Transcript Speech Title

Maintaining the Momentum:
Policy Priorities for Turkey
June 2007
Hugh Bredenkamp
International Monetary Fund
Outline

The turnaround in the Turkish economy since 2001
has been impressive

But policymakers cannot rest on their laurels

Growth is slowing and vulnerabilities remain

Further reforms will be needed over the next five
years to consolidate financial stability and raise
potential growth
Growth is easing after the post-crisis
rebound...
Real GNP growth (y-o-y, in percent)
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
Annual Growth
-4
-6
2002-2005 average
-6
-8
-8
-10
-10
2000
2001
2002
2003
2004
2005
2006
2007
...and becoming merely “average”
Growth in Turkey and Emerging Markets (in percent)
20
15
10
5
0
Turkey
Maximum
Minimum
Median
-5
-10
-15
2002
2003
2004
2005
2006
Disinflation has become more difficult …
CPI inflation (in percent)
68.5
39.0
29.7
ay
.0
7
9.7
M
7.7
20
06
20
05
20
04
20
03
20
02
12.7 9.4
20
01
20
00
75
65
55
45
35
25
15
5
9.2
Jan.05
Feb.05
Mar.05
Apr.05
May.05
Jun.05
Jul.05
Aug.05
Sep.05
Oct.05
Nov.05
Dec.05
Jan.06
Feb.06
Mar.06
Apr.06
May.06
Jun.06
Jul.06
Aug.06
Sep.06
Oct.06
Nov.06
Dec.06
Jan.07
Feb.07
Mar.07
Apr.07
May.07
… running well above the 4 percent target
Headline CPI inflation and end-year CPI targets (in percent)
14
12
10
8
6
4
2
Turkish exports have gained market share…
Turkey's export shares, 1997=100
(Turkish exports/region's total imports)
170
160
World
EU
Germany
US
150
140
130
120
110
100
90
80
2000
2001
2002
2003
2004
2005
… but booming imports and adverse terms
of trade widened the current account deficit
Current account balances (in percent of GNP)
10
8
6
4
2
0
-2
-4
-6
-8
-10
Total
Non-oil
2000
2001
2002
2003
2004
2005
2006
Labor force participation is still low and
unemployment high...
Labor participation and unemployment rates (in percent)
90
12
80
10
70
60
8
50
6
40
30
4
20
2
10
0
0
Turkey
Emerging
Markets
EU 10
Advanced
Economies
Men Activity
Rate
Women Activity
Rate
Unemployment
Rate (right
scale)
lip
pi
ne
s
l
a
FS
U/
CE
E
La
t.
Am
.
As
i
Th
ai
la
nd
Ph
i
Br
az
i
Re
p.
In
do
ne
sia
Hu
ng
ar
y
Ar
ge
nt
in
a
Ko
re
a
Po
la
nd
M
ex
ico
M
al
ay
si
a
Tu
rk
ey
Ro
m
an
ia
Bu
lg
ar
ia
Cz
ec
h
...informality remains a drag on
growth potential
Informal economy 1999/2000 (in percent of GDP)
55
50
45
40
35
30
25
20
15
10
01-Mar-06
08-Mar-06
15-Mar-06
22-Mar-06
29-Mar-06
05-Apr-06
12-Apr-06
19-Apr-06
26-Apr-06
03-May-06
10-May-06
17-May-06
24-May-06
31-May-06
07-Jun-06
14-Jun-06
21-Jun-06
28-Jun-06
05-Jul-06
12-Jul-06
19-Jul-06
26-Jul-06
02-Aug-06
09-Aug-06
16-Aug-06
23-Aug-06
30-Aug-06
06-Sep-06
13-Sep-06
20-Sep-06
27-Sep-06
04-Oct-06
11-Oct-06
18-Oct-06
25-Oct-06
01-Nov-06
08-Nov-06
15-Nov-06
22-Nov-06
29-Nov-06
06-Dec-06
13-Dec-06
20-Dec-06
27-Dec-06
03-Jan-07
10-Jan-07
17-Jan-07
24-Jan-07
31-Jan-07
07-Feb-07
14-Feb-07
21-Feb-07
28-Feb-07
07-Mar-07
14-Mar-07
21-Mar-07
28-Mar-07
... and Turkey is particularly vulnerable to
financial market volatility
The lira-dollar rate and global volatility
25
1.75
YTL/$ (left scale)
VIX Index (right scale)
1.65
1.45
1.25
23
21
19
1.55
17
15
13
1.35
11
9
The task ahead
 Strong policies are needed to put Turkey in the
ranks of the fastest growing EM economies...
 ...while reducing vulnerability to external
shocks
Strategy for high sustained growth needs:






Inflation in the low single digits
Lower public debt and a stronger reserve
position
A more efficient tax structure
A more flexible labor market
More developed financial markets
More competitive product markets
The importance of low inflation

Cross-country evidence suggests that keeping inflation in the low
single-digits helps growth

The median EM country is at that point, and Turkey needs to “join
the club” by persevering with tight monetary and fiscal policies
Inflation in Turkey and Emerging Markets (in percent)
50
40
Turkey
Maximum
Minimum
Median
30
20
10
0
-10
2002
2003
2004
2005
2006
The decline in public debt should continue
Bringing the net debt/GNP ratio down to around 30 percent
over the medium term would reduce exposure and create
greater fiscal room for maneuver over the cycle
Gross public debt (in percent of GDP)
80
70
60
50
40
30
20
10
0
110
100
90
80
Russia
Czech
Rep.
S. Africa
Poland
Turkey
Hungary
Brazil
70
60
50
2000 2001 2002 2003 2004 2005 2006
Reserve coverage of external debt is still low
Raising coverage of short-term debt to at least 100 percent
would help bolster market confidence
Reserves to short-term external debt (in percent)
250
200
150
100
50
Russia
S. Africa
Czech
Rep.
Hungary
Poland
Brazil
Turkey
0
Further tax reform is a high priority
 Need to create fiscal room to lower taxes
through sustained spending discipline and social
security reform
Focus should be on those taxes most out of line
with Turkey’s competitors
 First candidates could be taxes on labor and
financial intermediation
Social security reform is essential
Social security system's financial balance
(in percent of GDP)
-2%
-3%
2074
2070
2066
2062
2058
2054
2050
2046
2042
2038
2034
2030
2026
2022
2018
-1%
2014
0%
2010
0%
2006
1%
2002
1%
-1%
-2%
No reform
May-2006 reform
-3%
-4%
-4%
-5%
-5%
-6%
-6%
-7%
-7%
Turkey has one of the most restrictive labor
market regimes in the OECD...
Overall employment restriction legislation
(OECD Employment Outlook)
Portugal
Turkey
Spain
France
Greece
Sweden
Germany
Italy
Netherl.
Poland
Korea
Slovak
Czech
Denmark
Japan
Hungary
Australia
Ireland
Canada
UK
US
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
...with high severance pay
Severance pay in OECD countries (in monthly wages)
25
20
after 9 months
15
after 4 years
10
after 20 years
5
Slovak Rep.
Czech Rep.
Australia
Denmark
Ireland
Canada
UK
Japan
France
Greece
Spain
Turkey
Portugal
0
Spain
Latvia
US
Romani
Slovak
Lithuani
Czech
Bulgaria
Hungary
Portugal
Ireland
Poland
Slovenia
Greece
Netherl.
UK
France
Turkey
Estonia
...high minimum wages
Minimum wage in 2006 (in percent of GDP per capita)
90
80
70
60
50
40
30
20
10
0
Ireland
Mexico
Korea
Luxemb.
New
US
Iceland
Australia
Switzerl.
UK
Canada
Japan
Portugal
Slovak
Norway
Netherl.
Denmark
Czech
Spain
Austria
Finland
Greece
Italy
Hungary
France
Belgium
Germany
Turkey
Sweden
Poland
...a high tax wedge on labor
Labor tax wedge including employer's social security
contributions (average rate, 2005, in percent)
45
40
35
30
25
20
15
10
5
0
...and limitations on temporary employment
Restrictiveness of temporary employment regulations in OECD
countries (2003)
6.0
5.0
4.0
3.0
2.0
1.0
US
Canada
UK
Slovak Rep.
Czech Rep.
Ireland
Australia
Hungary
Netherl.
Poland
Japan
Denmark
Sweden
Korea
Germany
Italy
Portugal
Greece
Spain
France
Turkey
0.0
Financial sector development has a long way
to go: bank intermediation is low...
Private credit to GDP (in percent)
EM-Latin
America
Turkey
EMEurope
Emerging
Markets
EU-12
EM-Asia
70
60
50
40
30
20
10
0
...the mortgage market is in its infancy
Mortgage (housing) loans as a share of total loans
(end-2003, in percent)
40
35
30
25
20
15
10
5
0
...and there is no active corporate
bond market
7
Outstanding domestic debt securities by corporate issuers
(in percent of GDP)
6
5
4
3
Emerging markets
2
Emerging markets Europe (incl. Turkey)
Turkey
1
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
A rich agenda for financial sector reform
 implement new mortgage and insurance laws
 eliminate remaining financial intermediation
taxes
 improve accounting standards
 privatize state banks
 continue strengthening supervision
Finally, product markets need to be liberalized
Sectors with high/sticky inflation could be prime
candidates: e.g. agriculture, services
Intensity of product market regulation in OECD countries (2003)
3.0
2.5
2.0
1.5
1.0
0.5
Australia
UK
Iceland
US
Ireland
Denmark
New
Canada
Sweden
Luxemb.
Japan
Finland
Belgium
Netherl.
Austria
Slovak
Germany
Norway
Korea
Portugal
Spain
Switzerl.
France
Czech
Greece
Italy
Hungary
Mexico
Turkey
Poland
0.0
To summarize...
 Turkey has made great strides over the past five years
 But to sustain strong growth, a new push on reforms will be
needed
 Goal should be to raise potential growth while reducing
vulnerabilities to external shocks
 Policy priorities:
 Continued fiscal and monetary discipline to reduce inflation
and bolster market confidence
 Broad-based structural reforms to make the economy
more flexible and competitive