Transcript Import and Export of Intermediate Inputs, 1989-2005, billion

Who’s afraid of the
Current Account Deficit?
Güven Sak
İstanbul, 20 April 2006
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 Prof Mundell’s words of wisdom
 Policy consistency
 exchange rate shall never be neglected
 fund inflows and the appreciation of the
currency are a price to be paid for having a
consistent and coherent policy framework
(curse?)
Slide 2
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Slide 3
Real Appreciation of Lira
A la Goldfajn & Valdes(1999)
200
10 Percent
5 percent
Predicted RER
(HP Filtered)
180
160
Actual RER
140
120
100
2001 CRISIS
80
1994 CRISIS
60
40
Eyl.88
Mar.91
Ağu.93
Şub.96
Tem.98
Oca.01
Haz.03
Ara.05
Haz.08
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Slide 4
Current Account: scary levels?
5
2,0
-
0,0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-5
-2,0
-10
-4,0
-6,0
-8,0
-10,0
Current Account Deficit / GDP
Current Account Deficit (billion USD)
-15
-20
-25
Current Account Deficit (billion USD)
Current Account Deficit / GDP (%)
4,0
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Slide 5
Let’s complement Prof Mundell’s
picture
 The business environment and the incentive
structure has changed dramatically
 Floating exchange rate as a sweeping
mechanism?
As a mechanism to braek the inertia.
as an igniting mechanism for creative
destruction?
 The current account deficit seems to have
a structural component as well as an
external one (i.e. China)
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Dramatic changes in the incentive
structure
Slide 6
 Existence of fiscal discipline
 Central bank independence and floating exchange
rate regime
 A series of public sector reforms
 Banking sector reform
 Results and Outcomes:






Impressive growth without inflation
Rising Productivity as the driver of growth
Unemployment rate does not decrease.
Move from implicit to formal inflation targeting
Currency appreciates
Current account continues to deteriorate
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Slide 7
Trade Integration: booming after 2001
 Growth rate of trade volume
 Turkey in global economy
 increasing trade of goods and
 1989-2001: %8.5
 2002-2005: %29
services
 increasing foreign direct
investment
 change in the sectoral
composition in exports
 Increase in import of
intermediate inputs
 1989-2001: %8
 2002-2005: %33
Import and Export of Intermediate Inputs, 1989-2005, billion $
100.000
Billion $
80.000
Export
60.000
Import
Customs union
2001 crisis
40.000
20.000
0
1989
1991
1993
1995
1997
1999
2001
2003
2005
Kaynak: TCMB 2005
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Slide 8
Loss of competitiveness?
Size of the bubbles indicate export volume in 2004
2000-2004 annual growth rate of exports (CAGR)
60%
Emerging
Sectors
50%
Petroleum Products
40%
Automotiv e
30%
20%
Star Sectors
TVs and Telecom
Electrical Machinery
Metals
Güç kaynakları (makinalar)
General machinery
10%
Iron&Steel
Non mettalic minerals
Plastic Materials
Fruit&Vegies
Textiles
Apparels
transportation equipment
Traditional Sectors
Snail Sectors
0%
0%
1%
2%
3%
World market share %
4%
5%
6%
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Slide 9
Structural change is also reflected in
employment figures
Sectoral Employment and Demographic Trends, 1999-2005, 1999 indexed to 100
140
Industrial Production
Index
130
Service Employment
120
Manufacturing
employment
110
Working Age
Population
Total Employment
100
90
80
Agriculture
employment
70
1999
2000
2001
2002
2003
2004
2005
Source: TÜİK and WDI
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Slide 10
EU Accession and Current Account
 Financial and goods market integration leads to
 Reduction in country risk,
 decrease in interest rates,
 decrease in savings,
 increase in investments,
 current account deterioration, are the common features
observed in the relatively poor accession countries.
Blanchard & Giavazzi (2001)
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Slide 11
Financial integration: composition of
current account financing
 FDI inflows increase as a result of global value chain
integration
 trade credits will increase more as a by-product
 Portfolio investments increase (ISE)
 Central bank reserves increase consistently
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Slide 12
Case of Turkey
 Spread decrease
 Saving investment gap widens
 Increase in current account deficit is mainly due to increase in
investment
 Increase importance of fiscal discipline. Private (S-I) decrease and public
(S-I) increases
EMBI+ Turkey Government Bond Spread
1400
1200
Index
1000
800
600
400
200
0
30.07.99
30.07.00
30.07.01
30.07.02
Date
30.07.03
30.07.04
30.07.05
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A different sort of a saving investment gap
20.0
Investment Saving Balance (Private)
15.0
Investment Saving Balance (Public)
10.0
5.0
0.0
1990
-5.0
-10.0
-15.0
-20.0
1992
1994
1996
1998
2000
2002
2004
2006
Slide 13
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Slide 14
To sum up
 Low level of domestic savings and low level
of financial integration could only raise the
importance of policy consistency
 Rapid modernization of the Turkish economy
& the accompanying risks
 mitigates through productivity gains
 exacerbates through sectoral transformation
 unemployment, creative destruction and policy
consistency risk
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Slide 15
Some questions…
 How can you ignore high levels of deficits with still




low levels of financial integration?
How can you manage the animal instincts of the
portfolio managers if the adjustment is not
complete?
Is the appreciated exchange rate a strong driver of
the sectoral transformation process?
Is there a role for Industrial policy to guide
sectoral transformation process?
Could the importance of the EU as an anchor be
ignored?