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An Overview of Macroeconomic Developments in Turkey with special reference to the AK-Party Era (2002-04) Aykut Kibritçioğlu Associate Professor of Economics

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An Overview of Macroeconomic Developments in Turkey with special reference to the AK-Party Era (2002-04) Aykut Kibritçioğlu Associate Professor of Economics Ankara University, Turkey Tel.: (+90-312) 319 77 20, ext. 340 Fax: (+90-312) 319 77 36 E-Mail: [email protected] olitics .ankara.edu.tr

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slide1

An Overview of Macroeconomic Developments in Turkey

with special reference to the AK-Party Era (2002-04)

Aykut Kibritçioğlu

Associate Professor of Economics

Ankara University, Turkey

Tel.: (+90-312) 319 77 20, ext. 340

Fax: (+90-312) 319 77 36

E-Mail: [email protected]

Homepage: http://dialup.ankara.edu.tr/~kibritci/wiiw.html

Vienna, 1-15 November 2004

Kibritçioğlu, November 1-15, 2004, (1/79)

slide2

Outline of the Presentation

  • General Facts and Figures, 1970-2004
  • Political Climate, 1969-2004
  • 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 (1970-2003)

Kibritçioğlu, November 1-15, 2004, (2/79)

slide3

General

Facts and Figures, 1970-2004

Kibritçioğlu, November 1-15, 2004, (3/79)

slide4

The 1980-1989 Transformation

1978 - 1980: Balance-of-payments crisis, productivity slowdown and accelerating inflation

January 1980: Announcement of a substantial stabilization and structural adjustment program in order to gradually liberalize the economy

1980 - 1982: Domestic financial liberalization

May 1981: Abandonment of the fixed exchange-rate regime

June 1984 - August 1989: Capital account liberalization and convertibility of the Turkish lira

Kibritçioğlu, November 1-15, 2004, (4/79)

slide5

Post-1989 Macroeconomic Developments

December 1993 - April 1994: A major currency crisis and acceleration in the inflation

August 1999: Negative macroeconomic impacts of the Marmara earthquake

December 1999: Announcement of an exchange-rate-based stabilization program for 2000-2002

November 2000 & February 2001: Two successive banking and currency crises and political instability in Turkey

May 2001: Announcement of the new economic program

Kibritçioğlu, November 1-15, 2004, (5/79)

slide6

Selected Macroeconomic Indicators [1]

annual

period

averages

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.

Kibritçioğlu, November 1-15, 2004, (6/79)

slide7

Selected Macroeconomic Indicators [2]

annual

period

averages

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.

Kibritçioğlu, November 1-15, 2004, (7/79)

slide8

Political Climate,

1969-2004

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

slide9

Governments & Political Instability

in Turkey, 1969-2004

  • 1969-2004 = 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.)

Kibritçioğlu, November 1-15, 2004, (9/79)

slide10

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:
  • 2000-2003 Program introduced...
  • November 2000 and February 2001:
  • Financial crisis occurred...
  • November 2002:
  • General elections & AK-Party-Government starts...

Kibritçioğlu, November 1-15, 2004, (10/79)

slide11

Market for Goods:

Inflation & Disinflation

Kibritçioğlu, November 1-15, 2004, (11/79)

slide12

Annual Consumer Price Inflation

(%, log scale)

  • In the late 1990s, Turkey was not able to join the global disinflation process observed explicitly...

Kibritçioğlu, November 1-15, 2004, (12/79)

slide13

In terms of the length of the period, Turkish high-inflation experience is “unique” in the world...

Kibritçioğlu, November 1-15, 2004, (13/79)

slide14

Turkey suffered from high and persistent inflation since more than three decades. But, finally, it’s declining now...

Kibritçioğlu, November 1-15, 2004, (14/79)

slide15

Annual inflation rates fell below 15 percent as end of September 2004. (Official target for Dec. 2004: 12 percent)

  • Inflationary expectations in the country are also changing in a positive direction.

Kibritçioğlu, November 1-15, 2004, (15/79)

slide16

Market for Goods:

Production & Productivity

Kibritçioğlu, November 1-15, 2004, (16/79)

slide17

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.

Kibritçioğlu, November 1-15, 2004, (17/79)

slide18

Industrial Production Index (1980=100)

  • Turkish industrial sector demonstrated a remarkable growth performance since 1980.

Kibritçioğlu, November 1-15, 2004, (18/79)

slide19

GDP per capita ($): Turkey & Selected Countries

  • In an international context, however, Turkey’s economic growth performance is relatively poor.

Kibritçioğlu, November 1-15, 2004, (19/79)

slide20

In recent years, growth rate of the real GDP has significantly fluctuated.

  • The Turkish real sector is recovering from the 2000-2001 crisis, which is one of the four deepest economic crises after 1950.

Kibritçioğlu, November 1-15, 2004, (20/79)

slide21

During the AK-Party era, the industrial production index increased again up to the pre-crisis level.

Kibritçioğlu, November 1-15, 2004, (21/79)

slide22

Annual increases in the industrial production index sharply fluctuate around an average annual growth of 10 percent, during the AK-Party era.

Kibritçioğlu, November 1-15, 2004, (22/79)

slide23

Capacity utilization ratio in manufacturing industry also increased up to the pre-crisis level in recent months.

Kibritçioğlu, November 1-15, 2004, (23/79)

slide24

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.

Kibritçioğlu, November 1-15, 2004, (24/79)

slide25

The manufactuing industry exhibits a remarkable increase in labor productivity.

  • The reasons for that are still not investigated by economists sufficiently.

Kibritçioğlu, November 1-15, 2004, (25/79)

slide26

Labor Market:

Employment &

Real Wages

Kibritçioğlu, November 1-15, 2004, (26/79)

slide27

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 2000-2001 financial crisis.

Kibritçioğlu, November 1-15, 2004, (27/79)

slide28

Real wages in manufacturing industry declined significantly following the 2000-2001 crisis.

  • They shrinked about 18 percent during the crisis.

Kibritçioğlu, November 1-15, 2004, (28/79)

slide29

Foreign Exchange Market:

Exchange Rates, and Currency Substitution

Kibritçioğlu, November 1-15, 2004, (29/79)

slide30

“Black-Market” Exchange Rates (BMER) vs. Official Exchange Rates (OER)

and Annual Increases in OER (1950-2004)

  • 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.

Kibritçioğlu, November 1-15, 2004, (30/79)

slide31

During the last 27 months, nominal exchange rates seems to float around a specific level, without showing any tendency towards a sharp increase.

Kibritçioğlu, November 1-15, 2004, (31/79)

slide32

Note that annual growth rate of nominal USD exchange rates turned to negative values between May 2003 and April 2004.

Kibritçioğlu, November 1-15, 2004, (32/79)

slide33

Following the 2000-2001 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.

Kibritçioğlu, November 1-15, 2004, (33/79)

slide34

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.

Kibritçioğlu, November 1-15, 2004, (34/79)

slide35

The real appreciation of the Turkish lira against major foreign currencies following the 2000-2001 crisis seems to have stopped within the last 12 months.

Kibritçioğlu, November 1-15, 2004, (35/79)

slide36

Currency Substitution in Turkey (1985-2004)

FX Deposits to M2

  • High inflation and low credibility of government policies in the 1990s created a strong currency substitution. But it’s changing now...

Kibritçioğlu, November 1-15, 2004, (36/79)

slide37

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.

Kibritçioğlu, November 1-15, 2004, (37/79)

slide38

Balance of Payments and External Debts

Kibritçioğlu, November 1-15, 2004, (38/79)

slide39

History of Taxation in Turkish International Trade in Goods (1925-2002)

Kennedy(1967)

Customs Union with the EU (1996)

Tokyo (1979)

GATT (1947)

Uruguay (1986-1993)

  • Foreign trade liberalization in Turkey is closely associated to Turkey’s relations to the GATT/WTO and the European Union (EU).

Kibritçioğlu, November 1-15, 2004, (39/79)

slide40

Foreign trade liberalization in the 1980s positively affected Turkey’s trade in goods with the rest of the world.

Kibritçioğlu, November 1-15, 2004, (40/79)

slide41

Exports to Imports Ratio in Turkey (1923-2003, annual)

Kibritçioğlu, November 1-15, 2004, (41/79)

slide42

Exports to Imports Ratio in Turkey (1950-2004, 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.

Kibritçioğlu, November 1-15, 2004, (42/79)

slide43

The developments in the exports to imports ratio show that foreign trade deficits are increasing since early 2002.

Kibritçioğlu, November 1-15, 2004, (43/79)

slide44

Export and Import Price Indices

(1982=100, monthly averages)

Kibritçioğlu, November 1-15, 2004, (44/79)

slide45

Goods Composition of Turkish Exports and Imports

(1969-2003, ISIC, percent)

Exports

Imports

Kibritçioğlu, November 1-15, 2004, (45/79)

slide46

Goods Composition of Turkish Exports and Imports

(1969-2003, BEC, percent)

Exports

Imports

Kibritçioğlu, November 1-15, 2004, (46/79)

slide47

Country Composition of Turkish Exports (1980-2003, percent)

Kibritçioğlu, November 1-15, 2004, (47/79)

slide48

Country Composition of Turkish Imports (1980-2003, percent)

Kibritçioğlu, November 1-15, 2004, (48/79)

slide49

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.

Kibritçioğlu, November 1-15, 2004, (49/79)

slide50

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.

Kibritçioğlu, November 1-15, 2004, (50/79)

slide51

Erratic Nature of Net Short-Term Capital Inflows

(billion USD, annual data)

1994

crisis

capital

account

liberalization

2000-01

crisis

Kibritçioğlu, November 1-15, 2004, (51/79)

slide52

Net Short-Term Capital Inflows (billion USD)

capital

account

liberalization

  • 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.

Kibritçioğlu, November 1-15, 2004, (52/79)

slide53

Short-term capital outflows that rose following the 2000-2001 financial crisis declined significantly after January 2002.

  • Net short-term capital inflows (in terms of cummulative data) are positive in 2004.

Kibritçioğlu, November 1-15, 2004, (53/79)

slide54

current

account

liberalization

capital

account

liberalization

  • 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.

Kibritçioğlu, November 1-15, 2004, (54/79)

slide55

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.

Kibritçioğlu, November 1-15, 2004, (55/79)

slide56

“Hot Money” Mechanism in Turkey

Political Process

(Voters, Political Parties & Bureaucrats)

It‘s not only “capital account liberalization” itself which caused macroeconomic problems in Turkey after 1989.

High Public Sector Deficits

High Real International Interest Rate Differential

Decreasing or Stable Nominal Exchange Rates

interest rate parity

high inflation

Net Short-Term

Capital Inflows from Abroad

upward pressure on FX rates

But everything changes,

if there is a CC at the door…

...

Kibritçioğlu, November 1-15, 2004, (56/79)

slide57

FDI inflows into Turkey are far from being sufficient to improve the economy: Only 16.1 billions of USD within 23 years...

Kibritçioğlu, November 1-15, 2004, (57/79)

slide58

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.

Kibritçioğlu, November 1-15, 2004, (58/79)

slide59

The ratio of international reserves to short-term external debts increased significantly after the 2000-2001 financial crisis, but in the AK-Party era it declined again slightly.

Kibritçioğlu, November 1-15, 2004, (59/79)

slide60

Public Sector:

Deficits and Debts

Kibritçioğlu, November 1-15, 2004, (60/79)

slide61

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.

Kibritçioğlu, November 1-15, 2004, (61/79)

slide62

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.

Kibritçioğlu, November 1-15, 2004, (62/79)

slide63

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.

Kibritçioğlu, November 1-15, 2004, (63/79)

slide64

Public sector’s domestic debts increased sharply following the 2000-2001 crisis, both in nominal and real terms.

Kibritçioğlu, November 1-15, 2004, (64/79)

slide65

Public sector’s domestic debts in terms of USD are also increasing sharply...

Kibritçioğlu, November 1-15, 2004, (65/79)

slide66

Public sector’s domestic debts seem to be stabilized with respect to changes in industrial production index within the last two years.

Kibritçioğlu, November 1-15, 2004, (66/79)

slide67

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.

Kibritçioğlu, November 1-15, 2004, (67/79)

slide68

Financial Sector

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

slide69

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 ...”.

Kibritçioğlu, November 1-15, 2004, (69/79)

slide70

The Turkish banking sector is recovering from the 2000-2001 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 ...”.

Kibritçioğlu, November 1-15, 2004, (70/79)

slide71

Banking Sector Fragility in Turkey

  • The recent developments in the FL to FA ratio indicate that the external open (short) position of Turkish banking system is decreasing now...

Kibritçioğlu, November 1-15, 2004, (71/79)

slide72

The ratio of 1-month to 12-month deposit interest rates exhibits a different pattern after the 2000-2001 financial crisis: It is very close to 100 percent now...

Kibritçioğlu, November 1-15, 2004, (72/79)

slide73

Istanbul Stock Exchange’s National 100 Index

Kibritçioğlu, November 1-15, 2004, (73/79)

slide74

Annual Increases in ISE’s National 100 Index

Kibritçioğlu, November 1-15, 2004, (74/79)

slide75

ISE’s (İMKB) National 100 index increased mostly during the AK-Party era. Since spring 2004, however, it follows a relatively stable path.

Kibritçioğlu, November 1-15, 2004, (75/79)

slide76

Concluding Remarks

  • 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 monthin 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.

Kibritçioğlu, November 1-15, 2004, (76/79)

slide77

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

Kibritçioğlu, November 1-15, 2004, (77/79)

slide78

Appendix:

Selected Macroeconomic Indicators for Turkey,

1970-2003

Kibritçioğlu, November 1-15, 2004, (78/79)

slide79

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.

Kibritçioğlu, November 1-15, 2004, (79/79)

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