1

Hüseyin Zafer

Executive Director

May 2011

CENTRAL BANK OF THE REPUBLIC OF TURKEY

1

2

Contents

I. General Outlook in the Turkish Economy

II. Post-Crisis Challenges

III.New Policy Mix as the Response

IV.Outcomes of the New Policy

2

3

I. General Outlook in the Turkish Economy

3

4

Strong Rebound in Economic Activity in 2010

Source: TURKSTAT, SPO

GDP Growth (%)

3,0

6,8

0,7

-4,8

8,9

4,5 5,0 5,5

-6

-4

-2

0

2

4

6

8

10

1993-2001

2002-20072008

20092010

2011p2012p

2013p

4

Source: TURKSTAT

Last observations: January 2011

Unemployment ratio(%, Seasonally Adjusted)

Unemployment is Still High but Recovering

Non-Agricultural Employment and GDP Growth

10,6

14,8

9

10

11

12

13

14

15

01

.05

05

.05

09

.05

01

.06

05

.06

09

.06

01

.07

05

.07

09

.07

01

.08

05

.08

09

.08

01

.09

05

.09

09

.09

01

.10

05

.10

09

.10

01

.11

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

2005 2006 2007 2008 2009 2010

-200

0

200

400

600

800

1000

1200

GDP Grow th (%)

Change in Non-agriculturalEmployment (000 person,rhs)

5

Inflation Realizations(%, red dots are the year-end inflation targets)

Source: TURKSTAT

5 55,5

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

6

Disinflation Continues

Lending Rates(%, weighted averages for the categories)

Source: CBRT

0

10

20

30

40

50

60

70

80

01-0

2

07-0

2

01-0

3

07-0

3

01-0

4

07-0

4

01-0

5

07-0

5

01-0

6

07-0

6

01-0

7

07-0

7

01-0

8

07-0

8

01-0

9

07-0

9

01-1

0

07-1

0

01-1

1

Personal Finance

Vehicle

Housing

Commercial

CBT Policy Rate

7

And so Does the Historically-Low Lending Rates..

Source: CBRT

CDS Premia of Selected Countries(January 1, 2008 - April 22, 2011)

CDS Premia of Selected Countries(January 1, 2008=0, April 22, 2011)

Turkey-200

0

200

400

600

800

1000

1200

1400

1600

01.0

8

05.0

8

09.0

8

01.0

9

05.0

9

09.0

9

01.1

0

06.1

0

10.1

0

02.1

1

GreecePortugalTurkeySpainIrelandItalyBelgium

CDS (bps)

0

200

400

600

800

1000

1200

01.0

8

05.0

8

09.0

8

01.0

9

05.0

9

09.0

9

01.1

0

06.1

0

10.1

0

02.1

1

Turkey

Czech R.

Poland

Hungary

Bulgaria

Romania

Russia

8

Highest Decline in CDS Spreads Despite Highest Interest Rate Cut

9

II. Post-Crisis Challenges

9

101010

Emerging Markets

Strong Growth Prospects &High Interest Rates

Capital Inflows to Emerging Markets

Credit Growth&Risk of Overheating

Advanced Economies

Low Growth rates&Very Low Interest Rates

+

Risk of future instability!

Background

Source: TURKSTAT, CBT

Capital Inflows

Capital Inflows(USD billion)

* After controlling for the effect of change in Decree No. 32

-30

-20

-10

0

10

20

30

40

50

01

.08

04

.08

07

.08

10

.08

01

.09

04

.09

07

.09

10

.09

01

.10

04

.10

07

.10

10

.10

01

.11

FDI

Portfolio Investments and Deposits

Private Sector Credit*

11

Source: BRSA

Last observation: February 2011

Loan Growth(%, year-on-year change)

… Supporting the Strong Growth in Credits

-20

-10

0

10

20

30

40

50

60

02

.08

04

.08

06

.08

08

.08

10

.08

12

.08

02

.09

04

.09

06

.09

08

.09

10

.09

12

.09

02

.10

04

.10

06

.10

08

.10

10

.10

12

.10

02

.11

SME Total Individual Corporate/Commercial

12

Source: ECB Statistical Data Warehouse

Change in Bank Credit(%, year-on-year, 2010)

… which is Higher than the EU Countries

-22.6

-1.7 -0.9 -0.7

0.0 0.7 1.0 2.5 3.9 4.1 5.48.4 8.5

20.4

31.633.9

-30

-20

-10

0

10

20

30

40

Ire

lan

d

Lu

xem

bo

urg

Sp

ain

Ne

the

rla

nd

s

Ge

rma

ny

Po

rtu

ga

l

De

nm

ark

Be

lgiu

m

Fra

nce

Au

stri

a

Fin

lan

d

U.K

Italy

Sw

ed

en

Gre

ece

Tu

rke

y

13

Source: IMFLatest Data Available varies btw 2009-2010

Return on Assets(%)

Outstanding Outlook in the Banking Sector

-5

-4

-3

-2

-1

0

1

2

3

Latv

ia

Rom

ania

Gre

ece

Hun

gary

Net

herla

nds

Slo

veni

a

Fra

nce

Ital

y

Est

onia

Sw

eden

Sw

itzer

land

Por

tuga

l

Slo

vak

Rep

ublic

Spa

in

Rus

sia

Pol

and

Nor

way

Bul

garia

Lith

uani

a

Cze

ch

Tur

key

(Feb

'11)

Tur

key

(201

0)

0

5

10

15

20

25

Por

tuga

lG

reec

eA

ustr

alia

1Li

thua

nia

Slo

veni

aS

pain

Ital

yP

olan

dF

ranc

eN

orw

ayS

lova

k R

epub

licS

wed

enLa

tvia

Irel

and

Net

herla

nds

Hun

gary

Rom

ania

Cze

ch R

epub

licB

ulga

riaS

witz

erla

ndT

urke

y (F

eb'1

1)R

ussi

anT

urke

y ('1

0)E

ston

ia

Capital Adequacy Ratio(%)

14

Source: IMF, BRSALatest Data Available varies btw 2009-2010

NPL Ratios of Selected Countries(%)

…with Comparatively Very Low NPL Ratios

NPL Ratios in Turkey(%)

0

2

4

6

8

10

12

14

16

Sw

itzer

land

Nor

way

Aus

tral

ia 1

Net

herla

nds

Tur

key

(Feb

'11)

Por

tuga

lT

urke

y (1

0)P

olan

dF

ranc

eS

pain

Slo

vak

Rep

ublic

Est

onia

Cze

ch R

epub

licS

love

nia

Lith

uani

aB

ulga

riaG

reec

eH

unga

ryR

ussi

an F

eder

atio

n2It

aly

Rom

ania

Irel

and

Latv

ia

2

3

4

5

6

7

8

02

.08

04

.08

06

.08

08

.08

10

.08

12

.08

02

.09

04

.09

06

.09

08

.09

10

.09

12

.09

02

.10

04

.10

06

.10

08

.10

10

.10

12

.10

02

.11

SME

Corporate

Total

Individual

15

1616Source: Eurostat, CBRT

Last observations:Sep. 2010

2009Sep. 2010

Households FX Assets* 67,597 69,338

Households FX Liabilities*

2,172 1,572

FX Position* 65,425 67,766

GDP* 616,753 734,723

FX Position/GDP (%) +10.6 +9.2

15.4

0 20 40 60 80 100 120 140 160

DenmarkIrelandSpain

PortugalLuxembourg

SwedenUK

The NetherlandsGermany

EU27FinlandEstoniaFranceAustriaLatvia

GreecePoland

ItalyLitvania

HungaryBelgiumBulgaria

Czech RepSloveniaSlovakiaRomania

Turkey

Household Liabilities to GDP Ratios(%)

Household FX Positions

* (USD million)* (USD million)

16

Strong Balance Sheet of Households

1717

28

0 20 40 60 80 100 120 140 160 180

LuxembourgCyprusIrelandMaltaSpain

PortugalDenmarkSlovenia

NetherlandsSwedenAustria

ItalyLatvia

EstoniaEU27

BulgariaFranceGreece

United KingdomGermanyLithuaniaBelgiumFinland

HungaryTurkey

SlovakiaCzech Republic

RomaniaPoland

Bank Loans to Non Financial Companies (% of GDP)

Bank Loans to Non Financial Companies (% of GDP)

September 2010

NFC FX Assets* 83,860

NFC FX Liabilities* 173,128

FX Position* -89,268

FX Position/GDP (%)** -12.7

•(USD million).

** Note that the short FX position for short term liabilities are less than 1% of GDP (USD 458 mio). Banking Sector FX position is balanced.

•(USD million).

** Note that the short FX position for short term liabilities are less than 1% of GDP (USD 458 mio). Banking Sector FX position is balanced.

Non Financial Companies (NFC) FX Positions

Source: Eurostat, CBRT

Last observations:Sep.2010 17

…and Non-Financial Sector

1818Source: MoF, Treasury, MTP (2011-2013) Targets, IMF WEO April 2011

… and of Public Sector

Public Debt Forecast for 2011(% of GDP)

Budget Deficit Forecast for 2011(% of GDP)

-2.8

-11 -9 -7 -5 -3 -1 1 3

IrelandUK

GreeceSpain

LithuaniaFrancePoland

PortugalLatvia

Slovak Rep.SloveniaCyprus

RomaniaItaly

BelgiumNetherlandsCzech Rep.

DenmarkAustria

MaltaTurkey*

BulgariaGermany

FinlandLuxembourg

EstoniaSweden

Hungary

Maastricht Criterium

40.6

0 20 40 60 80 100 120 140 160

Greece

Italy

Ireland

Belgium

Portugal

France

UK

Germany

Hungary

Malta

Netherlands

Spain

Cyprus

Poland

Finland

Denmark

Slovak Republic

Lithuania

Latvia

Slovenia

Czech Republic

Turkey*

Romania

Sweden

Austria

Bulgaria

Luxembourg

Estonia

Maastricht Criterium

*: Turkey’s budget deficit figure is MTP (2011-2013 projection) for central govenment. IMF WEO April 2011 budget deficit forecast for Turkey is 1.7% and better than what was envisaged in Turkey’s MTP as 2.1% for general government.

*: Turkey’s budget deficit figure is MTP (2011-2013 projection) for central govenment. IMF WEO April 2011 budget deficit forecast for Turkey is 1.7% and better than what was envisaged in Turkey’s MTP as 2.1% for general government.

*: Turkey’s debt figure is MTP (2011-2013) projection. IMF WEO April 2011 public debt forecast for Turkey is 39.4%.

*: Turkey’s debt figure is MTP (2011-2013) projection. IMF WEO April 2011 public debt forecast for Turkey is 39.4%.

18

19

0

2

4

6

8

10

12

14

16

18

20

Oca

.05

May

.05

Eyl

.05

Oca

.06

May

.06

Eyl

.06

Oca

.07

May

.07

Eyl

.07

Oca

.08

May

.08

Eyl

.08

Oca

.09

May

.09

Eyl

.09

Oca

.10

May

.10

Eyl

.10

Oca

.11

-7

-6

-5

-4

-3

-2

-1

0

Export

Import

Net Export (rhs)

Export and Import Quantity Indices (3-month MA)

Export, Import & Foreign Trade Balance (12-month MA, USD Billion)

100

110

120

130

140

150

160

170

180

190

200

Oca

.05

May

.05

Eyl

.05

Oca

.06

May

.06

Eyl

.06

Oca

.07

May

.07

Eyl

.07

Oca

.08

May

.08

Eyl

.08

Oca

.09

May

.09

Eyl

.09

Oca

.10

May

.10

Eyl

.10

Oca

.11

Export Quantity Index

Import Quantity Index

Source: TURKSTAT

Stronger Import Demand Partly Fuelled by Credit Growth...

The quantity indices depict the stronger import demand growth compared to export growth.

Higher growth in import demand resulted in increasing foreign trade deficit.

20Source: TURKSTAT, CBRT

... Leading to a Deterioration in the Current Account…

Current Account Balance/GDP(%)

Ratio to GDP

2007 2008 2009 2010

2011*

CAB -5.3 -6.8 -2.2 -6.6 -7.7

CAB Excl. Energy

-1.3 -0.2 1.9 -2.0 -2.6

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

0100

0101

0102

0103

0104

0105

0106

0107

0108

0109

0110

CAB / GDP

CAB (excl. Energy)/ GDP

* As of February 2011, last 12 months.

20

2121

…Although “Current Account Imbalances” is a Global Issue.

Source. IMF, CBRT

-15

-10

-5

0

5

10

15

20

25

30M

alay

sia

Taiw

an

Saud

i Ara

bia

Chi

na

Thai

land

Japa

n

Kore

a

Indo

nesi

a

Fran

ce

Braz

il

Cze

ch R

ep.

Uni

ted

King

dom Indi

a

Indi

a

Uni

ted

Stat

es

Pola

nd Italy

Spai

n

Turk

ey (2

010)

Turk

ey (2

011)

Gre

ece

Current Account Balance in Some Countries(2010 IMF Forecasts, ratio to GDP, percent)

21

22

III. New Policy Mix as the Response

22

2323

The Three Phases of the Monetary Policy since the Collapse of Lehman Brothers

• Phase-1: Full liquidity support (after the collapse of Lehman

Brothers, September 2008)

• Phase-2: Exit Strategy (April 2010)

• Phase-3: New Policy Mix (since November 2010)

- A lower policy rate,

- Wider interest rate corridor and

- Higher reserve requirements

23

2424

RRR and the Policy Rate being the Main Monetary Tools

24

For Financial Stability:

1.Required Reserve Ratios2.TRY Liquidity Management3.Short-Term Interest Rates

For Price Stability:

1.Short-Term Interest Rates2.TRY Liquidity Management3.Required Reserve Ratios

Tools in the order of priority

2525

The New Policy Framework of Two Targets and Two Instruments

25

0

5

10

15

20

25

01.08 04.08 07.08 10.08 01.09 04.09 07.09 10.09 01.10 04.10 07.10 10.10 01.11 04.11

Policy Rate

Interest Rate Corridor

Policy Rate and Interest Rate Corridor(%)

26

Lower Policy Rate and Wider Corridor

0

2

4

6

8

10

12

14

16

18

Nov 2010 Step 1 (Dec 2010) Step 2 (Jan 2011) Step 3 (Apr 2011) Step 4 (Apr 2011)

Longer Than 1 Year

6-12 Months

3-6 Months

1-3 Months

Up to 1 Month

Demand Deposit

Source: CBRT

Reserve Requirements Balances(%)

27

Higher Reserve Requirements

Current Reserve Requirement Ratios(%)

20.5 20

13.511.8

10.0

8

6

4 3.5

0

5

10

15

20

25

Chin

a

Bra

zil

Turk

ey (

TRY)

Turk

ey (

FX)

Per

u

Indones

ia

India

Russ

ia

Pola

nd

Source: Central Banks, CBRT 28

Reserve Requirements – An International Comparison

2929

Measures Taken by other Turkish Authorities.

1.Fiscal discipline

2.No FX loans to households

3.Domestic currency bond market

4.Loan/value restrictions

5.Tax hikes on certain consumer loans

6.Restrictions on credit card borrowing

29

30

IV. Outcomes of the New Policy

30

Source: CBRT

TRY Required Reserves

FX Required Reserves

0

10

20

30

40

50

60

70

01.0

9

03.0

9

05.0

9

07.0

9

09.0

9

11.0

9

01.1

0

03.1

0

05.1

0

07.1

0

09.1

0

11.1

0

01.1

1

03.1

1

The new reserve requirements will be effective as of Apr 29, 2011(approx. 1.5 billion TRY and 1.4 billion USD)

Reserve Requirements Balances(billion TRY)

31

1. Tightening Liquidity

Overnight Interest Rates(%)

Swap Rates(%)

Source: CBRT 32

2. Desired Level of Volatility in Money Markets

TRY and Other EM Currencies Against USD ( 4 Jan 2010= 1)

33

3. Impact on Currency

3434

Yield Curve*(%)

Source: CBRT

Inflation Expectations(%.)

*Calculated from the compunded returns on bonds quoted in ISE by using ENS method.

34

4. Steeper Yield Curve and Inflation Expectations under Control

35

Hüseyin Zafer

Executive Director

May 2011

CENTRAL BANK OF THE REPUBLIC OF TURKEY

35

36

Reserve Slides

Monetary Policy Outlook

36

3737

The net impact is on the tightening side.

20-25% annual credit growth is targeted at the end of 2011

Risks both on the downside and on the upside

37

Baseline Scenario – Inflation Report (April 28, 2011)

3838

-7

-6

-5

-4

-3

-2

-1

0

12.0

9

03.1

0

06.1

0

09.1

0

12.1

0

03.1

1

06.1

1

09.1

1

12.1

1

03.1

2

06.1

2

09.1

2

12.1

2

03.1

3

06.1

3

09.1

3

12.1

3

Output Gap Forecast(%)

Inflation Forecasts(%)

6.4

5.25

6.5

5.5

5 5

6.9

2

3

4

5

6

7

8

9

2010 2011 2012 2013

Inflation ForecastsInflation TargetsUncertainty Band

Source: CBRT, April 2011 Inflation Report 38

Inflation and Output Gap Forecasts

3939

Scenario 1

• In case global economic problems intensify and contribute to stronger capital flows, a policy mix of low policy rate, high RRR and wider interest rate corridor may be implemented for a long period. If this scenario leads to weaker domestic demand, it may require an easing in all instruments.

Scenario 2

• If the global economy faces a faster-than-expected recovery, global inflation may increase and thus trigger a tightening in the monetary policies of developed economies.

• Materialization of such a scenario would mean higher global interest rates and demand-driven domestic inflation, and thus necessitate a tightening by using both policy rates and reserve requirements.

Scenario 3

• The increases in commodity prices, if they persist, exert risks regarding general pricing behavior, given the strong pace of domestic demand.

• Should such a risk materialize and hamper the attainment of the medium-term inflation targets, there may be stronger tightening than envisaged in the baseline scenario.

• Higher commodity prices may worsen the current account balance.

• Therefore, the policy mix may vary depending on the developments regarding external demand, capital flows, and the outlook for credit growth.

39

Risk Scenarios