MEHMET YÖRÜKOĞLU

CENTRAL BANK OF TURKEYDEPUTY GOVERNOR

GLOBAL FINANCIAL TURBULENCE

AND ITS IMPACTS

October 2008

22

I. Reasons behind the turbulence,

II. Measures taken so far …

III. Impacts of the turmoil on;

III.1. Emerging markets,

III.2. Turkey;

IV. Prospects.

Contents

33

-4

-3

-2

-1

0

1

2

3

4

5

95 96 97 98 99 00 01 02 03 04 05 06 07 08

-20

-15

-10

-5

0

5

10

15

20

01

-01

07

-01

01

-02

07

-02

01

-03

07

-03

01

-04

07

-04

01

-05

07

-05

01

-06

07

-06

01

-07

07

-07

01

-08

07

-08

Reasons Behind the Turmoil Loose Monetary Policies:

As a result of low real interest rates in the

developed economies, especially in USA,

during the period 2001 – 2005, investors

initiated leveraged transactions and used risky

instruments in order to gain high yields.

Lack of Transparency and Supervision :

Parallel to the widespread use of originate-to-

distribute business models, financial innovation

and technolobical advancements, complex

instruments were used widely, which in turn

complicated tracing of the investments and risk

analysis of these investments.

Problems in the Housing Sector :

Decline in house prices in USA that began in

the first quarter of 2006 adversely affected

household consumption demand and brought

about increase in the mortgage foreclosure

rate.

Loose Monetary Policies:

As a result of low real interest rates in the

developed economies, especially in USA,

during the period 2001 – 2005, investors

initiated leveraged transactions and used risky

instruments in order to gain high yields.

Lack of Transparency and Supervision :

Parallel to the widespread use of originate-to-

distribute business models, financial innovation

and technolobical advancements, complex

instruments were used widely, which in turn

complicated tracing of the investments and risk

analysis of these investments.

Problems in the Housing Sector :

Decline in house prices in USA that began in

the first quarter of 2006 adversely affected

household consumption demand and brought

about increase in the mortgage foreclosure

rate. Source: OFHEO, Standard&Poors

Housing Price Index (January 2001 – July 2008, annual percentage change)

OFHEO

Case&Shiller

Real Policy Rate in USA(January 1981 – September 2008, percentage)

Soruce: FED, Bureau of Labor Statistics

44

What triggered the crisis?

Increased delinquency rate in sub-prime mortgages and therefore decline in mortgage-backed securities (MBS).

• Big exposures of financial institutions which also have high leverages to these MBS.

Increased risk appetite in the face of low real interest rates

Creation of complex financial instruments in search of higher profitability

“Originate to distribute” model and extensive use of off-balance sheet instruments

Imprudent credit decisions

• Erosions of capital due to financial losses

Cut back in loan supply

Reasons behind the Turbulence

55

Uncertainty in financial markets transformed into a trust problem between financial institutions

In spite of correcting actions of regulatory bodies, arising financial weaknesses of large financial institutions such as Lehman Brothers, Bear Stearns, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual Fund and AIG.

Reasons behind the Turbulence

66

0

50

100

150

200

2007 Q2and Earlier

07 Q3 07 Q4 08 Q1 08 Q2 08 Q3

Global Losses

USA

Europe

As of October total losses that the international financial system has suffered reached 659 billion US Dollars.

IMF revised its global loss forecast from 945 billion US Dollars to 1.4 trillion US Dollars.

During the same period banks were able to raise up equity by 638 billion US Dollars.

Due to the financial turmoil banks faced significant losses and hence they tightened the credit standards significantly.

As of October total losses that the international financial system has suffered reached 659 billion US Dollars.

IMF revised its global loss forecast from 945 billion US Dollars to 1.4 trillion US Dollars.

During the same period banks were able to raise up equity by 638 billion US Dollars.

Due to the financial turmoil banks faced significant losses and hence they tightened the credit standards significantly.

Losses in the Banking and Financial Sector (billion US dollars)

Source: Bloomberg

World

Asia

Ratio of Banks Reporting Tightening Credit Standards to the Total Banks

(2006 Q1 – 2008 Q3, quarterly, percentage)

-20

-10

0

10

20

30

40

50

60

70

20

06

Q1

20

06

Q2

20

06

Q3

20

06

Q4

20

07

Q1

20

07

Q2

20

07

Q3

20

07

Q4

20

08

Q1

20

08

Q2

20

08

Q3

USA

Europe

Source: FED, ECB

77

Measures taken so far …

Coordinated response of Central Banks by providing liquidity support

Bail outs from U.S. and European governments

Intervention of US government by its fiscal policy

• Capital injection and assets expansion by accepting as collateral,

• Encouraging some banks to fund the troubled banks by secured funding,

• Paying interest on depository institutions required and excess reserve balances (by Fed),

Guarantee on bank deposits and/or other liabilities in USA and Europe

88

8

16

24

32

40

48

56

64

72

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

Impacts of the Turmoil Volatility index (VIX) has reached its highest level of the last 19 years, surpassing

previous highs seen during the Asian crisis, dot-com bust and after the 11 September attacks.

TED spread, an indicator of credit risk in the economy, used to range around 50 basis points prior to the start of the turmoil but lately the spread has widened to around 460 basis points.

Volatility index (VIX) has reached its highest level of the last 19 years, surpassing previous highs seen during the Asian crisis, dot-com bust and after the 11 September attacks.

TED spread, an indicator of credit risk in the economy, used to range around 50 basis points prior to the start of the turmoil but lately the spread has widened to around 460 basis points.

0

50

100

150

200

250

300

350

400

01-0

7

03-0

7

05-0

7

07-0

7

09-0

7

11-0

7

01-0

8

03-0

8

05-0

8

07-0

8

09-0

8

Source: Bloomberg Source : Bloomberg

Volatility Index(2 January 1990 – 20 October 2008)

Difference Between LIBOR and US Treasury Bill (3 month)

(1 January 2007 – 6 October 2008, basis points)

Long-term average

99

200

250

300

350

400

450

500

550

600

650

700

02

.01

.20

08

17

.01

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08

04

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08

20

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06

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08

24

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08

08

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23

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08

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08

23

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08

10

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08

25

.06

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08

10

.07

.20

08

28

.07

.20

08

12

.08

.20

08

27

.08

.20

08

12

.09

.20

08

29

.09

.20

08

15

.10

.20

08

-100

0

100

200

300

400

500

Foreign Exchange Rates and Risk Indicators

Since the beginning of August fall in the value of Turkish Lira against US Dollars is close to the average depreciation rate of emerging economies’ currencies.

In the second quarter of 2008 Turkey’s risk premium increased more than that of other developing countries. Yet, a marked correction has been observed since July 2008.

Since the beginning of August fall in the value of Turkish Lira against US Dollars is close to the average depreciation rate of emerging economies’ currencies.

In the second quarter of 2008 Turkey’s risk premium increased more than that of other developing countries. Yet, a marked correction has been observed since July 2008.

Source: JP Morgan

(Turkey) – (EMBI+)

-5 0 5 10 15 20 25 30 35 40 45

Iceland KorunaBrazilian Real

Hungarian ForintColombian Peso

South African RandPolish Zloty

Mexican PesoChilean Peso

Romanian LeySouth Korean Won

Turkish LiraCzech Koruna

Indian RupeeLatvian Lats

Lithuanian LTLRussian Ruble

Ukraine HryvniaMalaysian Ringgit

Phillippine PesoSingapore Dolar

Indonesian RupeeTaiw an DolarIsralie Shekel

Source: OANDA

Change in the Spot Foreign Exchange Rate vs USD

(between 1 August 2008 and 16 October 2008, percent)

Risk Indicators(2 January 2008 – 20 October 2008, basis points)

EMBI + TurkeyEMBI +

1010

Banking and Financial Sector

Capital Inflows and Current Account Deficit

Economic Activity

Exchange Rate and Inflation

Potential Impacts on Turkish Economy

1111

Until now, limited effects on banking and financial sector due to,

• Considerable improvement in macroeconomic stability,

• Prudent macroeconomic policies,

• Conservative Regulation and Supervision,

• Tools used by Central Bank of Turkey to calm the markets, such as reintroduction of FX deposit market,

• Tight fiscal policy and monetary policies.

Impacts on Turkish Banking and Financial Sector

1212

-7

-6

-5

-4

-3

-2

-1

0

1

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

Banking Sector

Compared to earlier periods Turkish banking sector’s resilience has improved remarkably.

The sector does not hold a noteworthy FX short position.

Net FX positions of the banks are at a low level compared to their equity capital.

Compared to earlier periods Turkish banking sector’s resilience has improved remarkably.

The sector does not hold a noteworthy FX short position.

Net FX positions of the banks are at a low level compared to their equity capital.

Net FX Position of the Banking Sector(2000 Q1 – 2008 Q3*, billion USD)

* As of 19 September 2008 Source: BRSA, CBT

The capital adequacy ratio is well above the legal limit and the EU average of 12.1%.

Banks’ short-term FX liquidity and total short-term liquidity adequacy ratios remain above the legal limits of 80% and 100%, respectively.

Strong capital structure and high profit to equity ratios curtail banking sector’s vulnerability to the financial turmoil.

The capital adequacy ratio is well above the legal limit and the EU average of 12.1%.

Banks’ short-term FX liquidity and total short-term liquidity adequacy ratios remain above the legal limits of 80% and 100%, respectively.

Strong capital structure and high profit to equity ratios curtail banking sector’s vulnerability to the financial turmoil.

0

4

8

12

16

20

24

28

12-0

5

02-0

6

04-0

6

06-0

6

08-0

6

10-0

6

12-0

6

02-0

7

04-0

7

06-0

7

08-0

7

10-0

7

12-0

7

02-0

8

04-0

8

06-0

8

Capital Adequacy Ratio (December 2005 – July 2008, percent)

Target rate is 12%

Legal limit is 8%

Operational risk included

Source: BRSA, CBT

1313

0

50

100

150

200

250

300

07-0

7

08-0

7

09-0

7

10-0

7

11-0

7

12-0

7

01-0

8

02-0

8

03-0

8

04-0

8

05-0

8

06-0

8

07-0

8

08-0

8

09-0

8

Banking Sector

0

50

100

150

200

250

300

07

-07

08

-07

09

-07

10

-07

11

-07

12

-07

01

-08

02

-08

03

-08

04

-08

05

-08

06

-08

07

-08

08

-08

09

-08

Short-Term FX Liquidity Ratio (6 July 2007 – 12 September 2008, percent)

Legal limit is 80%

Up to 1 month

0-7 days

Total Short-Term Liquidity Ratio (6 July 2007 – 12 September 2008, percent)

Legal limit is 100%

Up to 1 month

0-7 days

Source: BRSA, CBT Source: BRSA, CBT

1414

Banking Sector

11.5

3.5

4.9

3.7 3.9

2.8

0

2

4

6

8

10

12

14

2003 2007

Ratio of Non-Performing Loans to Total Loans (2003 vs. 2007, percent)

* Developing countries: Argentina, Brazil, Bulgaria, Czech Republic, Croatia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, Ukraine** Developed countries: France, Germany, Italy, United Kingdom, USASource: IMF, CBT

Developed Countries**

Developing Countries*

Turkey

1515

Bank Credits

0

10

20

30

40

50

60

70

80

90

01

-06

02

-06

03

-06

04

-06

05

-06

06

-06

07

-06

08

-06

09

-06

10

-06

11

-06

12

-06

01

-07

02

-07

03

-07

04

-07

05

-07

06

-07

07

-07

08

-07

09

-07

10

-07

11

-07

12

-07

01

-08

02

-08

03

-08

04

-08

05

-08

06

-08

07

-08

08

-08

Retail Loans

Business Loans

Business Loans and Retail Loans(1 January 2006 – 5 September 2008, year-on-year percentage change)

Source: CBT

1616

58

912

17

23

5760

63

0

10

20

30

40

50

60

70

2004 2005 2006

Households

Total Household Liabilities(2004 – 2006, percent of GDP)

European Union

Eastern Europe

Turkey

Source: CBT Source: ECB, CBT

FX Debt of Households((2003 – September 2008,

percent of total consumer loans)

8.6

6.4

4.8

3.63.9

4.6

0

2

4

6

8

10

2003 2004 2005 2006 2007 Sep-08

1717

Turkey (A) shows the data of 2007 including participation banks; Turkey (B) shows the data of June 2008 including participation banks. For EU members, the data of 2007 is used.

Source: Turkstat, BRSA-CBRT, ECB.

Banking sector is still quite small with a strong potential to grow.

(%)

RomaniaTurkey (A)Turkey (B)PolandLithania

HungaryBulgariaCzech Republic

Latv iaFinlandGreece

ItalySweden

PortugalSpain

GermanyMU13

AustriaEU27

FranceNetherlandsBelgium

DenmarkUK

Luxembourg

(2533)

0 100 200 300 400 500 600 700 800 900

Ireland

•

Impacts on Turkish Banking and Financial Sector

1818

Impacts on Turkish Banking and Financial Sector

Source: BRSA,CBRT, Association of Capital Market Intermediary Institutions, CMB

(1) Figures are as of June 2008.

3.0 2.0 0.10.50.50.60.71.2

88.1

3.3

0102030405060708090

100

Ba

nks

(in

cl.p

articip

atio

n

Mu

tua

l fu

nd

s

Insu

ra

nce

co

mp

an

ies

Le

asin

g

co

mp

an

ies

Fa

cto

rin

g

co

mp

an

ies

Co

nsu

me

r

fin

an

ce

Se

cu

ritie

s

bro

ke

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ge

fir

ms

Re

al e

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stm

en

t

Pe

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un

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Inve

stm

en

t

co

mp

an

ies

(%)

•Financial system in Turkey is bank dominated;

•No toxic financial instruments in banks’ portfolio;

•Shallow markets for complex financial derivatives.

1919

Impacts on Turkish Banking and Financial Sector

Financial Stability Index

Source: CBRT

110.0

113.0

116.0

119.0

122.0

12.0

2

12.0

3

12.0

4

12.0

5

12.0

6

12.0

7

08.0

8

Index

Financial Stability Index Average

•FSI is a composite index that is used as a measure of the financial soundness.

•It indicates a sound Turkish banking sector.

2020

Inflation Developments in Turkey Thanks to achievements in price stability, Turkey’s ranking in terms of inflation has

improved.

While in the 1997-2003 period, Turkey was among the 10 countries with highest inflation in the world, as of September she declined to the 62th position.

Thanks to achievements in price stability, Turkey’s ranking in terms of inflation has improved.

While in the 1997-2003 period, Turkey was among the 10 countries with highest inflation in the world, as of September she declined to the 62th position.

0

20

40

60

80

100

120

140

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

47 7

10

48 9

34

25 26

55

62

0

10

20

30

40

50

60

70

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

*

* Most recent data as of September 2008The total number of countries is 155. The ranking is in descending order.Source: IMF, TURKSTAT, CBT

Inflation Targeting Regime

Inflation in Turkey (1980 – 2008*)

Turkey in the Global Inflation Ranking (1997 – 2008)

* 2008 forecast of the Central Bank of TurkeySource: IMF, TURKSTAT, CBT

2121

Effects on the Turkish Economy; Inflation As a result of global crisis commodity prices, especially food and energy prices, declined

drastically.

Falling commodity prices, moderating domestic demand and depreciation of Turkish Lira will have favorable effects on the current account deficit and an improvement in the current account deficit is expected in the months to come.

As a result of global crisis commodity prices, especially food and energy prices, declined drastically.

Falling commodity prices, moderating domestic demand and depreciation of Turkish Lira will have favorable effects on the current account deficit and an improvement in the current account deficit is expected in the months to come.

4

6

8

10

12

14

01-0

7

03-0

7

05-0

7

07-0

7

09-0

7

11-0

7

01-0

8

03-0

8

05-0

8

07-0

8

09-0

8

40

60

80

100

120

140

160

01-0

7

03-0

7

05-0

7

07-0

7

09-0

7

11-0

7

01-0

8

03-0

8

05-0

8

07-0

8

09-0

8

Wheat Price(1 January 2007 – 9 October 2008, US Dollars/Bushel)

Oil Prices(NYMEX WTI, 1 January 2007 – 9 OCtober 2008, US Dollars)

Source: Bloomberg

Source: Chicago Board of Trade

-5.7

-0.7

-6.1

-4.6

-3.7

-2.5

-2.7

-1.8

-2.9-2.4-2.5

-7

-6

-5

-4

-3

-2

-1

0

2002 2003 2004 2005 2006 2007

* Keeping energy prices constant at 2002 levels.

Current Account Deficit

Current Account Balance and The Effect of Energy Prices on the Current Account

Deficit*

(2002 – 2007, percent of GDP)

Source: TURKSTAT, CBT

2222

Effects on the Turkish Economy; Inflation Favorable developments in commodity prices and deterioration in the domestic demand

suggest that inflation will improve in the following months.

However, recent depreciation of Turkish Lira may create upward pressure on the inflation rate in the short-run.

The items outside the domain of monetary policy such as food prices, food and energy prices prices contributed to annual inflation by 41% in 2004-2006 period, whereas their contribution rose to 63% in September 2008.

Favorable developments in commodity prices and deterioration in the domestic demand suggest that inflation will improve in the following months.

However, recent depreciation of Turkish Lira may create upward pressure on the inflation rate in the short-run.

The items outside the domain of monetary policy such as food prices, food and energy prices prices contributed to annual inflation by 41% in 2004-2006 period, whereas their contribution rose to 63% in September 2008.

Components of Annual Inflation (percentage share)

* Food: Food and Non-Alcoholic Beverages

** Tobacco: Tobacco Products and Alcoholic Beverages

Source: TURKSTAT, CBT

2004 – 2006 Average September 2008

59.140.9

Other Goods and Services

Food and Energy

37.5

62.5Other Goods and

Services

Food and Energy

2323

Balance of Payments – Current Account

17.3 16.0

18.2

20.2 19.3

17.5

19.2

24.4 23.8

24.9 25.4

22.6

20.0

15.1

10

15

20

25

30

2001 2002 2003 2004 2005 2006 2007

Source: SPO Program for 2008, CBT

Domestic Savings and Investments (2001 – 2007, percent of GNP)

Domestic Savings

Investments

* 1987 based series

2424

Balance of Payments – Current Account

Source: TURKSTAT, CBT

* Keeping energy prices constant at 2002 levels.

Current Account Balance and The Effect of Energy Prices on the Current Account Deficit*

(2002 – 2007, percent of GDP)

Current Account Deficit Excluding the Effect of Energy Prices

Current Account Deficit

-5.7

-0.7

-6.1

-4.6

-3.7

-2.5

-2.7

-1.8

-2.9-2.4-2.5

-7

-6

-5

-4

-3

-2

-1

0

2002 2003 2004 2005 2006 2007

2525

-40

-20

0

20

40

60

80

100

2000 2003 2004 2005 2006 2007 2008*

-40

-20

0

20

40

60

80

100

2000 2003 2004 2005 2006 2007 2008*

Financing of the Current Account(2000 – 2008*, percent of current account deficit)

Source: CBT

Foreign Direct Investment 3

Long Term Credits 2

Short Term Credits 1

Capital Flows

Portfolio Investments 4

* Last 12 months as of 2008 May1 Short Term Credits: Net short term loans of the banking sector, non-bank private sector and the public sector, plus trade credits2 Long Term Credits : Net long term loans of the banking sector, non-bank private sector and the public sector

3 Foreign Direct Investment: Foreign direct investment inflows4 Portfolio Investment: Purchases of equities and securities by nonresidents and deposits of nonresidents

Financing of the Current Account(2000 – 2008*, percent of current account deficit)

Source: CBT

* Last 12 months as of 2008 May1 Bank Credits: Short and long-term borrowing of the banking sector2 Non-Bank Private Sector Credits : Short and long term borrowing of the non-bank private sector, plus trade credits3 Foreign Direct Investment: Foreign direct investment inflows4 Public Sector Borrowing: Purchases of government securities (including Eurobonds) by nonresidents, credits to central government and to the Central Bank (including IMF credits)5 Equaities: Purchases of equities by nonresidents

Foreign Direct Investment 3

Non-Bank Private Sector Credits 2

Bank Credits 1

Public Sector Borrowing 4

Equities 5

2626

Foreign Direct Investment (Annual, billion US dollars)

Foreign Direct Investment

China 83.5

Hong Kong 60.0

Russia 52.5

Singapore 24.1

Turkey 22.0

Mexico 24.7

Brazil 34.5

India 22.9

Romania 9.7

Chile 14.4

Source: UNCTAD

Foreign Direct Investment Inflows (2006, billion US dollars)

1.0 1.1 1.82.9

10.0

19.9

22.0

0

5

10

15

20

25

30

Averageof 1990-

2001

2002 2003 2004 2005 2006 2007

Source: CBT

2727

23.9

32.930.4

24.9

18.6

30.2

48.6

0

10

20

30

40

50

60

Brazil CzechRepublic

SouthAfrica

Hungary Mexico Poland Turkey

Cumulative GDP Growth (Percentage change, 2001-2007)

Economic Growth

Source: TURKSTAT, IMF World Economic Outlook

2828

Productivity and Wages

Productivity, Real Wages and Real Unit Wages in the Manufacturing Industry(1998 Q4 – 2008 Q1, per hour worked, 4-quarter moving average, logarithmic scale)

1.95

2.00

2.05

2.10

2.15

2.20

2.2519

98 Q

4

1999

Q2

1999

Q4

2000

Q2

2000

Q4

2001

Q2

2001

Q4

2002

Q2

2002

Q4

2003

Q2

2003

Q4

2004

Q2

2004

Q4

2005

Q2

2005

Q4

2006

Q2

2006

Q4

2007

Q2

2007

Q4

1.70

1.75

1.80

1.85

1.90

1.95

2.00

2.05

2.10

Productivity Index (lhs)

Real Unit Wages Index(rhs)

Source: TURKSTAT, CBT

Real Wages Index(rhs)

2929

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.91

95

0

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

Export Performance

Source: WTO, CBT

Turkey’s Share in World Exports (1950 – 2007, percent)

3030

0

5

10

15

20

25

30

35

40

01-0

6

03-0

6

05-0

6

07-0

6

09-0

6

11-0

6

01-0

7

03-0

7

05-0

7

07-0

7

09-0

7

11-0

7

01-0

8

03-0

8

05-0

8

07-0

8

10

15

20

25

30

35

01-0

6

03-0

6

05-0

6

07-0

6

09-0

6

11-0

6

01-0

7

03-0

7

05-0

7

07-0

7

09-0

7

11-0

7

01-0

8

03-0

8

05-0

8

07-0

8

Foreign Trade

0

20

40

60

80

100

120

140

160

180

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Real Imports and Real Exports Indices(1982 – 2007, 2003 = 100)

Imports

Exports

Imports

Exports

Source:TURKSTAT, CBT

Imports and Exports Growth(January 2006 – August 2008, 12-month rolling

year-on-year change, in USD, percent)

Source:TURKSTAT, CBT

Exports

Imports (ex-oil)

3131

Export Performance

Composition of Turkey’s Exports (top 8 export sectors, billion USD)

* 12-month rolling as of May 2008Source: TURKSTAT, CBT

1.0 2.3 3.6

22.4

1.9 1.9 2.8

15.2

1.62.2

13.5

1.3 2.13.2

9.9

0.71.3

1.8

8.8

3.62.9

3.1

9.0

2.73.7

4.3

9.7

6.16.6

8.1

14.5

1.3-

20

40

60

80

100

1996 2000 2002 2008

Apparel and clothing

Textile yarn, fabrics

Food and live animals

Chemicals and petroleum products

Iron and steel

Electrical machinery and appliances

Motor vehicles

Industrial Machinery

3232

146 4 1 1 2

29

3936

3836

3530

28 27 24

13172528

2629 28

42

34

43

6662

55

49

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008Q1

2008Q2

24.5

10.29.0

4.5

0.6 0.11.3

0

5

10

15

20

25

30

2001 2002 2003 2004 2005 2006 2007

Public Sector

Maastricht Criteria: 3.0%

Source: Treasury

EU Defined General Government Budget Deficit (2001 – 2007, percent of GDP)

Public Sector Net Debt Stock / GDP (2000 – 2008 Q2, percent of GDP)

Source: Treasury

Total Net Debt Stock

Net Foreign Debt

Net Domestic Debt

Public sector has become more resilient to external shocks due to tight fiscal policy that has been implemented since 2001.

The Treasury maintains a high level of FX reserves with the aim of minimizing any liquidity risk that might arise in cash and debt management.

Public sector has become more resilient to external shocks due to tight fiscal policy that has been implemented since 2001.

The Treasury maintains a high level of FX reserves with the aim of minimizing any liquidity risk that might arise in cash and debt management.

3333

Central Bank Foreign Exchange Reserves

Source: CBT

Ratio of Short Term Debt to Central Bank FX Reserves

(1996 – 2008 Q1, percent)

Source: CBT

0

20

40

60

80

100

120

140

160

96 97 98 99 00 01 02 03 04 05 06 07 08

71.3

58.3

48.3

36.033.7

27.0

76.2

0

10

20

30

40

50

60

70

80

90

2002 2003 2004 2005 2006 2007 2008 Sep

Central Bank FX Reserves (2002- September 2008, billion USD)

3434

Prospects for World Economy

Challenges for the world economic outlook• Coupling, • Further squeeze in liquidity and increase in funding cost,• Further deterioration of expectations and confidence in

international markets,• Slowdown in world economic growth,• Unemployment,• New architecture of financial markets

• Consolidation• Reshaping of financial institutions

• Need for effective regulation and supervision,• Coordination and cooperation among both

local and cross border authorities.

MEHMET YÖRÜKOĞLU

CENTRAL BANK OF TURKEYDEPUTY GOVERNOR

Thank you.

October 2008

3636

0

2

4

6

8

10

12

Ç1 Ç2 Ç3* Ç4

20082007

-10

0

10

20

30

40

03-0

7

04-0

7

05-0

7

06-0

7

07-0

7

08-0

7

09-0

7

10-0

7

11-0

7

12-0

7

01-0

8

02-0

8

03-0

8

04-0

8

05-0

8

06-0

8

07-0

8

08-0

8

General Budget Primary Expenditures and Tax Revenues

(March 2007 – August 2008, year-on-year change, 3-month moving average, percent)

Tax Revenues

Primary Expenditures

Source: Ministry of Finance

Central Government Primary Balance (Program defined, 3-month total, 2006 Q1- 2008 Q3*,

TRY billion)

*July-August averageSource: Undersecretariat of Treasury

Public Sector

3737

46

78 8172

100108

117128

139155

63 66 68 73

-120

-80

-40

0

40

80

120

160

200

2005 2006 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1

FX AssetsFX Liabilities

Net FX Position

39.9

22.9

17.6

60.1

0

10

20

30

40

50

60

70

2008 2009 2010 2011 and later

The FX position of the non-banking sector was USD 73.8 billion as of the first quarter of 2008.

Short term net FX position of the real sector is about 2 billion USD.

Maturity composition of the real sector debt has extended considerably.

The FX position of the non-banking sector was USD 73.8 billion as of the first quarter of 2008.

Short term net FX position of the real sector is about 2 billion USD.

Maturity composition of the real sector debt has extended considerably.

FX Position of the Corporate Sector (2005 – 2008 Q1, billion USD)

Maturity Composition* of the Long-term External Debt of the Corporate Sector

(as of July 2008, billion USD)

* Days to maturity Source: CBT

Source: CBT

Corporate Sector

3838

58 9

12

17

23

5760

63

0

10

20

30

40

50

60

70

2004 2005 2006

Households

In Turkey, the practice of variable interest rate for consumer loans is limited. FX

denominated loans are not extended to consumers and companies with no FX income.

FX-indexed consumer loans make up only 4.1 % of total amount of consumer loans.

Household indebtedness is at a low level compared to European Union and Eastern

Europe countries..

In Turkey, the practice of variable interest rate for consumer loans is limited. FX

denominated loans are not extended to consumers and companies with no FX income.

FX-indexed consumer loans make up only 4.1 % of total amount of consumer loans.

Household indebtedness is at a low level compared to European Union and Eastern

Europe countries..

4.13.93.6

4.8

6.4

8.6

0

2

4

6

8

10

12

14

16

18

20

2003 2004 2005 2006 2007 2008 Eylül

Source: CBT

Ratio of FX-indexed Consumer Loans to Total Consumer Loans

(2003 – September 2008, percent)

Ratio of Household Liabilities to GDP (2004-2006, percent)

European Union

Eastern Europe

Turkey

Source: ECB, CBT

3939

Parallel to the economic activities that gained pace between 2002 and 2007, the number

of bad checks increased in line with the number of bank checks used.The ratio of the

amount of bad checks to the total checks submitted to the clearing house, which was

6.8% in 2003, declined to 5.5% in 2007. This ratio stood at 5.1% as of July 2008.

Likewise, the ratio of protested bills to commercial loans (an indicator of commercial

activities) declined to 2.9% in Augustos 2008 after reaching 11% in 2002.

Parallel to the economic activities that gained pace between 2002 and 2007, the number

of bad checks increased in line with the number of bank checks used.The ratio of the

amount of bad checks to the total checks submitted to the clearing house, which was

6.8% in 2003, declined to 5.5% in 2007. This ratio stood at 5.1% as of July 2008.

Likewise, the ratio of protested bills to commercial loans (an indicator of commercial

activities) declined to 2.9% in Augustos 2008 after reaching 11% in 2002.

Commercial Activities

0

2

4

6

8

10

12

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Ratio of the amount of Protested Bills to (12 months, cumulative, real) Total Commercial Loans (January 1999 – August 2008, real, percent)

Ratio of Bad Checks to the Total Amount of ChecksSubmitted to the Clearing House

(2003-2008*, percent)

5.6

6.8

6.0

5.2

5.5

5.1

4

5

6

7

2003 2004 2005 2006 2007 2008*

* January-July averageSource:CBT, ICHC

Source:CBT

4040

Turkey

Malaysia

Thailand

S. Korea

Israel

S. AfricaChile

MexicoBrazilRomania

Russia

Czech Republic

Hungary

Poland

-100

0

100

200

300

400

500

-2 0 2 4 6 8 10

Real Policy Rate in August 2007 (ex-ante)

Change in the Inflation between August2007 and

August 2008 (basis points)

Inflation and Policy Rates Developing countries that followed a tight monetary policy in 2007 were in better

position to resist inflationary pressures in 2008 as compared to countries that followed accomodative monetary policies.

Developing countries that followed a tight monetary policy in 2007 were in better position to resist inflationary pressures in 2008 as compared to countries that followed accomodative monetary policies.

Source: Central Banks

Change In Inflation Rate and Real Policy Rates In Developing Countries