-prudential regulations Fiscal policy Structural Measures Increasing domestic savings Reducing import-dependency on energy Increasing competitiveness and diversification of export markets and products Improving the quality of financing 22
Increasing Domestic Savings Maintaining fiscal discipline Increasing private savings Introducing matching state contribution in Private Pension System Regulations to support insurance sector Regulations to extend the scope and increase the operational efficiency of Catastrophe Insurance Scheme Financial Literacy Strategy New Turkish Commercial Law Strategy for fight against informal economy 23
Reducing Import-Dependency on Energy Renewable Energy - Increasing the share of renewable energy sources in total electricity production to at least 30% in 2023 Energy Efficiency - Utilizing significant energy saving potential in housing (~30%), industry (~20%) and transportation (~15%) Nuclear Energy - Raising the share of nuclear energy in total electricity production to around 20% by 2023 24
Increasing Competitiveness and Diversification of Export Markets and Products New Investment Incentive System Input Supply Strategy Preliminary studies on iron & steel, automotive, machinery, chemicals, textiles and agriculture sectors have been completed, implementation of actions plans is expected to take place in 2012. Diversification of Export Markets Country Desk Strategy Supporting Services Exports Further Improving the Investment Climate R&D and Innovation Support Programs Labor Market Reforms 25
Improving the Quality of Financing Incentives for long-term savings - Regulation on authorizing Council of Ministers regarding the differentiation of withholding tax rate based on the maturity of deposits Support to Business Angels Support to Venture Capital Funds Regulation on reducing the withholding tax rate to zero percent on trade of investment funds which have more than 75% of its portfolio in the form of stocks Supporting portfolio investment companies established in Turkey managing overseas funds Legislation on rental certificate issuance by Treasury Promoting equity financing New Capital Markets Law Istanbul Finance Center Project New regulation on real estate sale to non-residents 26
III. RECENT DEVELOPMENTS IN GROWTH AND CURRENT ACCOUNT BALANCE 27
Credit Growth (fx adjusted, annual % change) 28 Source: BRSA
Industrial Production Index (seasonally adjusted) 29 Source: TURKSTAT
Capacity Utilization Rate of Manufacturing Industry ( seasonally adjusted, %) 30 Source: CBRT
Medium Term Program Projections GDP Growth Rate (%) 31 Source: Ministry of Development
GDP Growth Expectations for 2012* (%) (*) Median of the expectations Source: Forecast of International Institutions and Investment Banks 32
Foreign Trade Developments (annualized, % change) 33 Source: TURKSTAT
Foreign Trade Deficit (annualized, billion $) 34 Source: TURKSTAT
Current Account Deficit (annualized, billion $) 35 Source: CBRT, TURKSTAT
Rebalancing of Demand (contribution to GDP growth, percentage points) 36 Source: TURKSTAT, Undersecretariat of Treasury
Medium Term Program Projections Current Account Deficit/GDP (%) 10 8.0 7.5 8 7.0 6 4 2 0 2012 2013 2014 37 Source: Ministry of Development
Financing Structure of Current Account Deficit (annualized, billion $) 70 60 50 40 30 20 10 0 -10 2007-1 3 5 7 9 11 2008-1 3 5 7 9 11 2009-1 3 5 7 9 11 2010-1 3 5 7 9 11 2011-1 3 5 7 9 11 2012-1 3 Portfolio and Short-Term Foreign Direct Investment and Long-Term Note: Short term capital movements include short term credits and deposits of banks and non-bank private sector. 38 Source: CBRT
IV. FISCAL POLICY 39
Fiscal Policy Performance (2001-2011) (*) Provisional 40 Source: Undersecretariat of Treasury, MoF, MoD, TURKSTAT
Key Public Debt Indicators 41 Source: Undersecretariat of Treasury, MoF, TURKSTAT
Fiscal Performance and Debt Management in 2010 and 2011 (*) Provisional 42 Source: Undersecretariat of Treasury, MoF, MoD, TURKSTAT
Fiscal Adjustment in 2010 and 2011 (*) Provisional 43 Source: Undersecretariat of Treasury, MoF, MoD
Change in General Government Debt Stock and Budget Balance between 2007 and 2011 Source: IMF, Fiscal Monitor April 2012 44
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