Turkish Macroeconomic and Financial Sector Outlook Murat etinkaya - PowerPoint PPT Presentation

Turkish Macroeconomic and Financial Sector Outlook Murat Çetinkaya Deputy Governor Central Bank of Republic of Turkey November 17, 2015 IFN Forum Turkey, İstanbul

Outline A. Macroeconomic Outlook B. Financial Sector Overview C. Islamic Finance (IF) in Turkey 2

MACROECONOMIC OUTLOOK 3

The slowdown in developing countries makes downward pressure on global growth. GDP Growth Rates (YoY, Constant Prices, Percent) 12 6 10 4 8 6 2 4 0 2 -2 0 Export Weighted Advanced Countries -2 -4 Developing Countries GDP Weighted -4 Developing Countries Excluding India and China -6 -6 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015 Last Observation: 2015 Q2. Source: TURKSTAT. 4

However, GDP continues to grow at a stable pace in Turkey. GDP (Seasonally Adjusted, Constant Prices, Billion TL) 35 33 31 29 27 25 23 21 19 17 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Last Observation: 2015 Q2. Source: TURKSTAT. 5

Job creation has been remarkable in Turkey compared to both advanced and developing countries. Growth Rate of Total Employment* (Annual Average, Percent, 2007-2014) Advanced Countries and Turkey Developing Countries and Turkey 4 4 3 3 2 1 2 0 -1 1 -2 -3 -4 0 Greece Ireland Spain Portugal Italy Japan USA France UK Austria Sweden Belgium Germany Canada Korea Switzerland Australia Turkey Czech R. Russia Poland Thailand Hungary Egypt S.Africa Brazil Philippines Mexico Peru Indonesia Chile Turkey Colombia Malaysia *The data for Chile, Colombia, Egypt, Source: IMF. Source: IMF. Malaysia and Peru is between 2007-2013. 6

Decisive monetary implementation has been the main driver of disinflation. Inflation Realizations and Targets (Percent) 80 73,16 Realization Target 70 60 50 40 33,41 30 20 11,69 12,06 11,14 10,19 9,66 10 7,58 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 35 20 12 8 5 4 4 7.5 6.5 5.5 5 5 5 5 5 Target 29.7 18.4 9.3 7.7 9.7 8.4 10.1 6.5 6.4 10.4 6.2 7.4 8.2 - - Realization Source: TURKSTAT, CBRT. January 2002: 73.16, March 2003: 33.41, July 2006: 11.69, July 2008: 12.06, April 2010: 10.19, April 2012: 11.44, May 2014: 9.66 Last Observation: October 2015. 7

The improvement in current account deficit proceeds. Current Account Balance (12-Month Cumulative, % GDP) 0,0 Macroprudential -2,0 Policies -4,0 -6,0 Current Account Deficit/GDP -8,0 Current Account Deficit/GDP (excl. gold) -10,0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Current Account 0.6 7.6 14.2 21.4 31.8 37.8 40.4 12.2 45.4 75.1 48.5 65.0 47.0 Deficit (Billion USD) Current Account 0.3 2.5 3.6 4.5 6.0 5.7 5.4 2.0 6.2 9.7 6.2 7.9 5.8 Deficit/GDP (%) Source: CBRT. Last Observation: 2015 Q2. 8

Fiscal discipline is expected to remain strong. EU Defined Gross Public Debt (Percent of GDP) 77,9 80 80 74,0 67,7 59,6 60 60 52,7 46,5 46,0 42,3 39,9 40,0 39,1 40 40 36,2 36,1 34,0 33,5 32,8 31,3 30,0 20 20 0 0 Last Observation: 2014. Source: Undersecretariat of Treasury, Medium Term Program (2016-2018). * Medium Term Program (2016-2018) realization target. ** Medium Term Program (2016-2018) target. 9

FINANCIAL SECTOR OVERVIEW 10

Financial deepening in Turkey is on the rise. Total Bank Assets, Loans and Deposits to GDP (Percent) 120 Assets to GDP Loans to GDP 100 Deposits to GDP 80 60 40 20 0 Source: BRSA, CBRT *Latest Data: 2015Q1 11

Banking sector competition has rapidly increased in recent years. Concentration Boone Indicator and External Financing (Percent) 90 Top 5 Banks Top 10 Banks 1,6 0,45 85 0,4 1,4 80 0,35 1,2 75 0,3 1 70 0,25 0,8 65 0,2 60 0,6 0,15 55 0,4 Boone Indicator 0,1 50 0,2 Ratio of External Borrowing 0,05 45 (Right Axis) 0 0 40 2005-01 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01 2014-01 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Financial Stability Report, May 2015, CBRT *2015 is as of September 12

Total loan growth has been hovering around 15 percent. Total Loan Growth (YoY Change, FX Adjusted, Percent) 45 40 35 30 25 20 15 10 Last Observation: November 6, 2015. Source: CBRT. Total banking sector (including participation banks, excluding non-performing loans) 13

Banks are well capitalized. Capital Adequacy Ratios in G20 Countries (Percent) 25 20 15,50 15 10 5 0 Last Observation: For France, Italy and Saudi Arabia 2014 Q2, for Japan 2014 Q3, for UK 2014 Q4 and for others 2015 Q1. Source: IMF 14

Asset quality of the Turkish banking sector remains high. NPL Ratios NPL Coverage Ratio and Cost of Risk* (Percent) (Percent) 6,50 NPL Coverage Ratio Total 150 NPL Coverage Ratio Adjusted 3,5 6,00 Corporate Cost of Risk (RHA) 140 Retail 3,0 5,50 130 5,00 2,5 120 4,50 2,0 110 4,00 1,5 100 3,50 1,0 90 3,00 0,5 80 2,50 70 0,0 2,00 12.07 06.08 12.08 06.09 12.09 06.10 12.10 06.11 12.11 06.12 12.12 06.13 12.13 06.14 12.14 06.15 12.05 05.06 10.06 03.07 08.07 01.08 06.08 11.08 04.09 09.09 02.10 07.10 12.10 05.11 10.11 03.12 08.12 01.13 06.13 11.13 04.14 09.14 02.15 07.15 *Cost of Risk=Special Provisions for NPL/Average Loans Source: BRSA, CBRT Latest Data: 06.11.2015 NPL Coverage Ratio Adjusted considers the value of collateral. 15

FX and liquidity risks of the Turkish banking sector are significantly low. Total Liquidity Coverage Ratio 1 FX Position (Percent) (Billion TL) 60 Sector Legal Ratio Off-BalanceSheet 500 450 40 400 2007 2010 2015 20 350 Net Position 2015 300 0 250 200 -20 On-BalanceSheet 150 100 -40 50 -60 0 06.04.13 05.06.13 04.08.13 03.10.13 02.12.13 31.01.14 01.04.14 31.05.14 30.07.14 28.09.14 27.11.14 26.01.15 27.03.15 26.05.15 25.07.15 23.09.15 10.14 11.14 11.14 12.14 01.15 01.15 02.15 03.15 03.15 04.15 05.15 05.15 06.15 07.15 07.15 08.15 09.15 09.15 10.15 (1) Development and Investment Banks are excluded. Source: BRSA Last data: 30.10.2015 Source: BRSA 16

ISLAMIC FINANCE (IF) IN TURKEY 17

Turkish experience on Islamic finance  Market share of participation banks has been increasing significantly in recent years.  Islamic finance is expected to contribute financial stability by: providing more diversified funding and loan bases, i. promoting risk sharing based funding rather than debt instruments, ii. providing support for investments and especially SME’s finance. iii.  One of the objectives of Turkish G20 presidency is to increase financial inclusion through enhancing SMEs’ access to funds and to promote equity financing instead of debt instruments.  New entrances are expected to enhance the development of Islamic finance in Turkey. 18

There is still room for further growth in Islamic Finance for Turkey. Islamic Banking Share in Total Banking Shares of Global Islamic Assets by Jurisdiction (1H 2014) Banking Assets (1H 2014) Source: IFSB (« IFSI Stability Report 201 5») 19

Islamic Finance and Financial Stability I. Does Islamic finance contribute financial stability ? II. What should be done for stable and resilient functioning of Islamic finance entities ? 20

Enabling Stable Functioning of IF  Regulation: Understanding the business model and products  Providing risk-hedging policies and instruments: Liquidity management  New product development  21

Need for Regulation and Standardization  Need for improving regulatory oversight (rapid growth)  Industry standards for customer confidence and protection  Flexibility to meet the customer demand Competitiveness Resiliency Growth Stability 22

New Global Regulatory Structure Main Reform Areas BCBS, CPSS, 1. Basel III capital IOSCO, framework IAIS, IASB 2. Basel III liquidity framework G-20 FSB 3. G-SIBs IFSB 4. OTC derivatives reforms 5. Shadow Banking 6. Other national or National Authorities regional regulatory reforms 23

A Challenge: Liquidity Management Islamic banks need liquid instruments: High quality  Short term  Sharia’h compliant  Lack of liquid instruments result in In international currency  Competitive disadvantage compared  to conventional banks (higher holding of cash and larger net liquidity gap)  Basel III would affect liquidity position of Islamic Banks Impeding on cross-border activities  24

IILM initiative to support Islamic finance Compatible with the liquid asset definitions in international Eligible regulations Globally collateral for accepted and interbank tradable in transactions secondary and/or central IILM : market bank financing A unique initiative of central banks In major Short-term (3 reserve months- 1 year) currencies Highly rated (A1/P1/F1) 25