Debt Management in a non-Conventional Monetary Policy ......Turkish economy has continued to improve since 2002 3 High level of growth: • average real growth rate between 2002-2012

Debt Management in a non-Conventional Monetary Policy World: Turkish Experience

Mr. Taşkın TEMİZ DG for Public Finance Turkish Treasury

June 20, 2013 Washington DC

2

Outline

Reflections of non-conventional monetary policies on Turkey

capital flows

monetary policy responses

debt dynamics

Turkish economy has continued to improve since 2002

3

High level of growth:

• average real growth rate between 2002-2012 is 5.2%

Strong banking sector:

• capital adequacy ratio of banking sector as of 2012 stands at 17.9%

Robust fiscal position:

• average public sector primary balance (imf defined) to GDP ratio between 2003-2012 is

2.6 %

Improved debt dynamics:

• general government debt to GDP ratio decreased to 36.1% in 2012 (74% in 2002)

• time to maturity of central government debt increased to 4.6 years in 2012 (<1 year in

2002)

• Local currency debt as a percentage of central gov’t debt stands at 73% as of 2012 (42%

in 2002)

• floating rate debt as a percentage of central gov’t debt declined to 40% in 2012 (55% in

2002)

Like other EMs, capital inflows to Turkey increased after AE CBs’ non-conventional policies

4 (*) As of 31st May, 2013

Source: CBRT

-10

-5

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013*

bill

ion

USD

Net Flow to Stock Market Net Flow to DIBS Market Total Net Flow

Turkey has been affected by this trend more significantly than many other EMs

5 Source: JP Morgan

100

150

200

250

300

350

400

450

500

01

-20

07

05

-20

07

09

-20

07

01

-20

08

05

-20

08

09

-20

08

01

-20

09

05

-20

09

09

-20

09

01

-20

10

05

-20

10

09

-20

10

01

-20

11

05

-20

11

09

-20

11

01

-20

12

05

-20

12

09

-20

12

01

-20

13

05

-20

13

GBI-EM Traded Index Total Return Index Level Local Currency

GBI-EM Turkey Traded Index Total Return Index Level Local Currency

CBRT responded to this change with accommodative policies

6

Objectives

to sustain price stability

to maintain financial stability

• exchange rate

• credit growth

Tools

policy rate

liquidity management

interest rate corridor

required reserve ratios

reserve option mechanism

Depending on the market circumstances, CBRT changed liquidity conditions

7 Source: CBRT

0

4

8

12

16

20

24

01-2

007

06-2

007

11-2

007

04-2

008

09-2

008

02-2

009

07-2

009

12-2

009

05-2

010

10-2

010

03-2

011

08-2

011

01-2

012

06-2

012

11-2

012

04-2

013

%

O/N Borrowing Rate 1W Repo Rate (Policy Rate) O/N Lending Rate

Start of active use of interest rate corridor (September 2010)

…. and increased its FX reserves

8 (*) As of 31st May, 2013

Source: CBRT

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013*

bill

iıon

USD

CBRT FX Reserves (million USD)

Treasury’s borrowing cost significantly declined while the share of foreign investors in domestic debt increased

9 Source: Treasury, CBRT

0

5

10

15

20

25

30

2006

2007

2008

2009

2010

2011

2012

Jan

. 20

13

Feb

. 201

3

Mar

. 201

3

Ap

r. 2

013

%

Non-Resident Share in Domestic Debt Stock Average Borrowing Cost

Yields in all maturities have decreased

10

20

40

60

80

100 20003000

40005000

60007000

80009000

10000

4

6

8

10

Vade (Gün)

Dönem

Getiri

Yie

ld

Maturity

Period

Expected real interest rate fluctuated around zero

11 Source: Treasury

-2

-1

0

1

2

3

4

5

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-12

Sep

-12

Oct

-12

No

v-12

De

c-1

2

Jan

-13

Feb

-13

Mar

-13

%

Foreign participation also enhanced secondary market liquidity

12 Source: Borsa Istanbul

0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

bill

ion

TL

BIST Over-the-Counter

Treasury used this opportunity to extend borrowing maturities and to concentrate on fixed rate borrowing

13

0

20

40

60

80

100

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013*

mo

nth

s

Share of Floating Rate Borrowing

Share of Fixed Rate Borrowing

Average Maturity of Domestic Borrowing (Right Axis)

(*) As of 31st May, 2013

Source: Treasury

Turkish Government bonds yields

14 Source: Bloomberg

0

1

2

3

4

4

6

8

10

12

08.

04

.20

10

08.

07

.20

10

08.

10

.20

10

08.

01

.20

11

08.0

4.20

11

08.

07

.20

11

08.

10

.20

11

08.

01

.20

12

08.

04

.20

12

08.0

7.20

12

08.

10

.20

12

08.

01

.20

13

08.

04

.20

13

% %

Turkey 2Y Turkey 5Y Turkey 10Y US 10Y (Right Scale)

Challenges Ahead

15 Source: Bloomberg

How will AE CBs exit their non-conventional monetary

policies?

Will EMs lose all of their gains?

How should debt managers react?

16

An international monetary coordination is required

AE CBs should coordinate with other countries on exit of their non-

conventional monetary policies

EMs should implement prudential measures

Fundamentals

Fiscal discipline

Structural reforms

Monetary Policy

EM CBs should continue to react to maintain financial stability

Debt Management

sensitivity of debt stock to risks (esp. interest rate, exchange rate, and liquidity

risks) should be decreased

Challenges Ahead

17

Turkey’s debt to GDP ratio has significantly declined

35.0

33.0

31.0

32.1

32.8

32.7

36.135.8

30

34

38

42

46

2008 2009 2010 2011 2012 2013 2014 2015

Gen

era

l G

overn

men

t D

eb

tS

tock

/ G

DP

(%)

Baseline Scenario Exchange Rate Shock (10%) Growth Shock (2 points)Interest Rate Shock (500 bp) Combined Shock

(*) 2013-2015: MTP Projections

18

sensitivity of debt stock to macrofiscal shocks decreased

2001 2012

Change in real exchange rate app/dep

by 5 percentage points

+ / - 2.2 points + / - 0.5 points

Change in TL interest rate by*

10 percent + / - 2.0 points + / - 0.2 points

25 percent + / - 5.0 points + / - 0.5 points

Change in GDP growth rate by

2 percentage points

+ / - 1.5 points + / - 0.7 points

Source: Treasury

19

Domestic Market Roll-Over Ratio

Source: Treasury

70

80

90

100

110

120

2004 2005 2006 2007 2008 2009 2010 2011 2012

%

Domestic Market Roll-Over Ratio (Turkey)

20

Duration of Domestic Debt Stock Held by Foreign Investors

(*) As of September 2012

Source: CBRT

0

1

2

3

4

5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

year

Duration of Debt Stock Held by International Investors (Turkey)

21

Total Securities to Total Assets Ratio of Banking Sector

(*) As of April 2013

Source: BRSA

10

20

30

40

50

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

%

Total Securities to Total Assets Ratio of Banking Sector (Turkey)