TURKEY ECONOMIC MONITOR MAY 2018 MINDING THE EXTERNAL GAP World Bank Group TURKEY ECONOMIC MONITOR, May 2018: Minding the External Gap I TEM, May 2018: Minding the External Gap © 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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II World Bank Group Contents Executive summary...........................................................................................................................................................1 Taking stock......................................................................................................................................................................2 Global growth remains strong in Q1 2018 though market volatility increases...............................................................2 Strong policy response to 2016 shock supports Turkey’s sharp recovery in 2017............................................................3 The balance of risks has shifted from growth to stability................................................................................................6 Policy adjustments could help reduce the risks of a boom-bust cycle.............................................................................8 Containing growth volatility is key to higher productivity and potential output.........................................................11 Looking ahead.................................................................................................................................................................13 Growth is projected to moderate in 2018 with downside risks....................................................................................13 Turkey’s external buffers against tightening financial conditions have declined............................................................17 Pressures on corporates and macro-financial risks have risen........................................................................................18 Policy space to respond to tighter external financial conditions...................................................................................22 Annex 1: Medium-Term Outlook...................................................................................................................................25 Annex 2: Medium-Term Outlook...................................................................................................................................26 Annex 3: Gross Domestic Product...................................................................................................................................27 Annex 4: Gross Domestic Product...................................................................................................................................28 Annex 5: Prices................................................................................................................................................................29 Annex 6: Balance of Payments.........................................................................................................................................30 Annex 7: Monetary Policy...............................................................................................................................................31 Annex 8: Monetary Policy...............................................................................................................................................32 Annex 9: Fiscal Operations..............................................................................................................................................33 Annex 10: Banking Sector Balance Sheet.........................................................................................................................34 Annex 11: Banking Sector Ratios....................................................................................................................................35 Annex 12: Doing Business Index (2018).........................................................................................................................36 Annex 13: Logistics Performance Index (2016)...............................................................................................................40 Annex 14: Health Statistics (2015)..................................................................................................................................41 Annex 15: Education Statistics (2015).............................................................................................................................41 References.......................................................................................................................................................................42 List of Figures Figure 1: Broad-based global recovery................................................................................................................................2 Figure 2: Output remains strong in Q1 2018....................................................................................................................2 Figure 3: Increased market volatility Q1 2018...................................................................................................................3 Figure 4: Portfolio flows to EMDEs are resilient................................................................................................................3 Figure 5: Low consensus forecast in early 2017..................................................................................................................4 Figure 6: Broad recovery in domestic demand...................................................................................................................4 Figure 7: Counter-cyclical fiscal policy has supported short-term recovery from shocks.....................................................4 Figure 8: Money growth in 2017 driven by private credit expansion..................................................................................4 Figure 9: Declining poverty...............................................................................................................................................5 Figure 10: Slight decrease in inequality..............................................................................................................................5 Figure 11: Higher lending rates during downturns............................................................................................................6 Figure 12: Credit is increasingly pro-cyclical......................................................................................................................6 Figure 13: Rising inflation expectations.............................................................................................................................6 Figure 14: Broad-based increase in prices...........................................................................................................................6 Figure 15: Demand-side factors, cost-push and currency contributed to price pressures....................................................7 Figure 16: Higher implicit inflation target than the legislated one.....................................................................................7 Figure 17: Rising current account deficit...........................................................................................................................7 Figure 18: Strong recovery in portfolio flows.....................................................................................................................7 Figure 19: Sharp Lira depreciation against US dollar and Euro..........................................................................................8 Figure 20: Currency adjustment supports REER depreciation despite high inflation.........................................................8 III TEM, May 2018: Minding the External Gap Figure 21: Financial sector development matters for growth volatility...............................................................................9 Figure 22: Manufacturing, trade and construction fueling private credit............................................................................9 Figure 23: Growth in Turkey is volatile............................................................................................................................11 Figure 24: Consumption and investment volatility..........................................................................................................11 Figure 25: Decline in potential growth rate.....................................................................................................................12 Figure 26: Decline in potential TFP contribution............................................................................................................12 Figure 27: Drop in global potential growth rate...............................................................................................................12 Figure 28: Decline in global TFP growth.........................................................................................................................12 Figure 29: Declining real wages.......................................................................................................................................13 Figure 30: Sustained investment spending.......................................................................................................................13 Figure 31: Slight deterioration in fiscal conditions in 2018..............................................................................................14 Figure 32: ...with smaller primary and recurrent surpluses...............................................................................................14 Figure 33: Revenue estimate for 2018 are relatively flat...................................................................................................15 Figure 34: ...with slow growth in tax collections..............................................................................................................15 Figure 35: Spending adjustments on investment side.......................................................................................................15 Figure 36: ...to enable large increase in public transfers....................................................................................................15 Figure 37: ...particularly for Labor and Social Security....................................................................................................15 Figure 38: Defense ministry has also seen a big jump......................................................................................................15 Figure 39: Global growth projected to rise in 2018.........................................................................................................16 Figure 40: Continued export growth in EMDEs.............................................................................................................16 Figure 41: Commodity prices increasing.........................................................................................................................16 Figure 42: Decline in forex reserve coverage....................................................................................................................16 Figure 43: External flows vulnerable to monetary tightening in the US...........................................................................17 Figure 44: Exchange rate developments also closely linked..............................................................................................17 Figure 45: Large external financing needs........................................................................................................................17 Figure 46: Increased external debt stock..........................................................................................................................17 Figure 47: Short-term debt vulnerability low...................................................................................................................18 Figure 48: Increased debt sustainability concerns.............................................................................................................18 Figure 49: Net Open FX Position of Corporates increasing.............................................................................................18 Figure 50: Contribution to Increase in External Debt in 2017 comes mostly from corporates.........................................18 Figure 51: Structure of Corporate Vulnerability Index.....................................................................................................19 Figure 52: CVI in Turkey deteriorates.............................................................................................................................21 Figure 53: Firms with DAR > 2 more than doubles.........................................................................................................21 Figure 54: Sharp rise in leverage ratios.............................................................................................................................21 Figure 55: Deterioration in debt service capacity.............................................................................................................21 Figure 56: Rollover risk becoming a problem..................................................................................................................21 Figure 57: Compounded by falling earnings....................................................................................................................21 Figure 58: Fiscal discipline maintained............................................................................................................................24 Figure 59: Fiscal buffers relatively strong.........................................................................................................................24 Figure 60: Deviation of inflation from target...................................................................................................................24 Figure 61: Real policy rates are positive...........................................................................................................................24 Figure 62: High credit to GDP gap.................................................................................................................................24 Figure 63: Indications of credit boom..............................................................................................................................24 List of Tables Table 1: Thresholds to classify a firm as financially vulnerable..........................................................................................20 Table 2: Cross-country indicators of fiscal space..............................................................................................................23 List of Boxes Box 1: Poverty and inequality trends in Turkey..................................................................................................................5 Box 2: Global trends in potential growth.........................................................................................................................12 Box 3: Turkey’s 2018 Budget and Medium-Term Program..............................................................................................14 Box 4: Corporate Vulnerability Index..............................................................................................................................19 IV World Bank Group The Turkey Economic Monitor (TEM) periodically analyzes economic developments, policies and prospects in Turkey. The TEM was prepared under the guidance of Johannes Zutt (WB Country Director, Turkey) and Lalita M. Moorty (Practice Manager, Macroeconomics, Trade and Investment) by Habib Rab (Program Leader, EFI Turkey), Pinar Yasar (Country Economist, MTI GP), and Erdem Atas (Research Analyst, MTI GP). The TEM (May 2018) is based on data as of end April 2018. The team is very grateful for inputs from Igor Esteban Zuccardi Huertas (Financial Sector Economist, Finance, Competitiveness and Innovation GP), Charl Jooste (Economist, MTI GP), Metin Nebiler (Research Analyst, Poverty GP), Facundo Cuevas (Senior Economist, Poverty GP), and Cemile Hacibeyoglu (Senior Private Sector Specialist, MTI GP). Pinar Baydar provided administrative support. The team thanks Kiatipong Ariyapruchya (Senior Country Economist, MTI GP), Karlis Smits (Senior Country Economist, MTI GP), Srikant Seshadri (IMF Senior Resident Representative in Turkey), Alexander Pankov (Lead Financial Sector Specialist, FCI GP), and Alper Ahmet Oguz (Senior Financial Sector Specialist, FCI GP) for their comments and advice. The team is very grateful to colleagues from the Central Bank, the Ministry of Development, the Ministry of Finance, and the Treasury for discussions on economic developments and policy priorities. The team discussed recent economic developments with several business associations and private businesses and appreciates very much their time and insights. The TEM is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank (or the governments they represent), or the Government of the Republic of Turkey. V TEM, May 2018: Minding the External Gap VI World Bank Group Executive summary Taking stock Looking ahead A strong policy response – on the back of fiscal buffers, a Growth in Turkey is projected to moderate to 4.7 percent in strong financial system, and favorable external conditions 2018, though with heightened downside risks. There is high – enabled Turkey to recover from its shock of 2016, with probability of continued expansionary policies driven by the growth accelerating to 7.4 percent in 2017. Countercyclical desire to maintain strong growth in the run up to elections fiscal policy and private sector credit boosted demand, and in 2018 and 2019. Inflation is projected at over 10 percent helped overcome labor market and financial sector rigidities to and will remain an important policy challenge in the coming accelerate production. Short-term fiscal and credit measures year. Whilst export growth is expected to remain strong, the helped avert a bigger collapse in demand and production after contribution of net exports to growth is projected to be offset the economy contracted in Q3 2016. They also contributed by a large import bill linked to rising commodity prices. to progress on poverty reduction. Tighter global liquidity conditions in 2018 will affect two soft spots for the Turkish economy: access to and cost of external The balance of risks in the Turkish economy since Q3-Q4 finance, an important lever of growth for the country. Turkey’s 2017 has shifted from growth to stability. Demand has external buffers to withstand further financial tightening have overshot supply capacity and macroeconomic imbalances reduced relative to prior episodes of financial tightening due have widened. The outcome of supply constraints and to rising external debt, which are subject to sustainability demand impulse are reflected in high inflation; a large current risks in the case of extreme currency depreciation or energy account deficit; and currency volatility. These developments price shocks. are weighing on private sector confidence despite the ongoing boost to sales, employment and profits. Despite corporate and financial sector buffers, tightening financial conditions could further increase pressures on Policy adjustments could help reduce the risks of a boom- the real sector and raise macro-financial risks. Corporate bust cycle. With economic recovery, fiscal policy and private vulnerability of companies listed in the Turkish stock markets credit have turned procyclical. Policy adjustments could rose in 2017. Non-financial corporates face elevated interest include an unwinding of temporary fiscal incentives; and rate and exchange rate risks due to net open foreign exchange increased alignment between monetary and macroprudential positions. Though much of the latter has long-term maturity policies. The removal of fiscal incentives could help maintain and is concentrated among larger firms with stronger balance fiscal buffers that in the first place helped deal with the sheets, increased cost of finance and a weaker Lira could affect most recent shocks. Misalignment between monetary and financial sector assets. These risks may be exacerbated by the macroprudential policies could exacerbate macro-financial projected slowdown in economic activity. risks through a more leveraged private sector on the one hand Fiscal policy space needed to react quickly to adverse and higher cost of financing on the other. external developments remains relatively strong in Turkey, A renewed focus on supply side constraints will be important notwithstanding contingent liabilities. The government is in for medium-term growth. Recent reforms in this regard a good position to finance its long-term commitments and the composition of public debt does not unduly expose the include: (i) further strengthening of the secured transactions authorities to a sudden change in financial market conditions. system, which would support the financial sector’s On the other hand, tightening global financial conditions countercyclical capacity and SME growth; (ii) investment together with elevated levels of external and private sector climate reforms to improve private sector competitiveness; debt have the potential to rapidly erode fiscal space if the and (iii) reforms to bankruptcy and insolvency procedures latter become contingent liabilities. to improve efficiency and promote continuity of viable businesses. The possibility for monetary policy to respond to adverse external developments is more challenging. A combination Enabling an orderly adjustment is important for productivity of high inflation (due to demand pressures, exchange rate and potential output. Turkey has been prone to large passthrough and higher production costs) on the one hand, economic swings in the past. The greater the volatility in and rising (and positive) policy rates on the other (average growth, the more pronounced is the negative impact on CBRT funding rate is currently above the last five years’ productive investment and efficiency of resource allocation. average), creates challenges for a monetary stimulus in the This hurts long term productivity and potential output, both event of an external shock. This challenge is exacerbated by of which have stagnated in Turkey, as in other Emerging the need to cool credit expansion, which has been above its Market and Developing Economies. long-term trend. 1 TEM, May 2018: Minding the External Gap Taking stock 2017 (qoq, SAAR), saw a slight decline in the official manufacturing PMI in February. Major commodity- Global growth remains strong in Q1 exporting EMDEs (Nigeria, South Africa, Indonesia, 2018 though market volatility increases1 Brazil) are seeing an acceleration in growth with a recovery in investments. For commodity importing 1. The global economy continues to grow at a strong EMDEs on the other hand, early 2018 has been mixed, pace in early 2018. Global growth in 2017 reached 3 with some slowdown in industrial output and higher percent (up from 2.4 percent in 2016) whilst Emerging inflation. Markets and Developing Economies (EMDEs) growth accelerated to 4.3 percent (from 3.7 percent in 2016) 3. Global trade activity continues to expand (Figure 1). Global industrial production growth posted in tandem with industrial production despite its strongest performance since 2010. Unemployment uncertainties related to recently announced rates in many economies reached lows not seen for a protectionist measures. Global trade in 2017 decade or more. This momentum has carried over into expanded at its highest rate since 2011. The biggest 2018. The composite Purchasing Managers’ Index for increase came from developing Europe and Central developed and emerging markets point to continued Asia, which includes Turkey and some of its largest expansion of manufacturing and services trading partners. New manufacturing export orders in STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL – – (Figure 2). DespiteMay 21, 2018 strong growth, global median inflation stood early 2018 point to positive momentum for the coming May 21, 2018 at 2.1 percent in January. Inflation in both advanced months. Protectionist measures, such as the United economies and EMDEs has been relatively flat since States’ imposition of import tariffs on steel (25 percent) Taking stock and on aluminum (10 percent), in addition to possible Taking stock early 2017. 2. All major economies and regions continue to tariffs on a wide range of Chinese goods, have added to global trade uncertainty. experience Global simultaneous growth economic remains expansion strong in Q1 . In2018 the though market volatility increases Global growth remains strong in Q1 2018 though market volatility increases1 1 United States, the labor market added 313,000 jobs 4. Expectations around US monetary policy in tightening and fears of trade protectionism caused 1.February 1. The (compared The global global an average toeconomy economy of 200,000 continues continues to since to grow growat aat a strong strong increasedpace pace in early in early volatility in 2018. 2018. Global Global financial markets growth growth in in 2017 inearly 2017 2018 2011) whilst reached the 3 consumer percent (up confidence from 2.4 index percent wasin at an 2016) whilst Emerging reached 3 percent (up from 2.4 percent in 2016) whilst Emerging Markets and Developing Economies Markets and Developing Economies 18-year high. (EMDEs) In the growth Euro Area, accelerated consumer topercent confidence 4.3 percent (from after 3.7 percent a prolonged in 2016) period (Figure of 1). Global relative industrial stability. This production (EMDEs) growth accelerated to 4.3 (from 3.7 percent in 2016) (Figure 1). Global industrial production growth and growth the posted posted composite its strongest its strongest PMI reached performance performance since decade-long since 2010. highs 2010. in was associated Unemployment Unemployment with ratesrates a in many in manycontinuedeconomies economies rise in US long-term reached reached lowslows not not seenIn January. seen for for Japan, a a decade decade or more. the unemployment This or more. This momentum momentum rate fell from has carried over into 2018. The composite Purchasing high yields has (US carried 10-year over into bond 2018.yields The reached composite a four-year Purchasing percent Index Managers’ 2.7 Managers’ Index to 2.4for for developed percent developed and emerging in January,and emerging its lowest markets markets 2.9 ofpoint level point percent to continued to continued February), inexpansion expansiondriven of by rising and of manufacturing manufacturing inflation and services in services (Figure 25 years. (Figure China, 2). Despite 2). Despite strong which grew strong growth, atgrowth, globalin 6.3 percent global medianmedianexpectations inflation and stood prospects at Q4 inflation stood at 2.1 percent in January. Inflation in in 2.1 of percent faster normalization January. in Inflation of both advanced economies and EMDEs has both advanced economies and EMDEs has been relatively US been relatively flat since flat monetary early since early policy. 2017. 2017. Following the release of stronger- Figure Figure 1: Broad-based 1: Broad-based global global recovery recovery Figure Figure 2: Output 2: Output remains remains strong strong in 2018 in Q1 Q1 2018 Figure 1: Broad-based global recovery Figure 2: Output remains strong in Q1 2018 GDP GDP growth growth (%) (%) Purchasing Purchasing Managers' Managers' Index Index (> (> 50 =50 = mom mom < 50< expansion; expansion; =50 = mom mom contraction) contraction) 4 4 -6 -6 2009 2009 2008 2008 2011 2011 2010 2010 2012 2012 2013 2013 2014 2014 2016 2016 2015 2015 2017 2017 Advanced Advanced EMDE EMDE Emerging Emerging and developing and developing Europe Europe Developed Developed Markets Markets Emerging Emerging Markets Markets TurkeyTurkey Turkey Turkey Area Area Euro Euro Source: Source: Source: WB WB WB Economic Global Global Global Economic Economic Prospects Prospects Prospects (January (January (January 2018) 2018)2018) Source: Source: IHP Source: IHP IHP Markit Markit Markit Economics, Economics, Economics, HaverHaver Haver Analytics Analytics Analytics 2. 2. All major All major economies economies andand regionsregions continue continue to experience to experience simultaneous simultaneous economic economic expansion expansion . . 1 In This the section In Weekly)” the United isUnited States, based on WB, States, the labor market added 313,000 jobs in February (compared to an average of 200,000 and “Global (January – March 2018) the labor Economic market Prospects: added Broad-Based 313,000 Upturn, jobs but For in February How Long?” (compared (January 2018); to and WB, “Globalan average Economic of Monitor 200,000 (Monthly sincesince 2011) 2011) whilst the the whilst consumer consumer confidence confidence index index was wasat an at 18-year an 18-year high. high. In theIn the Euro Euro Area, Area, consumer consumer confidence 2confidence and and the composite the composite PMIPMI reached reached decade-long decade-long highs highs in January. in January. In Japan, In Japan, the unemployment the unemployment rate rate fell fell from from 2.7 percent 2.7 percent 2.4 percent to percent to 2.4 in January, in January, its lowest its lowest levellevel in 25 25 years. inyears. China, China, which which grewgrew at 6.3at percent 6.3 percent in Q4 in Q4 2017 2017(qoq, (qoq, SAAR),SAAR),saw saw a slight a slight decline decline in the in the official official manufacturing manufacturing PMIPMI in February. in February. MajorMajor commodity- commodity- exporting exporting EMDEs EMDEs (Nigeria, (Nigeria, SouthSouth Africa, Africa, Indonesia, Indonesia, Brazil)Brazil) are seeing are seeing an acceleration an acceleration in growth in growth withwith a recovery a recovery in investments. in investments. For For commodity commodity importing importing EMDEsEMDEs on theon other the other hand, hand, early early 2018 2018 has been has been mixed, mixed, withwith some some associated a continued withwith associated a continued in US riserise long-term in US long-termyields (US yields 10-year (US 10-yearbond bondyields reached yields reached a four-year a four-year high highofof2.9 2.9 percent in February), driven by rising inflation expectations and prospects of faster percent in February), driven by rising inflation expectations and prospects of faster normalization of USnormalization of US monetary monetarypolicy. Following policy. Following release the the of stronger-than-expected release of stronger-than-expected USUS wage wagegrowth growth February, in in February, USUSand andglobal global equity markets equity tumbled markets tumbledandandstock market stock volatility market spiked volatility (Figure spiked (Figure3).3). After Afterrecovering recovering from from this initial this jolt, initial World Bankjolt, Group financial market financial volatility market returned volatility in end returned March in end following March news following that news the that US the administration US administration is considering is considering tariffs tariffs wide on aon range a wide of Chinese range of Chinesegoods. goods. Figure 3: Increased Figure market 3: Increased volatility market Q1 Q1 volatility 2018 2018 Figure 4: Portfolio Figure flows 4: Portfolio to to flows EMDEs are EMDEs resilient are resilient Figure 3: Increased market volatility Q1 2018 Figure 4: Portfolio flows to EMDEs are resilient Volatility (Jan. 1 IndexIndex Volatility 2017 (Jan. = 100) 1 2017 = 100) IIFIIF Tracker: Tracker: Total Total Portfolio Portfolio Flows Flows into into EMsEMs (US$ (US$ billion) billion) 290 290 40 40 240 240 190 190 20 20 140 140 0 0 90 90 40 40 -20 -20 U.S. equities U.S. equities volatility volatility U.S. U.S. Treasuries Treasuries volatility volatility IIF Portfolio Debt Flows Tracker FX volatility FX volatility IIF Portfolio IIF Debt Portfolio Flows Equity Tracker Flows Tracker Source:Source: WB WB GlobalGlobal Economic Economic Monitor Monitor Source: Source: National National Sources, Sources, Bloomberg, Bloomberg, International International Institute Institute of of Source: WB Global Economic Monitor Source: National Sources, Bloomberg, International Institute of Finance Finance Finance 5. 5. Despite Despite market market volatility, volatility, capital capital flows flows to to EMDEs EMDEs in inthe the early early partpart ofof20182018 have have remained remained relatively relatively strong strong .wage. EMDE EMDE financial financial markets markets started started the the year year on a on a strong strong note, note, with with portfolio portfolio flows flows accelerating accelerating than-expected rapidly inUS January growth 2018 in February, US and whilst investment accounted for around 30 percent rapidly in January 2018 andand international international bond bondsalessales reaching reaching an an all-time all-time highhigh of of US$71 US$71 billion. billion. But But EMDE EMDE equity were globalmarkets markets affected tumbled by the stock market and sell-off global in early of growth. February, Though resulting ninety percent of this outflows investment markets were affected by the global sell-off in early February, resulting in in equity equity and and bond bond portfolio portfolio outflows over the course of February (Figure 4). In March, portfolio capital inflows to EMDE bond and equity also volatility over spiked the (Figure course of 3). After February recovering (Figure 4). Infrom March,this growth portfolio was capital due inflows to construction, to EMDE bond H2 and 2017 equity funds funds saw a initial rebounded jolt, financialfollowing market thevolatility previous returned month’s dip. in Bond spreads end recovery also innarrowed machinery after andspiking in February. equipment investments rebounded following the previous month’s dip. Bond spreads also narrowed after spiking in February. March following news that the US administration is following a contraction over four consecutive quarters. Strong considering Strong tariffs policy policyon a response wide range response to 2016 of Chinese to 2016 shockshock goods. supports supports Turkey’s combination A Turkey’s ofsharp sharp these recovery led recovery inin to a broad-based 2017acceleration 2017 in domestic demand (Figure 6). 5. Despite 6. market Turkey volatility, experienced capital flowsrecovery a sharp to EMDEs in 2017 (7.4 percent growth), exceeding all expectations. in6.theIn Turkey early part experienced 2018 have of consensus a sharp remained recovery in 2017 (7.4 relatively percent Expansionary 7. growth growth), exceeding fiscal policies all wereexpectations a major . driver January 2017, forecasts averaged 2.3 percent for the year (Figure 5). 2 External demand in In January 2017 2017, picked consensus up withmarkets forecasts an acceleration averaged 2.3 percent growth for the year (Figure 5). 2 External demand in strong . EMDE financial started in theEU yearimports on a from Turkey of this uptick andin a quadrupling domestic demand of net portfolio . The fiscal inflows. response 2017 pickedconsumption Private up with an acceleration drove half ofintheEU imports from expansion in 2017, Turkey whilst and a quadrupling investment accounted of net for portfolio around inflows. 30 percent strong Privatenote, with portfolio consumption drove flows half accelerating of the expansionrapidlyin in 2017, was whilst possible investment in partaccountedthanks for to buffers around 30 maintained percent January of growth. 2018Though Though and international ninety percent bond of sales this investment reaching an growth growth through was due to countercyclical construction, fiscal policiesH2 2017 in alsoalso previous sawyears a of growth. recovery in ninety and machinery percent of equipment thisinvestments investment following was a due to construction, contraction over four H2 2017 consecutive saw a quarters. A all-time recovery highinof US$71 billion. machinery and But EMDE equipment markets were investments following (Figure 7). Government a contraction over expenditures four consecutive quarters.rapidly expanded A combination of these led to a broad-based acceleration in domestic demand (Figure 6). affected by the global sell-off in early February, resulting combination of these led to a broad-based acceleration in domestic demand (Figure 6). in 2017 (16 percent in nominal terms) and had a strong 7. and bond in equity portfolio outflows Expansionary over the fiscal policies werecourse of driver a major multiplier of this effect, uptick estimated in domestic at between demand 0.8. Theand 1.15.3 fiscal 7. response February Expansionary (Figure was 4). possible fiscal In March, policies portfolio in part thanks were capital a inflows major to buffers driver maintainedThis ofwasthis through uptick offset by a in domestic recovery countercyclical fiscaldemand in customs policies . The and fiscal tax in income previous toresponse EMDE was yearsbond (Figurepossible and in part 7).equity funds Government thanks to buffers rebounded expenditures maintained following expanded through receipts, rapidly in 2017 countercyclical which (16helped percent fiscal contain in nominalpolicies the fiscal indeficit terms) previous and had within a years (Figure strong 7). Government multiplier effect, expenditures estimated at expanded between 0.8 rapidly and in 1.15. the previous month’s dip. Bond spreads also narrowed 1.5 percent of GDP, though primary and recurrent32017 This (16 was percent offset in by nominal a recovery terms) in and customs had a and strong after spikingmultiplier income tax in effect, which receipts, February. estimatedhelpedat between contain the 0.8 fiscal and 1.15. deficit 3 This was offset by a recovery in customs and surpluses within have1.5narrowed percent of GDP, though significantly over primary the past and two income tax receipts, recurrent surpluses havehelped which narrowed contain the fiscal significantly over deficit the within past two 1.5 percent of GDP, though primary and years. years. recurrent Strong surpluses policy have narrowed response to 2016 significantly shock over the past two years. 8. There are indications that fiscal incentives also supports Turkey’s sharp recovery in 2017 helped sustain supply capacity by helping address 2 Consensus Economics Inc. 2 Consensus 3 AssumptionEconomics include Inc. a negative output gap in the past five years, low propensity to import, labor market rigidity, limited 6. Turkey automatic 3 Assumption experienced stabilizers, include low a public a negative sharp debt, output recovery gapand the in ineffective past2017 public labor finance five years, market rigidities lowmanagement. propensity toSee also.IMF import, Incentives market included labor (September 2014). rigidity, subsidies limited automatic (7.4 percent stabilizers, growth), low public debt, exceeding and all effective public expectations . In 4 finance minimum See formanagement. wage also IMF (September support and public 2014). transfers for January 2017, consensus forecasts averaged 2.3 percent4 employment programs. Recent research finds that growth for the year (Figure 5).2 External demand in whilst real wages tend to adjust to economic conditions 2017 picked up with an acceleration in EU imports at higher levels of income, at the lower end of the from Turkey and a quadrupling of net portfolio inflows. wage distribution real wages are less elastic because Private consumption drove half of the expansion in 2017, 2 Consensus Economics Inc. 3 Assumption include a negative output gap in the past five years, low propensity to import, labor market rigidity, limited automatic stabilizers, low public debt, and effective public finance management. See also IMF (September 2014). 3 TEM, May 2018: Minding the External Gap STRICTLY STRICTLY CONFIDENTIAL – – CONFIDENTIAL May 21, 2018 May 21, 2018 Figure 5: Low Figure consensus 5:consensus Low forecast in early consensus 2017 Figure 6: Broad recovery in domestic demand Figure 5: Low in early in forecastforecast early 2017 2017 Figure Figure 6: Broad 6: Broad recovery recovery in domestic in domestic demand demand STRICTLY Turkey GDP STRICTLY Turkey GDP(% change) CONFIDENTIAL (%CONFIDENTIAL - 2017 change) - Consensus - 2017 – – - Consensus Contributions to GDP Contributions Growth to GDP Growth May Forecast May 21, 21, 2018 Forecast 2018 10%10% 6.006.00 January 2017 average of of January 2017 average consensus growth consensus forecats: growth … … forecats: Figure Figure 5: Low 5: Low consensus consensus forecast forecast in early in early 2017 2017 Figure 6% 6% 6: Broad Figure 6: Broad recovery recovery in domestic in domestic demand demand 4.004.00 Turkey Turkey GDP GDP (% change) (% change) - 2017 - 2017 - Consensus - Consensus Contributions 2% 2% to GDP Growth Contributions to GDP Growth Forecast 2.00 Forecast 2.00 10%10% -2%-2% 6.006.00 January January 20172017 of of average average consensus growth forecats: consensus growth forecats:… … 6% 6% C C G G I NXNX Stocks Growth 4.004.00 © Copyright Consensus © Copyright Economics Consensus Inc.Inc. Economics I Stocks Growth Source: Source: Consensus Consensus Inc. Inc. Economics Economics 2% 2% Source: Haver Source: Analytics, Haver Analytics, WB WB Staff estimates Staff estimates Source: Consensus Economics Inc. Source: Haver Analytics, WB Staff estimates 2.002.00 8. 8. There There are indications are indications that thatfiscal incentives also helped sustain supply capacity by by helping minimum ofaddress wage and rigidities other factors. 4 fiscal incentives This creates 16 percent -2% also -2% helped sustain in 2017) though supply capacity remained high in helping line with labor market . Incentives included address labor market rigidities. Incentives included subsidies for minimum wage support and subsidies for minimum wage support and public public labor market transfers transfersforforrigidity employment at employment the lower programs. programs. end of Recent Recentthe income research research finds demand. finds that This whilst that whilst was real driven wages real wages by tend tenda 20 to to adjust percent adjust jump to to economic in credit economic C G I NX Stocks Growth distribution. conditions conditions atThehigher latter at higherlevels account levels © © income, of Copyright of income, Copyright for at 25 Consensus Consensus the percent lower the Economics at Economicslower endof end Inc. Inc. of ofto the wage the the C private distribution wage G sector distribution I (Figure real wages real NX8), wages 70 are less are percent elastic Stocks less of because elastic which Growth because was of workers minimum in of minimum Source: Source: Turkey wage Consensus who Consensus Economics and wage and are Economics other also Inc. factors. the most 4 This vulnerable Inc. other factors. This creates Source: 4 creates to labor market linked labor Haver Source: to market rigidity Haverloans at under rigidity Analytics, Analytics, WB WB Staff the lower the at estimates Staff end of government-backed the lower end of the income estimates the income Credit distribution. job losses during distribution. The latter economic The account latter downturns. account forfor percent 25Fiscal 25 of of incentives percent workers workers in Turkey Guarantee in Turkey who Fundwhoare (CGF)also are the also for most theSMEs most vulnerable (volume vulnerable to TL of jobjob to 200 losses likely 8. during helped 8. losses economic There during There to are are sustain economic downturns. indications employment downturns. indications Fiscal that that Fiscal fiscalincentives fiscal when likely incentives growth likely incentives incentives helped billion also also helpedto sustain helped in 2017). helped sustain to sustain sustainemployment This supply was helped employment supply when capacity when capacity growth by favorableby growthslowed by helpinghelping external slowed down slowed address and address down down the and labor probability labor the and market probability the market retrenchments of rigidities of probability rigidities . retrenchments retrenchments . of Incentives increased. Incentives included increased. included ThisThismay may subsidiesalso subsidies conditions, explain also for for minimum explain including in part minimum ina part thewage recovery wage continued the insupport continued support progress portfolio and and progress flows public in that public in poverty transfers increased. reduction transfers poverty for employment reduction for This during employment may also during 2017 explain (Box programs. 2017 programs.in (Box 1). part Recent 1). Recent research research finds the continued finds boosted that that whilst whilst financial real real wages wages tend to adjust to economic sector liquidity. tend to adjust to economic conditions conditions progress at higher at higher in poverty levels levels reduction of income, income, of during 2017 at(Box at the the lower lower 1).endend of the of the wagewage distribution distribution real real wages wages areareless less elastic elastic because because of Figure minimum of minimum Figure 7: Counter-cyclical wage and 7: Counter-cyclical wage other and other factors. fiscal factors.policy fiscal 4 This 4 This policy has creates creates Figure 10. labor has labor Figure 8: The Money market CGF Moneyat market8:rigidity growth together rigidity at growth in the the lower 2017 with lower in 2017 driven end some end driven by of of the private loosening the byincomeincome private of 9. supported distribution. Rapid growth supported short-term The in latter private short-term recovery account sector recovery forfrom25 credit shocks percent also from shocks of helped workers in Turkey macroprudential credit who are regulations credit expansion also the most in vulnerable 2016 5 to job helped distribution. The latter account for 25 percent of workers in Turkey who are also expansion the most vulnerable to job boost losses losses during demand during economic and economic increasedownturns. downturns. production. Fiscal Fiscal incentives Money incentives likely likely helped overcome helped to sustain financial to sustain employment market frictions. employment when when growth In the growth slowed slowedabsence growth down GDP down GDP andand andand the Central moderated theCentralprobability Government slightly probability (from of retrenchments spending 18 of retrenchments Government (% percent spending (% in increased. 2016 to This increased. This ofMoney Money may these may measures, supply also also explain growth explain banks and in in part part are contribution the supply growth and contribution (%) the continued unlikely (%) continued to progress have progress in in extended poverty change, poverty yoy) change, reduction yoy) during 2017 (Box 1). reduction during 2017 (Box 1). 35% 35% 0.090.09 15% 25%25% 15% 7: Counter-cyclical Figure fiscal policy has Figure 8: Money growth in 2017 driven by private Figure Figure 7: Counter-cyclical 7: Counter-cyclical fiscal fiscal policy policy has has supported Figure Figure 8: 8: Money Money growth growth in 2017 in 2017 driven driven by private private by CG spending growth 15% spending growth supported short-term recovery from shocks 15% credit expansion GDP growth supported short-term recovery from shocks 0.040.04 credit expansioncredit expansion GDP growth short-term recovery from shocks 5% 5% 10%10% GDP -5%-5% GDP andand Central Central Government Government spending spending (% (% -0.01 -0.01 MoneyMoney supply supply growth growth andand contribution contribution (%)(%) change, change, yoy) yoy) -15% -15% 35% 35% CG 5% 5% -0.06 0.090.09 15%15% -0.06 25%25% OI (Net) Non-Bank FI Cr. OI (Net) Non-Bank FI Cr. CG spending growth 15%15% and and Inv Inv Banks DevDev Private sector Cr. Cr. CG spending growth GDP growth 0.04 Banks Private sector GDP growth spending CG CG growth) (yoy(yoy spending growth) GDP (yoy(yoy GDP growth) 0.04 growth) NF NF Public Enterprises Public Cr. Cr. Enterprises Government Governmentand and SSI SSI Cr. Cr. 5% 5%NFA M3 M3 NFA 10%10% Sources: Haver Analytics, Staff WBWB estimates. -0.01 -5%-5% Sources: Haver Analytics, Staff estimates. -0.01 -15% -15% 5% 5% -0.06 -0.06 OI (Net) OI (Net) Non-Bank Non-Bank FI Cr. FI Cr. DevDev Inv and Inv and Banks Banks Private Private sector sector Cr. Cr. CG CG spending spending (yoy(yoy growth) growth) (yoy(yoy GDP GDP growth) growth) NF NF Public Public Enterprises Enterprises Cr. Cr. Government Government and and SSI Cr. SSI Cr. NFA NFA M3 M3 Sources: Sources: Haver Sources: Haver Analytics, Analytics, Haver Analytics, WB WB WB Staff Staff estimates. Staff estimates. estimates. Aldan, A., 4 4 Aldan, andand A., Gürcihan H. B. (2016),H. Yüncüler,Yüncüler, Gürcihan B.Wages “Real and the (2016), Business “Real Cycle in Wages andTurkey”, thetheCBRT Working Business Paper, Cycle inNo. 16/25; and Turkey”, Yüncüler, CBRT G., “To what extent are Working real Aldan, A., and Gürcihan Yüncüler, H. B. (2016), “Real Wages and Business Cycle in Turkey”, CBRT Working 4 wages responsive to the business cycle in Turkey?” Paper, Paper,No. No.16/25; 16/25;and Yüncüler, and Yüncüler,G.,G.,“To “Towhatwhatextent extentare are wages realreal responsive wages to the responsive business to the cycle business in Turkey?” cycle in Turkey?” 5 5 5 Baziki, S.B. (2017): “Impact of macroprudential policies on loan utilization,” CBRT Blog 4 4 Aldan, A., and Gürcihan Yüncüler, H. B. (2016), “Real Wages and the Business Cycle in Turkey”, CBRT Working 4Aldan, A., and Gürcihan Yüncüler, H. B. (2016), “Real Wages and the Business Cycle in Turkey”, CBRT Working Paper, Paper, No.No. 16/25; 16/25; andand Yüncüler, Yüncüler, G., G., “To “To what what extent are are realreal extent wages wages responsive responsive to the to the business business cycle cycle in Turkey?” in Turkey?” World Bank Group STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL–– May May21, 21,2018 2018 Box Box Poverty 1:1: and Poverty inequality and trends inequality in trends Turkey in Turkey Box 1: Poverty and inequality trends in Turkey Poverty Poverty Poverty in in Turkey in Turkey Turkey continues continues continues to totodecline decline decline .. The The . The share share share of of of the the the population population population with with with per per percapita expenditure capita capita expenditure expenditure below below below the poverty line (US$5.5 aaday in 2011 PPP) isis estimated to have fallen from 9.9 percent to 9.1 percent in the poverty line (US$5.5 the poverty line (US$5.5 a day in 2011 PPP) is estimated to have fallen from 9.9 percent to 9.1 percent in day in 2011 PPP) estimated to have fallen from 9.9 percent to 9.1 percent in 2017. 2017. Compared Compared to other to otherUpper Upper Middle Middle Income, Income, ororrecently recently acceded acceded totoHigh High Income, Income, Countries, Countries, Turkey Turkey 2017. Compared to other Upper Middle Income, or recently acceded to High Income, Turkey has achieved has hasachieved achieved one oneof the of fastest the progress fastest progress ininpoverty poverty reduction reduction over overthe thepast past 15 15years years(Figure (Figure 9). 9).OnOn average, average, one of the fastest progress in poverty reduction over the past 15 years (Figure 9). On average, inequality over inequalityover inequality overthis thisperiod periodhas hasalso beenrelatively alsobeen relativelylow,low,although althoughin morerecent inmore yearshas recentyears startedto hasstarted to this period increase increase has also (Figure (Figure 10).been relatively low, although in more recent years has started to increase (Figure 10). 10). Figure Figure9:9: Declining poverty Declining poverty Figure Figure10: 10:Slight Slightdecrease decreasein ininequality inequality Figure 9: Declining poverty Figure 10: Slight decrease in inequality Poverty Povertyrates (% rates (%of ofpopulation) population) Inequality Inequality(Gini (GiniIndex) Index) 4040 55 55 50 50 3030 45 45 2020 40 40 1010 35 35 00 30 30 Chile Chile Mexico Mexico Poland Poland Chile Chile Mexico Mexico Poland Poland Turkey Turkey Argentina Argentina Thailand Thailand Turkey Turkey Argentina Argentina Thailand Thailand Source: Source:Household HouseholdBudget BudgetSurvey Survey2003 –– 2003 2016, TUIK. 2016, The TUIK. World The Bank, World PovcalNet Bank, for PovcalNet other for countries. other countries. Source: Household Budget Survey 2003 – 2016, TUIK. The World Bank, PovcalNet for other countries. Note: Note: Note: Poverty Poverty Poverty measured measured measured using using the the using the absolute absolute absolute poverty linepoverty poverty of line ofof line US$5.50-a-day US$5.50-a-day inUS$5.50-a-day inin 2011 2011 PPP, the World2011PPP, PPP, Bank’s the theWorld World internationally Bank’s Bank’sinternationally comparable methodology forcomparable internationally comparable upper midd- methodology methodology le-income for countries upper for uppermiddle-income middle-income countries countries The The The progress progress progress inin2017 2017 2017 was wassupported was supportedby supported by increasedemployment increased increased employmentand employment and and aahigher higher higher minimum minimum minimum wage wage wage . The . The The unemployment unemployment rate rate rate declined declined from from from 12.7 percent 12.7 12.7 percent percent inin in 2016 2016 2016 toto to 10.4 10.4 10.4 percent percent percent inin in 2017. 2017. 2017. AnAn estimated estimated1.6 1.6million million jobswere jobs jobs were overthis createdover werecreated created over thisperiod, this period,half period, halfof half ofwhich of whichwere which werein were inservices in servicesand services anda a and afifth fifthin fifth in inindustry. industry. industry.Labor Labor Labor force force force participation rates ratesfor participationrates participation for women forwomen increased womenincreased from increasedfrom 32.2 from32.2 toto 33.5 32.2 to33.5 percent. Fiscal percent. Fiscal 33.5 percent. support support to Fiscal support to disadvantaged to disadvantaged groups disadvantaged groups groups and and and areas areas may areas may may have have have contributed contributed contributed to to some to some some of of ofthese these these outcomes, outcomes, outcomes, but but their but their their actual actual actual impact impact impact yet isisyet is to yet to be to be assessed. be assessed. assessed. 9.9. Rapidgrowth Rapid growthin privatesector inprivate sectorcredit alsohelped creditalso helpedboost boostdemand demandand increaseproduction. andincrease production. Money Money growth growth moderatedslightly moderated slightly(from (from 1818percent percentinin2016 2016 to to1616percent percentinin2017) 2017)though though remained remained high highinin line with line withdemand. demand. This This was wasdriven driven bybyaa20 20percent percentjump jump inincredit creditto the to private the privatesector sector(Figure (Figure8), 70 8), 70percent percentof of which which was was linked linked to to loans under loans under the the government-backed government-backed Credit Credit Guarantee Guarantee Fund Fund (CGF) (CGF) for forSMEs SMEs (volume (volume of of TLTL 200 200billion billioninin2017). 2017). This This was was helped helped bybyfavorable favorable external external conditions, conditions,including including thetherecovery recovery ininportfolio portfolio flows flows that thatboosted boosted financial sector financial sector liquidity. liquidity. 10. 10. TheCGF The togetherwith CGFtogether someloosening withsome looseningof macroprudentialregulations ofmacroprudential regulationsin in2016 20165 5helped helped overcome overcome financial financial market market frictions. frictions. In In the theabsence absence of of these measures, these measures, banks banks are areunlikely unlikely to have to have extended extended countercyclicalfinancing. countercyclical Privatecredit financing.Private creditin Turkeyisispro-cyclical inTurkey pro-cyclical(Figure (Figure11) andhas 11)and has becomeincreasingly become increasinglysoso after 2009 after 2009(Figure (Figure 12). 12).The The countercyclical countercyclical capacity capacity of ofthe the financial sector financial sector in Turkey in Turkey isis limited limited bybyits depth. its depth.This This includesthe includes relativelysmall therelatively non-bankfinancial smallnon-bank financialsector sector(e.g. (e.g.capital markets,private capitalmarkets, equity,insurance). privateequity, insurance).These These short-term short-term measures measures –– ononthe theback back of ofaa strong strong financial financialsystem system and and favorable favorable external external conditions conditions –– therefore therefore helped helped avert avertaamore more sustained sustained collapse collapse inindemand demand and and production production after afterthe the contraction contraction in Q3 in Q3 2016. 2016. 5 Baziki, 5 S.B. 5 Baziki, (2017): S.B. “Impact (2017): of “Impact macroprudential of policies macroprudential on policies loan on utilization,” loan CBRT utilization,” Blog CBRT Blog 66 STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL –– May TEM, May 21, May21, 2018 2018 2018: Minding the External Gap STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL – – May 21, 2018 May 21, 2018 Figure Figure 11: 11: Higher Higher lending lending rates rates during during downturns downturns Figure Figure 12: 12: Credit Credit is is increasingly increasingly pro-cyclical pro-cyclical Figure 11: Higher lending rates during downturns Figure 12: Credit is increasingly pro-cyclical Turkey Turkey quarterly quarterly GDP GDP growth growth and and lending lending GDP GDP growth growth and and private private credit credit growth growth (%) (%) rates rates (%) (%) 25 Figure 11: Higher lending 25 rates Figure 11: Higher lending rates during during downturns downturnsConsumer lending rate Figure Figure 12: 0.04 12: Credit Credit 0.04 is increasingly is increasingly pro-cyclical = 0.6127 pro-cyclical Consumer lending rate R² R² = 0.6127 growthsector growth growthsector growth Commercial Commercial lending lending rate rate 0.03 0.03 20 20 Turkey Turkey quarterly quarterly GDPGDP growth growth andand lending lending GDP GDP 0.02 growth 0.02 growth andand private private credit credit growth growth (%)(%) R² R² = 0.1368 Lending rates Lending rates = 0.1368 Lending ratesLending rates (%)(%) rates rates 25 25 R² R² = 0.4293 = 0.4293 0.01 0.01 Consumer lending 0.04 0.04 15 15 Consumer lending raterate R² R² = = 0.6127 0.6127 sector private sectorprivate 0 0 0.03 Commercial Commercial lending lending raterate 0.03 20 20 -0.05 -0.01 -0.05 0 0 0.05 0.05 0.10.1 0.15 0.15 0.20.2 -0.01 0.020.02 10 10 Quarterly R² R² = = 20090.1368 0.1368 Quarterly R² =R² 0.4293 = R² 0.4293 = 0.3515 -0.02 -0.02 Pre Pre 2009 R² = 0.3515 0.010.01 15 15 -0.03 Post Post 2009 2009 Quarterly private -0.03 Quarterly private 5 5 0 0 -0.04 -0.02 -0.06 -0.04 -0.02 -0.05-0.05 0 0 -0.04 -0.04 0.050.05 0.1 0.1 0.150.15 0.2 0.2 -0.06 0 0 0.02 0.04 0.02 0.04 0.06 0.06 -0.01-0.01 Quarterly GDP 10 10 (Seasonally Adjusted) growth Quarterly Quarterly GDP GDP growth growth (Seasonally (Seasonally Adjusted) Adjusted) Quarterly GDP growth (Seasonally Adjusted) R² = 0.3515 -0.02 -0.02 Pre Pre 20092009 R² = 0.3515 -0.03 Post Post 2009 2009 Sources: Haver Analytics, WB Staff estimates -0.03 Sources: Sources: Haver Haver Analytics, Analytics, WB WB 5 Staff 5 estimates Staff estimates -0.06 -0.04 -0.06 -0.04 -0.02-0.02 0 0 0.020.02 0.040.04 0.060.06 -0.04 -0.04 Quarterly GDP growth (Seasonally Adjusted) countercyclical Quarterly financing. Quarterly GDP GDP growth Private growth (Seasonally credit (Seasonally Adjusted) in Turkey is Adjusted) consistent withQuarterly the GDP latest growth Purchasing(Seasonally Adjusted) Managers’ Index TheThe Sources: balance balance pro-cyclical Sources: Haver (Figure Haver of Analytics, of 11) Analytics, risks risks WBWB and has Staff Staff has has become estimates estimates shifted shifted from from increasingly growth growth so (PMI) toto stability survey results (March 2018), which point to stability after 2009 (Figure 12). The countercyclical capacity of a fourteenth consecutive month of expansion in the 11. the 11. Monthly financial Monthly sector in data data Turkey point point toto sustained sustained is limited by its depth. growth growth inin This Q1Q1manufacturing 2018, 2018, though though sector.6 Despite economic economic confidence confidence theindices boost indices to have sales, have started started includes to the to decline decline relatively withwith small increased increased non-bank macroeconomic macroeconomic financial sector imbalances. employment imbalances. Industrial and Industrial production profits production over continued the continued past to12to riserisebyby months, The The balance balance of risks ofper risks has has shifted shifted fromfrom growth growth to to stability stability over over 10 10 percent percent per month month in in early (e.g. capital markets, private equity, insurance). These early 2018. 2018. This This is is consistent consistent with inflation, with the the latest currency latest Purchasing volatility, Purchasing Managers’ and Managers’ policy Index Index (PMI) predictability (PMI) survey survey results (March 2018), which point toto a fourteenth consecutive have started month to weigh ofof expansion on private in insector the manufacturing confidence. 11. 11. results short-term (March Monthly measures Monthly 6 Despitedata 2018), –data on point the point which back toofpoint sustained to sustained a strong a fourteenth growth financial growth in Q1inconsecutive Q1 2018, 2018, month though though economic economic expansion confidence confidence the manufacturing indices indices havehave sector. sector. 6 Despite the the boost boost to to sales, sales, employment employment andand profits profits overover the the past past 12 12 months, months, inflation, inflation, currency currency started started system and to to declinedecline favorable with with increased increased external macroeconomic macroeconomic conditions – therefore imbalances. imbalances. 12. Demand Industrial Industrial has production overshot continued production continued supply capacity to rise to rise by by and volatility, volatility, and and policy policy predictability predictability have have started started to to weigh weigh on on private private sector sector confidence. confidence. over over 10 helped 10 percent avert percent a more per month per sustained month in collapse in early early 2018. 2018. This is consistent in demand This is consistent and macroeconomic with the latest with the latest Purchasing Purchasing imbalances Managers’ Managers’ have widened. Index Index (PMI) (PMI) Headline survey survey production results results after (March (March the 2018), 2018), contraction which whichin Q3 pointpointto a 2016. to a fourteenth fourteenth consecutive consecutive inflation month (CPI) month of expansion of expansion accelerated in the from in 7 the manufacturing manufacturing percent in 2016 12.12. 6 Demand Demand has hasovershot overshot supply supply capacityand capacity and macroeconomic macroeconomic imbalances imbalances havehave widened. widened. sector. Despite the boost to sector. Despite the boost to sales, employment and profits 6 sales, employment and profits to 12 overover percent the the past in past 12 12 months, 2017, months, exceeding inflation, inflation, the currency currency Central Bank’s Headline Headline inflation inflation (CPI) (CPI) accelerated accelerated from from 7 7 percent percent in 2016 toto1212 percent in 2017, exceeding the Central Bank’s The balance volatility, volatility, and andpolicyof policy risks predictability has predictability have shifted have started started to toin from weigh 2016 weigh on on private target percent private of sector 5 sector percent. in 2017, exceeding confidence. confidence. Inflationary the Central expectations Bank’s have risen, target target ofof 5 percent. 5 percent. Inflationary Inflationary expectations expectations havehave risen, risen, creating creating upward upward inertia inertia inin price price pressures pressures (Figure (Figure 13). 13). growth The 12. The 12.CPI to CPI Demand stability diffusion diffusion Demand has index, index, has which which overshot overshot measures measures supply supply the the capacity capacity fraction fraction and creating and ofofCPI upward CPI macroeconomic macroeconomic components inertia components in rising imbalances price rising imbalances (or pressures (or falling) falling) have have (Figure in widened. intotal widened. 13). total components, components, followed followed an an upward upward trend trend in7in 2017 2017 (Figure (Figure The 14). CPI Almost diffusion 8080 percent index, ofof which CPI measures components the rose above of fraction Headline 11. Headline Monthly inflation inflationdata(CPI) (CPI) point toaccelerated accelerated sustained from from growth 7 percent percent in Q1 in14). in 2016 2016 Almost to to 12 12 percent percent percent in in 2017, 2017, CPI exceeding exceedingcomponents CPI components rising (or falling) in total components, the the rose Central Central above Bank’s Bank’s thethe inflation inflation target, exceeding historical averages. target 2018, of of target though 5target, percent. 5 percent. exceeding Inflationary Inflationary economic historical confidence expectations expectations averages. indiceshave have risen, risen, have creating creating followed upwardupward an upward inertia inertia trend in price in price pressures in pressures 2017 (Figure (Figure (Figure 14).13). 13). Almost The The CPI started CPI diffusion diffusion decline toFigure index, index, with which which measures increased measures macroeconomic the the fraction80fraction of of CPI CPI components components rising(or risingincrease (or falling) falling) in in total total Figure 13: 13: Rising Rising inflation inflation expectations expectations percent Figure Figure of 14: 14:CPI components Broad-based Broad-based rose increase above in in prices the prices inflation components, components, imbalances. followed followed Industrial an an upwardupward production trendtrend continued in 2017 in 2017 to (Figure (Figurerise 14). 14). Almost Almost 80 80 percent percent of ofCPI CPI components components rose roseaboveabove the inflation target, exceeding historical averages. target, exceeding historical averages. bythe inflation over 10 percent target, perexceeding month in earlyaverages. historical 2018. This is Inflation & Inflation Expectations (yoy % change) Inflation & Inflation Expectations (yoy % change) Inflation Inflation Diffusion Diffusion Index, Index, (in(in percent) percent) 13 13 Figure Figure 13:13: Rising Rising inflation inflation expectations expectations Figure 90 90 14:14: Figure Broad-based Broad-based increase increase in prices in prices Figure 13: Rising inflation expectations Figure 14: Broad-based increase in prices 11 11 80 80 Inflation Inflation & Inflation & Inflation (yoy(yoy Expectations Expectations % change) % change) Inflation Inflation Diffusion 70 Diffusion Index, Index, (in percent) (in percent) 70 9 13 13 9 90 90 60 60 7 11 11 7 80 80 50 50 70 70 5 5 9 9 40 40 60 60 7 7 50 50 Inflation Inflation Diffusion Diffusion Index Index (SA, (SA, mom, mom, 3-M3-M MA, MA, +5%) +5%) CPI CPI CPI CPI Expectations Expectations (next (next 12 12 months) months) 40 40 5 5 Sources: Sources: Haver Haver Analytics, Analytics, WBWB Staff Staff estimates estimates Inflation Inflation Diffusion Diffusion Index Index (SA,(SA, mom,mom, 3-M3-M MA,MA, +5%) +5%) CPICPI CPICPI Expectations Expectations (next (next 12 months) 12 months) 6 IHS Markit and Istanbul Chamber of Industry PMI, “Turkish manufacturing sector continues to grow,” (March 2018) 6 IHS Markit and Istanbul Chamber of Industry PMI, “Turkish manufacturing sector continues to grow,” (March 2018) Sources: Sources: Sources:Haver HaverHaver Analytics, Analytics, WB WB Analytics, WB Staff Staff estimates Staff estimates estimates 77 6 IHS Markit and Istanbul Chamber of Industry PMI, “Turkish manufacturing sector continues to grow,” (March 2018) 6 IHS Markit and Istanbul Chamber of Industry PMI, “Turkish manufacturing sector continues to grow,” (March 2018) IHS6Markit and Istanbul Chamber of Industry PMI, “Turkish manufacturing sector continues to grow,” (March 2018) 6 7 7 Exchange Exchange rateratedepreciation depreciation (proxied (proxied bybyterms terms trade) of of trade) accounted accounted for almost for almost half of of half thetheincrease increase in in consumer consumer prices prices 2017. in in 2017.Inflation Inflationdynamics dynamics were were also significantly also significantly driven driven byby cost push cost pushfactors factors(wage, (wage, rental cost rental of of cost capital capital etc.) etc.)and expansionary and expansionary fiscal fiscalpolicy, policy,particularly particularly the in in thelast quarter last quarter 2017. of of Along 2017. Along with with a strong a strong cyclical cyclicalrecovery, recovery, thetheslack slack in in demand demand has vanished, has vanished, which which has hasstarted started to toexert exert higher higherpressure pressure onon inflation, inflation, signaling signaling a risk World a riskfor Bank for Group inflation inflation outlook. outlook. Subtracting Subtracting thetheshocks shocks off offinflation inflation leaves leaves core coreinflation inflation at at around around 8.5 percent 8.5 percent in in2017, 2017, STRICTLY suggesting suggesting STRICTLY that CONFIDENTIAL the that implicit the implicit CONFIDENTIAL inflation inflation– – is higher target target is higher thanthan thethelegislated one legislated one(Figure (Figure 16). 16). May May 2018 21, 21, 2018 Figure Figure 15: Demand-side 15: Demand-side factors, factors, cost-push cost-push and and Figure Figure 16: Higher 16: Higher implicit implicit inflation inflation target target thanthan Figure 15: Demand-side factors, cost-push and curren- Figure 16: Higher implicit inflation target than the currency currency contributed contributed price to to pricepressures pressures the legislated the legislated one one cy contributed to price pressures legislated one 13.13. Demand-side Demand-side factors, factors, cost-push cost-push and andLiraLiradepreciation depreciation all all contributed contributed to inflation to inflation (Figure (Figure 15).15). Exchange 2.5 Decomposing 2.5 rate Decomposingdepreciation Inflation (% Inflation (proxied (% by contribution, terms contribution, of trade) accounted 15 15 for Decomposingalmost Decomposing half Inflation Exchange rate depreciation (proxied by terms of trade) accounted for almost half of the increase in consumer of Inflation(% the (% increase contribution) contribution)in consumer prices prices 2017. in standardized) standardized) in 2017. Inflation dynamics Inflation dynamics were also were significantly also significantly driven drivenby cost push by cost factors push (wage, factors rental (wage, cost rental of capital cost of capital etc.) and expansionary fiscal policy, particularly in the last 10 10 of 2017. Along with a strong cyclical recovery, quarter etc.) and expansionary fiscal policy, particularly in the last quarter of 2017. Along with a strong cyclical recovery, thetheslack in demand slack in demand hashasvanished, vanished, whichwhichhashasstarted startedto exert to 5exerthigher pressure higher pressureon oninflation, inflation,signaling signalinga risk forfor a risk 0.5 0.5 5 core inflation at around 8.5 percent in 2017, inflation outlook. Subtracting the shocks off inflation leaves inflation outlook. Subtracting the shocks off inflation leaves core inflation at around 8.5 percent in 2017, suggesting suggesting that thethe that implicit implicitinflation target inflation is higher target is higherthan thethe than legislated one (Figure 16). 0 0 legislated one (Figure 16). Figure -1.5 15: 15: Figure -1.5 Demand-side factors, Demand-side cost-push factors, and cost-push and Figure Figure -5 -5 Higher 16: 16: implicit Higher inflation implicit target inflation than target than currency contributed currency to price contributed pressures to price pressures thethe legislated one legislated one Residual Residual Government Government Interest rate Interest rate Decomposing 2.5 2.5 Decomposing Cost-push Cost-push InflationFX(% Inflation contribution, Demand FX(% contribution, Demand pullpull Decomposing 15 15 Core Core DecomposingInflation (% Government Government Inflation contribution) (% Interest contribution) rate Interest rate standardized) standardized) Inflation Inflation Cost-push Cost-push FXFX Demand Demand pullpull Sources: Haver Analytics, WB Staff estimates 10 10 Sources: Sources: Haver Haver Analytics, Analytics, WB WB Staff Staff estimates estimates 0.5 0.5 5 5 14.14. Strong Strong demand demand and and rising rising commodity commodity prices prices contributed contributed to to a widening a widening current current account account deficit deficit 13. in in Demand-side 2017 2017 and and thetheearly earlyfactors, partpartof of cost-push 20182018 (Figure (Figure and 17). 17).The Lira The current current current 0 0account account account deficit deficit deficit increased increased increased fromfrom 3.8 from percent 3.8 percent3.8 of percent GDP of GDP of depreciation in in 2016 2016 to to5.6 all contributed percent 5.6 percent 2017 in in to 2017 inflation (US$47 (US$47 (Figure billion billionrising 15). rising to toUS$53 GDP US$53 in 2016 billion billion in in to February 5.6 percent February 2018 2018 ononin 2017 a 12-month a 12-month (US$47rolling billion rolling basis) Exchange basis) -1.5 (Figure -1.5 17). Rising rate depreciation (Figure 17). Rising energy (proxied energy prices by and prices terms andgold of imports gold trade) imports were -5rising were -5 important to US$53 important drivers billion drivers ofinthis of increase. February this 2018 increase. The on Thevalue avalue of 12-month of energy energy accounted imports imports rose for almost rose by 37of by half 37percent percent the in in increase 2017, in whilst 2017, whilst consumer itsits share share in in rolling merchandise merchandise basis) (Figure imports imports increased 17). Rising increased from energy from 1414 prices toand 1616 to gold percent percent prices in 2017.between between 20162016 and Inflation dynamicsand2017. 2017. The The net trade net were alsoInteresttrade in gold in significantly gold wentwent from from a surplus a surplus of US$1.8 of US$1.8 billion billion imports were important drivers of this increase. The in 2016 in 2016 to a to deficit a deficit Residual Residual Government Government rate rate Interest of of driven US$9.9 US$9.9 pushin billion cost byCost-push billion Cost-push 2017 in factors2017 FX (rising FX (rising (wage, to over to rental over US$12 cost US$12 Demand Demand billion of capital pull billion pull invalue January), in Core January), ofCore with energywith imports Government imports imports Government rose accelerating by 37rapidly accelerating Interest rapidly Interest percent in in rate inthe ratethe 2017, second second halfhalfof Inflation the of theyearyearand andin January in January 2018. 2018. At Atthe same the same time,time, Cost-push goldgoldand and Cost-pushenergy energy FX adjusted FX current adjusted current Demand account account pull figures Demand figures pull Inflation etc.) and expansionary fiscal policy, particularly in whilst its share in merchandise imports increased from indicate sustained domestic consumption. Net portfolio flows recovered sharply (from 0.7 to to2.9 percent of of the indicate sustained domestic consumption. Net portfolio flows recovered sharply (from 0.7 2.9 percent Sources: Haver Sources: Analytics, Haver WB Analytics, StaffStaff WB estimates estimates last quarter of 2017. Along with a strong cyclical 14 to 16 percent between 2016 and 2017. The net trade GDPGDP between between 2016 2016 and and2017) 2017) (Figure (Figure 18), though 18), though net netFDI FDI flowsflows declined declined byby 19.2 19.2percent. percent. recovery, the slack in demand has vanished, which has in gold went from a surplus of US$1.8 billion in 2016 14.14. Strong Strong demand demand and andrisingrising commodity commodity prices prices contributed contributed to a towidening a widening current current account account deficit deficit started in 2017 to Figure and exert Figure the higher 17: Rising 17: early Risingpressure partcurrent current of 2018on inflation, account account deficitsignaling deficit to a Figure deficit Figure 18: 18:ofStrong US$9.9 Strong billion recovery recovery in inin 2017 portfolio portfolio (rising flows flows to over (Figure 17). The current account in 2017 and the early part of 2018 (Figure 17). The current account deficit increased from 3.8 percent GDP deficit increased from 3.8 percent of of GDP ainrisk 2016 for inflation to 5.6 percentoutlook. in 2017 Subtracting (US$47 the billion shocks rising off to US$53 US$12 billion billion in in February January), 2018 with on on imports a 12-month accelerating rolling in 2016 to 5.6 percent in 2017 (US$47 billion rising to US$53 billion in February 2018 a 12-month rolling inflation basis) (Figure Current Current basis) leaves Account (Figure core 17). Account inflation Rising components 17). componentsenergy at around prices and8.5 Rising energy prices and gold importsNet percent gold imports in were Netrapidly were in important Foreign Foreign the Flows important second drivers (US$ Flows drivers of half this Million, of this (US$ Million, FXof the increase. & FX & year increase. The The in andvalue valueJanuary of of 2017, energy (US$ suggesting (US$ imports Million, Million, rose 12-m that 12-m by the rolling) 37 rolling) implicit percent in inflation 2017, target whilst its is share 2018. Market in Market energy imports rose by 37 percent in 2017, whilst its share in merchandise imports increased from 14 to 16 At merchandise Price Price the Effect same Effect imports Adjusted) time, Adjusted) gold increased andfrom energy 14 to adjusted 16 percent higher than 20000 between 20000 percent between 2016 the legislated 2016and 2017. one and The (Figure 2017. The net 16). trade net in gold trade in goldwent went from currentfrom a surplus account a surplus of US$1.8 figures of US$1.8 billion indicate billionin 2016 to a sustained in 2016 todeficit adomestic deficit of ofUS$9.9 0 0 billion in 2017 (rising to over US$12 billion in US$9.9 billion in 2017 (rising to over US$12 billion January), consumption. 1,300 in 1,300 January), with imports Netimports with accelerating portfolio flows recovered accelerating rapidly rapidlyin the in sharply the 14. second Strong -20000 half -20000 of demand the year andin and rising January commodity 2018. At Atthe prices same time, gold and energy adjusted current account figures second half of the year and in January 2018. the same (from time, 0.7 gold to and 2.9 energy percent adjustedof GDP current between account 2016 figures and contributed indicate -40000 sustained -40000 wideningconsumption. to a domestic current account Net deficit flows recovered sharply (from 0.7 to 2.9 percent of portfolio indicate sustained domestic consumption. Net portfolio flows 2017) recovered (Figure 18), sharply though (from net 0.7 FDI to 2.9 flows percent declined of by in GDP2017 between -60000 and the -60000 2016earlyand part 2017) 2018 (Figure of(Figure 18), 17). net though The FDI -700 -700 declined by 19.2 percent. flows GDP between 2016 and 2017) (Figure 18), though net FDI 19.2 flows declined by 19.2 percent. percent. -80000 -80000 Figure 17: 17: Figure Rising current Rising account current accountdeficit deficit Figure -2,700 Figure -2,700 18: 18: Strong recovery Strong in portfolio recovery flows in portfolio flows Figure 17: Rising current account deficit Figure 18: Strong recovery in portfolio flows Energy Energy Gold Gold Current Account Current Accountcomponents Merchandise components Merchandise Services Services Foreign NetNet Flows Foreign (US$ Flows Million, (US$ FX FX Million, & & (US$ Million, (US$ 12-m Million, Primary Primary rolling) 12-m Income rolling) Income Transfers Transfers Market Price Market Effect Price Adjusted) Equity Effect Market Bond Market Equity Adjusted) Market Bond Market 20000 20000 Sources: Haver Sources: Analytics, Haver WB Analytics, Staff WB estimates Staff estimates 0 0 1,300 1,300 -20000 -20000 -40000 -40000 8 8 -60000 -700-700 -60000 -80000 -80000 -2,700 -2,700 Energy Energy GoldGold Merchandise Merchandise Services Services Primary Income Transfers Equity Market Equity Market Bond Market Bond Market Primary Income Transfers Sources: Haver Sources: Analytics, Haver WB WB Analytics, StaffStaff estimates estimates Sources: Haver Analytics, WB Staff estimates 8 8 7 TEM, May 2018: Minding the External Gap 15. These developments have contributed to a sharp 17. Financial sector stability and lower inflation, depreciation in the Lira (Figure 19). A depreciating both key to avoiding a boom-bust cycle, are likely free float has been an important shock absorber for the to require greater alignment of monetary and economy. It has contributed to the recovery in exports macroprudential policies. Monetary tightening, with and should help moderate import demand (particularly a 450 basis points increase in the average cost of funding for consumables). It also helped accelerate customs in 2017, has not reigned in monetary expansion because receipts to contain the budget deficit. Accordingly, the of sustained credit growth. With the uptick in economic Real Effective Exchange Rate has dropped by close to 20 growth, credit has turned procyclical, despite the slight percent since 2015, the sharpest among a selected group deceleration in recent weeks. Whilst countercyclical of EMDEs, whilst the Lira rate against the US dollar credit expansion was important, it is now worth and the Euro also depreciated by close to 20 percent in revisiting the policy mix. Recent Central Bank research the past two years. Currency depreciation accelerated highlights that “monetary policy alone is not as effective in most recent weeks due to a combination of global as when it used with macroprudential instruments liquidity tightening and investor sentiments, which led to limit credit growth and stabilize credit volatility.”7 to a net outflow of portfolio debt and equity flows in Misalignment between the two could exacerbate a February and March. deterioration in banking sector asset quality through a more leveraged private sector on the one hand and Policy adjustments could help reduce the higher cost of financing on the other. risks of a boom-bust cycle 18. This could be a concern in Turkey where 16. Policy adjustments STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL could help – mitigate – risks of volatility in private sector credit is associated with May May 2018 21,21, macroeconomic 2018imbalances from unraveling into a volatility in growth. Turkey’s extensive macroprudential sharp cyclical downurn. Despite strong growth, there toolkit8 has helped to contain risks in the financial are signs that fiscal policy remains accomodative. This is sector, including those transmitted through highly 15.15. These reflected in These developments developments the continued have expansion have ofcontributed contributed public to to transfers a sharp a sharp volatiledepreciation flows in depreciation capital thethe in from Lira abroad. (Figure Lira The 19).19). (Figure A finds literature A depreciating depreciating free float free has float hasbeen beenan important an importantshock shockabsorber absorberfor the for economy. the economy. in the 2018 Budget, including in the form of direct that increased credit is associated with less growth It has It contributed has contributed to the to the recovery recoveryin exports and should help moderate import demand (particularly for for consumables. It also helped subsidies forin exports private and sector should help employers moderate (Box import 3). These demand volatility(particularly up to a certain consumables. point, but too It also muchhelped credit accelerate customs accelerate customs receipts receipts to contain to contain budget thethe deficit. budget Accordingly, deficit. Accordingly, Real thethe Effective Real Effective Exchange Exchange Rate hashas Rate may be dropped supplemented by by close to 20 by additional percent since stimulus 2015, measures sharpest thethe can among increase a selected volatility group (Figure of EMDEs, 21). 9 This is both because whilst Lira the the dropped close to 20 percent since 2015, sharpest among a selected group of EMDEs, whilst Lira proposed rate against rate to the againstParliament USUS the dollar in dollar the and the andpast two Euro the Euro months. also depreciated also Given by close depreciated of the by to closesize 20 of credit to percent 20 percentinin inGDP the past the (and two past years. twoassociated leverage), Currency years. Currency the positive output depreciation depreciation gap, however, accelerated accelerated in most in most the recent fiscal recentweeksmultiplier due weeks to a due is to and a lack combination a combination of global of global of diversification liquidity liquidity in financial tightening andand tightening instruments. investor investor expected to decline sentiments, sentiments,which which inled led 2017. to a tonet outflow a net of portfolio outflow debt of portfolio and debt This equity and could flows equity be in exacerbated flows February in February ifMarch. andand March.is concentrated growth Figure Sharp 19: 19: Figure Lira Sharp depreciation Lira against depreciation USUS against Figure 20: 20: Figure Currency adjustment Currency supports adjustment supportsREER REER Figure 19: Sharp Lira depreciation dollar and dollar Euro and against US dollar Euro Figure 20: Currency depreciation adjustment despite depreciation high despite supports inflation high REER dep- inflation and Euro reciation despite high inflation Exchange Rates Exchange Rates Real Effective Real Exchange Effective Rate Exchange (2010=100, Rate (2010=100, 5.0 5.0 deflated) CPICPI deflated) 115 115 4.0 4.0 95 95 3.0 3.0 75 75 55 55 2.0 2.0 Brazil Brazil South Africa South Africa India India TL/$ TL/$ TL/EURO TL/EURO Indonesia Russia Turkey Indonesia Russia Turkey Sources: Haver Sources: Sources: Haver WBWB Analytics, Haver Analytics, Analytics, WB StaffStaff estimates Staff estimates estimates 7 Chadwick, M.G. (2018): “Effectiveness of monetary and macroprudential shocks on consumer credit growth and volatility in Turkey,” Central Bank Review Policy 8 Policy Kara, H. adjustments adjustments (2016): could “A brief assessment ofcould help Turkey’s help reduce reduce macroprudential the policy therisks approach: of of risks a Central 2011-2015”, boom-bust a boom-bust cycle Bank Review 16 cycle (2016). 9 Easterly et al (2000); Dabusinskas et al (2012) 16.16. Policy adjustments Policy adjustments could couldhelp mitigate help risks mitigate of macroeconomic risks of macroeconomic imbalances imbalances from unraveling from unraveling 8 into a sharp into a sharpcyclical downurn. cyclical downurn.Despite strong Despite growth, strong there growth, are are there signs that signs fiscal that policy fiscal remains policy accomodative. remains accomodative. This is reflected This in the is reflected continued in the expansion continued expansion of public transfers of public in the transfers 2018 in the Budget, 2018 including Budget, in the including form in the formof of direct subsidies direct forfor subsidies private sector private employers sector (Box employers 3). 3). (Box These may These be be may supplemented supplemented by by additional stimulus additional stimulus measures measuresproposed proposedto Parliament in the to Parliament past in the two past months. two months.Given Giventhethe positive positiveoutput gap, output however, gap, however,the the fiscal fiscal sector, sector, including including those those transmitted transmitted through through highly highly volatile volatile capital capital flows flows fromfrom abroad. abroad. TheThe literature literature finds finds thatthat increased credit is associated with less growth volatility up to a certain point, but too much credit increased credit is associated with less growth volatility up to a certain point, but too much credit can increase can increase volatility volatility (Figure (Figure 21).21). 9 This is both because of the size of credit in GDP (and associated leverage), and a lack of 9 This is both because of the size of credit in GDP (and associated leverage), and a lack of diversification in financial instruments. diversification in financial instruments. ThisThis could could be exacerbated be exacerbated if growth if growth is concentrated is concentrated in sectors in sectors World thatthat Bank havehave Group relatively higher levels of troubled assets and higher outstanding credits (Figure 22). relatively higher levels of troubled assets and higher outstanding credits (Figure 22). This requires strong This requires strong macroprudential macroprudential regulations regulations focused focused on financial on financial sector sector stability stability rather rather than than short-term short-term demand demand management. management. 10 10 21: 21: Figure Figure Financial Financial sector sector development development matters Figure matters 22: 22: Figure Manufacturing, Manufacturing, trade trade andand construction construction Figure 21: Financial sector for development growth volatility matters for Figure 22: Manufacturing, fueling trade private and construction credit for growth volatility fueling private credit growth volatility fueling private credit Volatility Volatility in credit in credit andand economic economic growth growth Sector Sector credit credit (growth (growth andand contribution) contribution) 25 25 30%30% Credit growth volatility (s.d.) 20 20 Credit growth volatility (s.d.) 20%20% 15 15 R² =R² = 0.20 0.20 R² =R² = 0.07 0.07 10%10% 10 10 R² =R² = 0.17 0.17 5 5 0% 0% 0 0 OtherOther Energy Energy 0.02 0.02 0.04 0.04 0.00 0.00 0.06 0.06 0.08 0.08 Individual Housing Credit Growth volatility Individual Housing Credit Real Real Estate Estate Brokerage Brokerage Growth volatility (s.d.)(s.d.) Individual Credit Other Construction High Credit/GDPMedMed Credit/GDPLowLow Credit/GDP Individual Credit Other Construction High Credit/GDP Credit/GDP Credit/GDP Manufacturing Wholesale & Retail Manufacturing Wholesale & Retail Source: Haver Sources: Haver Source: Analytics, Analytics, Haver Analytics, WB WB WB Staff Staff Staff estimates estimates estimates Source: Source: Haver Haver Analytics, Analytics, WB WBStaffStaff estimates estimates 19. The The recently recently imposed imposed restrictions restrictions on on foreign foreign currency currency borrowing borrowing to contain real and financial 19. in sectors risks that arising havefromrelatively higher currency levels mismatch of troubled could a large has part in net opento support contain position alignment real because of and offinancial dollar imports monetary and risks arising from currency mismatch could in part support alignment of monetary and assets and higher macroprudential outstanding policies macroprudential policies. Accommodative monetary policies in developed markets has led to a sharp riserise 11 .credits (Figure 11 Accommodative 22). This monetary and Lira policies sales, in but developed where Lira markets denominated has led to a sales sharp in the in foreign currency borrowing by corporates, not just in Turkey but among other EMDEs also. Recent bouts price requires in strong foreign macroprudential currency borrowing regulations by corporates, focused not on just indomestic Turkey butmarket among areotherindexed EMDEs to the also. US Recentdollarbouts financial sector stability of depreciation of depreciation therefore therefore rather than short-term negatively negatively affect affect demand profitability profitability of andanddebtimported debt service service fuel); capacity capacity and for for (iii) foreign corporates, non-financial non-financial currency corporates, loans which management. has 10which can spill over into the financial sector. haveIn response been which has which can spill over into the financial sector. In response to this, effective from May this year, a to major this, source effective of from long-term May this finance, year, which Turkish Turkish residents residents will will onlyonly be be restrictions able able to borrow to borrow in foreign currency cannot be if they substituted have foreign quickly currency by Lira income or or denominated 19. The outstanding recently foreign imposed currency loans of on in US$15 foreign foreign million or currency more at if they the time have of foreign borrowing. currency income outstanding foreign currency loans of US$15 million or more at the loans, time of borrowing. therefore complementary measures to increase currency borrowing to contain real and financial Lira deposits (which are mostly short-term maturity) risks 20. 20. arising This from Thisshould currency should helphelp mismatch contain contain thethe could demand demand infor part for foreign foreign currency loans and associated risks, though arecurrency needed to loans avoid and associated maturity mismatch. risks, though support a few alignment points needof monetary to be and considered macroprudential : (i) companies without a few points need to be considered: (i) companies without US$15 million in foreign exchange debt may US$15 million in foreign exchange debt maybe be borrowing policies .11 Accommodative up to the threshold monetary thereby policies having the in opposite 21. effect Recent on borrowing up to the threshold thereby having the opposite effect on forex demand, at least till May; (ii) some forex reformsdemand, to at the least till secured May; (ii) some transactions sectors developed sectors have have markets a natural a natural has led to hedgehedge (e.g. (e.g. a sharp energy, energy, rise whichwhich in foreign has has a largea large system net net open open could position positioncontribute because because of of to dollardollar the financialimports imports and and sector’s LiraLira currencysales, butbut sales, borrowing wherewhere byLiraLira denominated denominated corporates, sales not just sales in the in Turkey the in domestic domestic market market counter-cyclical are are indexed indexedcapacity to the to the US US and dollar dollar improve priceprice of of supply imported imported but among fuel);fuel); andand other (iii)(iii) EMDEs foreign foreign also. currency currencyRecent loansloans have bouts have of been been a major major aresponse. sourcesource During of long-term of long-term cyclical finance, finance, downturns, whichwhich SMEs’ cannot cannotaccess to be substituted be substituted depreciation quickly quickly therefore by Lira Lira bynegatively denominated denominated affect loans, loans, therefore therefore profitability complementary complementary finance becomes measures measures even to increase more to increase restricted Lira Lira deposits deposits than usual due (which (which are are mostlymostly short-term short-term maturity) maturity) are are neededneeded to to avoid avoid maturity maturity mismatch. mismatch. and debt service capacity for non-financial corporates, to high collateral requirements in terms of fixed assets. which can spill over into the financial sector. In response Downturns depress collateral value – for those that have to this, effective from May this year, Turkish residents it in the first place – making it difficult to obtain funding will Kara, 8 only 8 Kara, H. be (2016): H. able (2016): to “A “A brief borrow brief assessment in foreign assessment of Turkey’s currency of Turkey’s macroprudential if they even macroprudential policy policy approach: forapproach: profitable 2011-2015”, or innovative 2011-2015”, Central Central projects. Bank Bank Review Review The Law 16 (2016). currency income or outstanding foreign on Moveable Collateral in Commercial Operations12 16 (2016). have foreign 9 Easterly et al (2000); Dabusinskas et al (2012) 9 Easterly currency et al (2000); loans of US$15Dabusinskas million or(2012) et al more at the time (January 2017) enables SMEs to use tangible and 10 IMF (2017): “Turkey – 2017 Article IV Consultation – Staff Report,” IMF Country Report No.17/32 10 IMF (2017): “Turkey – 2017 Article IV Consultation – Staff Report,” IMF Country Report No.17/32 of borrowing. 11 Official Gazette No. 30312, January 25, 2018: (i) Decree No. intangible 2018/11185 moveable amending assetsDecree including 32 receivables, on the stocks, 11 Official Gazette No. 30312, January 25, 2018: (i) Decree No. 2018/11185 amending Decree No.No. the the 32 on the Protection Protection of the Value of the Turkish Currency; (ii) Communiqué machinery No. and 2018-32/46equipment amending as security the to Communiquégenerate on capital. the 20. Thisofshouldthe Valuehelp Turkish Currency; of thecontain the demand (ii) Communiqué for No. 2018-32/46 amending the Communiqué on the Decree Decree No. No. 32 32 on theon the Protection Protection of the Value of the Valuerisks, of the of the though Turkish Turkish Currency Currency This can help tackle market failures that prevent SMEs foreign currency loans and associated from innovating. This is particularly the case during a few points need to be considered: (i) companies 10 10downturns when companies cannot expand short-term without US$15 million in foreign exchange debt may production, but should be able to access cheaper finance be borrowing up to the threshold thereby having the for longer-term productive investments.13 opposite effect on forex demand, at least till May; (ii) some sectors have a natural hedge (e.g. energy, which 10 IMF (2017): “Turkey – 2017 Article IV Consultation – Staff Report,” IMF Country Report No.17/32 11 Official Gazette No. 30312, January 25, 2018: (i) Decree No. 2018/11185 amending the Decree No. 32 on the Protection of the Value of the Turkish Currency; (ii) Communiqué No. 2018-32/46 amending the Communiqué on the Decree No. 32 on the Protection of the Value of the Turkish Currency 12 Law No. 6750 on Moveable Collateral in Commercial Operations, January 1, 2017 13 Dabusinskas et. al (2012) 9 TEM, May 2018: Minding the External Gap 22. This important reform was further deepened 24. Further measures to improve the investment in recent months as part of an Omnibus Law14 climate were introduced relating to bankruptcy aimed at improving the overall investment climate. and insolvency procedures.15 The existing procedures The legislative package expanded the use of collateral were costly and inefficient, and a major hurdle in the to future or after-acquired assets as well as to proceeds business environment. Since the introduction of the and replacements of the original assets, which will Bankruptcy Law in 2003, only 2 percent of the 3524 allow a wider selection of goods to be used as collateral enterprises that filed for this procedure recovered from for businesses. Banks will be able to expand loans to insolvency. In practice, this means that most insolvent riskier borrowers at more affordable rates, whilst SMEs businesses are terminated informally and that viable can scale up and improve productivity. This can be an businesses that could stay in the market end up being important enabler for higher growth through deeper liquidated. On the other hand, resolution of insolvency supply side capacity. In the future, the collateral procedures last around 5 years on average, which is more amendment could be further aligned with global best than twice the average across Europe and Central Asia practices by establishing a single center for monitoring (ECA). Recent reforms aim to address these issues. A and reviewing the collateral registries of companies by new ‘concordat’ procedure has been introduced, which creditors and developing new products for asset-based enables authorities to set timelines for the procedure, and lending to increase the utilization of movable collaterals. puts a heavy focus on business continuation rather than its liquidation through new financing, confirmation 23. The Omnibus Law adopts several other of contracts and sale of essential assets in bankruptcy. measures to improve the investment climate. Firstly, These reforms should help businesses to go through a to simplify business registration, ID verification and more efficient and faster insolvency procedure focused certification of company books by notaries are now on saving the business. moved to the Trade Registry Office, and 25 percent paid-in minimum capital requirement is removed. 25. Ongoing discussions to reform the tax Moreover, inspection from the tax office requirement system are also geared to improving private sector was eliminated and entrepreneurs are now able to competitiveness. The draft Law on Value Added Tax complete their social security system registration process submitted to Parliament in February 2018 has several electronically. Secondly, to improve the system for features in this regard.16 They include measures to construction permitting, an online application process improve the availability of VAT refunds and limit the will be introduced for more transparency on guidelines, possibility that the VAT acts as a tax on investment. fees, documents and pre-approvals via municipalities’ This is in addition to administrative proposals to clear webpages. Thirdly, land registration and transfers the existing backlog of VAT refunds, which will need will be simplified and done through a web registry to be sequenced carefully to avoid fiscal pressures. The system, which allows for online verification of non- draft Law also aims to simplify the VAT regime for small encumbrance information. In addition, an independent businesses. The latter will need to be complemented complaints mechanism related to land-specific disputes with reforms to simplify VAT accounting and reporting has been established. Lastly, contract enforcement for small businesses. On the other hand, the current reforms were adopted through introduction of a small draft also sees the proliferation of VAT exemptions and claims procedure for cases below TL 100,000 and concessions, which reduces the overall efficiency of the number limit to adjournments, provision of electronic VAT and may be worth considering further. publication of judgments and incentives for using Alternative Dispute Resolution. This is expected to play a key role on the acceleration of conflict resolution, especially among SMEs. 14 Law No: 7099 on Amending Various Laws for Improving Investment Climate, March 10, 2018. 15 Law No: 7101: on Amending the Bankruptcy and enforcement, March 15, 2018. 16 Law No. 7104 on amending the Value Added Tax Law and Certain Laws was published in the Office Gazette dated April 6, 2018. 10 volatility could arise poorer (particularly from shocks with lower income to permanent households savings); or a breakdown consumption in financial is usually the mostand/or stable jobs marketso component intermediation. Growth volatility could volatility arise from also associated is shocks with volatility to permanent income or in investment, a breakdownwhich can translate and/or into in financial jobs lower market GDP growth Growth per capitaintermediation. over the long-term volatility (Figure is also 24).17 associated The with degree in volatility volatility can ofinvestment, depend which on the into type can translate of lower per capita(e.g. GDP growth over the long-term 17 The degree of volatility can depend on the type of exogenous shock commodity prices, flows), 24). capital (Figure structural rigidities, economic buffers, and Worldpolicy Bank Group responses. exogenous shock Pro-cyclical commodity (e.g. can policies amplifyprices, capital economic flows), swings structural through rigidities, economic overshooting buffers, of and the erosion and policy fiscal, responses. financial sector Pro-cyclical and external policies can amplify economic swings through overshooting and the erosion of fiscal, buffers. financial sector and external buffers. Figure 23: Growth in Turkey is volatile Figure 24: Consumption and investment volatility in 23: Figure Figure 23: Growth Growth Turkey in Turkey is volatile is volatile Figure Figure 24: 24: Consumptionand Consumption andinvestment investmentvolatility volatility Volatility in per capita Volatility GDP, in per PPP capita (constant GDP, PPP (constant Growth volatility Growth and volatility C/I and volatility C/I volatility 2011 international US$, annual 2011 international US$, annuals.d.) change, change, s.d.) 14 14 Consumption and investment 0.08 Consumption and investment volatility 0.08 12 12 Investment Investment 0.06 10 10 volatility (s.d.) 0.06 Consumption R² = 0.6032 R² = 0.6032 8 8 0.04 0.04 6 (s.d.) 6 R² = 0.2014 R² = 0.2014 0.02 4 4 0.02 2 2 0.00 0.00 0 0 1991-1995 1996-2000 2001-2005 2006-2010 2010-2017 1991-1995 1996-2000 2001-2005 2006-2010 2010-2017 0 0 0.02 0.02 0.04 0.04 0.06 0.06 0.08 0.08 0.1 0.1 Turkey Median s.d. for the period Turkey Median s.d. for the period Growth volatility Growth (s.d.) volatility (s.d.) Sources: World Development Indicators, WB Staff estimates Sources: World Sources: World Development Development Note: Countries inIndicators, Indicators, WB WB the sample Staff Staff include estimates estimates Argentina, Brazil, Chile, China, Hungary, India, Indonesia, Korea (Rep.), Malaysia, Mexico, Poland, Note: Countries in Romania, Note: Countries in the the sample Russian sample include include Argentina, Federation, South Argentina, Brazil, Africa, Brazil, Chile, Thailand, Chile, China, China,Turkey. Hungary, Hungary, India, Indonesia, India, Indonesia, Korea Korea (Rep.), (Rep.),Mexico, Malaysia, Malaysia, Mexico, Poland, Poland, Romania, Russian Federation, Romania, Russian South Africa, Turkey. South Africa, Thailand, Turkey. Federation, Thailand, Containing growth volatility is key to as in other EMDEs (Box 2).18 The need to manage short-term demand diverts resources away from longer- higher productivity and potential output 16 Law No. 7104 on amending the Value Added Tax Law and term investment Certain Laws was in structural published reforms, in the skills, technology Office Gazette dated 26. 16 LawPolicyApril No.17 adjustments 6, 2018. as noted above are and innovation. The greater 7104 on amending the Value Added Tax Law and Certain Laws was published in the Office Gazette dated the swings in demand, the necessary toRamey, contain G. and V.A. large Ramey economic(1995): “Cross-country swings, which evidence on the link between volatility and growth”, American April 6, 2018. more pronounced is the negative impact on productive 17 Ramey, G.Economic Review, No. 85 (5); Easterly, W., R. Islam, J.E. Stiglitz (2000): “Explaining growth volatility,” The World Turkey has and been Ramey (1995): V.A.prone to in “Cross-country the past. evidence on Growth and volatility the link between investment efficiency andof growth”, resourceAmerican allocation. In Bank; Loayza, N.V., R. Ranciere, L. Serven, J. Ventura (2007): “Macroeconomic Volatility and Welfare in Developing Economic volatility inReview, Countries:No. Turkey An has85 (5); Easterly, historically Introduction,” TheW., been R. WorldIslam, high Bank J.E. Stiglitz relative (2000): Economic Turkey, Review (V.“Explaining this growth is reflected 21, No. volatility,” in labor 3); Dabusinskas, A., D. The World shifting Kulikov, increasingly M. Bank; Loayza, N.V., (2012): Randveer R. Ranciere, L. Serven, “The Impact J. Ventura of Volatility (2007): “Macroeconomic on Economic Growth,” Bank Volatility of Estonia and Welfare Working PaperinSeries Developing to other Upper Middle-Income Countries, or countries into less productive sub-sectors within manufacturing Countries: An Introduction,” The World Bank Economic Review (V. 21, No. 3); Dabusinskas, A., D. Kulikov, M. that have (recently) Randveer (2012): “The crossed Impact the High-Income of Volatility threshold on Economic Growth,”and services.19 A growing share of value addition is 12 Bank of Estonia Working Paper Series (Figure 23). This is a challenge because it is associated accounted for by those less productive sub-sectors, with volatility in consumption, which hurts household 12 pointing to a misallocation of resources and slow uptake welfare (particularly poorer households with lower of technology and innovation. A combination of these savings); consumption is usually the most stable has dampened overall productivity. component so volatility could arise from shocks to 28. The shift from deepening supply capacity to permanent income or a breakdown in financial and/ managing short-term demand spurred by recent or jobs market intermediation. Growth volatility is shocks has contributed to a stagnation in Turkey’s also associated with volatility in investment, which can potential growth rate (Figure 25). With declining translate into lower per capita GDP growth over the contributions from Total Factor Productivity (TFP long-term (Figure 24).17 The degree of volatility can – efficiency in harnessing human and physical capital depend on the type of exogenous shock (e.g. commodity for growth), the potential growth rate for Turkey in prices, capital flows), structural rigidities, economic 2017 is estimated at 5 percent (Figure 26). Capital buffers, and policy responses. Pro-cyclical policies can accumulation has been the main driver of potential amplify economic swings through overshooting and the growth, while TFP has made a negligible contribution. erosion of fiscal, financial sector and external buffers. Although continued strong growth in the working-age 27. Macroeconomic and structural policy responses population supports a positive outlook for potential to shocks that help reduce growth volatility can help growth, greater rebalancing towards deepening supply improve productivity, which has stagnated in Turkey side capacity could lift both potential and actual growth. 17 Ramey, G. and V.A. Ramey (1995): “Cross-country evidence on the link between volatility and growth”, American Economic Review, No. 85 (5); Easterly, W., R. Islam, J.E. Stiglitz (2000): “Explaining growth volatility,” The World Bank; Loayza, N.V., R. Ranciere, L. Serven, J. Ventura (2007): “Macroeconomic Volatility and Welfare in Developing Countries: An Introduction,” The World Bank Economic Review (V. 21, No. 3); Dabusinskas, A., D. Kulikov, M. Randveer (2012): “The Impact of Volatility on Economic Growth,” Bank of Estonia Working Paper Series 18 WBG (2016), “Turkey’s Future Transitions: Towards Sustainable Poverty Reduction and Shared Prosperity.” 19 WBG (2018), “Turkey Country Economic Memorandum on Productivity,” (Forthcoming) 11 28. The shift from deepening supply capacity to managing short-term demand spurred by recent shocks shocks has contributed has contributed to a stagnation to a stagnation in Turkey’s in Turkey’s potential potential growth growth rate (Figure rate (Figure 25). With 25). With declining declining contributions from Total Factor Productivity (TFP contributions from Total Factor Productivity (TFP – efficiency in harnessing human and physical capital for for – efficiency in harnessing human and physical capital growth), growth), the the potential potential growth growth rate rate Gap for for Turkey Turkey in 2017 in 2017 is estimated is estimated at 5 percent at 5 percent (Figure (Figure 26). Capital 26). Capital accumulation accumulation TEM, May has 2018: been Minding the the External main driver of potential growth, while TFP has made a negligible contribution. Although has been the main driver of potential growth, while TFP has made a negligible contribution. Although continued strong growth in the working-age population supports a positive outlook continued strong growth in the working-age population supports a positive outlook for potential growth, for potential growth, greater rebalancing towards deepening supply side capacity could lift both potential greater rebalancing towards deepening supply side capacity could lift both potential and actual growth. and actual growth. Figure Figure 25: Decline 25: Decline in potential in potential growth Figure growth rate Figure 26: Decline in potential TFP contribution Figure 25: Decline in potential growth rate rate 26: 26: Figure Decline in potential Decline TFP in potential contribution TFP contribution Potential Potential Growth Growth Estimates, Estimates, % % Contributions Contributions to Potential to Potential Growth,Growth, % % 80 80 10 10 60 60 5 5 40 40 0 0 20 20 -5 0 0 -5 Capital Capital Potential Potential Stock Stock Upper Bound Upper Bound Lower Bound Lower Bound GDP growth GDP growth Potential Employment Potential Employment Potential Potential TFP TFP Sources: Sources: Haver Analytics, Haver Development Analytics, WB WB Staff Staff estimates estimates Sources: World Indicators, WB Staff estimates Note: Note: Potential Potential growth growth rates rates are are estimated estimated by HP by HP filter, filter, Multivariate Multivariate filter, Cobb-Douglas filter, Cobb-Douglas Production Production and CES CES production and Malaysia, production function methodologies. Note: Countries in the sample include Argentina, Brazil, Chile, China, Hungary, India, Indonesia, Korea (Rep.), Mexico, function methodologies. Poland, Romania, Russian Federation, Contributions Contributions to potential to potential growth is calculated based on Cobb-Douglas production growth is calculated based on Cobb-Douglas production function estimates. function estimates. South Africa, Thailand, Turkey. STRICTLY STRICTLY –– CONFIDENTIAL CONFIDENTIAL May May 21, 21, 2018 2018 Box Box 2: 2: Global Global trends trends Box inin 2: growth potential potential Global growth trends in potential growth Global Global potential potential growth growth is is well well below below its its pre-crisis pre-crisis average average inin both both advanced advanced economies economies and and Global emerging potential emerging market market growth andand is well below developing developing its pre-crisis economies economies average inDespite (EMDEs). (EMDEs). both advanced Despiteaarecent economies recent acceleration accelerationand emerging ofof global global market economic and economic developing activity, activity, economies slowdown slowdown in in (EMDEs). potential potential Despite output output growtha recent growth acceleration continues continues (Figure (Figure global of27). 27). economic This This activity, broad-based broad-based slowdown slowdown slowdown inmainly potential mainly output reflects reflects weakergrowth weaker continues capital capital 27). (Figureslowing accumulation, accumulation, This slowing broad-based productivity productivity slowdown growth growth and and mainly reflects demographic demographic trends weaker trends (Figure capital (Figure 28). accumulation, 28). slowing productivity growth and demographic trends (Figure 28). Figure Figure 27: 27: Drop Drop inin global global potential potential growth growth rate rate Figure Figure 28: 28: Decline Decline inin global global TFP TFP growth growth Figure 27: Drop in global potential growth rate Figure 28: Decline in global TFP growth 8 8Potential Potential Growth Growth %% (yoy (yoy change) change) 3 3 Average Average TFP TFP Growth, Growth, (yoy %% (yoy change) change) 6 6 2 2 18 WBG (2016), “Turkey’s Future Transitions: Towards Sustainable Poverty Reduction and Shared Prosperity.” 18 4 419 (2016), “Turkey’s Future Transitions: Towards Sustainable Poverty Reduction and Shared Prosperity.” WBG 19 WBGWBG (2018), (2018), “Turkey “Turkey Country Country Economic Economic Memorandum Memorandum on Productivity,” on Productivity,” (Forthcoming) (Forthcoming) 2 2 13 13 1 1 0 0 1998-2002 2003-07 2008-12 2013-17 2018-27 1998-2002 2003-07 2008-12 2013-17 2018-27 1998-2002 2003-07 2008-12 2013-17 2018-27 1998-2002 2003-07 2008-12 2013-17 2018-27 1998-2002 2003-07 2008-12 2013-17 2018-27 1998-2002 2003-07 2008-12 2013-17 2018-27 0 0 2003-07 2013-17 2018-27 2003-07 2013-17 2018-27 2003-07 2013-17 2018-27 2003-07 2013-17 2018-27 2003-07 2013-17 2018-27 2003-07 2013-17 2018-27 World World AEsAEs EMDEs EMDEs World World AEAE EMDE EMDE Potential Potential growth growth Actual Actual growth growth 1998-2017 1998-2017 potential potential growth growth 1998-2007 1998-2007 average average Source: Source: WBG, WBG, Global Global Economic Economic Prospects Prospects (January (January 2018) 2018) Source: Source: WBG, WBG, Global Global Economic Economic Prospects Prospects (January (January 2018) 2018) Source: WBG, Global Economic Prospects (January 2018) Source: WBG, Global Economic Prospects (January 2018) Following Following the the GFC, GFC, a sharp a sharp slowdown slowdown inin productivity productivity growth growth below below its its longer-term longer-term average average and and pre-crisis pre-crisis levels levels was was accompanied accompanied byby slower slower productivity productivity enhancing enhancing investment investment Following the GFC, a sharp slowdown in productivity growth below its longer-term average and pre- growth growth . . TheThe slowdown slowdown inin crisis levels productivity productivity was started started accompanied bywell well before before slower thethe GFC GFC productivity inin advanced advanced enhancing economies economies and and investment spread spread growth .toto The emerging emerging slowdown in market productivity started well before the GFC in advanced economies and spread to emerging market to market developing developing economies economies after after thethe crisis. crisis. Unless Unless focus focus is is shifted shifted from from cyclical cyclical policy policy options options to developing productivity productivity enhancing enhancing reforms, reforms, thethe ongoing ongoing trend trend is is likely likely toto continue. continue. economies after the crisis. Unless focus is shifted from cyclical policy options to productivity enhancing reforms, the ongoing trend is likely to continue. Source: Global Economic Prospects (January 2018) 12 World Bank Group Looking ahead measures have already been announced. This includes supplementary fiscal measures proposed to Parliament Growth is projected to moderate in 2018 in February to accelerate investment and employment (TL 17 billion); a new super incentive scheme targeted with downside risks at 23 projects designed to reduce import dependence 29. Growth is projected to moderate in 2018 with (US$33 billion); and a further extension to the Credit downside risks. Private consumption is expected to be Guarantee Fund for lending in 2018 (TL 55 billion). In weighed down by rising costs and declining real wages line with these announcements, public consumption is (Figure 29), though employment growth continues. expected to accelerate and the budget deficit is projected There are also signs of a slowdown in credit growth. to widen to just above 2 percent of GDP. Leading indicators suggest that the recent pick up in 31. Inflation is projected at over 10 percent and will machinery and equipment investment in the second remain an important policy challenge in the coming STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL – – half Mayof 2017 21, is likely 2018 to continue in the first half of 2018 year. Core inflation has remained high and for the first May 21, 2018 (Figure 30), particularly as capacity utilization rates time in a decade rose to double digits. Inflationary have already hit high levels and imports of capital goods expectations remain elevated at close to 10 percent for have been rising. On the other hand, producer price Looking Lookingahead ahead pressures, slowing demand, and oversupply is projected 2018. A lack of policy adjustment as discussed above could leave inflationary expectations unanchored with to moderate construction sector growth. associated wage-price spiral. The burden of adjustment A moderate moderate 30. AThere growth is highgrowth in 2018 probability with in 2018 with downside risks downside risks of continued rests on monetary and macroprudential policies. expansionary policies driven by the desire to maintain Recalibrating policy with a credible inflation target, Growth 29. 29. growth strong in in Growth Turkey thein Turkey run up isto projected is projected elections to moderate into moderate 2018 andto 4.7 to percent 4.7 percent supported in by2018. in Private 2018. Private a transparent consumption consumption and is expected predictable is adjustment expected to be 2019. weighed to be Twoweighed down sets of down by rising by rising elections costs and are scheduled: declining real costs and simultaneous wages declining real wages(Figure to policy 29), (Figure though 29),and rates thoughemployment employment growth macroprudential growth continues. continues. regulations to focus There are are There Presidential also and signs also of of signs a slowdown Parliamentary a slowdown in credit elections in growth. in credit June growth. 2018; Leading Leadingindicators on financialindicatorssuggest sector that suggest stability, the that recent the could recent help pick up up pick better in in anchor machinery and machinery and local electionsequipment and equipment investment in March investment in 2019. Severalthe second in the second half incentivehalf of 2017 is of 2017 is likely to continue in the first half of 2018 likely to continue in the first half of 2018 economic expectations. (Figure 30), (Figure particularly 30), as capacity particularly utilization as capacity rates utilization have rates already have hit hit already high levels high and levels imports and importsof capital of capitalgoods goods have been rising. On the other hand, producer price pressures, slowing demand, and oversupply have been rising. On the other hand, producer price pressures, slowing demand, and oversupply is projected is projected to to moderate construction sector moderate construction sector growth.growth. Figure 29: 29: Figure Declining real Declining wages real wages Figure 30: 30: Figure Sustained investment Sustained spending investment spending Figure 29: Declining real wages Figure 30: Sustained investment spending Real wages Real (yoy wages % change) (yoy % change) Survey: Investment Survey: Expenditure Investment Expenditure (SA, 3m-o-3m) (SA, 3m-o-3m) 13%13% 8% 8% 8% 8% 6% 6% 3% 3% 4% 4% -2% -2% 2% 2% 0% 0% -7% -7% -2% -2% -12% -12% -4% -4% -6% -6% All All Manufacturing Manufacturing Trade services and and Trade services Construction Construction Sources: Haver Sources: Analytics, Haver WB WB Analytics, StaffStaff estimates estimates Sources: Haver Analytics, WB Staff estimates 30. 30. There There is high probability is high of continued probability of continued expansionary expansionary policies policiesdriven by by driven thethedesire to maintain desire to maintain strong growth strong growth in the run in the up up run to elections in 2018 to elections and in 2018 2019. and Two 2019. Two sets of elections sets areare of elections scheduled: simultaneous scheduled: simultaneous13 Presidential and Presidential Parliamentary and Parliamentaryelections in June elections in June2018; and 2018; local and elections local in March elections in March 2019. Several 2019. Several incentive incentive measures have measures already have been already announced. been announced.This includes This supplementary includes supplementary fiscal measures fiscal measuresproposed proposedto Parliament to Parliament in February to accelerate in February investment to accelerate investmentand employment and employment (TL 17 17 (TL billion); a new billion); super a new incentive super scheme incentive scheme targeted targeted at 23 projects at 23 designed projects to reduce designed import to reduce dependence import dependence(US$33 (US$33billion); and billion); a further and extension a further to the extension to theCredit Credit STRICTLY TEM, STRICTLY the External Gap – CONFIDENTIAL CONFIDENTIAL May 2018: Minding – May May 2018 21,21, 2018 Box 3: Turkey’s Box 2018 3: Turkey’s Budget 2018 and Budget Medium-Term and Program Medium-Term Program Turkey’s Turkey’sBox 2018 2018 3:Budget Budget Turkey’s was approved was 2018 approved by byBudget Parliament Parliament and on December on Medium-Term December 22,22,2017.2017.The The Program Budget Budget is based is based on on a a Medium-Term Medium-Term Turkey’s 2018 Budget Program Program (MTP)(MTP) was approved released byreleased by Parliament the by onMinistry theDecember of Ministry of Development 22,Development 2017. The Budgeton September on September is based on a 27 last 27 year. last year. Medium-Term Macroeconomic Program (MTP) released Macroeconomic assumptions: by the Ministry assumptions: The TheBudget and of Development Budget andMTP onassume MTP September assume an anoptimistic last year. 27optimistic 5.55.5 percent percent real growth real growth perper year 2018-2020, year 2018-2020, Macroeconomic with unemployment with unemployment assumptions: falling The Budget and to falling MTPjust below just below to assume 10 percent 10 percent an optimistic by 5.5by2020. 2020. percent Inflation Inflation growth is real is projected per projected year 2018-to to abate 2020, quickly abate with quickly to 7 percent to 7 percent unemployment in 2018, in 2018, falling dropping to just dropping below 10further further to percentto5 percent by percent 5 2020. by the by the is Inflation end of end the of the program projected program period. to abate quicklyperiod.to 7 percent Budget in 2018, aggregates:dropping further Overall to 5 fiscal percent conditionsby the end areare of the expected program to to period. deteriorate slightly in in2018, including Budget aggregates: Overall fiscal conditions expected deteriorate slightly 2018, including narrower narrower Budget primary primary aggregates: and current and fiscal Overallcurrent surpluses. surpluses. conditions The MTP The MTP are expected projects to projects a deteriorate budget a slightly deficit budget in deficitclose 2018,close to 2 including percent to 2 narrower percent of ofGDP GDP primary in andin2018 currentand 2019, 2018 surpluses. and 2019, before MTPfalling before The falling to projects 1.3 to percent deficitin 1.3 percent a budget in 2020. 2020. close Yet to 2 general Yet general percent government of GDP government in 2018 andrevenue revenue as a as a share 2019, before share of of falling GDP GDP to 1.3 is projected is projected percent to in 2020.to decline Yet generalslightly decline slightly over government the program over revenue the program period, period, as a share despite of GDPdespite tax reforms, tax reforms, is projected large to decline tax gaps, largeslightly tax gaps, and overanda thea growing growing program economy. economy. period, As despite As a result, tax areforms, expenditures result, expenditures adjust large tax gaps,adjust down from down from and a growing 34.834.8 to economy. to 32.7 As32.7percent percent a result, of GDP. of GDP. expenditures adjust down from Budget to 32.7 priorities: 34.8policy percent of GDP. Maintain (i) (i) macroeconomic stability; Increase (ii) (ii) human capital and labor Budget policy priorities: Maintain macroeconomic stability; Increase human capital and labor quality; Budget (iii) policy enhance quality; (iii) enhance high value-added production; (iv) Improve business and investment environment; priorities:high(i) value-added Maintain production; macroeconomic (iv) Improve stability; (ii) business Increase and human investment capital and environment; labor quality; (iii) (v) Increase (v) Increase enhance employment employment high value-added and improve and improve production; income income (iv) Improve distribution. distribution. business and investment environment; (v) Increase employment and improve Revenue: income Tax distribution. reforms approved by byParliament in December include: (i) increasing thethe CIT rate (20(20to to Revenue: Tax reforms approved Parliament in December include: (i) increasing CIT rate 22 22percent), Revenue: Tax (ii) percent), reduced reforms (ii) reduced corporation approved corporation taxtax by Parliament exemption inexemption December forinclude: immovable for property (i) increasing immovable the property (from CIT(from 75 75 rate to (20 50 to percent to5022 percent – – percent), previously (ii) reduced sale of corporation shares tax and exemption immovable for immovableproperty benefited property (from 75from previously sale of shares and immovable property benefited from 75 percent exemption rate); (iii) to 50 75 percent percent – exemption previously sale rate); of shares (iii) and introduction immovable of of property introduction VAT VAT liability benefited from liabilityfor75 non-residents for percent engaged exemption non-residents rate); engaged e-commerce; in(iii) in introduction e-commerce; (iv) removal of(iv) VAT removal of of liability tax for taxbreaks non-residents breaks on on durable engaged goods in and e-commerce; furniture; (iv) and removal (v) of hike tax in breaks durable goods and furniture; and (v) hike in motor vehicle tax. motor on vehicle durable tax. goods and furniture; and (v) hike in motor vehicle tax. Expenditure: Spending growth of ministries is planned to moderate slightly to 12.7 percent, compared to an Expenditure: Expenditure: Spending Spendinggrowth of ministries is planned to moderate slightly to 12.7 percent, compared estimated 16.7 percent in 2017.of growth growth ministries Finance is planned and Treasury to moderate budgets slightly drive close to halfto of 12.7 percent, overall spendingcompared growth. to an to estimated an 16.7 estimated percent 16.7 growth percent in growth 2017. in Finance 2017. Financeand Treasury and budgets Treasury budgetsdrive close drive to close half to of overall half overall ofpercent Other big contributors are the Defense Ministry (30 percent increase in budget allocation, contributing 12 spending spending growth. Other growth. Other contributors bigbig areare contributors thetheDefense Ministry Defense Ministry(30(30 percent increase percent increasein in budget budget of overall growth), and the Labor and Social Security Ministry (contributing 8 percent to planned spending growth). allocation, contributing allocation, percent 12 12 contributing of of percent overall growth), overall and growth), thethe and Labor and Labor Social and Security Social Ministry Security Ministry (contributing Supplementary 8 fiscal (contributing percent 8 percentto planned stimulus: On spending to planned February spending growth). 22, the Parliament’s Plan and Budget Commission approved an growth). Omnibus Bill for Parliament’s consideration with fiscal stimulus to boost employment and investment. The package to costfiscal Supplementary is estimated Supplementary TL stimulus: 17.3 fiscal billion stimulus: OnOn (likely February over 3 years). February 22,22, thethe MeasuresParliament’s include: (i) Parliament’s Plan subsidies Planand Budget to and BudgetCommission private companies Commissionfor approved “minimum approvedan Omnibus wage an support” Omnibus Bill and for Bill of socialconsideration Parliament’s payment for Parliament’s security premia consideration with for withfiscal workers stimulus employed fiscal stimulustobetween boost employment to boost2018 employment and and 2020; (ii) and investment. additional The income investment. package tax The and revenue package is estimated stamp duty is estimated cost to to TLTL exemptions; cost 17.3 billion (iii) 17.3 VAT (likely billion over exemption (likely 3 years). on over Measures purchase 3 years). of Measures include: new machinery (i) and include: (i) subsidies equipment. to private companies for “minimum wage support” and payment of social subsidies to private companies for “minimum wage support” and payment of social security premia for security premia for workers employed workers Source: between employed MOF, WB Staff 2018 between estimates and 2018 2020; and (ii) (ii) 2020; additional income additional and taxtax income revenue and stamp revenue duty stamp exemptions; duty exemptions; VAT (iii)(iii) exemption VAT on on exemption purchase of new purchase machinery of new and machinery equipment. and equipment. Figure Figure Figure 31: 31: 31: Slight Slight deterioration Slight deterioration deterioration in fiscalin fiscal in fiscal in conditions Figure 32:32: Figure Figure 32: …with smaller …with …with smaller smaller primary and primary primary and recurrent and recurrent recurrent 2018… conditions in 2018… conditions in 2018… surpluses surpluses surpluses Budget aggregates Budget (% (% aggregates of GDP) of GDP) Budget balances Budget (% (% of GDP) balances of GDP) 1.5% 1.5% 21.3% 21.9% 21.9% 21.8% 21.8% 21.8% 21.8% 23%23% 21.3% 1.0% 1.0% 18%18% 0.5% 0.5% 0.0% 0.0% 13%13% 20.3% 20.8% 20.2% 19.9% -0.5% -0.5% 8% 8% 20.3% 20.8% 20.2% 19.9% -1.0% -1.0% 3% 3% -1.1% -1.5% -1.5% -1.0% -1.0% -1.1% -1.5% -1.5% -1.9% -1.9% -2.0% -2.0% -2%-2% 2015 2016 2017 e e 2018 b b 2015 2016 2017 e e 2018 b b 2015 2016 2017 2018 2015 2016 2017 2018 Total revenues Total expenditures Overall balance Overall balance Overall balance Primary balance Primary balance Total revenues Total expenditures Overall balance Recurrent balance Recurrent balance 16 16 14 STRICTLY STRICTLY – – CONFIDENTIAL CONFIDENTIAL STRICTLY World Bank Group STRICTLY MayMay CONFIDENTIAL CONFIDENTIAL – – 21, 2018 21, 2018 May May 21, 2018 21, 2018CONFIDENTIAL STRICTLY STRICTLY – – CONFIDENTIAL May 2018 21, 21, May 2018 Figure Figure Figure 33: Revenue33:estimate Revenue 33: Revenue estimate forestimate 2018 for 2018 arefor are are Figure 2018 relatively Figure 34…with Figure 34…with 34…withslow slow growth slow growth growth in in tax in tax collections. collections. tax collections. flat… Figure 33 : Figure 33: RevenueRevenue relatively estimate relatively estimateflat… for flat… for 2018 are2018 are Figure 34…with slow growth in tax Figure 34…with slow growth in tax collections. collections. Figure 33: 33 Figure relatively Revenue : relatively Revenue flat… flat… estimate for 2018 estimate for are are Figure 2018 34…with Figure 34…withslow growth slow growthin tax collections. in tax collections. Central Central Government Government Revenues Revenues (% of (% of GDP) GDP) Central Central government government revenue revenue (Index, (Index, = = 1) 20152015 relatively flat… relatively flat… Central Government Revenues (% of GDP) Central Government Revenues (% of GDP) 1) Central government revenue (Index, 2015 = Central government revenue 1) (Index, 2015 = 21% 21% 21%Government Central Revenues 1) (Index, 2015 = 2.2 2.2government revenue 1) revenue 21%Central Government 0.1% (% of Revenues 0.1% (% GDP) of GDP) Central Central government (Index, 2015 = 20% 20% 0.1% 0.1% 2.2 2.2 2.0 2.0 1) 1) 21% 21% 0.1%0.1% 0.1% 0.1% 0.1% 0.1% 20%20% 0.1%0.1% 0.1% 2.2 2.0 2.0 2.2 1.8 0.1%0.1% 0.1% 0.1%0.1% 1.8 19% 19% 20% 2.3% 2.0 1.8 20% 0.1% 2.0% 2.3% 0.1%0.1% 1.8 2.0 1.6 19%19% 2.0%0.1% 1.9% 1.9% 0.1%0.1% 1.9% 1.9% 1.6 18% 2.3%2.3% 1.8 1.6 1.6 18% 19% 19% 2.0% 2.0% 1.9%1.9% 1.9%1.9% 1.4 1.4 1.8 18%18% 2.3%2.3% 1.6 1.4 1.4 1.6 1.2 2.0%2.0% 1.9%1.9% 1.9%1.9% 1.2 17% 17% 18% 17.4% 17.6% 17.5% 17.4% 18% 17.4% 17.6% 17.5% 17.4% 1.4 1.2 1.2 17% 17% 17.6% 1.0 1.0 1.4 17.4% 17.6% 17.5% 17.5% 17.4% 16% 16% 17.4% 17.4% 1.2 1.0 2015 2015 1.0 1.2 2016 2016 2017 e 2017 e 2018 b 2018 b 17% 17% 2015 2016 2017 e 2018 b 2015 2016 2017 e 2018 b 16% 2015 17.4% 17.6% 2016 17.5% 2017 e 2018 b 16% 17.4% 17.6% 17.5% 17.4% 17.4% 1.0 1.0 2015 Tax Revenues Tax Revenues 2016 2017 e 2018 bRevenues Non-Tax Non-Tax Revenues Tax Tax 2015Revenues 2015 Non-Tax Revenues Non-Tax 2016 2016 Revenues 2017 Revenues 2017 e e Grants Grants 2018 and and b 2018 b Aids Aids Grants and Aids 16% 16% 2015 Grants Tax Tax2015and 20162016 Aids Revenues Revenues eNon-Tax 20172017 2018 eNon-Tax bRevenues 2018 Revenues b Tax Non-Tax RevenuesNon-Tax Tax Revenues 2015 2016 Revenues Revenues e Grants 20172017 Grants and b Aids and Aids Grants and Aids 2015 2016 e 2018 2018 b Grants and Aids Tax Revenues Non-Tax Revenues Tax Revenues Non-Tax Revenues Figure Tax Figure 35: Spending Revenues 35: Revenues Spending Tax Non-Tax adjustments RevenuesGrants Revenues adjustments Non-Tax on andinvestment on Grants Aids investment and Aids Figure Figure 36: Grants 36: Aids …to and Grants …to enable and enable Aids largelarge increase increase in public in public Figure Figure Figure 35: 35: 35: Spending Spending Spending adjustments adjustments side…side… adjustments on investment on investment on investment Figure side… Figure Figure36: 36:36: …to…to …to enable enable transfers… enable large transfers… large large increase increase increase in in public inpublic publictrans- Figure 35: 35: Figure Spending side… adjustments Spending side… on investment adjustments on investment Figure fers… 36: 36: Figure …to enable …to transfers… transfers… large enable increase large in public increase in public Economic Economic composition composition of CG CG expenditure ofexpenditure Spending Spending growth growth in economic in economic composition composition of of side… side… spending growth Spending (Index, intransfers… 2015 transfers… = 1) composition of economic (% (% of GDP) Economic Economic of GDP) composition of CG expenditure composition of CG expenditure Spending(Index, spending in economic growth2015 = 1) composition of (% (% of of GDP)GDP) spending spending (Index, 1.6 (Index, 20152015 1)= 1) =economic 20% Economic 20% Economiccomposition 2.1% 2.1% of 1.8% 1.8% composition CG expenditure of CG 1.9% 1.9% expenditure1.6% 1.6% Spending 1.6 growth Spending in economic growth in composition compositionof of 20% 1.8% 1.6 spending (Index, 1.6 spending 2015 = 1) (% of 20% GDP) (% of2.1% GDP) 2.1% 1.8% 1.9%1.9% 1.6%1.6% (Index, 2015 = 1) 1.4 1.4 15% 15% 20% 1.8%1.8% 1.9%1.9% 1.6 1.6 20% 2.1%2.1% 1.6%1.6% 1.4 1.4 15%15% 10% 1.2 1.2 1.4 1.4 15% 15% 18.3%18.3% 19.3%19.3% 19.0%19.0% 18.9%18.9% 10% 1.2 1.2 10%10% 18.3% 18.3% 19.3% 19.3% 19.0%19.0% 18.9%18.9% 1.0 1.0 5% 5% 1.2 1.2 10% 10% 18.3% 1.0 1.0 5% 5% 18.3% 19.3% 19.3% 19.0% 19.0% 18.9% 18.9% 0.8 0.8 1.0 1.0 0% 0% 5% 0.8 0.8 2015 2015 2016 2016 2017 e 2017 e 2018 b 2018 b 5% 2015 2016 2017 e 2018 b 0% 0% 2015 2016 2017 e 2018 b 2015 2015 2016 2016 20172017 e e 2018 2018 b b 2015 2016 2017 e 20182018 b 0.8 0.8 Personnel Personnel SSI contributions SSI contributions 0% 0% 2015 2016 2017 e b 2015 Goods and services 2016 20172017 Interest eInterest b b 20182018 Recurrent Recurrent expenditureNet capital expenditure Net capital acquisition acquisition Goods and services 2015 Personnel Personnel 2016 SSI eSSI contributions contributions 2015 20162016 2017 e capital 20182018 b b Transfers Transfers Goods and services Interest 2015 Recurrent expenditure Recurrent expenditure 2017 Net e acquisition Net capital acquisition Goods and services Interest Personnel Transfers Personnel Transfers SSI contributions SSI contributions Goods and services Interest Figure Recurrent37: …particularly expenditure Figure 37: …particularly for Labor and Social Recurrent expenditure Net for capital Net Labor acquisition capital and Social acquisition FigureFigure 38: 38: Goods Defense ministry has also Transfers Defense and services ministry has also seenseen big Interest a big a Transfers Figure Figure 37: 37: …particularly …particularlySecurity. Security. for 20 for Labor 20 Labor andand Social Social Figure Figure 38: 38: Defense Defense ministry ministry jump.jump.has has alsoalso seenseen a a big big Figure 37: Figure 37: Security. Security. …particularly …particularly 20 20 for Labor for and Labor andSocial Social Figure 38: Figure Defense 38: jump. jump. ministry Defense has ministry also has seen also abig seenbig big ajump. Figure 37: Ministry …particularly expenditures for (Top Labor seven, %and Social of total) Figure Ministry 38: Defense expenditure ministry growth has also seen a Ministry expenditures (Top seven, Security. % of 20 total) Ministry expenditure growth (Top(Top jump. seven,seven, Security. Ministry20 expenditures Ministry expenditures Security. (Top seven, (Top seven, %3.7% 20 % of total) of total) 3.7% 4.1% Index Ministry Ministry 2015 = 100) expenditure expenditure growth growth jump. (Top(Top seven, seven, 100% 100% 5.3% 5.3%4.6% 4.6% 4.1% Index 2015 = 100) Ministry 4.7% expenditures 5.3% (Top 4.6% %5.0% 4.6% seven, of 3.7% 3.7% 5.0% total) 4.9% 4.1% 4.1% Index Index 2015 Ministry 2015 = = 100) 100) expenditure growth (Top seven, 100%100% Ministry 4.6% 4.6% expenditures 5.3% 4.7% 4.6% 4.6% 4.7% 4.6%seven, (Top 4.4%% 4.6% 4.6% of total) 4.9% 4.4% 5.3% 5.3% 4.9% Ministry expenditure growth (Top seven, 4.7% 5.2% 4.6% 7.7% 5.0% 7.7% 5.0% 3.7% 4.9% 7.8% 100% 5.3% 5.2% 4.6% 4.6% 5.3% 7.7% 4.6% 4.6% 4.6% 7.7% 3.7% 4.4% 4.4% 4.1% 7.8% 5.3% 4.1% 5.3% Index 2015 Index = 100) 2015 = 100) 100% 12.7% 4.7% 12.7% 5.2% 5.2% 4.6% 13.0% 7.7% 13.0% 7.7% 4.6% 7.7% 13.2% 7.7% 5.0% 5.0% 13.2% 7.8% 4.9% 4.9% 12.1% 12.1% 7.8% 1.9 1.9 4.6% 4.7% 4.6%13.0% 4.4% 4.4% 5.3%12.1% 50% 12.7% 4.6% 4.6% 5.3% 1.9 1.9 50% 12.7% 13.9% 5.2% 5.2% 13.9% 13.0% 11.8% 11.8% 7.7% 7.7% 7.7%13.2% 13.2% 12.0% 12.0% 7.7% 12.1% 7.8% 7.8% 12.8% 12.8% 50%50% 12.7% 13.9% 11.8% 12.0% 12.8% 1.9 1.4 13.9%12.7% 13.0% 11.8%13.0% 13.2% 12.0%13.2% 12.1% 12.8%12.1% 1.4 1.9 50% 50% 13.9% 27.1% 27.1% 26.7% 26.7% 26.6% 26.6% 26.7% 26.7% 1.4 1.4 13.9% 11.8%11.8% 12.0%12.0% 12.8%12.8% 27.1%27.1% 26.7%26.7% 26.6%26.6% 26.7%26.7% 0% 0% 1.4 0.9 0.9 1.4 0% 0% 27.1% 2015 2016 2017 e 2018 2018 b 0.9 2015 2015 201527.1% 201626.7% 26.7% 2017 26.6% e 26.6% 26.7%b 26.7% 0.9 2016 2016 2017 e2017 e 2018 b 2018 b Finance 2015 2016 Treasury 2017 e e b b 20182018 Finance Finance2015 0% 0% Finance National Education 2016 Treasury 2017 Labor and Social Security 0.9 0.9 Finance 2015 2015 20162016 2017 e Treasury 2017 Treasury e b b 20182018 National Finance Education Treasury Labor and Social Treasury Security National National Finance Education Education Labor Labor and Social and Social Treasury Security Security 2015 National 2015Defense 20162016 2017 e Health 2017 e 2018 b 2018 b Finance 2015 National 2016 Defense Treasury 2017 e Labor Health 2018 b Security National National National Education Defense Education Labor Health Labor and Social and Social Security Security 2015 National National Defense National Education Education 2016 2017 Health e and 2018 Social Labor and Social Securityb Finance Transport Finance National andDefense Transport and Coms Coms Treasury Treasury Health Transport Finance Transport National and Coms Coms andDefense Treasury Health National Defense Health Finance National Defense HealthTreasury National Education National Labor and Social Security National Education Labor and Social Security Transport andEducation Transport and Coms Coms Labor and Social Security Transport andEducation National Transport and Coms Coms Labor and Social Security National Defense National Defense Health Health National Defense National Defense HealthHealth Source: WB and Transport Source: MOF, MOF, WB Transport Coms Staff Staff and estimates Coms estimates Transport and Coms Transport and Coms Source: Source: MOF,MOF, WB Staff WB Staff estimates estimates Source: MOF, WB Staff estimates Source: MOF, Source: WB Staff MOF, estimates WB Staff estimates 20 20 Note: Note: this this is is ministry ministry ratherrather than than functional functional general general government, government, or public or public sector sector This This spending. spending. therefore therefore not not doesdoes Note: this is ministry rather than functional general government, or public sector spending. This therefore does not reflect full sector spending in 20 20 Note: reflect 20 Note: reflect this full this full is ministry sector is ministry sector spending spending ratherrather in than education, education, health, defense, and others. in than functional education, functional general health, health,general defense, defense, government, government, and and others. others. or public or public sector sector spending. spending. This This therefore therefore not not does does 20 reflect reflect Note:full thisfull is sector sector spending spending ministry rather in education, in education, than health, health, functional defense, defense, general and 17and others. 17 others. government, sector or public spending. This therefore does not not 20 Note: this is ministry rather than functional general government, or public sector spending. This therefore does reflect full full sector spending in education, health, defense, 17 and 17 others. reflect sector spending in education, health, defense, and others. 17 17 15 from from thethe past past year, year, though though risks risks to to global global trade trade have have increased increased . Growth . Growth in in EMDEs EMDEs is projected to to is projected accelerate accelerate further further thanks thanks to to a rebound a rebound among among commodity commodity exporters exporters (Figure (Figure 39 39andand Figure Figure 40). 40). Recent Recent protectionist protectionist measures measures however however posepose concerns concerns forfor global global trade. trade. USUS tariffs tariffs on on steel steel (25(25 percent) percent) andand aluminum aluminum (10(10 TEM, percent) percent) May 2018: will will affect Mindingaffect Turkey. Turkey. the 21Gap External 21 The overall impact on the trade balance may not be that significant; indirect The overall impact on the trade balance may not be that significant; indirect STRICTLY STRICTLY impacts CONFIDENTIAL through CONFIDENTIAL turbulence – – markets and flows, protectionism and currency volatility may be more in financial impacts through turbulence in financial markets and flows, protectionism and currency volatility may be more MayMay21, severe. 2018 21, 2018 severe. 39:39: Figure Figure Global Global growth growth projected projected to rise to rise in 2018 Figure in 2018 Figure 40:40: Continued Continued export export growth growth in EMDEs in EMDEs 32. 32. Global Figure 39: growth Global Global in 2018 growth growth is expected in 2018 projected expected isto to rise in remain to remain 2018 supportive supportive Figure 40: of Continued Turkey’s of Turkey’sstrong export export strong export growth performance performance in EMDEs fromfrom past thethe year, past though year, though risks to global risks to global trade have trade haveincreased increased. Growth . Growth in EMDEs in EMDEs is projected is to to projected Growth Growth (yoy (yoy % change) % change) accelerate further accelerate 8 8 thanks further to thanks a to rebound a rebound among among commodity commodity 6 6 exporters exporters(Figure 39 (Figure and 39 Figure and Figure40). Recent 40). Recent protectionist measures protectionist however measures howeverpose concerns pose concerns for for global trade. global US US trade. tariffs on on tariffs steel (25 (25 steel percent) percent)andandaluminum aluminum (106 percent) (10 willwill 6 percent) affect Turkey. affect 21 The Turkey. overall 21 The impact overall on on impact the the trade balance trade may balance notnot may be that significant; be that indirect significant; indirect 4 impacts through impacts turbulence through in financial turbulence markets in financial markets flows, andand 4 protectionism flows, protectionism andand currency currencyvolatility may volatility be more may be more severe. severe. 4 4 2 2 2 39: 39: Figure 2 Figure Global growth Global projected growth to rise projected in 2018 to rise in 2018 Figure 40: 40: Figure Continued export Continued growth export in EMDEs growth in EMDEs 0 0 Growth (yoy(yoy % change) 0 0 Growth % change) 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 8 8 6 6 World Advanced economies EMDEs SAR EAP ECA SAR ECA EAP LAC LAC SSASSA MNA MNA 6 6 World Advanced economies EMDEs 4 4 Source: Source: Source: WBWB WB Global Global Global Economic Economic Economic Prospects Prospects Prospects (January (January(January 2018) 2018) 2018) 4 4 33.33. Turkey’s Turkey’s current current account account deficit deficit in in 2018 2018 is expected is expected 2 2 to to remain remain overover 5 percent 5 percent of of GDP GDP . This . This is is 32. 2 Global largely largely due to energy imports, which account for around 15-20 percent of total imports. Brent oil averaged 2 due growth to energy in 2018 imports, is expected which to account remain for around 33. 15-20 Turkey’s percent current of total account imports. deficit Brent oil in 2018 averaged is US$65 supportive per ofbarrel in Turkey’s February strong – a 5 exportpercent (mom) performance drop from expected January US$65 per barrel in February – a 5 percent (mom) drop from January – ending seven months of gains (Figure to – ending remain seven over 5 months percent of ofgains GDP (Figure . This is 0 0 from 41). 41). Prices rose again in late March amid concerns of sanctions against Iran. This points to sustained pressure 022 22 Prices the 0 past rose again year, in though late March risks amid to concerns global tradeof sanctions largely against due to Iran. energy This points imports, to which sustained account pressure for around 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 on on have the the LiraLira increased given given . moremore 20Growth thethe recent recent in EMDEsdecline decline in foreign inprojected isforeign exchange exchange 15-20 reserve reserve coverage coverage percent (Figure of (Figure total 42)42) and imports. and a a slowdown slowdown Brent in in oil averaged to capital capital inflows. accelerate inflows. further World World thanks Advanced economies Advanced a rebound to economies EMDEs EMDEs ECA among US$65 per barrel in February – a 5 percent (mom) drop ECA SAR SAR EAP EAP LAC LAC SSA SSA MNA MNA commodity Source: WB WB Source: exporters Global Economic Global (Figure EconomicProspects39 and (January Prospects Figure 2018) (January 40). 2018) Recent from January – ending seven months of gains (Figure Figure Figure 41:41: Commodity Commodity pricesprices increasing increasing Figure Figure 42:42: Decline Decline in forex in forex reserve reserve coverage coverage protectionist measures however pose concerns for global 41). 22 Prices rose again in late March amid concerns of 33. 33.US trade. tariffs Turkey’s Turkey’son steel current current (25 percent) account account and in deficit deficitaluminum 2018 in 2018 sanctions is expected is expected against to remain to remain Iran. over This 5 over 5 points percent percentof sustained toGDP of GDP. This pressure . Thisis is CrudeCrude oil oil due (RHS) (RHS) and gasgas natural (LHS) prices impact Gross reserves (US$ million, RHS) and largely (10 due percent) largely to toand energy will natural affect energyimports, Turkey. imports, (LHS) which 21 The prices whichaccount overall account for 100 100on Gross around for around15-20 on reserves the 15-20 percent Lira(US$ given percent ofmillion, total of more RHS) imports. total the and Brent recent imports. Brentoil oil averaged decline in foreign averaged coverage coverage (months (months of imports, of imports, LHS)LHS) US$65 the US$65 trade 65.00per barrel per balance 65.00 in barrel mayFebruary in not be–that February a–5a percent 5 percent(mom) significant; (mom) drop indirect from drop 9 January from 9 January exchange – ending – ending reserve seven coverage months seven months (Figure of 42) gains of (Figure gains and (Figure a slowdown 140,000 140,000 41). 22 Prices 41). rose 22 Prices again rose againin late in late impacts through turbulence in financial marketsMarch March amid concerns amid concerns of sanctions of and in sanctions against Iran. against This Iran. points This to points sustained to sustainedpressure pressure 80 80 8 capital inflows. Natural gas index 8 Natural gas index 130,000 on onthe theLira given Lira more given more recent the the recentdecline may exchange in foreign decline in foreign beexchange reserve coverage reserve coverage (Figure (Figure42) 42) andanda slowdown a130,000 slowdown in in Crude oil price flows, protectionism and currency volatility Crude oil price $ million 7 Months $ million capital inflows. 7 capital inflows. Months more 45.00 45.00 severe. 120,000 120,000 60 60 6 6 Figure 41: 41: Figure Commodity prices Commodity increasing prices increasing Figure 42: 42: Decline in forex reserve 110,000 coverage 5 Figure 5 Decline in forex reserve coverage 110,000 Figure 41: Commodity prices increasing 25.00 40 Figure 42: Decline in forex reserve coverage 25.00 40 4 4 100,000 100,000 Crude oil (RHS) Crude and and oil (RHS) natural (LHS) gas gas natural prices (LHS) prices 100 100 Gross reserves Gross (US$ reserves million, (US$ RHS) million, and and RHS) coverage (months coverage of imports, (months LHS) of imports, LHS) 65.00 65.00 Crude Crude oil, oil,Natural BrentBrent Natural ($/bbl) gas gas index ($/bbl) index (2010=100) (2010=100) 9 9 140,000 140,000 Reserves Reserves (months (months of imports) of imports) Gross Gross reserves reserves ($ million) ($ million) 80 80 Natural gas index 8 8 Natural gas index 130,000 130,000 Crude oil price Source: World Bank Commodity Prices Source: Haver WBWB Analytics, Global Economic Monitor Crude oil price Source: World Bank Commodity Prices Source: Haver Analytics, Global Economic Monitor $ million 7 7 $ million Months Months 45.00 45.00 120,000 120,000 60 60 6 6 5 5 110,000 110,000 21 Around 15 percent of total iron and steel exports from Turkey in 2016 were bound for the US (and 2 percent 21 Around of 25.00 15 percent of total iron and steel exports from 25.00 Turkey in 2016 were bound for the US (and 2 percent of 40 40 4 4 100,000 100,000 aluminum aluminum exports). exports). Around Around 4-54-5 percent percent of total of total ironiron andand steel steel imports imports by by USUS thethe comes comes fromfrom Turkey, Turkey, making making it the it the sixth sixth largest largest seller seller of iron of iron andand steel steel to the to the US. US. 22 WB, “Global Economic Monitor” (March 2018) 22 WB, “Global CrudeCrudeEconomic oil, Brent ($/bbl) oil, Brent Monitor” ($/bbl) (March Natural Natural 2018) gas index gas (2010=100) index (2010=100) Reserves (months of imports) Reserves (months of imports) Gross reserves Gross ($ million) reserves ($ million) 18 18 Source: Source: Source: World World World Bank Bank Commodity Bank Commodity Commodity Prices Prices Prices Source: Haver Source: Source: Analytics, Haver Haver WB Analytics, Analytics, Global WB WB Economic Global Global Economic Monitor Economic Monitor Monitor 20 21 Around 15 percent 21 Around of total 15 percent andand ironiron of total steel exports steel from exports Turkey from in 2016 Turkey were in 2016 bound were for for bound the the US US (and 2 percent (and of of 2 percent aluminum 21 aluminum Around 15exports). exports). percent Around of total Around iron and4-5 percent steel4-5 percent exports ofTurkey from total of total iniron 2016and iron steel and were bound imports steel US by (andthe imports for the by US US the 2 percent comes from comes of aluminum Turkey, from exports). making Turkey, Around making 4-5 it the percent ittotal theiron and of sixth largest sixth steel imports seller largest ofcomes seller by the US iron of ironandTurkey, from steel and to the steel making US. toitthe US.largest seller of iron and steel to the US. the sixth 22 22 “Global Economic Monitor” (March WB, WB, 22 WB, “Global “Global Economic Economic 2018) Monitor” (March Monitor” (March 2018) 2018) 18 18 16 34. 34. Tighterglobal Tighter globalliquidity liquidityconditions conditionsin 2018affects in2018 Turkey’saccess affectsTurkey’s accessto toand costof andcost external ofexternal finance, an important lever of growth for the country . Following the US Federal finance, an important lever of growth for the country. Following the US Federal Reserve’s decision to Reserve’s decision to raise raise policy rates by 25 basis points (from 1.5 percent to 1.75 percent) on March 21, and the policy rates by 25 basis points (from 1.5 percent to 1.75 percent) on March 21, and the Chairman’s assessmentChairman’s assessment of theUS ofthe USeconomy, marketsraised economy,markets theprobability raisedthe thatthe probabilitythat thepolicy ratewill policyrate behiked willbe hikedfour timesin fourtimes 2018. in2018. World 23 Past 23Bank Past Group episodes of US monetary tightening were associated with sharp slowdowns, and occasional episodes of US monetary tightening were associated with sharp slowdowns, and occasional reversals, of net reversals, of net portfolio portfolio flows flows toto Turkey Turkey (Figure43), (Figure 43), and and currency currency depreciation depreciation (Figure (Figure 44). 44). STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL – – May May 21, 2018 Figure Figure 21, 43: 43: 2018 External External flows flows vulnerable vulnerable to to monetary monetary Figure Figure 44: 44: Exchange Exchange rate rate developments developments also Figure 43: External flows tightening vulnerable in the to monetary US tigh- Figure 44: Exchange rate closely developments linked alsoalso closely tening in the US tightening in the US linked closely linked Turkey’s Turkey’s US US Fed Fed external rate rate external and and buffers change change ininbuffers portfolio portfolio against against flows flows tightening tightening financial financial US Fed rate conditions conditions increases and have have TL/US$ declined declined US Fed 15000 rate increases and TL/US$ 15000 1.5 movements movements 4.0 Net portfolio flows US$ Mil 1.5 4.0 1.5 Tighter 34. 34.1.5Tighter global global liquidity liquidity conditions conditions in in 20182018 affects affects Turkey’s Turkey’s access access to and to and cost cost of external of external Net portfolio flows US$ Mil 10000 10000 finance, finance, an important an important lever lever of growth of growth for for the the country country . Following . Following the Federal the US US Federal Reserve’s Reserve’s decision decision to raise to raise US Fed rate 1 3.5 policy policy 1 rates rates by by 25 25 basis basis points points (from (from 1.5 1.5 percent percent 5000 to to 1.75 1.75 percent) percent) on on March March 21, 21, and and the the Chairman’s Chairman’s assessment assessment US Fed rate 5000 1 3.5 1 of the of the US US economy, economy, markets markets the the raised raised probability probability 0 the the thatthat policy policy raterate will will be hiked be hiked four four timestimes in 2018. in 2018. 23 Past 23 Past 0 episodes episodes of US 0.5 of US monetary monetary tightening tightening were were associated associated with with 0.5 sharp 0.5 sharp slowdowns, slowdowns, and and occasional occasional reversals, reversals, of3.0 of net 3.0 net 0.5 -5000 portfolio portfolio flowsflows to Turkey to Turkey (Figure (Figure and and 43),43), currency currency depreciation -5000 depreciation (Figure 44).44). (Figure 0 -10000 0 2.5 0 0 2.5 Figure Figure 43: External 43: External flows flows vulnerable vulnerable to -10000 monetary to monetary Figure Figure 44: Exchange 44: Exchange raterate developments alsoalso developments tightening tightening US US in the in the closely closely linked linked Fed rate (%, left axis) Fed rate (%, left axis) Fed rate (%, left axis) Fed rate (%, left axis) US US Fed Sources: Sources: Fed rate Haver Haver rate and and change change Analytics, Analytics, inFederal US US Federal in portfolio portfolio Reserve, Reserve, WBflowsWB Staff flowsStaff estimates estimates US Fed US Fed rate rate increases increases and TL/US$ and TL/US$ Sources: Haver Analytics, US Federal Reserve, WB Staff estimates 1500015000 movements Net portfolio flows US$ Mil 1.5 1.5 movements 4.0 4.0 Net portfolio flows US$ Mil 35. externalbuffers Turkey’sexternal 35. 1.5 Turkey’s 1.5 buffersto withstand towithstand 10000 10000 furtherfinancial further tighteninghave financialtightening havereduced reducedrelative relativeto to Turkey’s prior external episodes of buffers financial against tightening. prior episodes of financial tightening. Compared Compared to 35. 2007 to 2007 Turkey’s (before external onset of buffers the GFC) 1 (before onset of the GFC) and 2012 (before toandwithstand 2012 further (before US Fed rate 3.5 3.5 US Fed rate 5000 5000 of US 1 “Taper 1 Tantrum 1 thatfollowed followedthe announcement theannouncement monetary of USfinancial policynormalization), tightening normalization), have reduced Turkey’s relative external to prior tightening “Taper position Tantrum has financial that deteriorated. conditions External financing have needs remain monetary large (Figure policy 45), whilst external Turkey’s debt stock external has risen position has deteriorated. External financing needs remain large 0 0 episodes of financial tightening. (Figure 45), whilst external debt stock has risenCompared to 2007 declined sharply 0.5 from 0.5 37 percent of GDP sharply from 37 percent of GDP in 2007, to 39 in 2007, to 39 percent percent 0.52012, in 0.5 and to around 53 percent in 2017 (Figure (before onset of the GFC) and in 2012, and to around 53 percent in 2017 (Figure 46). 2012 (before 3.0 3.0 46). “Taper -5000 -5000 Other Other than than South South Africa, Africa, selected selected EMDEs’ EMDEs’ external external financial financial requirements requirements Tantrum and and that followed debt debt are are the lower lower Turkey’s. thanTurkey’s. than announcement of US 34. Tighter global liquidity conditions in 2018 0 2.5 0 affects Turkey’s 0 access to and cost of external -10000-10000 finance, monetary policy normalization), Turkey’s2.5 external 0 Figure Figure 45: 45: Large Large external external financing financing needs needs Figure Figurehas 46: Increased 46: Increased external external debt debt stock stock an important lever of growth for the country. position deteriorated. External financing needs Following the US balance Federal Fed Fed rate Reserve’s rateleft (%, (%, left decision axis) axis) to raise remain large (Figure 45), rateleft Fed(%, Fed rate whilst (%, axis)external left axis) debt stock has Current Current account account balance (% (% ofof GDP) GDP) External debt to GDP (%) policy 6 rates by 25Analytics, basis External debt to GDP (%) to 1.75 risen sharply from 37 percent of GDP in 2007, to 39 6 Sources: Sources: HaverHaver Analytics, US points Federal (from US Federal Reserve, Reserve, WB1.5 percent WB Staff Staff estimates estimates percent)4 on March 21, 2007 2007 and the Chairman’s assessment 50 percent in 2012, 50 and to around 53 percent in 2017 2007 4 2012 2007 of the 35. US economy, 2012 Turkey’s Turkey’s markets external external raised the buffers buffers to probability to withstand withstand that further further (Figure 46). financial Other 2012 South thanhave tightening have Africa, reduced selected EMDEs’ relativeto to 35. 2 2017 2017 40financial tightening 2012 reduced relative the priorprior policy 2 episodes rate will episodes of beofhiked financial financial four tightening. times tightening. in 2018. 23 Compared Compared Past 40 to 2007external to 2007 (before (beforefinancial onset requirements onset of the of the GFC) GFC)and anddebt and 2012 are 2012 lower (before (before than “Taper “Taper episodes 0 0 Tantrum of Tantrum US that that monetary followed followed the tightening the announcement announcement were associated of of US 30US monetary Turkey’s. monetary 30 policypolicy normalization), normalization), Turkey’s Turkey’s external external position position with sharp has has deteriorated. deteriorated. slowdowns, and External External occasional financing financing needs reversals, needs ofremain net remainlarge large 45),45), (Figure (Figure whilstwhilst external external debt debt stock has has stock risenrisen -2 20 sharply sharply -2 from from 37 37 percent percent of of GDP GDP in portfolio flows to Turkey (Figure 43), and currency in 2007, 2007, to 39to 39 percent percent in 20 in 2012, 2012, and and to to aroundaround53 53 percent percent in in 2017 2017 (Figure (Figure 46). 46). OtherOther -4 than depreciation than South South (Figure 44). Africa, Africa, selected selected EMDEs’ EMDEs’ external external financial financial 10 requirements requirements and and debt debt are are lower lowerthan than Turkey’s. Turkey’s. -4 10 -6 Figure 45: Large external financing needs 0 FigureFigure 46: Increased external debt stock -6 Figure 45: Large Argentina Brazil external financing India Indonesia Russia needs South Turkey 0 46: Increased external debt stock Figure Brazil external 45: Large financing needs Argentina Figure 46: Brazil Increased India Indonesia debt Russiastock South AfricaTurkey Argentina India Indonesia Russia South Africa Turkey Argentina Brazil India external Indonesia Russia South AfricaTurkey Africa Current Current Source: IMF account account balance World balance (% of Economic (% of GDP) GDP) Outlook External External Source: debt WB debt to GDP to GDP (%) International (%)Statistics Debt Source: 6 6 IMF World Economic Outlook Source: WB International Debt Statistics 4 2007 2007 50 50 2007 2007 4 2012 2012 2017 2017 2012 2012 2 “Global Economic Monitor (Monthly)” (March 2018) 23 WB, 40 40 23 2 WB, “Global Economic Monitor (Monthly)” (March 2018) 0 0 30 30 19 19 -2 -2 20 20 -4 -4 10 10 -6 -6 0 0 Brazil Brazil Argentina Argentina India India RussiaRussia Indonesia Indonesia SouthSouth Turkey Turkey Argentina Brazil Brazil Argentina India India RussiaRussia Indonesia Indonesia SouthSouth AfricaTurkey AfricaTurkey AfricaAfrica Source: Source: Source: IMF IMF IMF World World World Economic Economic Economic Outlook Outlook Outlook Source: Source: WB Source: WBWB International International International Debt Debt Debt Statistics Statistics Statistics 23 WB, “Global Economic Monitor (Monthly)” (March 2018) 23 WB, “Global Economic Monitor (Monthly)” (March 2018) 23 WB, “Global Economic Monitor (Monthly)” (March 2018) 17 19 19 no no are are immediate immediate concerns over concerns external over liquidity external – the liquidity ratio – the of short-term ratio of short-term debt to reserves debt hashas to reserves declined though declined though remains remains belowbelow100 percent 100 (Figure percent (Figure47). In terms 47). In termsof solvency, of solvency,total external total debt external is projected debt to increase is projected to 56.3 to increase to 56.3 percent percentby by 2021, which 2021, does which pose notnot does significant pose sustainability significant sustainabilityrisks. But risks. external But externalshocks cancan shocks quickly change quickly change this TEM, scenario: this May scenario: (i) A (i) steeper 2018: Minding Athe riserise in steeper External Gapenergy in energyprices could prices push could external thethe push externaldebt ratio debt to 59.4 ratio percent to 59.4 percentof GDP of GDPin in 2021; (ii) (ii) 2021; a permanent a permanent 30 percent 30 percent depreciation realreal depreciation shock could shock increase could external increase debt external to GDP debt to GDP to 86.8 percent to 86.8 percent in 2021. in 2021.This puts This external puts debt external sustainability debt sustainabilityat risk (Figure at risk 48). (Figure 48). Figure Short-term 47: 47: Figure debt Short-term vulnerability debt low vulnerability low Figure 48: 48: Figure Increased debt Increased sustainability debt concerns sustainability concerns Figure 47: Short-term debt vulnerability low Figure 48: Increased debt sustainability concerns Short-term debt Short-term (%total (% of debt reserves) of total reserves) Baseline Baseline i-rate i-rate Growth Growth 125 125 CA CA 30 % 30baseline % baseline Combined Combined 2007 2012 2007 2016 2012 2016 100 100 105 105 90 90 85 85 80 80 Percent of GDP Percent of GDP 65 65 70 70 45 45 60 60 25 25 50 50 5 5 Argentina Brazil Argentina Indonesia Brazil IndiaIndiaRussia Indonesia Turkey Russia South Turkey South 40 40 Africa Africa 2014 2015 2014 2016 2015 2017 2016 2018 2017 2019 2018 2020 2019 2021 2020 2021 Source: Source: Source: WB WB International WB International International Debt DebtStatistics Debt Statistics Statistics Source: WB Source: Source: Staff WB WB estimates Staff Staff estimates estimates Pressures corporates onon Pressures and corporates macro-financial and risks macro-financial have risks risen have risen 36. Whilst Turkey’s total external debt trajectory Pressures on corporates and macro- 37. 37. sustainable, remains vulnerability to adverse shocks A large A large portion portion of of Turkey’s Turkey’s external external financing financingfinancial needs needs risks belongs belongs have to risen which corporates, to corporates, which have havea a has increased sizeable sizeable and andwith rising the rising recent netnetopen open rise foreign in foreign external exchange exchange debt . positions positions . Almost . Almost half of the half total of the external total debt external debtincrease increase Despite stemmed the stemmed drop fromfrom international in the the corporate corporate debtreserves, debtin 2017 there in 2017 are no (Figure (Figure 49). 37. The 49). The Anet net large FXFX portion openopen of Turkey’s position position of of external corporates corporates financing reached reached immediate US$221.5 US$221.5 concerns billion billion over dollars inexternal dollars January in January liquidity 2018 2018 – the (Figure 50). (Figure ratio The 50). share The needs shareof FXbelongs corporate of FX to corporate corporates, loans loanswith with which maturities have maturitiesof 5 a of 5sizeable years years and of longer and longer short-term make make debt upto more up more than reserves thanhalf has of half the declined total of the FXFX total though loans and loansof therising of thebanking net banking open sector. sector.foreign In In an an exchange adverse adversescenario positions scenario of of . significant significant remains tightening below tightening 100 percentof ofglobal globalliquidity, 47).and (Figure liquidity, Inandpersistentof lira persistent terms Almost half of the depreciation lira depreciation total external corporate corporate balance debt balance increase sheets sheetswould stemmed would be be strained. strained.Although Although banksbanksare not are allowed not solvency, total external debt is projected to increase to allowed to hold to net hold open net openfrom currency the currency corporate positions, positions, debt defaults in defaults 2017 in the in (Figure corporate the corporate 49). The sector sector net could couldalso have also havean adverse an adverse impact impact on the on banking the bankingsector sector FX through open through position credit risk credit of channels. risk corporates channels. reached US$221.5 56.3 percent by 2021, which does not pose significant billion dollars in January 2018 (Figure 50). The share sustainability risks. But external shocks can quickly 38. 38. CorporateCorporate vulnerability vulnerability of companies of companies listed listedonof the on FX corporate stock the exchange stock loans exchange inwith Turkey maturities in Turkey has of 5 years increased has increased in in and change this scenario: (i) A steeper rise in energy prices longer make up more than half of24the 2017. A recently 2017. A recently developed developed Corporate Corporate Vulnerability Vulnerability Index Index(CVI (CVI– see – seeBox Box3 for methodology) 3 for methodology) total FX suggests 24 suggests that loans that could pushvulnerability corporate corporate the external vulnerability in debt most in most ratio EMDEsEMDEsto has 59.4 percent risen has since risen 2013 since of2013 (Figure the (Figure52). banking The 52). increase The sector. In has increase anhasbeen particularly been adverse particularly scenario of of GDP sharp forfor sharp in 2021; Turkey. Turkey. The(ii)debt The a permanent in firms debt in firms that 30 are are that percent financiallyreal financiallyvulnerable vulnerable significantin 2inor2 more or more tightening indicators indicators of global increased increasedsignificantly liquidity, significantly and persistent depreciation fromfrom14 percent shock 14 percent to 37 could to percent increase 37 percent of total external reported of total debt debt reported of debt tolisted Turkish of listed lira Turkishfirms depreciation between firms between corporate2015 2015and 2017Q3 and balance 2017Q3 25 (Figure sheets (Figurebe 25would GDP 53). to Firms’ Firms’ 53). 86.8 percent vulnerability in is vulnerability 2021. mostly This is mostly puts driven driven external by high by high debt levels of leverage levels of leverage strained. ratios (Figure ratios Although (Figure54), banks deterioration 54), are deterioration not allowed of interest to interest of hold net coverage coverage sustainability ratio STRICTLY at (i.e., ratiorisk more (i.e., more (Figure firms CONFIDENTIAL firms 48). with ICR with ICR< 1) < (Figure 1) (Figure 55). As 55). open a As result, a currency rollover result, rollover risk positions, is risk increasingly is defaults increasingly in the becoming becoming corporate a a sector STRICTLY CONFIDENTIAL – – problem problem as debt as debtat risk at (DaR) risk (DaR) for Quick for Quick Ratio and Ratio Current and Current Liabilities could Liabilities also to have Long-term to an Long-term adverse liabilities impactliabilities onare therising are banking from rising from sector May May21, 201821, 2018 low levels low (Figure levels (Figure 56). These 56). These challenges challenges have been have compounded been compounded through by credit an by overall risk decline an overall decline channels. in earnings in earnings(Figure (Figure 57). 57). Figure Figure Figure 49: 49:Open Net Open 49: Net Net Open FX FX FX Position Position Position ofof of Corporates Corporates Corporates Figure incre- Figure 50:50: Figure 50: Contribution Contribution to to Contribution to Increase Increase in Increase in External External in External Debt increasing increasing Debt Debt in in 2017 2017 comes comes mostly mostly from from corporates corporates asing in 2017 comes mostly from corporates 24 Feyen, 24 Feyen, N. Fiess, E., E., I.Z.I.Z. N. Fiess, Huertas, L. Lambert, Huertas, “Which L. Lambert, “WhichEmerging Markets Emerging Developing andand Markets Economies Developing Face Economies Corporate Face Corporate 350 Balance 350 Sheet Vulnerabilities? A Novel Monitoring Framework,” Balance Sheet Vulnerabilities? A Novel Monitoring 25 World Framework,” Bank 25World Group Bank Policy Group Research Policy Working Research Paper Working Paper 81988198 250 250 20.9 20.9 25 The sample 25 The covers sample 274274 covers listed non-financial listed Turkish non-financial firms. Turkish firms. 20 20 150 150 20 20 16.3 16.3 50 50 15 15 -50 -50 10 10 8.0 8.0 -150 -150 5 5 -250 -250 0 0 General General Banks Banks Non-Financial Non-Financial Net Net FX FX Position Position Assets Assets Liabilities Liabilities Government Government Corporations Corporations Sources: Sources: CBRT, Sources: CBRT, CBRT, Treasury. Treasury. Treasury. 18 Box Box 3: 3: Corporate Corporate Vulnerability Vulnerability IndexIndex The The Corporate Corporate Vulnerability Vulnerability IndexIndex (CVI)(CVI) is calculated is calculated to track to track financial financial conditions conditions of non- of non- financial financial corporate corporate sector sector in EMDEs in EMDEs by using by using balance-sheet balance-sheet information information of listed of listed nonfinancial nonfinancial firmsfirms et al. et (Feyen (Feyen al. 2017). 2017). BasedBased on corporates’ on corporates’ balance-sheet balance-sheet information, information, the CVI the CVI measures measures four four key key 10 8.0 -150 5 -250 World Bank Group 0 General Banks Non-Financial Net FX Position Assets Liabilities Government Corporations Sources: CBRT, Treasury. Box 3: Corporate Vulnerability Box 4: Index Corporate Vulnerability Index The The Corporate Corporate Vulnerability Vulnerability IndexIndex (CVI) is(CVI) is calculated calculated to track to track financial financial conditions conditions of non-financial of non- corporate financial sector corporate in EMDEs sector by using in EMDEs balance-sheet by using balance-sheet information information of listed nonfinancial of listed firms (Feyen et al.nonfinancial 2017). Based firms on (Feyen balance-sheet corporates’ et al. 2017). information, Based on corporates’ balance-sheet the CVI measures four key information, the CVI aspects of financial measuresthat vulnerability four key have aspects of financial vulnerability that have been identified by the literature as leading indicators of been identified by the literature as leading indicators of corporate financial distress: (i) Debt Service Capacity; (ii) corporate Leverage financial (iii) distress: Rollover Risk; (i) Profitability/Market and (iv) value. (ii) Leverage (iii) Rollover Risk; and (iv) Debt Service Capacity; Profitability/Market value. These four aspects of corporate vulnerability are measured using seven indicators for which data are readily These and four aspects sufficiently of corporate available vulnerability across a broad range of are measured EMDEs usingCoverage : (i) Interest seven indicators for(ii) Ratio (ICR); which data Leverage are readily and sufficiently available across a broad range of EMDEs : (i) Interest Coverage Ratio; (iii) Net Debt to EBIT (Earnings before Interest and Tax) Ratio; (iv) Current Liabilities to Long-term Ratio Leverage (ICR); (ii)Ratio; Liabilities Ratio; (v) Quick (vi) Debt (iii) Net Ratio; Returnto EBIT on (Earnings Assets (ROA); andbefore Interest (vii) Market toand BookTax) Ratio; Ratio (iv) 51). Current (Figure Liabilities to Long-term Liabilities Ratio; (v) Quick Ratio; (vi) Return on Assets (ROA); and (vii) Market to Book Ratio (Figure 51). Figure 51: Figure Structureof Structure 51: ofCorporate Vulnerability Corporate Vulnerability Index Index Corporate Vulnerability Index Profitability/ Market Debt service capacity Leverage Rollover value Interest coverage ratio Current liabilities to LT (ICR)= Leverage = liabilities = Return on Assets (ROA)= Earnings Before Interest Total Debt/ Liabilities maturity <=1 Net Income and Taxes (EBIT)/ Total Assets year Total Assets Firm’s Interest Expense Liabilities maturity > 1 year Net Debt to EBIT = Quick Ratio = Market to Book Ratio = Total Debt – Cash and Current assets – Cash Equivalents Inventories Market value of Firm EBIT Current liabilities Book value of Firm The CVI is based on the concept of “Debt at Risk” (DaR), the total amount of outstanding debt in a country (or industry) associated with firms that are deemed financially vulnerable. DaR is Thedefined as the CVI is based share on of corporate the concept of “Debtdebt in a country at Risk” (DaR), thethat is considered total vulnerable debt amount of outstanding according to in a country industry) Y (orindicator at time with associated t and country firms c where that are deemed denotes one Y financially of seven vulnerable. DaR is defined For indicators. each as the of share ofthe corpo- indicators, rate firms are debt in a country thatclassified as financially is considered vulnerable vulnerable according toif an indicator indicator breaches Y at time an industry-specific t and country c where Y denotes onethreshold (Table at time tFor of seven indicators. each1). of the indicators, firms are classified as financially vulnerable if an indicator breaches an industry-specific threshold at time t (Table 1). 21 Total debt firms financially vulnerable in indicator Y, country c time t (DaRY ) = Total debt of all firms, in country c and time t  1 is used as a threshold for ICR, since firms with profits less than interest expenses are immediately highly vul-  1 is used as a threshold for ICR, since firms with profits less than interest expenses are nerable. immediately highly vulnerable.   ForFor Leverage Leverage Ratio, Ratio, Net DebtNet DebtRatio, to EBIT to EBIT and Ratio, to and Current to Long-Term CurrentLiabilities, Long-Term Liabilities, the vulnerability the thresholds to the thresholds vulnerability correspond correspond 90th percentile the 90th indicators to respective value of the percentile value for of the all firms respective the same indicators within industry and forcountries. across all firms within the same industry and across countries.   ForFor Quick Quick Ratio, Ratio, Return Return on Assets, on Assets, and Market and Market to Book to Book Ratio, theRatio, the thresholds respective respective thresholds are equal to theare 10th equal to percentile the value of10th percentile the indicator value of the indicator by industry. by industry. Table 1: Thresholds to classify a firm as financially vulnerable 19 Indicator “At risk” Thresholds Interest Coverage Ratio <1 (profits less than interest expenses) Leverage >90th percentile value of all firms within the same industry, Net Debt/EBIT for the whole sample 2006Q4-2017Q3. One number per  1 is used as a threshold for ICR, since firms with profits less than interest expenses are  1 a threshold is used as highly immediately for ICR, since firms with profits less than interest expenses are vulnerable. Leveragehighly immediately  For Ratio,vulnerable. Net Debt to EBIT Ratio, and Current to Long-Term Liabilities, the TEM, May For  2018: Leverage Minding Ratio, the External vulnerability thresholds Net Gap Debt to EBIT correspond Ratio, to the and Current 90th percentile to of value Long-Term Liabilities, the respective the indicators vulnerability thresholds correspond to the 90th percentile for all firms within the same industry and across countries. value of the respective indicators for all  For firms Quick within Ratio, the same Return industry on Assets, and and across Market countries. to Book Ratio, the respective thresholds are equal to the 10th percentile value of the indicator Book  For Quick Ratio, Return on Assets, and Market to Ratio, the respective thresholds are by industry. equal to the 10th percentile value of the indicator by industry. Table 1: Thresholds to 1: a classify Table firm as financially Thresholds vulnerable to classify a firm as financially vulnerable Table 1: Thresholds to classify a firm as financially vulnerable Indicator Indicator “At risk” Thresholds “At risk” Thresholds Indicator Interest Coverage Ratio risk” Thresholds “At(profits <1 less than interest expenses) • Interest Interest Coverage Coverage Ratio Ratio <1 (profits <1 (profits less than less than interest interest expenses)expenses) Leverage >90 percentile th value of all firms within the same industry, • Leverage Leverage >90 th >90 percentile th percentile value of value 2006Q4-2017Q3 all firms of all firms within within the same the same industry, industry, Net Debt/EBIT for the whole sample . One number per • Debt/EBIT Net Net Debt/EBIT Current Liabilities / Long-term Liabilities for for the the whole sample 2006Q4-2017Q3. One number per per industry whole sample 2006Q4-2017Q3 . One number industry Current Liabilities • Current Quick Ratio / Long-term Liabilities / Long-termLiabilities Liabilities industry <10th percentile value of all firms within the same industry, Quick Return Ratio on Ratio • Quick Assets (ROA) <10the for th percentile whole <10th sample all firms ofvalue value 2006Q4-2017Q3 percentile of allwithin firms . the same One within number industry, the same per industry, Return on Assets Market-to-Book Ratio • Return on Assets(ROA) (ROA) for the industry whole for sample the whole 2006Q4-2017Q3 sample 2006Q4-2017Q3. One number . One per per number Market-to-Book Ratio industry industry • Market-to-Book Ratio DaRY is extended to multiple indicators to measure the “intensity” of debt at risk. The underlying DaR DaR assumption Y is extended Y is extended toto is that multiple multiple debt indicators that indicators to measure to measure is associated with the “intensity” the firms that of “intensity” debt are risk. at atdebt of risk. The contemporaneously The underlying underlying assumption is vulnerable assumption that debt that is is that debt associated that with is firms associated that are with firms contemporaneously that are contemporaneously vulnerable according according to multiple indicators is more risky. It provides a stronger signal-to-noise ratio. In to vulnerable multiple this is indicators according more risky. regard, DaR Itto multiple indicators is more risky. It provides a stronger provides a stronger signal-to-noise ratio. In this regard, ≥X, which captures the proportion of total corporate debt DaR ≥X , signal-to-noise which captures the in a country that ratio. In this proportion is held of total by corporate regard, debt DaR in a country ≥X,vulnerable that which captures is held by firms the proportion that are vulnerable ofindicators total corporateaccording to X or more is held by same indicators at the firms that are according to X or more samein at the debt a country time, where that X ∈ [0,7]: time, firms that X where are [0,7]: ∈ vulnerable according to X or more indicators at the same time, where X ∈ [0,7]: Total debt firms financially vulnerable according to X or more indicators, country c time t (DaR≥X ) = Total debt firms financially vulnerable according to X or more indicators, country c time t (DaR≥X ) = Total debt of all firms, in country c and time t Total debt of all firms, in country c and time t Finally, CVI is calculated as the average of DaR≥X for country c and time t: Finally, Finally, CVIis CVI iscalculated calculatedas asthe average the average DaR of of DaR ≥X for country c and time t: ≥X for country c and time t: 7 1 7 CVIct = 1 � (DaR≥X ) CVIct = 7 =1 � (DaR≥X ) 7 =1 where 0 ≤ CVIct ≤ 1. where 0 ≤ CVIct ≤ 1. where The 0 ≤ CVI Corporate ct ≤ 1. Vulnerability Index (CVI) shows how vulnerable are firms across 7 financial indicators. The index Thefrom goes Corporate 0 to 1, where Vulnerability 0 represents Index (CVI) that firms shows are how vulnerable not vulnerable are firms in any indicator, across 7 that and 1 represents financial all firms are The Corporate indicators. vulnerable in all The Vulnerability index goes from 7 indicators. 0 to(CVI) Index shows 1, where how vulnerable 0 represents are are that firms firms notacross 7 financial vulnerable in any indicators. indicator, and The 1 index goes that represents fromall where to 1, are 0 firms 0 represents vulnerable that in all 7 firms are not vulnerable in any indicators. indicator, and 1 represents that all firms are vulnerable in all 7 indicators. 38. Corporate vulnerability of companies listed on firms between 2015 and 2017Q325 (Figure 53). Firms’ the stock exchange in Turkey has increased in 2017. A vulnerability is mostly driven by high levels of leverage recently developed Corporate Vulnerability Index (CVI ratios (Figure 54), deterioration of interest coverage ratio – see Box 4 for methodology)24 suggests that corporate (i.e., more firms with ICR < 1) (Figure 55). As a result, vulnerability in most EMDEs has risen since 2013 (Figure rollover risk is increasingly becoming a problem as debt at 52). The increase has been particularly sharp for Turkey. risk (DaR) for Quick Ratio and Current Liabilities to Long- The debt in firms that are financially vulnerable in 2 or term liabilities are rising from low levels (Figure 56). These more indicators increased significantly from 14 percent challenges have been compounded by an overall decline in to 37 percent of total reported debt of listed Turkish earnings (Figure 57). 24 Feyen, E., N. Fiess, I.Z. Huertas, L. Lambert, “Which Emerging Markets and Developing Economies Face Corporate Balance Sheet Vulnerabilities? A Novel Monitoring Framework,” World Bank Group Policy Research Working Paper 8198 25 The sample covers 274 listed non-financial Turkish firms. 20 STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL – – MayMay 2018 21,21, 2018 World Bank Group STRICTLY STRICTLY CONFIDENTIAL CONFIDENTIAL – – May May 2018 21,21, 2018 STRICTLY STRICTLY Figure CONFIDENTIAL 52: FigureCONFIDENTIAL CVI 52: in Turkey CVI – – deteriorates deteriorates in Turkey Figure Figure 53:53: Firms with Firms DAR with DAR>2>more than 2 more than May May 21,21, 2018 2018 Figure 52: CVI in Turkey deteriorates doubles doubles Figure 53: Firms with DAR > 2 more than doubles Figure CVI 52:52: Figure Turkey in in CVI deteriorates Turkey deteriorates Figure Figure Firms 53:53: with Firms DAR with >2 DAR >more than 2 more than Corporate Vulnerability Corporate Indices Vulnerability 2006-2017 Indices 2006-2017 Q3 Debt at Risk ratio > 2 Debt at Risk ratio > 2doubles doubles Figure 0.220.22 Figure 52: 52: CVI Q3 CVI Q3 in in Turkey Turkey deteriorates deteriorates Figure Figure 53:53: Firms Firms with with DAR DAR >more >2 2 more than than 50 50 Corporate Vulnerability Corporate Indices Vulnerability 2006-2017 Indices 2006-2017 Debt at Risk Debt ratio at Risk >2 ratio doubles > 2doubles 0.22 0.22 Q3Q3 40 40 50 50 0.12 Corporate 0.12 Corporate Vulnerability Vulnerability Indices Indices 2006-2017 2006-2017 Debt Debt at Risk at Risk ratio ratio >2 >2 30 30 0.220.22 Q3Q3 40 40 0.12 50 50 0.12 20 20 30 30 0.020.02 40 40 10 10 0.120.12 20 20 0.02 30 30 0.02 0 Brazil Brazil India India Indonesia Indonesia 10 100 20 20 South Africa South Africa Turkey Turkey 0.02 0.02 0 0 Brazil Brazil India India Indonesia Indonesia 10 10 South Africa South Africa Turkey Turkey Figure 54:54: Sharp rise in leverage ratios 0 0 Figure Deterioration 55:55: in debt service capacity Figure Brazil Brazil Sharp rise India in leverage India ratios Indonesia Indonesia Figure Deterioration in debt service capacity South South Africa Africa Turkey Turkey Figure 54:54: Figure Leverage Leverage Sharp Sharprise in in rise leverage ratios leverage ratios Figure Figure Debt Deterioration 55:55: service Deterioration capacity in in debt service debt capacity service capacity Figure 54: Sharp rise in leverage ratios Debt Figure service 55: capacity Deterioration in debt service capacity 40 40 40 40 Figure Leverage Figure Leverage 54:54: Sharp Sharp rise rise in in leverage leverage ratios ratios Figure Figure Debt 55: 55: service Debt Deterioration Deterioration capacity service capacity in in debt debt service service capacity capacity 30 40 40 30 30 40 40 30 Leverage Leverage Debt Debt service service capacity capacity 20 30 30 20 40 40 20 30 30 20 40 40 10 20 20 10 30 30 10 20 20 10 30 30 100 100 20 20 100 100 20 20 0 0 10 10 0 0 Leverage Leverage Debt NetNet to EBIT Debt to EBIT 10 10 ICRICR 0 0 Leverage Leverage Debt NetNet to EBIT Debt to EBIT 0 0 ICRICR Figure Rollover 56:56: Figure risk Rollover becoming risk a problem becoming a problem Figure 57:57: Figure Compounded by by Compounded falling earnings falling earnings Leverage Leverage Net Net Debt Debt to EBIT to EBIT ICR ICR Figure Rollover 56:56: Figure risk Rollover becoming risk a problem becoming a problem Figure 57:57: Figure Compounded byby Compounded falling earnings falling earnings Rollover Rollover Profitability/Market value Profitability/Market value 3 12 12 3 Figure Figure Rollover Rollover 56: 56: Rollover Rollover risk risk becoming becoming a problem a problem Figure Figure 57: 57: Compounded value by by Compounded Profitability/Market value Profitability/Market by falling falling earnings earnings Figure 56: Rollover risk becoming a problem Figure 57: Compounded falling earnings 32 3 12 12 2 8 8 Rollover Rollover Profitability/Market Profitability/Market value value 3 23 21 8 12 12 8 1 4 4 2 12 10 48 48 0 0 0 01 01 04 04 Curr/Lg Liabilities Curr/Lg Liabilities Quick Ratio Quick Ratio ROA ROA Market to Book Market to Book 0 0 Bloomberg, Sources: Sources: WBWB Bloomberg, Staff estimates Staff estimates 0 0 Curr/Lg Liabilities Curr/Lg Liabilities Quick Ratio Quick Ratio ROA ROA Market to Book Market to Book Sources: Bloomberg, Sources: Staff WBWB Bloomberg, estimates Staff estimates Curr/Lg Curr/Lg Liabilities Liabilities Quick Quick Ratio Ratio ROA ROA Market Market to Book to Book Sources: Sources: Sources: Bloomberg, Bloomberg, Bloomberg, WB WB WB Staff Staff Staff estimates estimates estimates 23 23 23 23 21 23 23 TEM, May 2018: Minding the External Gap Policy space to respond to tighter external financial conditions26 39. Fiscal policy space needed to react quickly to 41. The possibility for monetary policy to respond adverse external developments remains relatively strong to adverse external developments is more challenging. in Turkey. As noted above, countercyclical fiscal policy has This is because the positive deviation of inflation from its helped maintain fiscal discipline (Figure 58), and protect target is already high in Turkey (Figure 60),28 whilst the fiscal buffers (Figure 59). Solid fiscal positions in other Central Bank’s average cost of funding is already at 13.5 EMDEs prior to the GFC, enabled them to implement percent and positive in real terms (Figure 61). Therefore, strong stimulus programs. This more recently has led to if a tightening of external liquidity conditions leads to a deterioration in fiscal positions, exacerbated for some slower growth, the possibility of a monetary stimulus will by declining commodity prices. In Turkey, a broader set be challenging given high inflation. of fiscal space indicators (Table 2)27 confirms that the 42. In Turkey, this challenge is exacerbated by a government is in a strong position to finance its long-term need to cool credit expansion. The credit-to-GDP gap commitments (Table 2: Government debt sustainability in Turkey has been high in recent years, meaning that indicators), and that the composition of public debt does credit growth has been above its long-term trend pointing not unduly expose the authorities to a sudden change to potential erosion of countercyclical buffers (Figure in financial market conditions (Table 2: Balance sheet 62).29 Further evidence of excessive credit expansion composition). (credit boom) is evident when computing the threshold 40. Tightening global financial conditions together for credit growth that determines whether the observed with elevated levels of external and private sector growth in credit can be associated with a boom or a bust debt have the potential to rapidly erode fiscal space. (Figure 63).30 If international financial tightening exposes Turkey’s dependence on external finance remains high financial (and real sector) fragilities as discussed above, relative to other EMDEs, with some exceptions (Table 2: then high inflation constrains the ability to reduce interest External and Private Sector Debt). Therefore, if downside rates and/or expand credit to boost demand. risks associated with the banking sector, non-financial 43. These developments point to heightened corporates, and Public Private Partnerships – all of which macro-financial risks. The banking sector is stable with are exposed to currency risks – materialize, this may capital adequacy and NPL at 17 percent and 3 percent create contingent liabilities for the government. This may respectively but total troubled assets, which includes explain partly why, despite strong fiscal buffers, market restructured and written-off loans, are almost three times perceptions of risk towards Turkey remain relatively high higher than NPL levels. A combination of these factors (Table 2: Market Perception). together with high corporate hard-currency indebtedness, external financing constraints, and a slowing economy point to a deterioration in banking sector asset quality and heightened macro-financial risks. 26 Parts of this section draws on the approach in Rojas-Suarez, L., 2015. “Emerging Market Macroeconomic Resilience to External Shocks: Today versus Pre–Global Crisis”, Center for Global Development 27 The data in this section is taken from: Kose, M. Ayhan, Sergio Kurlat, Franziska Ohnsorge, and Naotaka Sugawara (2017). “A Cross-Country Database of Fiscal Space.” Pol- icy Research Working Paper 8157, World Bank, Washington, DC. Not all countries’ data for 2017 has been updated, therefore 2016 data is used to illustrate developments compared to 2007 (prior to GFC onset) and 2012 (prior to “Taper Tantrum” and collapse in commodity prices in 2014. 28 Rojas-Suarez, L., 2015: “Deviation of inflation from its announced target captures the constraints imposed on the implementation of countercyclical monetary policy when the economy is facing inflationary or deflationary pressures at the time of the shock.” 29 Bank for International Settlements: “The credit-to-GDP gap is defined as the difference between the credit-to-GDP ratio and its long run trend. The credit-to-GDP ratio as published in the BIS database of total credit to the private non-financial sector, capturing total borrowing from all domestic and foreign sources, is used as input data…The gap indicator was adopted as a common reference point under Basel III to guide the build-up of countercyclical capital buffers.” 30 Rojas-Suarez, Rojas-Suarez, L., 2015: L., 2015: where is the threshold = (∆ for credit −boom and ∆ ) ∗ (the − ∆ for)credit threshold ∆ ∆ where bust. The is the threshold thresholds for credit boom are determined and ∆ by using the Ho- the threshold for credit drick-Presscot (HP)bust. filter The tothresholds calculate are the determined cyclical component by using the of credit Hodrick-Presscot growth, then (HP) multiplyingfilter to calculate the standard the cyclical component deviation for theof credit growth, period then sample by 1.5 and multiplying standard the the -1.5 to obtain boomdeviation and bust for thresholds the sample period by 1.5 and -1.5 to obtain the boom and bust thresholds respectively. respectively. 22 Table 2: Cross-country indicators of fiscal space Argentina Brazil India Indonesia Russian Federation South Africa Turkey 2007 2012 2016 2007 2012 2016 2007 2012 2016 2007 2012 2016 2007 2012 2016 2007 2012 2016 2007 2012 2016 Government debt sustainability General government gross debt, % of GDP 61.0 38.9 54.2 63.7 62.2 78.3 74.0 69.1 69.6 32.3 23.0 27.9 8.0 11.5 15.6 27.1 41.0 51.7 38.3 32.7 28.1 Primary balance, % of GDP 1.7 -1.7 -4.8 3.2 1.9 -2.5 0.3 -3.2 -1.8 0.9 -0.4 -1.0 5.6 0.7 -3.1 3.7 -1.7 -0.6 2.7 0.7 -0.9 Cyclically-adjusted balance, % of potential GDP -2.0 -3.8 -4.2 -3.2 -3.8 -7.4 -5.2 -7.3 -6.3 -1.1 -1.7 -2.4 3.0 -0.5 -2.8 0.2 -4.6 -3.7 -3.1 -1.7 -2.8 Fiscal balance, % of GDP -0.1 -3.0 -5.8 -2.7 -2.5 -9.0 -4.5 -7.6 -6.6 -0.9 -1.6 -2.5 5.6 0.4 -3.7 1.3 -4.4 -4.0 -1.9 -1.8 -2.3 General government gross debt, % of average tax revenues 288.6 184.3 256.7 231.7 226.0 284.6 490.4 457.9 460.9 286.2 203.2 246.6 30.7 44.2 59.9 104.5 158.3 199.6 212.1 181.1 155.9 Fiscal balance, % of average tax revenues -0.5 -14.4 -27.5 -9.9 -9.2 -32.8 -29.8 -50.0 -43.5 -8.4 -14.0 -22.0 21.3 1.5 -14.0 4.9 -17.0 -15.4 -10.8 -10.1 -12.8 Balance sheet composition Debt securities held by nonresidents, % of total 0.2 0.1 0.4 0.7 0.1 0.1 1.0 1.1 0.8 General government debt held by nonresidents, % of total 42.0 30.8 37.7 10.1 13.9 14.4 5.9 6.4 5.7 53.2 58.1 60.0 29.7 20.2 17.9 20.5 34.4 36.0 29.5 41.2 41.8 Concessional external debt stocks, % of general government gross debt 1.0 1.5 1.2 0.3 0.8 0.7 4.9 4.0 2.9 25.2 19.2 10.0 3.2 0.8 0.7 0.0 0.0 0.0 2.3 4.0 4.8 Sovereign debt average maturity, years 24.6 18.1 13.3 15.8 13.9 10.7 4.7 4.5 16.4 12.3 14.1 10.4 7.9 6.9 6.3 9.0 8.7 13.3 11.9 12.3 Central government debt maturing in 12 months or less, % of GDP 2.7 12.9 5.0 7.4 3.9 8.7 0.9 3.0 0.7 1.3 5.4 8.1 9.2 2.3 External and private sector debt Total external debt stocks, % of GDP 43.2 25.0 33.3 17.3 17.9 37.6 16.7 21.6 20.1 30.1 27.5 34.1 33.3 28.8 40.1 25.8 35.9 48.4 37.0 38.9 46.8 External debt in foreign currency, % of total 89.7 93.8 92.3 74.5 83.3 78.0 68.8 72.1 78.5 60.4 42.9 49.5 94.5 93.2 94.1 Private external debt stocks, % of GDP 18.5 12.1 10.9 12.5 15.1 26.6 12.2 17.1 16.2 12.9 13.7 17.1 30.4 25.6 36.1 19.3 21.8 29.4 24.5 28.3 36.8 Domestic credit to private sector, % of GDP 13.1 15.2 14.0 51.5 69.0 66.2 44.8 51.9 49.8 23.1 29.9 33.1 35.2 43.9 78.3 68.6 66.9 28.2 49.1 65.7 Short-term external debt stocks, % of total 22.2 26.1 20.0 16.1 7.4 8.3 18.9 23.7 18.4 13.2 17.5 12.8 21.1 12.8 8.8 31.2 19.6 20.9 17.3 29.5 24.2 Short-term external debt stocks, % of reserves 59.8 87.4 94.3 21.6 8.7 15.4 14.1 31.1 23.2 32.8 39.2 34.9 20.4 15.2 12.0 73.0 55.0 63.1 56.4 83.9 92.4 Total external debt stocks, % of reserves 269.8 335.5 471.6 133.7 118.1 185.4 74.6 131.2 126.1 248.6 223.7 273.1 97.0 118.3 136.4 234.3 280.8 302.7 326.7 284.9 381.8 Total external debt stocks, % of reserves excluding gold 278.6 363.2 498.8 134.3 119.2 186.7 77.3 145.6 133.7 257.5 231.9 280.0 99.5 130.8 161.9 260.7 323.5 335.6 340.6 339.8 439.4 Market perception 5-year sovereign CDS spreads, basis points 315.0 1228.6 5244.0 89.1 129.8 325.1 136.0 166.4 180.2 61.9 183.1 244.4 46.1 159.4 274.0 169.3 204.7 260.0 Foreign currency long-term sovereign debt ratings, index from 1-21 5.0 6.4 5.0 10.5 13.0 10.3 12.0 12.0 12.0 8.7 11.7 11.7 13.7 13.3 11.3 14.0 14.2 12.3 9.0 10.6 11.4 Sources: The full database can be downloaded from: http://www.worldbank.org/en/research/brief/fiscal-space. The database is compiled from a range of sources including: World Development Indicators (WB); Interna- tional Debt Statistics (WB); Quarterly External Debt Statistics (WB); Quarterly Public Sector Debt (WB); World Economic Outlook (IMF); International Finance Statistics (IMF); World Revenue Longitudinal Dataset (IMF); Government Finance Statistics (IMF); Joint External Data Hub (WB, BIS, IMF, OECD); and databases provided by BIS, OECD, Bloomberg, J.P. Morgan, and Arslanap and Tsuda. 31,32 31 Arslanap, S., and T. Tsuda. 2014a. “Tracking Global Demand for Advanced Economy Sovereign Debt.” IMF Economic Review 62 (3): 430-464 32 Arslanap, S., and T. Tsuda. 2014b. “Tracking Global Demand for Emerging Market Sovereign Debt.” IMF Working Paper 14/39, International Monetary Fund, Washington DC 23 World Bank Group 23 58), and 58), protect and fiscal protect buffers fiscal buffers(Figure 59). (Figure Solid 59). fiscal Solid positions fiscal in other positions in otherEMDEs EMDEs prior to to prior thetheGFC, GFC,enabled enabled them themto implement to implement strong stimulus strong stimulusprograms. programs.This more This recently more hashas recently to a ledled todeterioration a deteriorationin fiscal positions, in fiscal positions, exacerbated exacerbated some forfor some declining by by commodity declining commodity prices. Turkey, In In prices. a broader Turkey, a broader of fiscal setset space of fiscal indicators space (Table indicators (Table 2)27 TEM,2) confirms 27 confirms May that the that 2018: Minding government the the government External Gap is in a strong is in a strongposition finance to to position finance long-term its its long-term commitments commitments (Table 2: 2: (Table Government Government debt sustainability debt indicators), sustainability and indicators), that and thethe that composition composition public of of debt public does debt not does unduly not undulyexpose expose authorities thethe authoritiesto atosudden a suddenchange changein financial market in financial marketconditions (Table conditions (Table2: Balance 2: Balancesheet composition). sheet composition). Figure Figure58:58: Fiscal discipline Fiscal maintained discipline maintained Figure 59:59: Figure Fiscal buffers Fiscal relatively buffers strong relatively strong Figure 58: Fiscal discipline maintained Figure 59: Fiscal buffers relatively strong Government lending/borrowing net net General Government General Net Government Debt Net (% (% of GDP) Debt of GDP) Government lending/borrowing of GDP) (% (% of GDP) 5 50 50 5 2007 2012 2017 20072012 2007 20122017 2017 2007 2012 2017 40 40 STRICTLY STRICTLY –– CONFIDENTIAL CONFIDENTIAL 0 0 May May 21, 21, 2018 2018 30 30 -5 -5 20 20 Figure Figure 60: 60: of of Deviation Deviation inflation inflation from from target target Figure Figure 61: 61: Real Real policy policy rates rates are are positive positive 10 10 -10 -10 Deviation Deviation of of Argentina inflation inflation Brazil Argentina from BrazilIndiafrom India its target target itsIndonesia Indonesia Russia South Russia SouthTurkey Turkey 0 Real Real policy 0policy rates rates (squared) (squared) Africa Africa Brazil Brazil South Africa South Africa Turkey Turkey STRICTLY 35 35 STRICTLY CONFIDENTIAL –CONFIDENTIAL – 6%6% Source: May Source: Source: IMFIMF 21,World IMF World Brazil 2018 Economic Brazil World Economic Outlook Outlook Economic Outlook Source: IMF Source: World IMF Economic World Outlook Economic Outlook May 21, 30 30 2018 Turkey Turkey 25 25 4%4% 40.40. Tightening Tightening global Indonesia Indonesia global financial financial conditions conditions together together with with elevated elevated levels of of levels external external andandprivate private 20 20 debt sector sector debthave have the potential the potential to rapidly to rapidlyerode erode fiscal space 2% space fiscal . Turkey’s . Turkey’s dependence dependence on external on externalfinance finance 2014 2014 Figure Figure 60: 60: Deviation Deviation of inflation of inflation from from target target 2% Figure Figure 61: 61:2: RealReal policy policy rates rates are positive are positive remains 15 60: Figure 15 remains high relative Deviation high relative toinflation of other to otherEMDEs, from EMDEs, with target some with some Figure(Table exceptions exceptions 61: Real (Table External policy and rates 2: External are Private andpositiveSector Private SectorDebt). Debt). 10 10 if downside Therefore, Therefore, if downside risks associated risks Russia with the banking sector, Russia associated with the banking 0%0% non-financial sector, non-financial corporates, corporates,and Public and Private Public Private Deviation Deviation of –of inflation inflation fromfrom its its target target Real policy rates Partnerships Partnerships 5 5 all of which all of –(squared) whichare exposed are exposed to currency toAfrica South South Africa risks currency – materialize, Real risks policy rates – materialize, this may this create may contingent create contingentliabilities forfor liabilities thethe 35 government. 35 (squared) This may explain partly why, despite strong 6% 6% fiscal buffers, market perceptions of risk towards government. 0 0 This may explain partly why, despite strong fiscal buffers, market perceptions of risk towards Brazil -2%-2% Turkey Brazil 30 remain Turkey 30 0 0remain relatively 5 high 5relatively 10 10 high 15(Table 15 (Table 20 20Market 2: Turkey 25 25 Perception). 2: Market Perception). 30 30 Brazil USUS Brazil FedFed Russia Russia South South Turkey Turkey Turkey 4% Africa Africa 25 25 2007 4% 2017 2012 2017 2012 Indonesia 2007 Indonesia 41. 41. 20 20 Sources: Sources: The IMF The IMF possibility possibility WEO, WEO, National National for monetary for Central Central monetary Banks, Banks, WB policy WB policy Staff Staff to torespond respond Source: to Source:Haver adverse to Haver adverse external Analytics, Analytics, external WB WB Staff Staff developments developments estimates estimates more is is more 2014 challenging. This is because the positive deviation of 2% 2%from its target is already high in Turkey (Figure inflation 2014 challenging. estimates estimates 15 15 This is because the positive deviation of inflation from its target is already high in Turkey (Figure 60), 28 whilst 60), 28 whilst thetheCentral Central Bank’s Bank’s average average Russia cost of of cost funding funding is already is alreadyat 13.5 at 13.5 percent percent and andpositive positivein real terms in real terms 10 10 Russia 0% (Figure 42. 42.(Figure 61). In In Therefore, Turkey, 61).Turkey, this Therefore, if this a tightening challenge challenge if a tighteningis of is external exacerbated exacerbated of external liquidity by bya liquidityaconditions 0% needneed to to cool conditions leads cool creditto credit leads slower expansion to growth, expansion slower . The growth,. the The possibility credit-to-GDP credit-to-GDP the possibilityof of 5 SouthSouth Africa Africa a gapmonetary gap a in 5 in monetary stimulus Turkey Turkey hashas been stimulus will been be high will challenging high bein in recent recent challenging given years, years, givenhigh meaning meaning inflation.that that high inflation. credit credit growth growth hashas been been above above itsits long-term long-term trend trend 0 0 -2%-2% pointing pointing to0 to potential potential erosion erosion of of countercyclical countercyclical buffers buffers (Figure (Figure 62). 62). 31 31 Brazil Further Further US Fed evidence evidence Russia of of excessive excessive South credit Turkey credit 0 5 5 10 10 15 15 20 20 25 25 30 30 Brazil US Fed Russia South Turkey expansion expansion (credit (credit boom) boom) is is evident evident 2007 when when computing computing thethe threshold threshold for for credit credit growth growth 2012 thatthat 2017 determines determines Africa Africa whether whether 2007 2012 2017 thethe observed observed growth growth in in credit credit can canbebe associated associated withwith a boom a boom oror a bust a bust (Figure (Figure 63).63). If If 32 32 international international financial financial Sources: tightening IMF WEO, exposes National financial Central (and Banks, real WB sector) Staff fragilities as Source: Haver discussed Analytics, above, WB then Staff high estimates inflation constrains the tightening Sources: Sources: 26 Parts IMFIMF exposes WEO, of this National WEO, financial Central National section draws (and Banks, Central on on WB Banks, thethe real Staff estimates approach sector) WB Staff fragilities in Rojas-Suarez, as discussed Source: Source: L., L., Haver Haver 2015. above, Analytics, Analytics, “Emerging WB then Staff WB Market high estimates Staff inflation estimates Macroeconomic constrains Resilience the 26estimates Parts estimates of this section draws approach in Rojas-Suarez, 2015. “Emerging Market Macroeconomic Resilience ability ability to to reduce reduce interest interest rates rates and/or and/or expand expand credit credit to External Shocks: Today versus Pre–Global Crisis”, Center for Global Development to to boost boost demand. demand. to External Shocks: Today versus Pre–Global Crisis”, Center for Global Development 27 The data in this section is taken from: Kose, M. M. Ayhan, Sergio Kurlat, Franziska Ohnsorge, and Naotaka Sugawara 42.42. In 27 The data In Turkey, in this Turkey,section is taken this this challenge from: challenge Kose, is exacerbated Ayhan, is GDP Sergio exacerbated Kurlat,by by Franziskaa need a needOhnsorge, to cool and cool toFigure Naotaka credit Sugawara credit expansion expansion .credit The. The credit-to-GDP credit-to-GDP (2017). "A Figure Figure 62: Cross-Country62: High High credit credit Database to to GDP of recent Fiscal gapgap Policy Space." Research Figure Working 63: 63: Paper Indications Indications 8157, of of World credit Bank, boom boom Washington, gap (2017). Figure gap in in 62:Turkey "A Turkey High has has credit beenbeen Cross-Country to high GDP highDatabase in in gap recentof Fiscalyears, years, meaning Space." meaning Policythat that Researchcredit Figure credit growth Working 63: growth has Paper Indications has been been 8157, of above World credit above boom its its Bank, long-term Washington, long-term trend trend DC. DC.Not pointing all countries’ Not all to data countries’ potential for for data 2017 erosion 2017hashas of been updated, been updated, countercyclical therefore therefore buffers 2016 2016data (Figure is data 62).used is used 31 to illustrate to Further developments illustrate evidencedevelopments of compared compared excessive credit pointing to Credit 2007 to potential (prior Credit to GFC erosion onset) and of 2012 countercyclical (prior to “Taper buffers Tantrum” (Figure and 62). Further collapse 31 in evidence commodity prices ofinexcessive 2014. credit to 2007 expansion to to GDP GDP (prior togap gap (credit (% GFC (% of boom) of GDP) GDP) onset) is and 2012 evident (prior when to “Taper computing Tantrum” the 400400 and threshold Financial collapse Financial for in commodity credit Fragility Fragility growth prices that in 2014. whether determines expansion 28 Rojas-Suarez,(credit L., boom) 2015: is evident “Deviation when of computing inflation from its the threshold announced target for credit captures growth the constraints 2007 2007 that determines imposed 2012 2017 onwhether the 28 Rojas-Suarez, the observed L., 2015: growth in “Deviation credit can of be inflation associatedfrom its announced with a boom or target a bust captures (Figure the 63). 322012 constraints 2017 imposed on If international the financial the observed implementation implementation growth of of in credit countercyclical can countercyclical be monetary associated monetary policy when policy with when a boom the economy the -100 or a -100 economy is bust facing is (Figure facing 63). inflationary inflationary 32 If orinternational or deflationary deflationary financial pressures at at pressures thetightening exposes financial (and real sector) fragilities as discussed above, then high inflation constrains the 8 8 tightening time of exposes the shock.” the time of the shock.” financial (and real sector) fragilities as discussed above, then high inflation constrains the ability to reduce interest rates and/or ability to reduce interest rates and/or expand credit to 24 expand credit to boostboost demand. demand. -600 -600 24 62: 62: Figure Figure HighHigh credit credit to GDP to GDP gap gap -1100 Figure 63: Indications of credit boom -1100 Figure 63: Indications of credit boom -12 -12Credit -1600 -1600 Credit gapgap to GDP to GDP (% (% of GDP) of GDP) 400 400 Financial Fragility Financial Fragility 2007 2012 2017 -2100 -2100 2007 2012 2017 8 Argentina -100-100 8 Argentina Brazil Brazil Indonesia Indonesia India India Russia Russia Turkey Turkey South South Africa Africa -600-600 Sources: Sources: Sources: Bank BankBank for for for International International International Settlements Settlements Settlements Sources: Sources: Haver Sources: -1100 Haver Haver Analytics, Analytics, Analytics, WB WB WBStaff Staff Staff estimates estimates estimates -1100 -1600 -12 -12 -1600 -2100 -2100 Argentina Brazil Indonesia 24 Bank 31 31 Bank forfor International International Argentina India Settlements: Settlements: Brazil “The Russia “The credit-to-GDP credit-to-GDP Turkey gap gap Indonesia is defined is defined as as thethe difference difference between between thethe credit-to-GDP credit-to-GDP India Russia Turkey ratio ratio andand its its longlong South South Africa run run trend. trend. Africa TheThe credit-to-GDP credit-to-GDP ratio ratio as as published published in in thethe BIS BIS database database of of total total credit credit to to thethe private private non- non- financial financial sector, Sources: sector, Bank capturing capturing for total total International borrowing borrowing Settlements from from all all domestic domestic andand foreign foreign Sources: sources, sources, Haver is used is used Analytics, as as WB input input Staff data…The data…The estimates gapgap Sources: Bank indicator was for International adopted Settlements Sources: Haver Analytics, WB Staff estimates indicator was adopted as as a common a common reference reference point point under under Basel Basel IIIIII to to guide guide thethe build-up build-up of of countercyclical countercyclical capital capital buffers.” buffers.” 32 32 ���� ���� ���� ���� ���� ���� World Bank Group Annex 1: Medium-Term Outlook Key Macroeconomic Indicators 2015 2016 2017 2018 2019 2020 Population (mid-year, million) 78.2 79.3 80.3 81.3 82.4 83.4 GDP (current US$, billion) 861.9 862.7 851.1 875.5 937.1 1007.7 GDP per capita (current US$) 11019 10883 10597 10763 11372 12082 Upper middle-income Poverty Rate (US$5.5 in 2011 PPP) 11.5 9.9 9.1 8.8 8.4 8.2 CPI (annual average, in percent) 7.7 7.8 11.1 10.4 9.0 8.2 Real Economy TL Billion, unless otherwise indicated Real GDP 1527.7 1576.4 1693.3 1773.1 1850.5 1924.5 Private Consumption 930.7 964.8 1023.8 1064.7 1105.2 1144.9 Government Consumption 200.4 219.5 230.5 241.9 254.8 266.4 Gross Fixed Capital Formation 455.5 465.8 499.8 526.5 551.0 573.3 Net Exports -14.2 -33.9 -31.6 -30.8 -31.3 -31.0 Fiscal Accounts TL Billion, unless otherwise indicated Total Revenues 799.2 904.3 1030.0 1146.5 1292.9 1458.5 Total Expenditures 801.6 939.5 1090.8 1222.0 1376.0 1534.7 General Government Balance -2 -35 -60 -76 -83 -76 Government Debt Stock 646.5 738.5 877.8 1008.6 1144.9 1271.4 Primary Balance 52.4 17.6 0.2 -1.1 0.6 27.2 Monetary Policy TL Billion, unless otherwise indicated Broad Money (M3) 1232.3 1451.8 1686.4 - - - Credit Growth (FX-adjusted, eop, y-o-y) 11.8 10.9 20.3 - - - Average Funding Rate (annual average, in percent) 8.4 8.4 11.5 - - - Gross Reserves (in US$ Billion) 110.5 106.1 107.6 - - - o/w Gold Reserves 17.6 14.1 23.5 - - - o/w Net Reserves 28.3 34.1 36.1 - - - External Sector US$ Billion, unless otherwise indicated Current Account balance -32.1 -33.1 -47.4 -49.9 -52.5 -55.6 Trade Balance -48.1 -40.9 -58.9 -66.4 -75.2 -83.9 Exports 152.0 150.2 166.2 180.7 196.0 211.7 Imports 200.1 191.1 225.1 247.0 271.2 295.6 Net Foreign Direct Investment 12.9 10.2 8.2 9.8 11.2 12.1 Source: TURKSTAT, CBRT, Ministry of Development, WB Staff Calculations 25 TEM, May 2018: Minding the External Gap Annex 2: Medium-Term Outlook Key Macroeconomic Indicators   2015 2016 2017 2018 2019 2020 Real Economy Annual percentage change, unless otherwise indicated Real GDP 6.1 3.2 7.4 4.7 4.4 4.0 Private Consumption 5.4 3.7 6.1 4.0 3.8 3.6 Government Consumption 3.9 9.5 5.0 5.0 5.3 4.6 Gross Fixed Capital Formation 9.3 2.2 7.3 5.3 4.7 4.0 Exports 4.3 -1.9 12.0 6.7 5.5 5.0 Imports 1.7 3.7 10.3 6.0 5.2 4.6 Fiscal Accounts Percent of GDP, unless otherwise indicated Total Revenues 34.2 34.7 32.6 32.3 32.1 32.1 Total Expenditures 34.3 36.0 35.0 34.5 34.2 33.8 General Government Balance -0.1 -1.3 -2.4 -2.1 -2.1 -1.7 Government Debt Stock 27.6 28.3 28.3 28.4 28.4 28.0 Primary Balance 2.2 0.7 0.0 0.0 0.0 0.6 Monetary Policy Percent of GDP, unless otherwise indicated CPI (annual average, in percent) 7.7 7.8 11.1 10.4 9.0 8.2 Broad Money (M3) 52.7 55.7 54.3 - - - Gross Reserves 12.9 12.3 12.7 - - - In months of merchandise imports c.i.f. 6.4 6.4 5.5 - - - Percent of short-term external debt 104.9 104.6 91.4 - - - External Sector Percent of GDP, unless otherwise indicated Current Account balance -3.7 -3.8 -5.6 -5.7 -5.6 -5.5 Trade Balance -5.6 -4.7 -6.9 -7.6 -8.0 -8.3 Exports 17.6 17.4 19.5 20.6 20.9 21.0 Imports 23.2 22.1 26.5 28.2 28.9 29.3 Net Foreign Direct Investment 1.5 1.2 1.0 1.1 1.2 1.2 Source: TURKSTAT, CBRT, Ministry of Development, WB Staff Calculations 26 World Bank Group Annex 3: Gross Domestic Product Gross Domestic Product: Production Approach   2013 2014 2015 2016 2017 GDP (current, TL billion) 1809.7 2044.5 2338.6 2608.5 3104.9 Agriculture 121.7 134.7 161.4 161.3 188.7 Industry 355.3 410.8 462.0 511.8 640.6 Construction 145.9 165.7 190.6 223.4 265.7 Services 962.4 1097.0 1246.7 1402.4 1655.4 GDP (constant prices, TL billion) 1369.3 1440.1 1527.7 1576.4 1693.3 Agriculture 94.6 95.2 104.1 101.4 106.1 Industry 268.9 284.0 298.4 311.0 339.7 Construction 101.3 106.4 111.6 117.6 128.1 Services 743.4 790.4 834.8 861.2 925.8 Real GDP Growth (%) 8.5 5.2 6.1 3.2 7.4 Agriculture 2.3 0.6 9.4 -2.6 4.7 Industry 9.0 5.6 5.1 4.2 9.2 Construction 14.0 5.0 4.9 5.4 8.9 Services 7.7 6.3 5.6 3.2 7.5 GDP (constant prices, % share) Agriculture 6.9 6.6 6.8 6.4 6.3 Industry 19.6 19.7 19.5 19.7 20.1 Construction 7.4 7.4 7.3 7.5 7.6 Services 54.3 54.9 54.6 54.6 54.7 Source: TURKSTAT, WB Staff Calculations 27 TEM, May 2018: Minding the External Gap Annex 4: Gross Domestic Product Gross Domestic Product: Expenditure Approach   2013 2014 2015 2016 2017 GDP (current, TL billion) 1809.7 2044.5 2338.6 2608.5 3104.9 Private Consumption 1120.4 1242.2 1411.8 1560.5 1836.0 Government Consumption 255.6 288.1 324.6 387.0 450.2 Gross Fixed Capital Formation 516.2 590.7 694.8 764.7 925.5 o/w Construction 291.4 338.4 380.2 424.5 533.8 o/w Machinery and Equipment 182.3 206.4 263.1 283.9 326.9 Net Exports -105.1 -79.4 -61.0 -75.3 -139.5 Change in Inventories 22.6 2.8 -31.5 -28.4 32.7 GDP (constant prices, TL billion) 1369.3 1440.1 1527.7 1576.4 1693.3 Private Consumption 857.2 882.8 930.7 964.8 1023.8 Government Consumption 187.0 192.8 200.4 219.5 230.5 Gross Fixed Capital Formation 396.6 416.8 455.5 465.8 499.8 o/w Construction 217.1 231.2 242.1 248.8 278.6 o/w Machinery and Equipment 148.2 153.9 182.4 184.5 185.8 Net Exports -48.1 -22.3 -14.2 -33.9 -31.6 Change in Inventories -23.4 -30.1 -44.7 -39.8 -29.1 Real GDP Growth (%) 8.5 5.2 6.1 3.2 7.4 Private Consumption 7.9 3.0 5.4 3.7 6.1 Government Consumption 8.0 3.1 3.9 9.5 5.0 Gross Fixed Capital Formation 13.8 5.1 9.3 2.2 7.3 o/w Construction 21.1 6.5 4.7 2.8 12.0 o/w Machinery and Equipment 8.1 3.9 18.5 1.2 0.7 Exports 1.1 8.2 4.3 -1.9 12.0 Imports 8.0 -0.4 1.7 3.7 10.3 Change in Inventories -18.5 28.8 48.4 -11.0 -26.8 GDP (constant prices, % share) Private Consumption 62.6 61.3 60.9 61.2 60.5 Government Consumption 13.7 13.4 13.1 13.9 13.6 Gross Fixed Capital Formation 29.0 28.9 29.8 29.5 29.5 o/w Construction 15.9 16.1 15.8 15.8 16.5 o/w Machinery and Equipment 10.8 10.7 11.9 11.7 11.0 Exports 22.1 22.7 22.3 21.2 22.1 Imports 25.6 24.2 23.2 23.4 24.0 Change in Inventories -1.7 -2.1 -2.9 -2.5 -1.7 Source: TURKSTAT, WB Staff Calculations 28 World Bank Group Annex 5: Prices Consumer and Producer Prices: End of period y-o-y, percentage change   2013 2014 2015 2016 2017 CPI (All items) 7.4 8.2 8.8 8.5 11.9 CPI (Food and non-alc. Beverages) 9.7 12.7 10.9 5.7 13.8 CPI (Core C) 7.1 8.7 9.5 7.5 12.3 Alcoholic beverages, tobacco 10.5 7.7 5.7 31.6 2.9 Clothing and footwear 4.9 8.4 9.0 4.0 11.5 Housing & Energy 4.8 6.8 6.7 6.4 9.6 Furnishings 9.7 7.7 11.0 7.9 10.6 Health 4.8 8.6 7.2 9.7 11.9 Transport 9.8 2.1 6.4 12.4 18.2 Communication 1.2 1.6 3.6 3.2 1.4 Recreation and culture 5.2 5.7 11.6 5.9 8.4 Education 10.1 8.3 6.4 9.5 10.5 Restaurants and Hotels 9.9 14.0 13.2 8.6 11.5 Miscellaneous goods and services 2.2 9.7 11.0 11.1 12.8 PPI (All items) 7.0 6.4 5.7 9.9 15.5 Consumer and Producer Prices: Annual average, percentage change 2013 2014 2015 2016 2017 CPI (All items) 7.5 8.9 7.7 7.8 11.1 CPI (Food and non-alc. Beverages) 9.1 12.6 11.1 5.8 12.7 CPI (Core C) 6.3 9.2 8.0 8.5 10.1 Alcoholic beverages, tobacco 15.2 4.1 4.5 18.1 15.4 Clothing and footwear 6.4 8.0 6.2 7.4 7.1 Housing & Energy 7.2 5.7 7.6 6.6 8.0 Furnishings 7.8 9.5 8.7 10.6 4.4 Health 2.7 8.4 7.3 9.6 12.4 Transport 6.8 9.8 1.5 7.4 16.8 Communication 5.1 1.0 3.1 2.8 2.7 Recreation and culture 2.5 7.3 9.0 7.1 9.8 Education 7.1 9.1 7.0 8.2 10.0 Restaurants and Hotels 9.3 13.3 13.5 10.2 10.3 Miscellaneous goods and services 4.9 7.2 10.1 11.3 12.3 PPI (All items) 4.5 10.2 5.3 4.3 15.8 Source: TURKSTAT, WB Staff Calculations 29 TEM, May 2018: Minding the External Gap Annex 6: Balance of Payments Balance of Payments Statistics   2013 2014 2015 2016 2017 2018-Mar   US$ Billion, unless otherwise indicated Current Account -63.6 -43.6 -32.1 -33.1 -47.4 -55.4 Trade Balance -79.9 -63.6 -48.1 -40.9 -58.9 -67.6 Exports 161.8 168.9 152.0 150.2 166.2 169.0 Imports 241.7 232.5 200.1 191.1 225.1 236.6 Services Balance 23.6 26.7 24.2 15.3 20.0 21.2 Primary Income Balance -8.6 -8.2 -9.7 -9.2 -11.1 -11.3 Secondary Income Balance 1.3 1.5 1.4 1.7 2.7 2.3 Capital Account -0.1 -0.1 0.0 0.0 0.0 0.1 Financial Account -63.0 -42.6 -22.4 -22.1 -46.7 -47.4 Direct Investment -9.9 -6.1 -12.9 -10.2 -8.2 -7.1 Portfolio Investment -24.0 -20.2 15.7 -6.3 -24.4 -22.3 Other Investment -38.7 -15.9 -13.3 -6.5 -5.8 -13.1 Net Errors & Omissions 1.0 1.1 9.8 11.0 0.7 7.9 Reserve Assets 9.9 -0.5 -11.8 0.8 -8.2 -4.9 Overall Balance 9.9 -0.5 -11.8 0.8 -8.2 -4.9 memo item: Energy Balance -49.2 -48.8 -33.3 -24.0 -32.9 -34.5 Gold Balance -11.8 -3.9 4.0 1.8 -10.0 -13.5   Percent of GDP, unless otherwise indicated Current Account -6.7 -4.7 -3.7 -3.8 -5.6 -6.5 Trade Balance -8.4 -6.8 -5.6 -4.7 -6.9 -7.9 Exports 17.0 18.1 17.6 17.4 19.5 19.9 Imports 25.4 24.9 23.2 22.1 26.5 27.8 Services Balance 2.5 2.9 2.8 1.8 2.3 2.5 Primary Income Balance -0.9 -0.9 -1.1 -1.1 -1.3 -1.3 Secondary Income Balance 0.1 0.2 0.2 0.2 0.3 0.3 Capital Account 0.0 0.0 0.0 0.0 0.0 0.0 Financial Account -6.6 -4.6 -2.6 -2.6 -5.5 -5.6 Direct Investment -1.0 -0.7 -1.5 -1.2 -1.0 -0.8 Portfolio Investment -2.5 -2.2 1.8 -0.7 -2.9 -2.6 Other Investment -4.1 -1.7 -1.5 -0.8 -0.6 -1.5 Net Errors & Omissions 0.1 0.1 1.1 1.3 0.1 0.9 Reserve Assets 1.0 -0.1 -1.4 0.1 -1.0 -0.6 Overall Balance 1.0 -0.1 -1.4 0.1 -1.0 -0.6 memo item:             Energy Balance -5.2 -5.2 -3.9 -2.8 -3.9 -4.1 Gold Balance -1.2 -0.4 0.5 0.2 -1.2 -1.6 Source: CBRT, WB Staff Calculations 30 World Bank Group Annex 7: Monetary Policy Monetary Survey   2013 2014 2015 2016 2017 2018-Mar Total Assets (TL Billion) 1228.4 1394.3 1627.4 1894.4 2224.6 2325.3 Net Foreign Assets -3.8 -41.5 -65.7 -42.4 -80.0 -100.7 Foreign Assets 364.6 385.8 443.6 561.8 631.2 659.6 Monetary Authorities 283.5 299.4 326.7 380.3 417.1 447.0 Deposit Money Banks 75.2 80.3 107.3 167.4 201.2 199.8 Participation Banks 4.4 4.6 7.1 6.7 7.3 7.5 Investment & Development Banks 1.4 1.6 2.6 7.4 5.6 5.3 Foreign Liabilities 368.4 427.4 509.3 604.2 711.2 760.4 Monetary Authorities 16.2 11.0 9.7 10.5 12.0 21.0 Deposit Money Banks 313.2 372.0 441.6 514.8 607.5 644.5 Participation Banks 17.8 18.4 20.0 22.2 22.4 22.7 Investment & Development Banks 21.3 26.1 38.0 56.7 69.3 72.2 Domestic Credits 1232.3 1435.8 1693.0 1936.8 2304.5 2426.0 Net Claims on Central Government 165.7 170.5 175.2 174.5 178.1 204.0 Claims on private sector 1023.2 1214.3 1456.3 1687.0 2025.9 2116.5 Total Liabilities 1228.4 1394.3 1627.4 1894.4 2224.6 2325.3 Money 165.9 185.5 217.1 270.1 297.4 300.9 Currency in Circulation 66.2 75.4 91.9 111.3 118.5 120.0 Demand Deposits 99.7 110.1 125.3 158.8 178.9 180.9 Quasi Money 826.3 923.5 1071.6 1245.5 1453.9 1514.5 Time and saving deposits 496.2 550.8 589.7 682.4 764.1 789.6 Residents’ foreign exchange deposits 289.4 328.5 439.2 517.6 631.4 658.4 Securities Issued 0.0 0.0 0.0 0.0 0.0 0.0 Restricted Deposits 0.0 0.0 0.0 0.0 0.0 0.0 Other Items (Net) 236.2 285.3 338.6 378.9 473.3 509.8 Source: CBRT 31 TEM, May 2018: Minding the External Gap Annex 8: Monetary Policy Central Bank of Turkey Balance Sheet (TL Billion)   2013 2014 2015 2016 2017 2018-Apr CBRT Assets 265.9 281.9 293.2 345.4 396.2 442.5 Foreign Assets 283.5 299.4 326.7 381.0 436.8 478.9 Domestic Assets 4.6 5.3 -0.8 18.2 16.4 12.5 Treasury Debt: Securities 8.9 9.2 9.0 13.9 14.5 14.7 Cash credits to Public Sector 8.9 9.1 8.9 13.8 14.4 14.6 Cash credits to Banking Sector 13.3 19.3 22.7 37.6 48.1 52.5 Credits to SDIF 0.0 0.0 0.0 0.0 0.0 0.0 Other Items -17.6 -23.1 -32.4 -33.1 -46.1 -54.6 FX Revaluation Account -22.2 -22.9 -32.7 -53.8 -57.0 -48.9 CBRT Liabilities 265.9 281.9 293.2 345.4 396.2 442.5 Total FX Liabilities 199.8 207.7 244.1 260.9 299.7 344.6 Foreign Liabilities 16.1 10.8 9.7 10.0 9.1 10.6 Domestic Liabilities 183.7 197.0 234.4 251.0 290.6 333.9 Central Bank Money 66.1 74.2 49.1 84.5 96.5 97.9 Reserve Money 91.2 107.2 122.3 168.0 174.1 158.5 Other Central Bank Money -25.1 -33.1 -73.3 -83.5 -77.6 -60.6 Source: CBRT 32 World Bank Group Annex 9: Fiscal Operations General Government Budget   2013 2014 2015 2016 2017 2018   TL Billion, unless otherwise indicated Revenues 625.3 691.2 799.2 904.3 1030.0 1146.5 Tax Revenues 334.4 361.9 418.7 470.4 534.6 613.8 o/w Indirect 231.1 243.7 285.7 315.1 363.8 411.3 o/w Direct 92.6 106.0 118.9 138.1 162.3 184.4 Non-Tax Revenues 29.5 38.9 42.8 46.3 60.7 66.3 Factor Incomes 90.8 99.4 112.7 129.6 138.3 136.5 Social Funds 158.0 178.9 212.9 248.4 282.0 305.0 Privatization Revenues 12.6 12.1 12.1 9.6 6.0 10.0 Expenditures 637.0 701.9 801.6 939.5 1090.8 1222.0 Current Expenditures 281.6 314.6 357.7 426.6 484.2 548.8 Investment Expenditures 65.8 66.9 81.1 91.4 108.4 120.1 Transfer Expenditures 289.6 320.4 362.8 421.4 498.1 553.1 o/w Current Transfers 272.0 295.8 339.4 399.9 471.8 525.6 o/w Capital Transfers 17.6 24.6 23.4 21.6 26.3 27.5 Balance -11.7 -10.6 -2.4 -35.1 -60.4 -75.5 Interest Expenditures 51.7 51.7 54.9 52.7 60.6 74.4 Government Debt Stock 567.9 588.2 646.5 738.5 877.8 1008.6 Primary Balance 39.9 41.1 52.4 17.6 0.2 -1.1   Percent of GDP, unless otherwise indicated Revenues 34.6 33.8 34.2 34.7 33.2 32.3 Tax Revenues 18.5 17.7 17.9 18.0 17.2 17.3 o/w Indirect 12.8 11.9 12.2 12.1 11.7 11.6 o/w Direct 5.1 5.2 5.1 5.3 5.2 5.2 Non-Tax Revenues 1.6 1.9 1.8 1.8 2.0 1.9 Factor Incomes 5.0 4.9 4.8 5.0 4.5 3.9 Social Funds 8.7 8.8 9.1 9.5 9.1 8.6 Privatization Revenues 0.7 0.6 0.5 0.4 0.2 0.3 Expenditures 35.2 34.3 34.3 36.0 35.1 34.5 Current Expenditures 15.6 15.4 15.3 16.4 15.6 15.5 Investment Expenditures 3.6 3.3 3.5 3.5 3.5 3.4 Transfer Expenditures 16.0 15.7 15.5 16.2 16.0 15.6 o/w Current Transfers 15.0 14.5 14.5 15.3 15.2 14.8 o/w Capital Transfers 1.0 1.2 1.0 0.8 0.8 0.8 Balance -0.6 -0.5 -0.1 -1.3 -1.9 -2.1 Interest Expenditures 2.9 2.5 2.3 2.0 2.0 2.1 Government Debt Stock 31.4 28.8 27.6 28.3 28.3 28.4 Primary Balance 2.2 2.0 2.2 0.7 0.0 0.0 Source: Ministry of Development, WB Staff Calculations 33 TEM, May 2018: Minding the External Gap Annex 10: Banking Sector Balance Sheet Money and Banking Statistics of Financial Institutions   2013 2014 2015 2016 2017 2018-Feb Assets Billion TL, unless otherwise indicated Total assets 1708.0 1972.4 2338.3 2732.6 3263.0 3329.7 Net foreign assets -279.3 -342.1 -397.5 -433.2 -521.4 -549.9 Claims on nonresidents 81.2 86.7 117.3 182.2 214.9 206.6 Liabilities to nonresidents 360.4 428.8 514.8 615.4 736.3 756.5 Claims on Central Bank 198.0 221.4 260.3 295.8 355.3 367.2 Currency 9.8 11.2 12.9 13.6 15.2 12.9 Reserve deposits and securities 188.2 210.2 247.3 282.2 339.7 354.0 Other claims 0.0 0.1 0.1 0.0 0.3 0.3 Net claims on central government 211.3 217.7 231.0 242.9 279.5 276.5 Claims on central government 249.0 261.6 287.8 307.1 353.8 366.3 Liabilities to central government 37.7 44.0 56.8 64.2 74.3 89.8 Claims on other sectors 1078.0 1276.9 1533.7 1790.7 2168.0 2215.4 Claims on other financial corporations 28.9 35.2 40.8 48.8 61.8 61.7 Claims on state & local governments 14.0 15.3 17.6 23.4 34.4 35.6 Claims on public nonfinancial corporations 0.9 0.9 3.7 3.8 5.5 5.4 Claims on private sector 1034.3 1225.5 1471.6 1714.7 2066.3 2112.6 Liabilities Billion TL, unless otherwise indicated Liabilities to Central Bank 50.8 65.6 112.9 106.8 99.2 97.5 Transfer deposits included in broad money 173.3 194.3 230.4 282.3 343.9 333.0 Other deposits included in broad money 687.5 761.0 881.7 1028.7 1184.3 1205.2 Securities other than shares included in broad money 24.5 26.5 27.4 26.3 38.9 43.1 Deposits excluded from broad money 0.0 0.0 0.0 0.0 0.0 0.0 Securities other than shares excluded from broad 1.3 2.5 1.2 1.5 2.3 1.6 money Loans 2.6 12.2 12.3 17.4 30.4 30.8 Financial derivatives 1.3 1.2 1.6 2.7 2.7 2.4 Insurance technical reserves 0.0 0.0 0.0 0.0 0.0 0.0 Shares & other equity 194.0 237.5 269.0 308.3 366.2 386.5 Other items (Net) 72.8 73.1 91.1 122.2 213.5 209.1 Source: CBRT, BRSA, IFS 34 Annex 11: Banking Sector Ratios Selected Ratios for Banking Sector   2013 2014 2015 2016 2017 2018-Mar Liquidity Position in percent, unless otherwise indicated Liquidity Requirement Ratio 146.5 144.3 143.5 135.6 144.5 143.7 Loan-to-Deposit Ratio 107.4 113.9 117.2 117.4 121.3 121.7 Capital Adequacy in percent, unless otherwise indicated Core Capital Adequacy Ratio - 14.0 13.3 13.2 14.1 13.9 Capital Adequacy Standard Ratio 15.3 16.3 15.6 15.6 16.9 16.6 Total Risk Weighted Assets (Net) / Total Risk Weighted Assets (Gross) 69.6 68.8 68.6 43.3 42.1 65.1 Regulatory Capital / Total Risk Weighted Assets 15.3 16.3 15.6 15.6 16.9 16.6 Profitability in percent, unless otherwise indicated Profit (Loss) Before Tax / Average Total Assets 2.0 1.7 1.5 1.9 2.0 0.5 Net Income / Average Total Assets 1.6 1.3 1.2 1.5 1.6 0.4 Net Income / Average Shareholder’s Equity 14.2 12.3 11.3 14.3 16.0 3.8 Net Interest (Profit) Revenues (Expenses) / Average Total Assets 3.7 3.5 3.5 3.6 3.8 1.0 Asset Quality in percent, unless otherwise indicated Non-Performing Loans (Gross) / Total Cash Loans 2.7 2.8 3.1 3.2 2.9 2.9 Provision for Non-Performing Loans / Gross Non-Performing Loans 76.3 73.9 74.6 77.4 79.4 75.1 Credit Growth (FX-adjusted, eop, y-o-y) 29.5 15.5 11.8 10.9 20.3 18.5 Interest Rates (end-of-period) in percent, unless otherwise indicated Weighted average of Central Bank Cost of Funding 6.8 8.5 8.8 8.3 12.5 12.8 Weighted average Interest Rate for Deposits 8.0 9.5 11.0 9.6 12.8 12.7 Consumer Loans Rate 12.6 13.1 16.4 14.7 17.7 18.7 Commercial Loans Rate 10.6 11.1 15.7 14.3 17.1 17.7 Source: CBRT, BRSA, IMF 35 World Bank Group 35 36 36 Annex 12: Doing Business Index (2018) Doing Business Indicators   UMC HIC Turkey Poland Argentina S. Africa Hungary Malaysia Global Rank 93 47 60 27 117 82 48 24 Starting a business Rank 100 59 80 120 157 136 79 111 Procedures - Men (number) 8 5 7 5 13 7 6 8 TEM, May 2018: Minding the External Gap Time - Men (days) 27 11 7 37 24 45 7 18 Cost - Men (% of income per capita) 21 4 13 12 10 0 5 5 Procedures - Women (number) 8 6 7 5 13 7 6 9 Time - Women (days) 27 11 7 37 24 45 7 19 Cost - Women (% of income per capita) 21 4 13 12 10 0 5 5 Minimum capital (% of income per capita) 4 6 8 11 0 0 44 0 Dealing with construction permits Rank 93 56 96 41 171 94 90 11 Procedures (number) 16 14 18 12 22 20 20 14 Time (days) 162 158 103 153 347 149 206 78 Cost (% of Warehouse value) 3 2 4 0 3 2 1 1 Building quality control index (0-15) 10 11 10 10 11 11 13 13 Quality of building regulations index (0-2) 2 2 1 1 2 2 2 2 Quality control before construction index (0-1) 1 1 1 1 1 0 1 1 Quality control during construction index (0-3) 1 2 2 2 2 2 2 2 Quality control after construction index (0-3) 3 3 3 2 3 3 3 3 Liability and insurance regimes index (0-2) 1 1 1 2 1 0 1 1 Professional certifications index (0-4) 2 3 2 2 2 4 4 4 Getting electricity Rank 91 49 55 54 95 112 110 8 Procedures (number) 5 5 4 4 6 4 5 4 Time (days) 89 73 55 122 92 84 257 31 Cost (% of income per capita) 705 77 458 19 25 147 90 28 Reliability of supply and transparency of tariff index (0-8) 4 7 5 7 5 0 7 8 Total duration and frequency of outages per customer a year (0-3) 1 2 0 2 0 0 2 3 System average interruption duration index (SAIDI) 16 1.2 4.5 3.1 .5 System average interruption frequency index (SAIFI) 8.6 1 16.2 1.4 .6 Minimum outage time (in minutes) 5 3 3 1 3 1 Mechanisms for monitoring outages (0-1) 1 1 1 1 1 1 1 1 Mechanisms for restoring service (0-1) 1 1 1 1 1 1 1 1 Regulatory monitoring (0-1) 1 1 1 1 1 1 1 1 Financial deterrents aimed at limiting outages (0-1) 0 1 1 1 1 0 1 1 Communication of tariffs and tariff changes (0-1) 1 1 1 1 1 1 1 1 Registering property Rank 95 60 46 38 117 107 29 42 Procedures (number) 6 5 7 6 7 7 4 8 Time (days) 34 38 7 33 52 23 18 13 Cost (% of property value) 6 4 3 0 7 8 5 4 Quality of land administration index (0-30) 15 21 22 20 14 14 26 28 Quality of land administration index (0-30) 15 21 22 20 14 14 26 28 Reliability of infrastructure index (0-8) 4 6 8 7 5 4 8 7 Transparency of information index (0-6) 3 3 3 3 3 3 4 6 Geographic coverage index (0-8) 2 5 4 4 2 2 8 8 Land dispute resolution index (0-8) 5 6 7 6 4 5 7 7 Equal access to property rights index (-2-0) 0 0 0 0 0 0 0 0 37 World Bank Group 37 38 38 Getting credit Rank 86 76 77 29 77 68 29 20 Strength of legal rights index (0-12) 5 6 4 7 3 5 10 8 Depth of credit information index (0-8) 5 6 7 8 8 7 5 8 Credit registry coverage (% of adults) 21 18 80 0 45 0 0 64 Credit bureau coverage (% of adults) 36 53 0 86 80 64 90 83 Getting Credit total score 10 11 11 15 11 12 15 16 Protecting minority investors Rank 86 63 20 51 43 24 108 4 TEM, May 2018: Minding the External Gap Extent of disclosure index (0-10) 6 6 9 7 7 8 2 10 Extent of director liability index (0-10) 5 6 5 2 2 8 4 9 Ease of shareholder suits index (0-10) 6 7 6 9 6 8 6 7 Extent of shareholder rights index (0-10) 6 6 8 6 9 8 6 8 Extent of ownership and control index (0-10) 4 5 7 5 7 6 5 6 Extent of corporate transparency index (0-10) 5 7 8 8 7 4 7 8 Extent of shareholder governance index (0-10) 5 6 8 6 8 6 6 7 Strength of minority investor protection index (0-10) 5 6 7 6 6 7 5 8 Paying taxes Rank 104 49 88 51 169 46 93 73 Payments (number per year) 22 14 11 7 9 7 11 8 Time (hours per year) 309 144 216 260 312 210 277 188 Total tax rate (% of profit) 40 37 41 41 106 29 47 39 Profit tax (% of profit) 17 15 18 15 4 22 10 22 Labor tax and contributions (% of profit) 17 19 20 25 29 4 34 16 Other taxes (% of profit) 7 3 3 1 73 3 2 1 Time to comply with VAT refund (hours) 8 8.5 15 22 Time to obtain VAT refund (weeks) 8.2 26.6 15.2 17.5 Time to comply with corporate income tax audit (hours) 1.5 6 6 11 12 11.3 Time to complete a corporate income tax audit (weeks) 0 18.1 0 31.6 23 33.5 Post filing index (0-100) 56 75 50 77 48 55 64 53 Trading across borders Rank 95 51 71 1 116 147 1 61 Trading across borders 70 86 80 100 65 58 100 83 Time to export: Documentary compliance (hours) 60 14 5 1 30 68 1 10 Time to import: Documentary compliance (hours) 73 19 11 1 192 36 1 10 Time to export: Border compliance (hours) 58 27 16 0 21 100 0 45 Time to import: Border compliance (hours) 65 28 41 0 60 144 0 69 Cost to export: Documentary compliance (US$) 145 72 87 0 60 170 0 45 Cost to import: Documentary compliance (US$) 109 79 142 0 120 213 0 60 Cost to export: Border compliance (US$) 494 238 376 0 150 428 0 321 Cost to import: Border compliance (US$) 536 268 655 0 1200 657 0 321 Enforcing contracts Rank 83 60 30 55 102 115 13 44 Time (days) 619 606 580 685 995 600 605 425 Filing and service (days) 44 34 30 60 90 30 60 35 Trial and judgment (days) 390 441 450 480 540 490 365 270 Enforcement of judgment (days) 185 131 100 145 365 80 180 120 Cost (% of claim) 29 22 25 19 23 33 15 37 Attorney fees (% of claim) 19 15 12 12 15 23 5 30 Court fees (% of claim) 5 4 3 5 7 8 8 1 Enforcement fees (% of claim) 5 3 10 2 1 3 2 6 Quality of the judicial processes index (0-18) 9 10 13 11 12 7 14 12 Quality of the judicial administration index (0-18) 9 10 13 11 12 7 14 12 Court structure and proceedings (0-5) 3 4 4 5 5 2 5 4 Case management (0-6) 2 2 4 2 4 2 4 3 Court automation (0-4) 1 2 4 2 1 1 3 3 Alternative dispute resolution (0-3) 2 2 2 3 2 3 3 3 39 World Bank Group 39 40 40 Resolving insolvency Rank 97 48 139 22 101 55 62 46 Outcome (0 as piecemeal sale and 1 as going concern) 0 1 0 1 0 0 0 1 Time (years) 3 2 5 3 2 2 2 1 Cost (% of estate) 17 10 15 15 17 18 15 10 Recovery rate (cents on the dollar) 33 61 15 63 22 34 44 81 Strength of insolvency framework index (0-16) 8 10 8 14 10 13 10 6 Commencement of proceedings index (0-3) 2 3 3 3 3 3 3 2 Management of debtor’s assets index (0-6) 4 5 2 6 4 6 5 2 Reorganization proceedings index (0-3) 1 1 1 3 2 2 1 0 TEM, May 2018: Minding the External Gap Creditor participation index (0-4) 2 2 2 2 1 2 2 2 Source: WB, Doing Business Annex 13: Logistics Performance Index (2016) Logistics Performance Indicators   UMC HIC Turkey Poland Argentina S. Africa Hungary Malaysia Logistics performance index: Overall 2.7 3.6 3.4 3.4 3.0 3.8 3.4 3.4 Lead time to export, median case (days) 4.1 2.3 2.0 1.0 2.0 3.0 - 3.0 Lead time to import, median case (days) 3.7 2.7 2.0 1.0 4.0 3.0 - 7.0 Ability to track and trace consignments  2.7 3.6 3.4 3.5 3.3 3.9 3.4 3.5 Competence and quality of logistics services 2.7 3.5 3.3 3.4 2.8 3.7 3.4 3.3 Ease of arranging competitively priced shipments 2.7 3.5 3.4 3.4 2.8 3.6 3.4 3.5 Efficiency of customs clearance process  2.5 3.4 3.2 3.3 2.6 3.6 3.0 3.2 Frequency with which shipments reach consignee within scheduled or expected time 3.1 3.9 3.7 3.8 3.5 4.0 3.9 3.7 Quality of trade and transport-related infrastructure 2.6 3.6 3.5 3.2 2.9 3.8 3.5 3.4 Score, 1=low to 5=high Source: WB, Logistics Performance Index Annex 14: Health Statistics (2015) Health Statistics Indicators   UMC HIC Turkey Poland Argentina S. Africa Hungary Malaysia Life expectancy at birth, total (years) 75.1 80.7 75.4 78.2 76.3 61.9 76.0 75.2 Life expectancy at birth, male (years) 72.9 78.2 72.2 74.4 72.6 58.5 72.4 73.0 Life expectancy at birth, female (years) 77.5 83.5 78.7 82.2 80.2 65.6 79.7 77.5 Mortality rate, infant (per 1,000 live births) 12.6 4.6 11.7 4.2 10.3 35.5 4.6 7.0 Source: WB, World Development Indicators Annex 15: Education Statistics (2015) Education Statistics Indicators   UMC HIC Turkey Poland Argentina S. Africa Hungary Malaysia Educational attainment, at least completed primary, - - 88.3 98.9 - 82.4 99.6 - population 25+ years, total (%) (cumulative) Primary completion rate, total (% of relevant age group) 94.7 98.8 91.8 97.9 101.8 - 96.9 101.2 Educational attainment, at least Master’s or equivalent, - - 1.8 18.7 - 1.2 8.9 - population 25+, total (%) (cumulative) Educational attainment, Doctoral or equivalent, - - 0.3 0.6 - - 0.8 - population 25+, total (%) (cumulative) School enrollment, secondary (% net) 79.1 92.2 86.4 92.5 88.2 - 91.0 68.5 Educational attainment, at least completed upper secondary, - - 37.1 83.5 - 64.6 75.1 - population 25+, total (%) (cumulative) Educational attainment, at least completed lower secondary, - - 56.4 83.9 - 77.2 96.8 - population 25+, total (%) (cumulative) Adjusted net enrollment rate, 95.7 97.2 94.2 96.5 99.7 - 95.7 98.1 primary (% of primary school age children) School enrollment, primary (% net) 94.8 96.5 94.1 96.4 99.3 - 90.6 98.1 *Scores for Poland and Argentina represent 2014 figures. 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