The Turkish ExperiencepBank of Indonesia and IMF Joint Conference on

Coping with Asia’s Large Capital Inflows in a Multi-Speed Global Economy

Erdem BaşçıErdem Başçı

Deputy Governor, Central Bank of Turkey

1

March 11, 2011Bali, Indonesia

Quantitative Easing vs. Quantitative Tightening

• Quantitative easing in major economies has continued in response to weakness in economic activity and heightened sovereign risksto weakness in economic activity and heightened sovereign risks, resulting in dramatic increases in central banks’ balance sheets.

• Facing huge influx of capital, some developing countries haveFacing huge influx of capital, some developing countries have resorted to quantitative macroprudential tightening, even capital controls.

• Turkey has also initiated quantitative tightening, starting from April 2010.

2

Appreciation Pressure

1 15

EM currencies against USD*(4 Jan 2010=1)

1.10

1.15

1.05

0.95

1.00

0.9006-10 07-10 08-10 09-10 10-10 11-10 12-10 01-11 02-11 03-11

EM Average

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

3

Two Approaches

• Approach 1: Use capital account measures to restrict inflows while tightening via interest rates (Brazil South Korea)while tightening via interest rates (Brazil, South Korea)

Approach 2: Use macroprudential measures to restrict domestic• Approach 2: Use macroprudential measures to restrict domestic credit and domestic demand while keeping the short term interest rate differentials as low as possible (Turkey)

4

Current Account Balance

20

Current Account Balance(2009, percent of GDP)

10

15

20

0

5

15

-10

-5

-15

Mal

aysi

a

Taiw

an

Thai

land

Saud

i Ara

bia

Chi

na

Kore

a

Japa

n

Indo

nesi

a

Uni

ted

King

dom

Cze

ch R

ep.

Braz

il

Pola

nd

Fran

ce

Turk

ey (2

009)

Uni

ted

Stat

es

Indi

a

Italy

Turk

ey (2

010*

)

Spai

n

Gre

ece

5

U

* IMF WEO EstimateSource: IMF, CBRT

Phases in Monetary Policy

• Phase-1: Full Liquidity Support (after the collapse of Lehman Brothers, September 2008), p )

• Phase-2: Monetary Exit Strategy (April 2010)Phase 2: Monetary Exit Strategy (April 2010)

• Phase 3: New Policy Mix (starting from November 2010)• Phase-3: New Policy Mix (starting from November 2010)

6

Liquidity after Monetary Exit

Central Bank Liquidity(billion TRY)

Weekly Repo Funding 3 month Repo Funding

20

30

Weekly Repo Funding 3-month Repo FundingSterilization through ON Borrowing Net Liquidity Provided

10

20

-10

0

-2001-09 04-09 07-09 10-09 01-10 04-10 07-10 10-10 01-11

7

Source: ISE, CBRT

Price Stability after Monetary Exit

18

Goods and Services Inflation(year-on-year change, percent)

14

16

18

Goods

8

10

12

4

6

8

0

2

04 05 06 07 08 09 10 11

Services

8

Source: TurkStat, CBRT

Financial Stability: Objectives

1. Debt Ratios: Use of more equity, more prudent borrowing

2. Debt Maturities: Extending maturities of domestic and foreign2. Debt Maturities: Extending maturities of domestic and foreign borrowing and deposits

3. FX Positions: Strengthening FX positions of public and private g g p p psectors

4. Risk management: More effective management of exchange rate risk via instruments such as the Turkish Derivatives Exchange

9

Macroprudential Tools

• Under the current economic conditions, it may not be possible to simultaneously ensure price stability and financial stability by means of

li t lpolicy rates alone.

• Solution: Using macroprudential tools in coordination with other public authoritiesauthorities.

• Macroprudential tools:1 Reserve requirements1. Reserve requirements2. Liquidity management3. Capital adequacy ratios4. Liquidity adequacy ratios5. Taxes6 P i dit f t

10

6. Primary expenditures of government

Tools (in the order of priority):

For Financial Stability: For Price Stability:For Financial Stability:

1. Required Reserve Ratios

2 TRY Liquidity Management

For Price Stability:

1. Short Term Interest Rates

2 TRY Liquidity Management2. TRY Liquidity Management

3. Short Term Interest Rates

2. TRY Liquidity Management

3. Required Reserve Ratios

11

Two Targets, Two Instruments

Policy ResponsePolicy Rate

Policy ResponsePolicy Rate Accelerating Policy Rate

Macroprudential toolsy

Macroprudential toolsAccelerating

Inflation

Price Stability TARGET

Policy Response Policy ResponseDeceleratingPolicy Rate

Macroprudential toolsPolicy Rate

Macroprudential tools

Decelerating

Inflation

Decelerating Credit Growth Accelerating Credit GrowthFinancial Stability

12

The New Policy Mix

A lower policy rate, a wider interest rate corridor and higher reserve requirementsq

• The framework we adopt in spirit is not significantly different from the conventional inflation targeting frameworkconventional inflation targeting framework.

• The only difference is that, previously our policy instrument was the one week repo rate, but now our instrument is a “policy mix”

• We seek to use these instruments in the right combination in order to cope with both inflation and macro-financial risks.

• The monetary policy stance in this framework is not only determined by the path of policy rates, but as a combination of all the policy instruments.

13

Effectiveness of Required Reserves

1. Liquidity Channel (wider corridor)

2. Cost Channel (no remuneration)2. Cost Channel (no remuneration)

14

The Policy Rate and the Interest Rate Corridor

25

Policy Rate and Interest Rate Corridor(percent)

20

25

Interest Rate Corridor

15

5

10

P li R t

001-08 05-08 09-08 01-09 05-09 09-09 01-10 05-10 09-10 01-11

Policy Rate

15

Source: CBRT

Reserve Requirements as a Macroprudential Tool

14

Reserve Requirement Ratios(percent)

12

14

Demand deposit

8

10 Up to 1 Month

1-3 Months

3 6 Months

End of remuneration

4

6

3-6 Months6-12 MonthsLonger than 1 year

2

4

07-09 10-09 01-10 04-10 07-10 10-10 01-11

16

Source: CBRT

Reserve Requirements as a Macroprudential Tool

8

Change in RRR Since the Start of the Crisis (percentage point)

Current RRR(percent)

4

6

8

Increases 20 19.520

25

0

2

4

11

9.5 9.510

15

-4

-2

D

8

6

3.5 3.55

10

-6

Bra

zil

urke

y (T

RY)

Chin

a

Peru

Indo

nesi

a

Rus

sia

Turk

ey (

FX)

Indi

a

Pola

nd

Decreases0

Braz

il

Chin

a

Turk

ey (F

X)

Turk

ey (T

RY)

Peru

Indo

nesi

a

Indi

a

Pola

nd

Russ

ia

Tu T

17

Source: Central Banks, CBRT Source: Central Banks, CBRT

T

Measures by Other Authorities

1. Fiscal discipline

2. No FX loans to households

3. Domestic currency bond market

4. Loan/value restrictions

5. Tax hikes on certain consumer loans

6. Restrictions on credit card borrowing

18

Tightening the Liquidity

60

Reserve Requirements Balances (billion TRY)

50

60

The new reserve requirements as of Feb 18, 2011 (approx. 10 billion TRY)

30

40

TRY required reserves

10

20

0

10

01-09 04-09 07-09 10-09 01-10 04-10 07-10 10-10 01-11

FX Required Reserves

19

Source: CBRT

Volatility in Money Markets

11

Overnight Interest Rates(percent)

9

Swap Rates(percent)

8

9

10CBRT Lending Rate

Policy Rate7

8 One year

6

7

8 Policy Rate

4

5

6

3

4

5

Overnight Interest Rate

2

3

4

One month

1

2

08-10 09-10 10-10 11-10 12-10 01-11 02-11

CBRT Borrowing Rate0

1

06-10 08-10 10-10 12-10 02-11

Overnight

20

Source: ISE, CBRT Source: Reuters, CBRT

Appreciation Pressure

1 15

EM currencies against USD*(4 Jan 2010=1)

1.10

1.15

1.05

0.95

1.00

0.9006-10 07-10 08-10 09-10 10-10 11-10 12-10 01-11 02-11 03-11

EM Average

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

21

Initial Impact on Currency

1 15

TRY and other EM currencies against USD*(4 Jan 2010=1)

1.10

1.15

TRY

1.05

0.95

1.00

0.9006-10 07-10 08-10 09-10 10-10 11-10 12-10 01-11 02-11 03-11

EM Average

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

22

Initial Impact on Currency

Real Effective Exchange Rate (CPI-based, against developing countries, 2003=100)

130

120

130

Long Term Average

110

90

100

802004 2005 2006 2007 2008 2009 2010 2011

23

Source: CBRT

Exports

80

Goods Exports(year-on-year percentage change)

40

60

80

Avg. 39%

Leading Indicators

0

20

40

Avg. 9%

40

-20

0

-60

-40

01-08 04-08 07-08 10-08 01-09 04-09 07-09 10-09 01-10 04-10 07-10 10-10 01-11

Avg. -26%

24

Source: TurkStat, Turkish Exporters Assembly, CBRT

Credit Growth

80

Household Loans(year-on-year change, percent)

Total Loans(annualized monthly change, percent)

60

60

Housing Loans

Other Consumer Loans

40

50

60Average of last 5 yearsLatest PeriodDifference

20

40

30

40

20

0

10

20

-40

-20

01-08 07-08 01-09 07-09 01-10 07-10 01-11

Auto Loans-10

0Ju

ly

gust

mbe

r

ober

mbe

r

mbe

r

uar y

ruar

y

25

Source: CBRT Source: CBRT

Au

Sep

tem

Oct

o

Nov

em

Dec

em Jan

Feb r

QT and Inflation Expectations

Yield Curve*(percent)

Inflation Expectations*(percent)

9.5 10

9.0Mar 2, 2011

9

12-month forward

8.0

8.5

7

8

7 0

7.5Oct. 1, 2010

5

6

24-month forward

6.5

7.0

0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.04

5

12-07 06-08 12-08 06-09 12-09 06-10 12-10

26

* Calculated from the compounded returns on bonds quoted in ISE Bills and Bonds Market by using ENS method.Source: ISE, CBRT

* CBRT Expectations Survey results from the second survey period.Source: ISE, CBRT

The Turkish ExperiencepBank of Indonesia and IMF Joint Conference on

Coping with Asia’s Large Capital Inflows in a Multi-Speed Global Economy

Erdem BaşçıErdem Başçı

Deputy Governor, Central Bank of Turkey

27

March 11, 2011Bali, Indonesia