Transcript 2002 September - JP Morgan Investor Meeting

CENTRAL BANK OF THE
REPUBLIC OF TURKEY
MONETARY POLICY FRAMEWORK
September 2002
1
Outline of the Presentation
 Macroeconomic Prospects
 Key Indicators of Financial Stability
 Inflation
 External Sector
 Growth
 Recent Monetary Policy Actions
 A Brief Overview of the FX Policy
 Inflation Targeting: The Eventual Monetary Policy
Framework
2
Signs of Stability are Emerging
Volatility of the exchange rate has
diminished compared to its peak in June.
The CBT continues to strictly limit its discretionary FX
interventions. Pre-announced auctions have been suspended
in June.
Volatility of Exchange Rate
(TL/USD, Coefficient of Variation)
FX Auctions
1700000
1600000
1500000
1400000
1300000
2%
1100000
1000000
1%
5/4
5/18
6/1
6/15
6/29
7/13
7/27
8/10
8/24
9/7
9/21
10/5
10/19
11/2
11/16
11/30
12/14
12/28
1/11
1/28
2/8
2/21
3/8
3/22
4/5
4/19
5/3
5/17
5/31
6/14
6/28
7/12
7/26
8/9
8/23
9/6
09/02
08/02
07/02
06/02
05/02
04/02
03/02
02/02
01/02
12/01
TL / USD (Weekly Average,Selling Price)
11/01
03/01
Sales Amount (Weekly , Millions of USD)
0%
10/01
-200
1200000
09/01
0
08/01
200
3%
07/01
400
4%
06/01
600
5%
05/01
800
04/01
1000
* (+) indicates FX sales to the market.
The upward trend in spreads between May and
July was reversed in August in light of the
improved political outlook.
95
1000
Overnight Repo, Simple, Left
09-02
08-02
500
07-02
8/26
8/11
7/27
7/12
6/27
6/12
5/28
5/13
4/28
4/13
3/29
3/14
2/27
2/12
1/28
1/13
12/29
12/14
11/29
11/14
10/30
9/30
10/15
9/15
8/31
8/1
8/16
7/2
45
7/17
50
600
06-02
55
53
700
05-02
65
56
04-02
59
800
03-02
75
02-02
62
900
01-02
85
12-01
65
Turkish Eurobond Spreads (bps)
11-01
68
1100
10-01
Interest Rates
71
105
08-01
74
09-01
Following its upward trend caused mainly by increased
political uncertainty in July, interest rates have been
declining since August.
ISE Bonds and Bills Market, Compound, Right
Spread =The difference between Turkish Eurobonds and US Treasury bills.
Source: JP Morgan
3
Price Developments between January-August 2002
Inflation displayed a declining pattern during this period owing to:
 The increase in the credibility of the program which, in turn, had a favorable impact on
expectations;
 The absence of demand pressures;
 The relative stability of the exchange rate and the marked decline in the pass-through from
the exchange rate.
 The significant slowdown in food and agricultural prices.
CPI (y-o-y percent change)
80.0
60.0
40.0
07-02
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
07-00
05-00
03-00
01-00
11-99
09-99
07-99
05-99
03-99
20.0
01-99

Annual change
4
Price Developments between January-August 2002
12
10
8
6
4
2
CP I mo nthly % change, sa
Jul-02
May-02
Mar-02
Jan-02
Nov-01
Sep-01
Jul-01
May-01
Mar-01
Jan-01
Nov-00
Sep-00
Jul-00
May-00
Mar-00
Jan-00
0
Due to the increased political
uncertainty between May and
July, both CPI and CPI
excluding food displayed an
upward trend. The acceleration
in prices, however, was limited
in August as a result of the
improved market sentiment
and political outlook.
The current trend of inflation
suggests that the end year
target should be comfortably
met.
CP I excluding fo o d, mo nthly % change, sa
14.0
12.0
10.0
8.0
The increase in price of
services has been more
subdued compared to that of
price of goods.
6.0
4.0
2.0
Go o ds, mo nthly % change, sa
Services, mo nthly % change, sa
Jul-02
May-02
Mar-02
Jan-02
Nov-01
Sep-01
Jul-01
May-01
Mar-01
Jan-01
Nov-00
Sep-00
Jul-00
May-00
Mar-00
Jan-00
0.0
5
Price Developments between January-August 2002
Inflation expectations are rapidly converging to the target.
End-year Inflation Expectations
(Consumer Prices)
75.0
70.0
65.0
60.0
Impact of the new
55.0
economic program
50.0
45.0
40.0
34,8
35,0
2002 Target
35.0
Sep-1
Aug-1
Jul-1
Jun-1
May-1
Apr-01
Mar-01
Feb-01
Jan-01
Dec-01
Nov-01
Oct-01
Sep-01
30.0
Aug-01

6
Price Developments between January-August 2002
 The implementation of the economic program is steering the inflation
expectations for 2003 towards the target.
Inflation Expectations for the Next 12 Months
(Consumer Prices)
52
48
44
40
% 30,5
36
32
Aug-01
Aug-02
Sep-01
Sep-02
Oct-01
Oct-02
Nov-01
Nov-02
Dec-1
Dec-02
Jan-01
Jan-02
Feb-01
Feb-02
Mar-01
Mar-02
Apr-1
Apr-02
May-01
May-02
Jun-1
Jun-2
Jul-1
Jul-2
Aug-1
Aug-2
Sep-1
28
Corporate sector
% 29,2
Financial sector
7
Outlook for Inflation
Medium-term inflation
Price stability:
targets:
 Price stability–-the primary objective
of monetary policy–-is a prerequisite
for rapid, balanced and sustainable
growth.
Risks:
2002  % 35
2003  % 20
2004  % 12
2005-...  Single digits
 Backward-looking indexation and price-setting behavior in the economy
 Price-setting behavior of the public sector: public service prices (natural gas,
electricity, water), wages, backward re-evaluation coefficient, monopoly,
tobacco, wheat etc.
 Price-setting behavior of the health sector
 Price-setting policy of the education sector
 Oil price shocks
 Resumption of the political uncertainty and the spillover effect on financial
markets
8
External Sector: Turnaround in BoP
Current Account
(Billions of USD)
3.4
6.0
1.0
-4.0
-1.5
The economic slowdown and the
depreciation of the Turkish lira have
led to a noticeable turnaround in the
current account balance in 2001,
giving a surplus of US$ 3.4 billion
from a deficit of US$ 9.8 billion in
2000.
-9.0
-14.0
-9.8
2000
2001
2002 Forecast
A current account deficit of US$
1.5 billion is projected for 2002.
Capital Account*
(Billions of USD)
13.0
6.4
12.0
4.0
-4.0
February 2001 crisis and resulting
confidence loss in TL left the capital
account with a deficit of US$ 4 billion
in 2001 from a surplus of US$ 13
billion in 2000.
-4.0
-12.0
-20.0
2000
* Including Fund credits
2001
2002 Forecast
Capital inflows are projected to
be US$ 6.4 billion in 2002.
9
External Sector: Evolution of the RER
Turkish lira started to depreciate in real terms after May and...
Real Effective Exchange Rate
($1 + € 0.77, producer price index for foreign goods & private manufacturing index for domestic goods)
115
110
105
100
95
90
85
80
75
07/02
01/02
07/01
01/01
07/00
01/00
07/99
01/99
07/98
01/98
07/97
01/97
07/96
01/96
07/95
01/95
70
...the cost-based real exchange rate indices point to an increase in competitiveness.
140
Unit Labor Costs
120
100
80
94Q1
94Q2
94Q3
94Q4
95Q1
95Q2
95Q3
95Q4
96Q1
96Q2
96Q3
96Q4
97Q1
97Q2
97Q3
97Q4
98Q1
98Q2
98Q3
98Q4
99Q1
99Q2
99Q3
99Q4
00Q1
00Q2
00Q3
00Q4
01Q1
01Q2
01Q3
01Q4
02Q1
60
unit labor costs ($)
tradables / non-tradables
10
Growth: Signs of recovery are becoming more apparent
 A stronger-than-expected recovery to date suggests that the 3 percent GNP
growth projection for 2002 should be comfortably met: GNP grew by 8.5 percent
in the first half of the year.
 Production
 A sharp recovery in business confidence since October 2001 as a result
of stability in financial markets and the implementation of the new economic
program supported by the international financial institutions.
 Better than envisaged performance in industrial production: Industrial
production rose by 7.4 % (y-o-y) in the first six months of 2002.
 Increase in agricultural production:
Agricultural production rose by 1.9 % in the first half of the year and the
growth rate of agricultural value added is expected to be around 5 % in 2002.
 Strong increase in inventory building and replacement investments in
industrial sector: The contribution of inventory changes to GDP growth was
8.5 % in the first six months of 2002.
11
Growth: Signs of recovery are becoming more apparent
 Demand
 Net Exports: The contribution of net exports to GDP growth was 2.9 % in the first
quarter and –5 % in the second quarter.
 Improved expectations: Decline in uncertainties had a positive impact on
investment and consumption decisions
 Improved exchange rate stability and the downward trend in short-term
rates: This development promoted consumption and created a more conducive
environment for investment decisions. As a result, the contribution of private
expenditures turned positive in the second quarter of 2002.
Contributions of Aggregate Demand Components to Growth
2001
Private Expenditure
Government Expenditure
Net Exports
Inventory Accumulation
GDP
Q1
-5.0
-0.3
9.8
-5.3
-0.8
2002
Q2
-14.9
-3.1
16.9
-8.6
-9.6
Q1
-6.4
-0.5
2.9
5.9
1.9
Q2
1.9
0.4
-5.0
10.9
8.2
12
Growth: Signs of recovery are becoming more apparent
 Both the production and demand side indicators, except the credit
volume, confirm that a solid recovery is underway.
Indicators Supporting the Production Growth
2001
I
II
III
IV
2002 I
II
IMPORTS*
-4.9
-30.1
-29.6
-32.9
-10.7
19.1
VELOCITY
OF EFT
3.25
2.36
2.41
2.47
2.53
2.50
NEW
DURABLES
BUSINESSES* PRODUCTION*
18.1
-6.5
-19.7
-28.3
-11.4
-19.1
-26.2
-3.8
-7.3
24.4
17.1
68.1
CAPACITY
UTILIZATION
RATE (%)
69.8
69.9
71.6
73.5
74.0
75.9
PROTESTED
BILLS*
48.0
100.6
80.7
80.6
-26.5
-42.8
NON-AGRICULTURAL
EMPLOYMENT
(Thousand )
12,954
12,905
13,199
13,310
12,843
13,650
Indicators Supporting the Aggregate Demand Growth
2001
I
II
III
IV
2002 I
II
EXPORTS*
8.9
13.4
13.7
12.6
4.6
2.3
CREDIT
CARDS*
55.30
32.80
12.90
17.10
30.70
CONSUMER
CREDIT*
0.9
-38.6
-49.0
-45.2
-24.9
PRIMARY
NON-AGRICULTURAL
VAT
AUTOMOBİLE BUDGETARY
EMPLOYMENT
COLLECTION*
SALES
EXPENDITURE*
(Thousand )
55.7
-61.9
22.2
12,954
32.8
-71.1
43.8
12,905
62.4
-73.3
45.2
13,199
91.7
-71.2
49.7
13,310
74.9
-62.0
90.4
12,843
81.3
-16.7
65.0
13,650
* Percentage change with respect to the same period of the previous year.
13
Growth: Signs of recovery are becoming more apparent

The evolution of the industrial production until July suggests that economic recovery will
continue in the third quarter as well.
GNP and Total Industrial Output
(Annual percentage change)
25
20
Industrial P ro ductio n
GNP
15
10
5
0
-5
-10
02Q1
01Q1
00Q1
99Q1
98Q1
97Q1
96Q1
95Q1
94Q1
93Q1
92Q1
91Q1
90Q1
89Q1
88Q1
-15
14
Recent Monetary Policy Actions
The CBT’s Quantitative Targets are on Track
Net Domestic Assets
(TL Trillion)
Monetary Base
(TL Trillion)
12000
10000
10600
8250
8900
10850
35000
30000
9250
20000
6000
4000
Realization
15000
Ceiling Values (2)
10000
2000
5000
0
0
February
(3)
April
June
September
December
Net International Reserves
(USD Million)(1)
February (3)
April
June
September
-3000
Realization
-5000
Floor Values
-11000
33139
31139
-6500
-7200
-7800
-8500
-9700
Realization
Ceiling Values (2)
February
April
June
September
December
(1)
Defined as Net International Reserves of CBT minus
(i) Treasury liabilities to the IMF (ii) Treasury FX
denominated borrowing with an original maturity of
less than one year.
(2)
Target for end-February calculated as four working
day average of February 11-12 and March 11-12,
2002, to take account of the transitory impact of the
Bayram (religious holiday) on currency demand.
NDA targets for June onward have been lowered by
TL 161 trillion compared to January 18, 2002 to
reflect the drop in required reserves following the
SDIF’s intervention in Pamuk Bank.
(3)
Calculated by using the four working day average of
Feb. 11-12 and March 11-12, to take account of the
transitory impact of the Bayram (religious holiday)
on currency demand.
December
-1000
-9000
28739
25000
8000
-7000
26100
27700
15
Recent Monetary Policy Actions
Interest Rate Cuts

The favorable outlook for inflation led the CBT to lower the short term rates:
Maturity
Quotations
Previous
Rate
20 Feb.
2002
14March
2002
8 April
2002
30 April
2002
5 August
2002
Bid
59
57
54
51
48
46
Ask
62
62
61
58
55
53
Bid
62
59
55
52
49
46
O/N
1 Week
 In view of the interruption of the improvement in market sentiment and
economic outlook between May and July, coupled with increased political
uncertainty, the CBT refrained from further interest rate cuts.
 In August, however, improvements in the inflation outlook and favorable
political developments led the CBT to lower its policy rate.
16
A Brief Overview of the FX Policy
 The CBT remains resolute to keep discretionary FX interventions outside the pre-announced
auctions limited. If necessary, the CBT, without interfering with exchange rates reaching their
market-determined levels over longer horizons, will smooth (temporary) excessive exchange
rate fluctuations.
 Has there been a “fear of floating” in Turkey?
Evolution of the Volatility of Exchange rate, Interest rate, and Reserves
Floating
Regime
Gross Reserves
O/N (Compound)
Dollar
Jan95 – Dec99
2.75 %
15.78 %
1.59 %
Jan00 – Feb01
2.62 %
95.93 %
1.91 %
Mar01 – Oct01
4.65 %
4.18 %
3.51 %
Nov01- Aug02
2.35 %
1.18 %
2.12 %
 Contrary to “fear of floating” argument, it seems that since the adoption of the float, the
volatility of the exchange rate increased while the volatility of interest rates and reserves
diminished. The role of the exchange rate as an adjustment variable has clearly
increased since the adoption of the floating regime, while the role of interest rates and
reserve movements as shock absorbers has declined noticeably.
17
The Eventual Monetary Policy Framework: Inflation
Targeting






Nominal Anchor: Under the floating exchange rate regime, inflation targeting
(IT) will serve as the nominal anchor of the economy.
A High Degree of Flexibility: Monetary policy will have a high degree of
flexibility to respond to shocks, thanks to the absence of other objectives, i.e. an
exchange rate target.
Communication: Under IT, the CBT will aim to find the clearest way to share
with the public the precise direction of monetary policy—what the target is and
how the CBT is trying to achieve it—through periodic reports (Monetary Policy
Report) and other means of communication with the public and markets.
Sustainable Debt: Aligning the public's inflation expectations with the CBT's
inflation target and removing the uncertainty risk premium in the interest rate
will also improve debt sustainability.
Improved Policy Coordination: Inflation targets are joint targets,
determined together with the Government. The joint agreement on inflation
targets will enhance the coordination between fiscal and monetary policy.
Increased Public Consciousness: Evidence with the adoption of IT suggests
that it fosters public awareness and acceptance of monetary policy decisions,
which can help reduce the cost of disinflation and enhance credibility.
18
Monetary Policy Strategy–Inflation Targeting
 Significant progress has been made to satisfy the preconditions for the implementation of IT:
 The Central Bank Law has been amended to ensure instrument independence,
accountability and transparency; and the CBT enjoys full control over its credits.
 The Law on Public Debt Management will bring about discipline and transparency in
the public sector, and facilitate the adaptation of fiscal policy to inflation targeting.

Progress on establishing the technical infrastructure:
Forecasting and policy analysis models
 The CBT is receiving technical support from international institutions and central banks
implementing IT.
 The CBT has been working intensively to develop:
 economic databases and reporting packages
• Inflation Expectation Survey for corporate and financial sectors
• Daily retail prices analysis by using sampling methods
 a near-term forecasting system incorporating a wide range of available information
 a core quarterly macroeconomic model
 a process for putting together a medium-term projection
 procedures for presenting the results to the Monetary Policy Council
19
Monetary Policy Strategy–Inflation Targeting
 The CBT endeavors to enhance its credibility through:
 Achieving the established objectives. Evidence to date suggests that the
end year target of 35 will be achieved.
 Improving communication, which is pursued with a view to communicate
not only the CBT’s quantitative objectives, but also the framework of
mechanisms that will be used to attain these objectives. To this end, the
CBT has been issuing Monetary Policy Reports and frequent press releases
in addition to presentations by the senior Central Bank officials.
20
Monetary Policy Strategy – Inflation Targeting
It is important to highlight that IT is only one complementary
ingredient in a broad strategy of institutional development and
its success, among other things, hinges closely on:
 Fiscal responsibility
 Financial deepening
 Eliminating backward-looking indexation mechanisms in
the economy,
 Flexibility in goods and factor markets to allow smooth
adjustment to relative price changes
21
Conclusion
Overall, prudent fiscal and monetary policies along with deep
seated structural reform measures included in Turkey’s
Medium-term Economic Program will lay the foundations of
an economy that is:
 well-placed on the high road of sustained low-inflationary
growth
 more resilient to adverse shocks
 less vulnerable to crises
 more equitable in income distribution
 more conducive to foreign and domestic investment
 as a consequence, better positioned to integrate into
European Structures.
22