turkey case

Seminar on Exchange Rates and Trade

March, 2012

EXCHANGE RATES –TRADE:

TURKEY CASE

THE MINISTRY OF ECONOMY

A- EXCHANGE RATE REGIMES IN TURKEY

B- EVOLUTION OF TURKEY’S FOREIGN TRADE

C- FINAL REMARKS

OUTLINE

The Ministry of Economy 2

Period before 1980 Fixed Exchange Rate Regime

Period between 1980-1996 Crawling Peg Exchange Rate Regime (1980 – 1989)

• Liberalization of the foreign exchange market in 1984

• Currency substitution started in 1985

• Liberalization of capital movements in 1989 with 32 numbered decree

A flexible Exchange Rate Regime (1989 – 1993)

Adoption of Crawling Band Regime (1994 – 1996) • Economic Crisis in April 1994

• Stabilization Program (April 5, 1994)

EXCHANGE RATE REGIMES IN TURKEY


Period between 1996-2000 • Rate of increase in foreign exchange basket was targeted in order to

minimize the volatility of the real exchange rate for the years between 1996-1999 .

Currency-Peg Regime was determined as the nominal anchor in the stabilization program in 2000.

• Stand-by Agreement with IMF in 2000

• Liquidity Crisis in November 2000

• New Agreement with IMF on December 18, 2000

• No change on the exchange rate policy.



Period Starting from 2001 Floating exchange rate regime

• Economic crisis in February 2001.

• New Stand-by Agreement with IMF on May 28, 2001

• New Economic Stabilization Program initiated in 2002

• Implicit Inflation Targeting between 2002 and 2005

• Limited Central Bank intervention in the foreign exchange market - to prevent excessive volatility

• Formal Inflation Targeting adopted in 2006

• Adoption of new regulations to ensure the efficiency in the foreign exchange market and to reinforce foreign exchange liquidity in the banking system in 2008

• Expansionary monetary policy was abandoned with announcement of the Monetary Policy Exit Strategy on April 14, 2010.

• In the fourth quarter of 2010, inflation targeting was augmented with an additional financial stability orientation.



2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-2011

GDP (Bl. $) 230.5 304.9 390.4 481.5 526.4 648.8 742.1 616.7 734.9 766.4

GDP Growth (%) 6.2 5.3 9.4 8.4 6.9 4.7 0.7 -4.8 9.0 7.5

GDP Per Capita ($) 3,492 4,559 5,764 7,022 7,586 9,240 10,438 8,559 10,067 10,363

Unemployment (%) 10.3 10.5 10.8 10.6 10.2 10.3 11.0 14.0 11.9 9.8

CPI (End of Year, %) 29.7 18.4 9.3 7.7 9.7 8.4 10.1 6.5 6.4 10.5

Exports (FOB) (Bl. $) 36.1 47.3 63.2 73.5 85.5 107.3 132.0 102.1 113.9 135.0

Imports (CIF) (Bl. $) 51.6 69.3 97.5 116.8 139.6 170.1 202.0 140.9 185.5 240.8

Trade Balance(Bl. $) -15.5 -22.1 -34.4 -43.3 -54.0 -62.8 -69.9 -38.8 -71.7 -105.9

Current Account Balance (Bl. $) -0.6 -7.5 -14.4 -22.3 -32.2 -38.4 -42.0 -14.0 -47.1 -77.1

CAD/GDP (%) -0.3 -2.5 -3.7 -4.6 -6.1 -5.9 -5.7 -2.3 -6.4 -10.0

Net FDI (Bl. $) 0.9 1.2 2.0 9.0 19.3 19.9 17.0 6.9 7.6 13.4

CBRT Reserves (Bl. $) 26.8 33.6 36.0 50.5 60.9 73.3 71.0 70.7 80.7 78.3

Net External Debt Stock (Bl. $) 88.4 96.2 103.0 99.0 108.6 133.9 151.1 145.8 170.2 -

CBRT Policy Interest Rate (%) 44.0 26.0 18.0 13.5 17.5 15.8 15.0 6.5 6.5 5.8

DEVELOPMENTS IN TURKEY’S ECONOMY

• 5.3% average annual growth between 2002-2011

• Significant increase in exports and imports, higher growth rates for imports • Increasing trade deficit

• Continuous increase in the current account deficit (CAD) until the financial

crises and remarkable jumps after 2009

Source: TurkStat (values in purple are estimations)


EVOLUTION OF THE FOREIGN TRADE

Turkey’s Foreign Trade (1980 – 2011)

Source: TurkStat


EVOLUTION OF THE CURRENT ACCOUNT AND TRADE BALANCE

-120,000

-100,000

-80,000

-60,000

-40,000

-20,000

0

20,000

20

02

-01

20

02

-04

20

02

-07

20

02

-10

20

03

-01

20

03

-04

20

03

-07

20

03

-10

20

04

-01

20

04

-04

20

04

-07

20

04

-10

20

05

-01

20

05

-04

20

05

-07

20

05

-10

20

06

-01

20

06

-04

20

06

-07

20

06

-10

20

07

-01

20

07

-04

20

07

-07

20

07

-10

20

08

-01

20

08

-04

20

08

-07

20

08

-10

20

09

-01

20

09

-04

20

09

-07

20

09

-10

20

10

-01

20

10

-04

20

10

-07

20

10

-10

20

11

-01

20

11

-04

20

11

-07

20

11

-10

20

12

-01

Current Account and Trade Balance (12m rolling - million dollar)

Current Account Trade BalanceSource: Calculations from TurkStat


HS Code Description 2000 HS Code Description 2011

61 Articles of apparel, accessories, knit or crochet3.73 87 Vehicles other than railway, tramway 15.80

62 Articles of apparel, accessories, not knit or crochet2.51 84 Nuclear reactors, boilers, machinery, etc11.56

85 Electrical, electronic equipment 2.00 72 Iron and steel 11.23

72 Iron and steel 1.62 85 Electrical, electronic equipment 8.88

87 Vehicles other than railway, tramway 1.59 61 Articles of apparel, accessories, knit or crochet8.40

84 Nuclear reactors, boilers, machinery, etc1.42 27 Mineral fuels, oils, distillation products, etc6.54

08 Edible fruit, nuts, peel of citrus fruit, melons1.03 73 Articles of iron or steel 5.76

63 Other made textile articles, sets, worn clothing etc1.02 62 Articles of apparel, accessories, not knit or crochet5.13

52 Cotton 0.71 39 Plastics and articles thereof 4.58

73 Articles of iron or steel 0.70 08 Edible fruit, nuts, peel of citrus fruit, melons3.91

16.34 81.79

27.77 134.97

Evolution of Turkey's Exports (Billion Dollar)

Subtotal Subtotal

Total Total

HS Code Description 2000 HS Code Description 2011

27 Mineral fuels, oils, distillation products, etc9.54 27 Mineral fuels, oils, distillation products, etc54.12

84 Nuclear reactors, boilers, machinery, etc7.96 84 Nuclear reactors, boilers, machinery, etc27.11

85 Electrical, electronic equipment 6.18 72 Iron and steel 20.42

87 Vehicles other than railway, tramway 5.47 87 Vehicles other than railway, tramway 17.18

72 Iron and steel 2.78 85 Electrical, electronic equipment 16.84

39 Plastics and articles thereof 2.04 39 Plastics and articles thereof 12.58

29 Organic chemicals 2.04 71 Pearls, precious stones, metals, coins, etc7.02

90 Optical, photo, technical, medical, etc apparatus1.18 29 Organic chemicals 5.50

52 Cotton 1.08 30 Pharmaceutical products 4.70

30 Pharmaceutical products 1.04 74 Copper and articles thereof 4.12

39.29 169.59

54.50 240.83

Evolution of Turkey's Imports (Billion Dollar)

Subtotal

Total

Subtotal

Total

EVOLUTION OF THE FOREIGN TRADE – SECTORAL

Source: TurkStat


EVOLUTION OF THE EXPORTS

Exports vs. Real Effective Exchange Rate (Index, 2003q1-2011q4)

Source: TurkStat, CBRT


EVOLUTION OF THE EXPORTS - CURRENCIES

Breakdown of Turkey’s Exports: Currencies

Source: TurkStat


EVOLUTION OF THE EXPORTS vs. EXCHANGE RATES

Exports vs. Euro/TL and USD/TL



EVOLUTION OF THE EXPORTS - REGIONAL

Source: Calculations from TurkStat


HS CHAPTERS 2008 2009 2010 2011 2002-2011

72-IRON AND STEEL 9.89 4.87 5.46 5.47

27-MİNERAL FUELS, OİLS, DİSTİLLATİON PRODUCTS, ETC 1.85 1.51 1.98 2.61

84-MACHİNERY, NUCLEAR REACTORS, BOİLERS, ETC 2.03 2.01 2.29 2.60

85-ELECTRİCAL, ELECTRONİC EQUİPMENT 1.95 1.80 1.93 2.18

73-ARTİCLES OF İRON OR STEEL 1.68 1.81 1.88 1.87

87-VEHİCLES OTHER THAN RAİLWAY, TRAMWAY 1.62 1.42 1.55 1.62

39-PLASTİCS AND ARTİCLES THEREOF 1.01 1.12 1.28 1.53

71-PEARLS, PRECİOUS STONES, METALS, COİNS, ETC 1.31 1.19 1.25 1.39

94-FURNİTURE, LİGHTİNG, SİGNS, PREFABRİCATED BUİLDİNGS0.64 0.68 0.79 0.92

15-ANİMAL,VEGETABLE FATS AND OİLS, CLEAVAGE PRODUCTS, ETC0.56 0.33 0.29 0.87

Top Ten Chapters in Turkey's Exports to Near and Middle Eastern Countries and North Africa

Source: TurkStat (Billion Dollars)

Share of Exports to Near and Middle Eastern Countries vs. REER

EVOLUTION OF THE IMPORTS

Imports vs. REER (Index, 2003q1-2011q4)



90

95

100

105

110

115

120

125

130

135

80

100

120

140

160

180

200

220

Real Imports (Left Axis) REER

Global Crises

2005Q1

EVOLUTION OF THE IMPORTS - CURRENCIES

Decomposition of Turkey’s Imports: Currencies

Source: TurkStat


EVOLUTION OF THE IMPORTS vs. EXCHANGE RATES

Imports vs. Euro/TL and USD/TL



EVOLUTION OF THE IMPORTS – SECTORS BY CURRENCIES

2008 2009 2010 2011 2002-2011

MINERAL FUELS, LUBRICANTS AND RELATED MATERIALS 36.7% 34.8% 33.4% 35.8%

MANUFACTURED GOODS CLASSIFIED CHIEFLY BY MATERIAL 18.4% 16.8% 17.8% 16.1%

MACHINERY AND TRANSPORT EQUIPMENT 12.0% 15.8% 16.1% 13.7%

CRUDE MATERIALS, INEDIBLE, EXCEPT FUELS 11.4% 10.6% 12.3% 12.1%

CHEMICALS AND RELATED PRODUCTS, N.E.S. 8.9% 9.9% 9.6% 9.5%

MISCELLANEOUS MANUFACTURED ARTICLES 4.1% 5.4% 5.1% 4.6%

COMMODITIES AND TRANSACTIONS NOT CLASSIFIED ELSEWHERE IN THE SITC4.0% 2.3% 2.2% 4.1%

FOOD AND LIVE ANIMALS 3.0% 2.9% 2.5% 2.9%

ANIMAL AND VEGETABLE OILS, FATS AND WAXES 1.3% 1.3% 0.9% 1.1%

BEVERAGES AND TOBACCO 0.2% 0.2% 0.2% 0.1%

TOTAL 100.0% 100.0% 100.0% 100.0%

Sectoral Breakdown of Imports in USD (% Share)

2008 2009 2010 2011 2002-2011

MACHINERY AND TRANSPORT EQUIPMENT 52.5% 51.9% 52.8% 53.0%

MANUFACTURED GOODS CLASSIFIED CHIEFLY BY MATERIAL 18.3% 17.5% 17.6% 17.2%

CHEMICALS AND RELATED PRODUCTS, N.E.S. 17.2% 18.1% 17.3% 16.5%

MISCELLANEOUS MANUFACTURED ARTICLES 7.8% 7.7% 7.0% 6.8%

FOOD AND LIVE ANIMALS 1.5% 1.9% 2.3% 2.8%

CRUDE MATERIALS, INEDIBLE, EXCEPT FUELS 1.9% 1.7% 1.9% 2.2%

COMMODITIES AND TRANSACTIONS NOT CLASSIFIED ELSEWHERE IN THE SITC0.2% 0.2% 0.4% 0.6%

BEVERAGES AND TOBACCO 0.4% 0.5% 0.4% 0.4%

MINERAL FUELS, LUBRICANTS AND RELATED MATERIALS 0.2% 0.3% 0.3% 0.4%

ANIMAL AND VEGETABLE OILS, FATS AND WAXES 0.1% 0.1% 0.1% 0.1%

TOTAL 100.0% 100.0% 100.0% 100.0%

Sectoral Breakdown of Imports in Euro (% Share)

Source: TurkStat, WTO


EVOLUTION OF THE FOREIGN TRADE vs. EXCHANGE RATES

Source: Calculations from TurkStat, CBRT


Real Exports Real Imports

USD/TL -27.34% -70.65%

EUR/TL -13.08% -47.71%

EUR/USD 21.06% 46.22%

REER 13.39% 31.08%

Real Exports 100.00% 30.98%

Real Imports 30.98% 100.00%

Real Exports Real Imports

USD/TL -60.58% -74.37%

EUR/TL -30.81% -56.31%

EUR/USD 45.51% 35.52%

REER 34.11% 52.17%

GDP 70.09% 91.75%

Real Exports 100.00% 65.34%

Real Imports 65.34% 100.00%

Correlations - Quarterly (2004q1 - 2011q4, change wrt previous quarter)

Correlations - Annually (2004q1 - 2011q4, change wrt previous year)

• Decreasing and/or delayed investments and FDIs between 1996 – 2000 – Mostly due to political instabilities – Customs Union with the EU in 1996

• Changing business environment after 2001 – Macro reforms and political stability – Significant increase in investments and FDIs – Increase in productivity and profitability

• Efficiency-oriented restructuring in private sector • Pressure over real wages

• Shift in the structure of manufacturing industry and exports – From labor-intensive to capital-intensive – Low value-added structure of capital-intensive production

due to import dependency

FINAL REMARKS


• Effects of the developments in exchange rates: – Imports:

• Remarkable increase in total bill

– Exports: • Disadvantages of appreciating TL, especially in the EU

market

– Threatening increase in trade deficit and current account deficit • CAD/GDP around 10% in 2011

EFFECTS OF EXCHANGE RATES ON TURKEY’S FOREIGN TRADE


• Recent actions to reduce trade deficit and CAD

– Export-Oriented Manufacturing Strategy

– GITES (Input Supply Strategy of Turkey)

– Reform in the Incentive System

– Recent actions to increase exports

• New approach to increase international competitiveness

– Communication on International Competitiveness

– Communication on Market Access

• Market Access Strategies by Countries and Sectors

• Increase in the number of Trade Counselors

• Increase in emphasis on trade in services

FINAL REMARKS


The MINISTRY of ECONOMY

March, 2012

THANK YOU

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