Recent Developments in the World Economy and Implications for Turkey

1. Recent Developments in the World Economy and Implications for Turkey Mark Lewis IMF Senior Resident Representative to Turkey Presentation at Atılım University Ankara May 27, 2013

2. Recent developments in the global economy

3. The risks have been reduced, but the global economy remains weak • Policies have addressed major risks but other risks remain • Global economy in broadly three speeds • Emerging market and developing countries (EMDE): coping well • US, other advanced economies (AE): shift from public to private demand in train • Euro area: the handover from public to private demand is still stuck • Priorities • AE: achieving a better fiscal/financial/monetary policy mix • EMDE: rebuilding policy room for maneuver and structural reforms

4. Activity is beginning to recover after the slowdown in 2012 Industrial Production and World Trade (annualized percent change of three-month moving average over previous three-month moving average) Source: Haver Analytics; Netherlands Bureau for Economic Policy Analysis for CPB trade volume index; and IMF staff calculations.

5. Financial conditions have also improved • Equity Markets • (2007 = 100; national currency) Net Portfolio Capital Flows to Emerging Markets (billions of US dollars; quarterly flows) Apr. 13 Sources: Haver Analytics; EPFR Global; and IMF staff calculations.

6. However, bank lending conditions still tight, especially in the euro area Lending Conditions (Net percentage of domestic respondents tightening standards for loans) Nonfinancial Firm and Household Credit Growth 1\ (year-over-year percent change) 12:Q4 Sources: Lending surveys by the Bank of England, European Central Bank, Bank of Japan, and the U.S. Federal Reserve for house holds and corporations; Haver Analytics; and IMF staff estimates. 1\ Flow of funds data are used for the euro area, Spain and the United States. Italian bank loans to Italian residents are corrected for securitizations.

7. Credit growth in Emerging Markets (EMs) has slowed Real Credit Growth (percent change from one year ago) Credit to GDP (percent) Jan. 13 Sources: Haver Analytics; IMF, World Economic Outlook; and IMF staff calculations. 7

8. The Outlook is still weak and uncertain. The forecast has been revised down WEO Real GDP Growth Projections (percent change from a year earlier) Source: IMF, World Economic Outlook. 8

9. The forecast suggests a three-speed global economy Advanced Economies (percent change from a year earlier) Emerging Economies (percent change from a year earlier) LAC: Latin America and the Caribbean; SSA: Sub-Saharan Africa; data are interpolated from annual frequency values Source: IMF Staff Estimates.

10. What to do? Work on medium-term policies and don’t overburden monetary policy! Euro area • Accommodative monetary policy (2014 inflation < < 2% !!) and working on better pass through • Restructuring weak banks, with help of ESM if needed • Stronger EMU: banking union and capital market integration • More entitlement reform and more structural reform • Medium-term fiscal plans and entitlement reform • U.S. needs to durably address debt ceiling • Japan needs a strong medium-term growth strategy • Accommodative monetary policy, including BoJ reforms U.S and Japan EMDC • Rebuild policy space • Watch for legacies of past credit growth or ongoing expansions • Structural reforms: to reaccelerate potential output, absorb inflowing capital productively, rebalance growth 11

11. Financial stability risks remain

12. In the U.S, corporations are building more debt U.S. high-yield covenant-lite loans U.S. corporate debt-to-earnings 1997:Q1 2000:Q4 2007:Q4 Current cycle (2011:Q4) ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’12 10

13. Emerging Markets are also accumulating • debt Selected emerging market bond, equity and loan issuance (U.S. dollar, bn) Emerging Market nonfinancial corporate leverage (percent, debt-to-equity) 12

14. Very sensitive to external factors Nonresident holdings of local currency government debt (share of total; in percent) Local currency yield tightening (Dec 08-Dec 12) (in basis points) Hungary Indonesia Malaysia Poland South Africa Turkey Mexico Brazil Korea 13

15. For financial stability, dealing with old risks and new challenges Remaining Old Risks New Challenges U.S. • Avoid financial excesses • Smooth exit Euro Area • Stronger integration • Make banks, corporates and sovereigns safer U.S. & Japan • Keep sovereigns safe • Avoid bad releveraging • Keep the guard up Emerging Markets • Safer global financial system Global 15

16. Turkey achieved a “soft landing”

17. Turkey: a welcome slowing of growth and domestic demand

18. Lower imports reduce the current account deficit; although financing still is short term

19. Inflation is not high

20. Unemployment has increased, but not much

21. Short-term model suggests momentum in Q1

22. Reflecting, among other things, faster credit growth

23. A soft landing is a new achievement

24. The global economy and Turkey

25. Domestic savings are low, which means:

26. There is a high current account deficit

27. Making Turkey dependent on foreign capital inflows

28. There has been trade diversification, but the EU still important

29. A challenge is to preserve and expand market share

30. Turkey will benefit from more Foreign Direct Investment

31. Thank You! For more information: IMF Website: www.imf.org IMF Turkey Website: www.imf.org/Ankara