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Kibritçioğlu, November 1-15, 2004, (1/79) An Overview of Macroeconomic Developments in Turkey with special reference to the AK-Party Era (2002-04) Aykut.

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Presentation on theme: "Kibritçioğlu, November 1-15, 2004, (1/79) An Overview of Macroeconomic Developments in Turkey with special reference to the AK-Party Era (2002-04) Aykut."— Presentation transcript:

1 Kibritçioğlu, November 1-15, 2004, (1/79) An Overview of Macroeconomic Developments in Turkey with special reference to the AK-Party Era ( ) Aykut Kibritçioğlu Associate Professor of Economics Ankara University, Turkey Tel.: ( ) , ext. 340 Fax: ( ) Homepage: Vienna, 1-15 November 2004

2 Kibritçioğlu, November 1-15, 2004, (2/79) Outline of the Presentation  General Facts and Figures,  Political Climate,  Market for Goods: Inflation & Disinflation  Market for Goods: Production & Productivity  Labor Market: Employment & Real Wages  Foreign Exchange Market: Exchange Rates, and Currency Substitution  Balance of Payments and External Debts  Public Sector: Deficits and Debts  Financial Sector  Statistical Sources  Appendix: Selected Macroeconomic Indicators for Turkey ( )

3 Kibritçioğlu, November 1-15, 2004, (3/79) General Facts and Figures,

4 Kibritçioğlu, November 1-15, 2004, (4/79) The Transformation : : Balance-of-payments crisis, productivity slowdown and accelerating inflation January 1980: January 1980: Announcement of a substantial stabilization and structural adjustment program in order to gradually liberalize the economy : : Domestic financial liberalization May 1981: May 1981: Abandonment of the fixed exchange-rate regime June August 1989: June August 1989: Capital account liberalization and convertibility of the Turkish lira

5 Kibritçioğlu, November 1-15, 2004, (5/79) Post-1989 Macroeconomic Developments December April 1994: December April 1994: A major currency crisis and acceleration in the inflation August 1999: August 1999: Negative macroeconomic impacts of the Marmara earthquake December 1999: December 1999: Announcement of an exchange- rate-based stabilization program for November 2000 & February 2001: November 2000 & February 2001: Two successive banking and currency crises and political instability in Turkey May 2001: May 2001: Announcement of the new economic program

6 Kibritçioğlu, November 1-15, 2004, (6/79) Source: State Institute of Statistics (SIS), Central Bank of Republic of Turkey (CBRT), State Planning Organization (SPO), the IMF and J.P.Morgan; Kibritçioğlu’s calculations. Selected Macroeconomic Indicators [1] annual period averages annual period averages

7 Kibritçioğlu, November 1-15, 2004, (7/79) Source: State Institute of Statistics (SIS), Central Bank of Republic of Turkey (CBRT), State Planning Organization (SPO), the IMF and J.P.Morgan; Kibritçioğlu’s calculations. Selected Macroeconomic Indicators [2] annual period averages annual period averages

8 Kibritçioğlu, November 1-15, 2004, (8/79) Political Climate,

9 Kibritçioğlu, November 1-15, 2004, (9/79) Governments & Political Instability in Turkey,  = 36 years = 432 months  Average period between two general elections = 48 months = 4 years  Average life of governments = 15.4 months = 1.3 years (ICRG=International Country Risk Guide; a declining PR index indicates an increase in the political risk. )

10 Kibritçioğlu, November 1-15, 2004, (10/79) Selected Events Marked as Black Columns in the Following Figures are:  January 1999: 4. Ecevit-Government starts...  May 1999: 5. Ecevit-Government starts...  January 2000: Program introduced...  November 2000 and February 2001: Financial crisis occurred...  November 2002: General elections & AK-Party-Government starts...

11 Kibritçioğlu, November 1-15, 2004, (11/79) Market for Goods: Inflation & Disinflation

12 Kibritçioğlu, November 1-15, 2004, (12/79)  In the late 1990s, Turkey was not able to join the global disinflation process observed explicitly... Annual Consumer Price Inflation (%, log scale)

13 Kibritçioğlu, November 1-15, 2004, (13/79)  In terms of the length of the period, Turkish high-inflation experience is “unique” in the world...

14 Kibritçioğlu, November 1-15, 2004, (14/79)  Turkey suffered from high and persistent inflation since more than three decades. But, finally, it’s declining now...

15 Kibritçioğlu, November 1-15, 2004, (15/79)  Annual inflation rates fell below 15 percent as end of September (Official target for Dec. 2004: 12 percent)  Inflationary expectations in the country are also changing in a positive direction.

16 Kibritçioğlu, November 1-15, 2004, (16/79) Market for Goods: Production & Productivity

17 Kibritçioğlu, November 1-15, 2004, (17/79) Indicators of Long-Run Growth in Turkey  Turkey’s economic growth performance was highly volatile.  Real GDP per capita rose 22 times between 1950 and 2000.

18 Kibritçioğlu, November 1-15, 2004, (18/79) Industrial Production Index (1980=100)  Turkish industrial sector demonstrated a remarkable growth performance since 1980.

19 Kibritçioğlu, November 1-15, 2004, (19/79) GDP per capita ($): Turkey & Selected Countries  In an international context, however, Turkey’s economic growth performance is relatively poor.

20 Kibritçioğlu, November 1-15, 2004, (20/79)  In recent years, growth rate of the real GDP has significantly fluctuated.  The Turkish real sector is recovering from the crisis, which is one of the four deepest economic crises after 1950.

21 Kibritçioğlu, November 1-15, 2004, (21/79)  During the AK-Party era, the industrial production index increased again up to the pre-crisis level.

22 Kibritçioğlu, November 1-15, 2004, (22/79)  Annual increases in the industrial production index sharply fluctuate around an average annual growth of 10 percent, during the AK-Party era.

23 Kibritçioğlu, November 1-15, 2004, (23/79)  Capacity utilization ratio in manufacturing industry also increased up to the pre-crisis level in recent months.

24 Kibritçioğlu, November 1-15, 2004, (24/79)  The monthly ratio of the number of new firms established to the number of the closed ones was fluctuating around 16 within the last two years.

25 Kibritçioğlu, November 1-15, 2004, (25/79)  The manufactuing industry exhibits a remarkable increase in labor productivity.  The reasons for that are still not investigated by economists sufficiently.

26 Kibritçioğlu, November 1-15, 2004, (26/79) Labor Market: Employment & Real Wages

27 Kibritçioğlu, November 1-15, 2004, (27/79)  The increases in manufacturing production are not fully accommodated by increases in employment.  Turkey has still to solve the unemployment problem that has been deepened after the financial crisis.

28 Kibritçioğlu, November 1-15, 2004, (28/79)  Real wages in manufacturing industry declined significantly following the crisis.  They shrinked about 18 percent during the crisis.

29 Kibritçioğlu, November 1-15, 2004, (29/79) Foreign Exchange Market: Exchange Rates, and Currency Substitution

30 Kibritçioğlu, November 1-15, 2004, (30/79)  Since May 1981, Turkey has a relatively flexible exchange rate system. This gradually removed the “black-market” for FX in Turkey.  In 2000, the monthly growth rates of nominal exchange rates were pre- determined to gradually disinflate the economy. “Black-Market” Exchange Rates (BMER) vs. Official Exchange Rates (OER) and Annual Increases in OER ( )

31 Kibritçioğlu, November 1-15, 2004, (31/79)  During the last 27 months, nominal exchange rates seems to float around a specific level, without showing any tendency towards a sharp increase.

32 Kibritçioğlu, November 1-15, 2004, (32/79)  Note that annual growth rate of nominal USD exchange rates turned to negative values between May 2003 and April 2004.

33 Kibritçioğlu, November 1-15, 2004, (33/79)  Following the crisis, gross FX reserves of the Turkish Central Bank increased significantly.  They are now about 38 percent higher than the level of reserves prior to the crisis.

34 Kibritçioğlu, November 1-15, 2004, (34/79)  The so-called foreign exchange market pressure index does not send any signs of an increase in pressure in the market, while it is observed that banking sector is acting more and more risky again.

35 Kibritçioğlu, November 1-15, 2004, (35/79)  The real appreciation of the Turkish lira against major foreign currencies following the crisis seems to have stopped within the last 12 months.

36 Kibritçioğlu, November 1-15, 2004, (36/79) FX Deposits to M2 Currency Substitution in Turkey ( )  High inflation and low credibility of government policies in the 1990s created a strong currency substitution. But it’s changing now...

37 Kibritçioğlu, November 1-15, 2004, (37/79)  There is a tendency towards reverse currency substitution during the AK-Party era.  Government’s success in disinflating the economy and its increasing credibility may significantly be contributing to this process.

38 Kibritçioğlu, November 1-15, 2004, (38/79) Balance of Payments and External Debts

39 Kibritçioğlu, November 1-15, 2004, (39/79) History of Taxation in Turkish International Trade in Goods ( ) Kennedy (1967) Tokyo (1979) Uruguay ( ) GATT (1947) Customs Union with the EU (199 6 )  Foreign trade liberalization in Turkey is closely associated to Turkey’s relations to the GATT/WTO and the European Union (EU).

40 Kibritçioğlu, November 1-15, 2004, (40/79)  Foreign trade liberalization in the 1980s positively affected Turkey’s trade in goods with the rest of the world.

41 Kibritçioğlu, November 1-15, 2004, (41/79) Exports to Imports Ratio in Turkey ( , annual)

42 Kibritçioğlu, November 1-15, 2004, (42/79) Exports to Imports Ratio in Turkey ( , monthly)  The share of the agricultural products on exports decreased in Turkey, and the volatility of exports to imports ratio in Turkey declined since early 1980s.

43 Kibritçioğlu, November 1-15, 2004, (43/79)  The developments in the exports to imports ratio show that foreign trade deficits are increasing since early 2002.

44 Kibritçioğlu, November 1-15, 2004, (44/79) Export and Import Price Indices (1982=100, monthly averages)

45 Kibritçioğlu, November 1-15, 2004, (45/79) Goods Composition of Turkish Exports and Imports ( , ISIC, percent) ExportsImports

46 Kibritçioğlu, November 1-15, 2004, (46/79) Goods Composition of Turkish Exports and Imports ( , BEC, percent) ExportsImports

47 Kibritçioğlu, November 1-15, 2004, (47/79) Country Composition of Turkish Exports ( , percent)

48 Kibritçioğlu, November 1-15, 2004, (48/79) Country Composition of Turkish Imports ( , percent)

49 Kibritçioğlu, November 1-15, 2004, (49/79)  The increasing deficit in net exports of goods is eliminated by an increasing surplus in net exports of services, and hence the CAB deficits are declining since March 2004.

50 Kibritçioğlu, November 1-15, 2004, (50/79)  However, the cumulative BoP data shows that the recent improvements have not fully translated into the annual data yet.  In 2003, the CAB/GDP ratio amounted to -2.8%. However, it will possibly climb to -4% in 2004.

51 Kibritçioğlu, November 1-15, 2004, (51/79) Erratic Nature of Net Short-Term Capital Inflows (billion USD, annual data) capitalaccountliberalizationcapitalaccountliberalization 1994crisis1994crisis crisis crisis

52 Kibritçioğlu, November 1-15, 2004, (52/79) Net Short-Term Capital Inflows (billion USD)  One indication that Turkey’s policies are on the right track would be a return to positive short-term inflows at a steady and sustainable level. But a substantial increase in longer term capital inflows is not observed in Turkey. capitalaccountliberalizationcapitalaccountliberalization

53 Kibritçioğlu, November 1-15, 2004, (53/79)  Short-term capital outflows that rose following the financial crisis declined significantly after January  Net short-term capital inflows (in terms of cummulative data) are positive in 2004.

54 Kibritçioğlu, November 1-15, 2004, (54/79)  The effects of both current and capital account liberalizations realized in the 1980s can roughly be followed by the fluctuations in the CAB to GDP and net short term capital inflows to GDP ratios. current account liberalization capital account liberalization

55 Kibritçioğlu, November 1-15, 2004, (55/79)  The monthly data shows that the volatility of the CAB to nominal industrial output is significantly lower than that of the net short- term capital inflows to output ratio.

56 Kibritçioğlu, November 1-15, 2004, (56/79) Political Process (Voters, Political Parties & Bureaucrats) Political Process (Voters, Political Parties & Bureaucrats) “Hot Money” Mechanism in Turkey High Public Sector Deficits High Real International Interest Rate Differential Decreasing or Stable Nominal Exchange Rates Net Short-Term Capital Inflows from Abroad Net Short-Term Capital Inflows from Abroad interest rate parity... It‘s not only “capital account liberalization” itself which caused macroeconomic problems in Turkey after But everything changes, if there is a CC at the door… But everything changes, if there is a CC at the door… high inflation upward pressure on FX rates

57 Kibritçioğlu, November 1-15, 2004, (57/79)  FDI inflows into Turkey are far from being sufficient to improve the economy: Only 16.1 billions of USD within 23 years...

58 Kibritçioğlu, November 1-15, 2004, (58/79)  In 2003, Turkey’s GDP amounted to 240 billion USD, while its total external debts reached to 147 billion USD.  95 out of 147 billion USD amounting total debts are created solely by the public sector.

59 Kibritçioğlu, November 1-15, 2004, (59/79)  The ratio of international reserves to short-term external debts increased significantly after the financial crisis, but in the AK-Party era it declined again slightly.

60 Kibritçioğlu, November 1-15, 2004, (60/79) Public Sector: Deficits and Debts

61 Kibritçioğlu, November 1-15, 2004, (61/79)  The PSBR is a better indicator of the public sector in Turkey because it also covers the non-CB public institutions.  The PSBR is diminishing since three years, while the non- interest PSBR is improving.

62 Kibritçioğlu, November 1-15, 2004, (62/79)  Non-interest (primary) consolidated budget balance (CBB) seems to be stabilized with respect to nominal output growth, while the CBB (incl. interest payments) is diminishing since late 2003 again.

63 Kibritçioğlu, November 1-15, 2004, (63/79)  As a result of both the successful disinflationary policies and the Government’s increasing political credibility, Turkish Treasury pays now lower interest rates in domestic borrowing.

64 Kibritçioğlu, November 1-15, 2004, (64/79)  Public sector’s domestic debts increased sharply following the crisis, both in nominal and real terms.

65 Kibritçioğlu, November 1-15, 2004, (65/79)  Public sector’s domestic debts in terms of USD are also increasing sharply...

66 Kibritçioğlu, November 1-15, 2004, (66/79)  Public sector’s domestic debts seem to be stabilized with respect to changes in industrial production index within the last two years.

67 Kibritçioğlu, November 1-15, 2004, (67/79)  Since the latest general elections in November 2002, the public sector’s domestic debts increased more than 65 percent in terms of USD, while its external debts expanded only around 15 percent.

68 Kibritçioğlu, November 1-15, 2004, (68/79) Financial Sector

69 Kibritçioğlu, November 1-15, 2004, (69/79) Banking Sector Fragility in Turkey  Turkish banking sector experienced difficulties many times within the last 25 years, as a result of their own excessive risk-taking behavior in the past. For Methodology: see Kibritçioğlu (2003), “Monitoring...”.

70 Kibritçioğlu, November 1-15, 2004, (70/79)  The Turkish banking sector is recovering from the crisis, and according to the BSF index, it is taking excessive risk again... (The BSF3 index is a weighted average of real annual changes in foreign liabilities, claims on private sector, and total deposits.) For Methodology: see Kibritçioğlu (2003), “Monitoring...”.

71 Kibritçioğlu, November 1-15, 2004, (71/79)  The recent developments in the FL to FA ratio indicate that the external open (short) position of Turkish banking system is decreasing now... Banking Sector Fragility in Turkey

72 Kibritçioğlu, November 1-15, 2004, (72/79)  The ratio of 1-month to 12-month deposit interest rates exhibits a different pattern after the financial crisis: It is very close to 100 percent now...

73 Kibritçioğlu, November 1-15, 2004, (73/79) Istanbul Stock Exchange’s National 100 Index

74 Kibritçioğlu, November 1-15, 2004, (74/79) Annual Increases in ISE’s National 100 Index

75 Kibritçioğlu, November 1-15, 2004, (75/79)  ISE’s (İMKB) National 100 index increased mostly during the AK-Party era. Since spring 2004, however, it follows a relatively stable path.

76 Kibritçioğlu, November 1-15, 2004, (76/79)  Inflation and interest rates are declining gradually.  In the Turkish manufacturing industry, the labor productivity is increasing and real wages remain low, while the industrial production index is rising again.  There is still a deep unemployment problem in Turkey. Production increases are not fully translated into employment increases yet.  Excessive risk taking behavior of the banking system (in terms of the BSF index) is expected to decline towards historical averages.  Real effective exchange rates do not show an appreciation of Turkish lira anymore.  Further structural reforms, stronger privatization efforts and continuity in political stability are needed in the country.  In Turkey, it is expected that a decision of the heads of EU governments next month in favor of the start of the accession talks for full-membership in early 2005 will positively affect the Turkish economy, particularly in terms of the FDI inflows. Concluding Remarks

77 Kibritçioğlu, November 1-15, 2004, (77/79) Statistical Sources for Figures and Tables  CBRT/TCMB, Electronic Data Distribution System.  SPO/DPT, Main Economic Indicators.  UT/HM, Treasury Statistics.  ISE/İMKB, Annual Yerabook.  IMF/IFS, IFS & DOTS.  Penn World Table (PWT), 6.1  Pick’s/World Currency Yearbook

78 Kibritçioğlu, November 1-15, 2004, (78/79) Appendix: Selected Macroeconomic Indicators for Turkey,

79 Kibritçioğlu, November 1-15, 2004, (79/79) Source: State Institute of Statistics (SIS), Central Bank of Republic of Turkey (CBRT), State Planning Organization (SPO), the IMF and J.P.Morgan; Kibritçioğlu’s calculations.


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