Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

MAY 2018
TURKEY

MONITOR
ECONOMIC

GAP
MINDING
THE EXTERNAL
 World Bank Group

TURKEY ECONOMIC MONITOR,

May 2018:
Minding the External Gap

I
TEM, May 2018: Minding the External Gap

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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

Executive summary
Taking stock
A strong policy response – on the back of fiscal buffers, a
strong financial system, and favorable external conditions
– enabled Turkey to recover from its shock of 2016, with
growth accelerating to 7.4 percent in 2017. Countercyclical
fiscal policy and private sector credit boosted demand, and
helped overcome labor market and financial sector rigidities to
accelerate production. Short-term fiscal and credit measures
helped avert a bigger collapse in demand and production after
the economy contracted in Q3 2016. They also contributed
to progress on poverty reduction.
The balance of risks in the Turkish economy since Q3-Q4
2017 has shifted from growth to stability. Demand has
overshot supply capacity and macroeconomic imbalances
have widened. The outcome of supply constraints and
demand impulse are reflected in high inflation; a large current
account deficit; and currency volatility. These developments
are weighing on private sector confidence despite the ongoing
boost to sales, employment and profits.
Policy adjustments could help reduce the risks of a boom-
bust cycle. With economic recovery, fiscal policy and private
credit have turned procyclical. Policy adjustments could
include an unwinding of temporary fiscal incentives; and
increased alignment between monetary and macroprudential
policies. The removal of fiscal incentives could help maintain
fiscal buffers that in the first place helped deal with the
most recent shocks. Misalignment between monetary and
macroprudential policies could exacerbate macro-financial
risks through a more leveraged private sector on the one hand
and higher cost of financing on the other.
A renewed focus on supply side constraints will be important
for medium-term growth. Recent reforms in this regard
include: (i) further strengthening of the secured transactions
system, which would support the financial sector’s
countercyclical capacity and SME growth; (ii) investment
climate reforms to improve private sector competitiveness;
and (iii) reforms to bankruptcy and insolvency procedures
to improve efficiency and promote continuity of viable
businesses.
Enabling an orderly adjustment is important for productivity
and potential output. Turkey has been prone to large
economic swings in the past. The greater the volatility in
growth, the more pronounced is the negative impact on
productive investment and efficiency of resource allocation.
This hurts long term productivity and potential output, both
of which have stagnated in Turkey, as in other Emerging
Market and Developing Economies.
World Bank Group
Looking ahead
Growth in Turkey is projected to moderate to 4.7 percent in
2018, though with heightened downside risks. There is high
probability of continued expansionary policies driven by the
desire to maintain strong growth in the run up to elections
in 2018 and 2019. Inflation is projected at over 10 percent
and will remain an important policy challenge in the coming
year. Whilst export growth is expected to remain strong, the
contribution of net exports to growth is projected to be offset
by a large import bill linked to rising commodity prices.
Tighter global liquidity conditions in 2018 will affect two soft
spots for the Turkish economy: access to and cost of external
finance, an important lever of growth for the country. Turkey’s
external buffers to withstand further financial tightening have
reduced relative to prior episodes of financial tightening due
to rising external debt, which are subject to sustainability
risks in the case of extreme currency depreciation or energy
price shocks.
Despite corporate and financial sector buffers, tightening
financial conditions could further increase pressures on
the real sector and raise macro-financial risks. Corporate
vulnerability of companies listed in the Turkish stock markets
rose in 2017. Non-financial corporates face elevated interest
rate and exchange rate risks due to net open foreign exchange
positions. Though much of the latter has long-term maturity
and is concentrated among larger firms with stronger balance
sheets, increased cost of finance and a weaker Lira could affect
financial sector assets. These risks may be exacerbated by the
projected slowdown in economic activity.
Fiscal policy space needed to react quickly to adverse
external developments remains relatively strong in Turkey,
notwithstanding contingent liabilities. The government is in
a good position to finance its long-term commitments and
the composition of public debt does not unduly expose the
authorities to a sudden change in financial market conditions.
On the other hand, tightening global financial conditions
together with elevated levels of external and private sector
debt have the potential to rapidly erode fiscal space if the
latter become contingent liabilities.
The possibility for monetary policy to respond to adverse
external developments is more challenging. A combination
of high inflation (due to demand pressures, exchange rate
passthrough and higher production costs) on the one hand,
and rising (and positive) policy rates on the other (average
CBRT funding rate is currently above the last five years’
average), creates challenges for a monetary stimulus in the
event of an external shock. This challenge is exacerbated by
the need to cool credit expansion, which has been above its
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).
early 2018 point to positive momentum for the coming
MayMay
Despite 21, 2018
strong
21, 2018 growth, global median inflation stood
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)

Takingstock
stock
and on aluminum (10 percent), in addition to possible
Taking
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
in1.February tightening and fears of trade protectionism caused
1. The(compared
The global
global toeconomy
economyan average of 200,000
continues
continues to since
to grow growat aatstrong
a strongpace pace in early
in early 2018. Global growth in 2017
2011) whilst the consumer confidence index was at an increased volatility in2018. Global
financial growth
markets ininearly
2017 2018
reached 3 percent (up from 2.4 percent in 2016) whilst Emerging Markets
reached 3 percent (up from 2.4 percent in 2016) whilst Emerging Markets and Developing Economies 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
growth
and the posted
posted
composite its strongest
its strongest
PMI performance
performance
reached sincesince
decade-long 2010.
highs 2010. was associated
Unemployment
inUnemployment with
ratesrates a
in manycontinued
in many rise
economies
economies in US long-term
reached
reached lowslows
not seen for
not seenInforJapan,
January. a
a decade decade or more. This
or more. This momentum
the unemployment 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
Managers’
Managers’
2.7 percent Index Index
to 2.4for for developed
developed
percent and emerging
and emerging
in January, its lowest markets
markets ofpoint
level point 2.9 percent
to continued inexpansion
to continued February), ofdriven
expansion by rising and
of manufacturing
manufacturing inflation
and
services
inservices (Figure
(Figure
25 years. 2). Despite
2). Despite
China, strong growth,
strongatgrowth,
which grew globalQ4 inflation stood at 2.1 percent in January. Inflation in inof
globalinmedian
6.3 percent medianexpectations
inflation and
stood prospects
at 2.1 of
percent faster
in normalization
January. Inflation
both advanced economies and EMDEs
both advanced economies and EMDEs has been relatively has been relatively
US flat since
flat monetary
since earlyearly 2017.
policy.
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
GDPGDP growth
growth (%) (%) Purchasing
Purchasing Managers'
Managers' IndexIndex
(> 50(>=50 = mom
mom
expansion;
expansion; < 50<=50 = mom
mom contraction)
contraction)

4 4

-6 -6
2008 2008
2009 2009
2010 2010
2011 2011
2012 2012
2013 2013
2014 2014
2015 2015
2016 2016
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 Euro Euro
Area Area
Source:
Source:
Source: WB WB Economic
WBGlobal
GlobalGlobal Economic
Economic Prospects
Prospects
Prospects (January
(January
(January 2018) 2018)2018) Source:
Source: IHP
Source: IHP Markit
Markit
IHP Economics,
Economics,
Markit 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, “Globalthe labor
Economic market
Prospects: added
Broad-Based 313,000
Upturn, but Forjobs in February
How Long?” (compared
(January 2018);
States, the labor market added 313,000 jobs in February (compared to an average of 200,000
(January – March 2018)
to
and WB, “Globalan average
Economic of(Monthly
Monitor 200,000and

sincesince
2011) 2011)
whilstwhilst
the the consumer
consumer confidence
confidence index index
was wasat anat 18-year
an 18-year high.high.
In theIn the
EuroEuro Area,Area, consumer
consumer
confidence
2confidence and and the composite
the composite PMIPMI reached
reached decade-long
decade-long highshighs in January.
in January. In Japan,
In Japan, the unemployment
the unemployment rate rate
fell fell
fromfrom 2.7 percent
2.7 percent to percent
to 2.4 2.4 percent in January,
in January, its lowest
its lowest levellevel
in 25inyears.
25 years. China,
China, which which
grewgrew
at 6.3at percent
6.3 percent
in Q4 in Q4
20172017 (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,
earlyearly
20182018 has been
has been mixed,
mixed, withwith
somesome
 associated withwith
associated a continued
a continuedriserise
in US long-term
in US long-termyields (US(US
yields 10-year
10-yearbondbondyields reached
yields reached a four-year
a four-yearhigh
highofof2.9
2.9
percent
percent in February), driven by rising inflation expectations and prospects of faster normalizationofofUS
in February), driven by rising inflation expectations and prospects of faster normalization US
monetary
monetarypolicy. Following
policy. Followingthe the
release of stronger-than-expected
release of stronger-than-expected USUS wage
wagegrowth
growth in in
February,
February,USUSand andglobal
global
equity markets
equity tumbled
markets tumbledandandstock market
stock volatility
market spiked
volatility (Figure
spiked (Figure 3).3).
After
Afterrecovering
recoveringfrom fromthis initial
this jolt,
initial
World Bank jolt,
Group
financial market
financial volatility
market returned
volatility in end
returned March
in end following
March news
following thatthat
news thethe
USUSadministration
administration is considering
is consideringtariffs
tariffs
on aon
wide 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 IndexIndex
Volatility (Jan. 1(Jan.
2017 = 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 IIFIIF
Portfolio 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 inthethe early
early partpartofof2018 2018have haveremained
remained
relatively
relatively strong. strong.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 accelerating
than-expected
rapidly inUS wage
January growth in February, US and whilst investment accounted forflows
around accelerating
30EMDEpercent
rapidly in January 20182018andand international
international bond bondsalessales reaching
reaching an an all-time
all-time highhigh of ofUS$71US$71 billion.
billion. ButButEMDE
globalmarkets
equity markets tumbled and sell-off
stock market of growth. Though ninety percent of this outflows
investment
markets werewere affected
affected by theby the global
global sell-off in earlyin early February,
February, resulting
resulting in in equity
equity and and bondbond portfolio
portfolio outflows
volatility
over the course of February (Figure 4). In March, portfolio capital inflows to EMDE bond and equity also
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 saw a
funds
funds
initial rebounded
jolt, financial following
market thevolatility
previous returned
month’s dip. in Bond spreads
end recovery alsoinnarrowed
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.
StrongStrong
considering policy policy
tariffs on a response
wide range
response to 2016
of Chinese
to 2016 shockshock
goods. supports
supports Turkey’s
A Turkey’s
combination ofsharp
sharp recovery
theserecovery
led inin2017
to a broad-based 2017acceleration
in domestic demand (Figure 6).
5. Despite
6. market
Turkeyvolatility,
experienced capital flowsrecovery
a sharp to EMDEs in 2017 (7.4 percent growth), exceeding all expectations.
in6.theInearlyTurkey part experienced
of consensus
2018 have a sharp
remained recovery in 2017 (7.4
relatively percent
7. growth
Expansionary growth), exceeding
fiscal policies all
wereexpectations.
a major
January 2017, forecasts averaged 2.3 percent for the year (Figure 5). 2 External demanddriver
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 fiscalinflows.
response
2017Private
pickedconsumption
up with an acceleration
drove half ofintheEUexpansion
imports from in 2017, Turkey
whilst and a quadrupling
investment accounted of net portfolio inflows.
strong
Privatenote, with portfolio
consumption drove flows
half accelerating
of the expansionrapidlyin in
2017, was
whilst possible
investment in partaccountedthanksforfor around
toaround
buffers30
30 percent
maintained
percent
January of growth.
2018Though Though
and internationalninety percent
bondofsales of this investment
reaching an growth growth
through was due to
countercyclical construction,
fiscal policiesH2 2017 also
in also
previous saw a
of growth.
recovery in ninety and
machinery percent
equipment thisinvestments
investment following was
a due to construction,
contraction over four H2 2017
consecutive saw ayears
quarters. A
all-time
recovery highinof US$71 billion.
machinery But EMDE
andledequipment markets were
investments following (Figure 7). Government
a contraction over expenditures
four consecutive expanded
quarters.rapidly
A
combination of these to a broad-based acceleration in domestic demand (Figure 6).
affected by the global
combination of thesesell-off
led toina broad-based
early February, resulting in in
acceleration 2017 (16
domestic percent
demand in nominal
(Figure 6). terms) and had a strong
in equity
7. and bond portfolio outflows
Expansionary over the
fiscal policies werecourse of driver
a major multiplier of this effect,
uptick estimated
in domestic at between
demand. 0.8Theandfiscal
1.15.3
7. response
February Expansionary
(Figure was 4).possible fiscal
In March, policies
thankswere
portfolio
in part capital a inflows
to buffersmajor driver
maintainedThisofwas thisoffset
through uptick by ainrecovery
domestic
countercyclical demand.
in customs
fiscal policiesandThe fiscal tax
in income
previous
toresponse
EMDE was
yearsbond
(Figure possible
and in part
7).equity funds
Government thanks to buffers
rebounded
expenditures maintained
following
expanded through
receipts,
rapidly countercyclical
which
in 2017 (16helped
percent infiscal
contain policies
the fiscal
nominal indeficit
terms) previous
and had within
a
years (Figure
strong 7).
multiplierGovernment
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
customshad a
and
strong
after spikingmultiplier
income effect, which
intaxFebruary.
receipts, 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 ofsignificantly
GDP, though over primary
the past andtwo
income tax receipts,
recurrent surpluses which
havehelped
narrowed contain the fiscal
significantly over deficit
theyears.within
past two 1.5 percent of GDP, though primary and
years.
recurrentpolicy
Strong surpluses 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 AssumptionEconomicsincludeInc.
a negative output gap in the past five years, low propensity to import, labor market rigidity, limited
6. 3 Assumption
Turkey
automatic experienced
stabilizers,
include lowa public
a negative sharp
output recovery
debt,gapand the inpast2017
ineffective public labor
finance
five years, market rigidities.
lowmanagement.
propensity toSee also IMF
import, Incentives
labor market included
(September subsidies
2014).limited
rigidity,
automatic
(7.4 percent stabilizers,
growth), lowexceeding
public debt,all andexpectations.
effective publicIn 4
financeformanagement.
minimum See wage alsosupport
IMF (September 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
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CONFIDENTIAL
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May 21, 2018

Figure 5: Low consensus forecast in early 2017 Figure 6: Broad recovery in domestic demand
FigureFigure
5: Low5:consensus
Low consensus
forecastforecast
in early in early
2017 2017 Figure
Figure 6: Broad
6: Broad recovery
recovery in domestic
in domestic demand
demand
STRICTLY
Turkey GDP
STRICTLY
Turkey GDP (%CONFIDENTIAL
(%CONFIDENTIAL
change) - 2017
change) - 2017 – –
- Consensus
- Consensus Contributions to GDP
Contributions Growth
to GDP Growth
May
Forecast
May 21,
21, 2018
Forecast 2018
10%10%
6.006.00 January 20172017
average of of
January average
consensus growth
consensus forecats:
growth … …
forecats:
Figure
Figure 5: Low
5: Low consensus
consensus forecast
forecast in early
in early 2017
2017 6% 6%Figure 6: Broad
Figure 6: Broad recovery
recovery in domestic
in domestic demand
demand
4.004.00

Turkey
Turkey GDPGDP (% change)
(% change) - 2017
- 2017 - Consensus
- Consensus Contributions
2% 2% to GDP Growth
Contributions to GDP Growth
2.00Forecast
Forecast
2.00
10%10%
-2%-2%
6.006.00 January
January 20172017 average
average of of
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 Economics
Economics Inc. Inc. 2%
Source: Haver
Source:
2% HaverAnalytics,
Analytics, WB
WB Staff estimates
Staff estimates
Source: Consensus Economics Inc. Source: Haver Analytics, WB Staff estimates
2.002.00
8. 8. There
There areareindications
indications thatthatfiscal incentives also -2%helped sustain supply capacity by byhelping
ofaddress
minimum wage and rigidities.
other factors. 4 fiscal incentives
This creates
also helped
16 percentfor
-2% sustain
in 2017) though
supply capacity
remained high
helping
inpublic
line with
labor market Incentives included subsidies
address labor market rigidities. Incentives included subsidies for minimum wage support and minimum wage support and public
labor market
transfers
transfersforforrigidity
employment at
employment the lower
programs.
programs.end of
Recent the
Recent income
research
research finds demand.
finds thatthat This
whilst
whilst was
realrealdriven
wages wages by
tend tenda 20
to to percent
adjust
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to to
economic in credit
economic
C G I NX Stocks Growth
distribution.
conditions
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higher latter
at higherlevels ©account
levels of© income,
CopyrightforConsensus
of income,
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lower
at Economics
the lower endofof
end
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wage and are
Economics
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other
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the most 4 This creates
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Inc. other factors. This creates Source:
Inc. 4 to labor market
linked
labor Haver
Source: to
market rigidity
loans
Haver at
under
rigidity
Analytics,
Analytics, WB
WB Staff
the lower
the
at estimates end of
government-backed
the lower end of the income
Staff estimates the income Credit
distribution.
job losses during
distribution. The Thelatter
economic account
latter downturns.
account forfor 25Fiscal
percent
25 of of
incentives
percent workers
workers in Turkey
Guarantee
in Turkey who
Fundwhoare
(CGF)alsoalso
are the
forthemost
SMEs
most vulnerable
(volume
vulnerable to TL
of jobjob
to 200
losses
likely 8. during
helped
8. losses during
There economic
There
to are are
sustain
economic downturns.
indications
employment
downturns.
indications Fiscal
that
that Fiscal incentives
fiscal
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incentives helped
also
billion
also helpedto sustain
helped
in 2017).
helped to sustain
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sustain
This supply
was helped
employment
supply when growth
capacity
by favorable
when
capacity by
growth slowed
by helpinghelping
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slowed
down
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address and
address
down down thelabor
and
labor probability
the
and market
probability
the
market of rigidities.
retrenchments
of
probability retrenchments
rigidities. of
Incentives increased.
Incentives increased.
retrenchments included This
included Thismay mayalsoalso
subsidies
conditions,
subsidies explain
for for
explain
including in part
minimum
minimum ina part thewage
recovery
wage continued
the insupport
continued
support progress
and
andprogress
portfolio flows
public in that
public
in
poverty reduction
transfers
povertyThis
transfers
increased. for
reduction
for during
employment
employment
may also during 2017
explain (Box
programs.
2017in(Box
programs. 1).
part Recent
1).
Recent research
research finds
the continued finds that
that whilst
boosted whilst real
real wages
financial wages tend to adjust
tend to adjust to economic
sector liquidity. to economic
conditions
conditions
progress at higher
at higher
in poverty levels
levels
reduction of income,
of during
income, at(Box
at the
2017 the
lower lower
1).endend of the
of the wagewage distribution
distribution realrealwages wages arearelessless elastic
elastic because
because
of Figure
minimum
of minimum 7:
Figurewage Counter-cyclical
wage and
7: Counter-cyclical other
and other factors. fiscal policy
factors.
fiscal 4 This
policy
4 This has creates Figure
10.
labor
has labor Figure
creates 8:
The Money
market CGF
market8:rigidity growth
together
rigidity
Moneyatgrowth at in
the
the lower 2017
with
lower
in 2017 driven
some
end
enddriven by
of
of the private
loosening
the
byincomeincomeof
private
supported
distribution.
9. distribution.
Rapid growth
supported short-term
The in latter
private
short-term recovery
account
sector forfrom
credit25 shocks
percent
also of
helped workers in Turkey
macroprudential credit
who are expansion
also
regulations the most in vulnerable
2016 5
to job
helped
The latter accountrecovery from shocks
for 25 percent of workers in Turkey who are credit
also expansion
the most vulnerable to job
boost losses
lossesdemand during
during economic economic
and increase downturns.
downturns. production.Fiscal incentives
Fiscal incentives Money likely
likelyovercomehelped to sustain
financial
helped to sustain employment
market frictions.
employment when
when growth growth
In the slowed
slowedabsence
downdown
GDP
growth andand
and
GDP the
and the
Central
moderated probability
Government
slightly
probability
Central (from of retrenchments
spending
18
of retrenchments
Government spending (% (% in
percent increased.
2016
increased. to This This
ofMoney
Money may may
these also explain
measures,
supply
also 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 during
yoy) during 2017 (Box 1).
reduction 2017 (Box 1). 35%35%
0.090.09
15%15% 25%25%
FigureFigure
7: Counter-cyclical Figure
7: Counter-cyclical
7: Counter-cyclical fiscal
fiscal
fiscal policy has policy
policy hashas
supported Figure
Figure
Figure 8: 8: Money
8: Money
Money growth
growth
growth in 2017
in 2017
in 2017 driven
driven
driven by private
by private
by private
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 Money
Money supply
supply growth
growth andand contribution
contribution (%)(%)
change,
change, yoy)yoy) -15% -15%
35%
35%
CG

5% 5% -0.06 0.09
0.09-0.06
15%15% 25%25%OI (Net) Non-Bank FI Cr.
OI (Net) Non-Bank FI Cr.
CG spending growth

15%15%Inv Inv
and and
DevDev
Banks Private sector Cr. Cr.
CG spending growth

GDP growth

0.04 Banks Private sector

GDP growth

CG CG
spending (yoy(yoy
spending growth)
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%
-5%-5%
Sources: Haver
Sources: Analytics,
Haver WBWB
Analytics, StaffStaff
estimates.
estimates. -0.01-0.01
-15%-15%

5% 5% -0.06-0.06
OI (Net)
OI (Net) Non-Bank
Non-Bank FI Cr.
FI Cr.
Inv and
Inv and DevDev Banks
Banks Private
Private sector
sector Cr. Cr.
CG CG spending
spending (yoy(yoy growth)
growth) GDP
GDP (yoy(yoy growth)
growth) NF NF Public
Public Enterprises
Enterprises Cr. Cr. Government
Government and and SSI Cr.
SSI Cr.
NFANFA M3 M3
Sources:
Sources: Haver
Sources: Haver Analytics,
Analytics,
Haver WB WB
WB Staff
Analytics, StaffStaff
estimates. estimates.
estimates.

4 4 Aldan,
Aldan, A.,A.,
andand
Gürcihan Yüncüler,Yüncüler,
Gürcihan H. B. (2016),H.“Real
B.Wages and the
(2016), Business
“Real Cycle in
Wages andTurkey”, CBRT Working
the Business Paper,
Cycle inNo. 16/25; andCBRT
Turkey”, Yüncüler,Working
G., “To what extent are
real Aldan, A., and Gürcihan Yüncüler,
in Turkey?”H. B. (2016), “Real Wages and the Business Cycle in Turkey”, CBRT Working
4
wages responsive to the business cycle
Paper,
Paper,No.No. 16/25;
16/25;andandYüncüler,
Yüncüler,G.,G.,“To“To whatwhatextent
extentare are
realreal
wages responsive
wages to the
responsive business
to the cycle
business in Turkey?”
cycle in Turkey?”
5 5 5Blog
Baziki, S.B. (2017): “Impact of macroprudential policies on loan utilization,” CBRT

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, No.No.
Paper, 16/25;
16/25; andand Yüncüler,
Yüncüler, G., G.,
“To“To what
what extent
extent are are
realreal wages
wages responsive
responsive to the
to the business
business cycle
cycle in Turkey?”
in Turkey?”
 World Bank Group
STRICTLY
STRICTLYCONFIDENTIAL
CONFIDENTIAL––
May
May21,
21,2018
2018

Box
Box1:1:Poverty
Povertyand
andinequality
inequalitytrends
trendsininTurkey
Turkey
Box 1: Poverty and inequality trends in Turkey
Poverty
Povertyin
Poverty ininTurkey continues
Turkeycontinues
Turkey continuesto totodecline.
decline. The
decline.The share
shareof
Theshare ofofthe
thepopulation
the populationwith
population withper
with percapita
per capitaexpenditure
capita expenditurebelow
expenditure below
below
the poverty line (US$5.5 a aday inin2011 PPP) isisestimated totohave fallen from 9.9 percent toto9.1 percent in
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
the poverty line (US$5.5 day 2011 PPP) estimated have fallen from 9.9 percent 9.1 percent in
2017.
2017.Compared
ComparedtotootherotherUpper
UpperMiddle
MiddleIncome,
Income,ororrecently
recentlyacceded
accededtotoHigh
HighIncome,
Income,Countries,
Countries,Turkey
Turkey
2017. Compared to other Upper Middle Income, or recently acceded to High Income, Turkey has achieved
has
hasachieved
achievedoneoneofofthe
thefastest
fastestprogress
progressininpoverty
povertyreduction
reductionoveroverthe
thepast
past1515years
years(Figure
(Figure9).9).On
Onaverage,
average,
one of the fastest progress in poverty reduction over the past 15 years (Figure 9). On average, inequality over
inequality
inequalityover
overthis
thisperiod
periodhashasalso
alsobeen
beenrelatively
relativelylow,
low,although
althoughininmore
morerecent
recentyears
yearshashasstarted
startedtoto
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
Decliningpoverty
poverty Figure
Figure10:
10:Slight
Slightdecrease
decreaseinininequality
inequality
Figure 9: Declining poverty Figure 10: Slight decrease in inequality
Poverty
Povertyrates
rates(%
(%ofofpopulation)
population) Inequality
Inequality(Gini
(GiniIndex)
Index)
4040 5555

5050
3030
4545
2020
4040
1010
3535
00 3030

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,
2016,TUIK.
TUIK.The
TheWorld
WorldBank,
Bank,PovcalNet
PovcalNetforforother
othercountries.
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
linepoverty
absolute
poverty line
ofpoverty lineofofUS$5.50-a-day
US$5.50-a-day inUS$5.50-a-day inin2011
2011 PPP, the World 2011PPP,
PPP,
Bank’s the
theWorld
World
internationally Bank’s
Bank’sinternationally
comparable forcomparable
internationally
methodology comparable
upper midd-
methodology
methodology
le-income forforupper
countries uppermiddle-income
middle-incomecountries
countries

The
Theprogress
The progressinin2017
progress 2017was
2017 wassupported
was supportedby
supported byincreased
increasedemployment
increased employmentand
employment anda ahigher
and higherminimum
higher minimumwage.
minimum wage.The
wage. The
The
unemployment
unemploymentrate ratedeclined
rate declinedfrom
from12.7
from 12.7percent
12.7 percentin
percent inin2016
2016to
2016 to10.4
to 10.4percent
10.4 percentinin
percent in2017.
2017.An
2017. Anestimated
estimated1.6 1.6million
million
jobs
jobswere
jobs werecreated
were createdover
created overthis
over thisperiod,
this period,half
period, halfof
half ofwhich
of whichwere
which wereinin
were inservices
servicesand
services anda aafifth
and fifthinin
fifth inindustry.
industry.Labor
industry. Laborforce
Labor force
force
participation rates
participationrates
participation for
ratesfor women
forwomen increased
womenincreased from
increasedfrom 32.2
from32.2 to
32.2 to 33.5 percent.
to 33.5
33.5 percent. Fiscal
percent. Fiscalsupport
Fiscal support to
support to disadvantaged
to disadvantaged groups
disadvantaged groups
groups
and
andareas
and areas may
mayhave
areasmay contributed
havecontributed
have contributedtototosome
some
someofofofthese
these
these outcomes,
outcomes,
outcomes, but
but their
but their
their actual
actual
actual impact
impact
impact isisyet
isyet
tototo
yet bebebe
assessed.
assessed.
assessed.

9.9. Rapid
Rapidgrowth
growthininprivate
privatesector
sectorcredit
creditalso
alsohelped
helpedboost
boostdemand
demandand andincrease
increaseproduction.
production.
Money
Moneygrowth
growthmoderated
moderatedslightly
slightly(from
(from1818percent
percentinin2016
2016toto1616percent
percentinin2017)
2017)though
thoughremained
remainedhigh highinin
line
linewith
withdemand.
demand.ThisThiswas
wasdriven
drivenbybya a2020percent
percentjump
jumpinincredit
credittotothe
theprivate
privatesector
sector(Figure
(Figure8),8),7070percent
percentofof
which
whichwaswaslinked
linkedtotoloans
loansunder
underthethegovernment-backed
government-backedCredit CreditGuarantee
GuaranteeFund
Fund(CGF)
(CGF)for forSMEs
SMEs(volume
(volumeofof
TLTL200200billion
billioninin2017).
2017).This
Thiswas
washelped
helpedbybyfavorable
favorableexternal
externalconditions,
conditions,including
includingthe therecovery
recoveryininportfolio
portfolio
flows
flowsthat
thatboosted
boostedfinancial
financialsector
sectorliquidity.
liquidity.

10.
10. The
TheCGF CGFtogether
togetherwithwithsome
someloosening
looseningofofmacroprudential
macroprudentialregulations
regulationsinin2016 2016 5 5helped
helped
overcome
overcomefinancial
financialmarket
marketfrictions.
frictions.InInthetheabsence
absenceofofthese
thesemeasures,
measures,banksbanksare
areunlikely
unlikelytotohave
haveextended
extended
countercyclical
countercyclicalfinancing.
financing.Private
Privatecredit
creditininTurkey
Turkeyisispro-cyclical
pro-cyclical(Figure
(Figure11)11)and
andhas
hasbecome
becomeincreasingly
increasinglysoso
after
after2009
2009(Figure
(Figure12).
12).The
Thecountercyclical
countercyclicalcapacity
capacityofofthe
thefinancial
financialsector
sectorininTurkey
Turkeyisislimited
limitedbybyitsitsdepth.
depth.This
This
includes
includesthe
therelatively
relativelysmall
smallnon-bank
non-bankfinancial
financialsector
sector(e.g.
(e.g.capital
capitalmarkets,
markets,private
privateequity,
equity,insurance).
insurance).These These
short-term
short-termmeasures
measures––on onthe
theback
backofofa astrong
strongfinancial
financialsystem
systemand
andfavorable
favorableexternal
externalconditions
conditions––therefore
therefore
helped
helpedavert
averta amore
moresustained
sustainedcollapse
collapseinindemand
demandand andproduction
productionafter
afterthe
thecontraction
contractionininQ3Q32016.
2016.

5 Baziki, 5
S.B.
5 Baziki, S.B.(2017):
(2017):“Impact
“Impactofofmacroprudential
macroprudentialpolicies
policiesononloan
loanutilization,”
utilization,”CBRT
CBRTBlog
Blog
66
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May21, 2018
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2018: Minding the External Gap

STRICTLY
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May 21, 20182018
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
raterate
Figure
Figure 12: 12: Credit
Credit
0.04
0.04 is increasingly
is increasingly pro-cyclical
= 0.6127 pro-cyclical
Consumer lending R² R²
= 0.6127

growthsector growth
growthsector growth
Commercial
Commercial lending
lending raterate 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 =R²0.6127
= 0.6127

sector private
sectorprivate
0
Commercial
Commercial lending
lending raterate 0.0300.03
20 20 -0.05 -0.010 0
-0.05 0.05
0.05 0.10.1 0.15
0.15 0.20.2
-0.01
0.020.02
10 10

Quarterly
R² =
R² = 2009 0.1368
0.1368

Quarterly
R² =R²0.4293
= R²
R² 0.4293
= = 0.3515
0.3515
-0.02
-0.02
0.010.01 PrePre
2009
15 15 -0.030 Post
Post 2009
2009

Quarterly private
-0.03

Quarterly private
5 5 0
-0.06 -0.04
-0.06 -0.04 -0.02
-0.02 0 0 0.02 0.04
0.02 0.04 0.06 0.06 -0.05-0.05 0 0
-0.04
-0.04
-0.01-0.01 0.050.05 0.1 0.1 0.150.15 0.2 0.2
Quarterly GDP 10 (Seasonally Adjusted)
10growth 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
-0.03-0.03 PostPost
20092009
Sources: Haver Analytics, WB Staff estimates
Sources:
Sources: Haver
Haver Analytics,
Analytics, WBWB 5 estimates
5Staff
Staff estimates
-0.06-0.06 -0.04-0.04 -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 (Seasonally
Purchasing Adjusted)
Managers’ Index
TheThe
pro-cyclical
Sources:
Sources:
balance
balance
Haver
(Figureof11)
Haver
ofWBrisks
risks
Analytics,
Analytics,
and has
WB
has
has
StaffStaff
shifted
shifted
become
estimates
estimates
fromgrowth
from
increasingly growth
so (PMI) totostability
stability
survey results (March 2018), which point to
after 2009 (Figure 12). The countercyclical capacity of a fourteenth consecutive month of expansion in the
11. Monthly
the11.financial Monthly
sector indata data
Turkey point
point toto sustained
sustained
is limited growth
growth
by its depth. inin
This Q1Q1manufacturing
2018,
2018, though
though sector.6 Despite
economic
economic confidence
confidence theindices
boost
indices tohave
have sales,
started
started
includes to
the to decline
decline
relatively with
with
small increased
increased
non-bank macroeconomic
macroeconomic
financial sector imbalances.
employment
imbalances. Industrial
and
Industrial production
profits
production over continued
the
continued past to12to rise
rise by
months,
by
The The balance
balance of
ofper
risksrisks has has shifted
shifted fromfrom growth
growth to to stability
stability
over
over 10 10 percent
percent per month
month in in early
early
(e.g. capital markets, private equity, insurance). These 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 apoint toto afinancial
fourteenth consecutive
have started month
to weigh ofof expansion
on private in
thethe
insector manufacturing
confidence.
11. results
short-term
11. measures
Monthly (March
Monthly
6 Despitedata
2018),
–data
on the
point which
point
back point
toofsustained
to sustained strong a fourteenth
growth
growth in Q1inconsecutive
Q1 2018,
2018, though month
though economic expansion
economic confidence
confidence manufacturing
indices
indices havehave
sector.
sector. 6 Despite theboost
the boosttotosales, sales,employment
employmentand andprofits
profitsover overthethepast past1212months,
months,inflation,
inflation,currency currency
system started
startedand to
to declinedecline
favorablewith with increased
increased
external macroeconomic
macroeconomic
conditions – thereforeimbalances. imbalances.
12. Demand Industrial
Industrial has production
production
overshot continued continued
supply capacity to rise by by
to rise 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
percent
avert a more per month
per sustained
month in collapsein early
early 2018. 2018. This is
This is consistent
in demand consistent with the latest
with the latest Purchasing
and macroeconomic 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 point
point to atofourteenth
2016. a fourteenth consecutive
consecutive
inflation month
(CPI) month of expansion
of expansion
accelerated in 7the
in the
from manufacturing
manufacturing
percent in 2016
12.12. 6 Demand Demand hashasovershot
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 fromfrom 7 percent
7started
percent in 2016 toto1212 percent in 2017, exceeding thethe Central Bank’s
The balance
volatility,
volatility, and andpolicyof
policy risks
predictability has
predictability haveshifted
have started tofromtoinweigh
weigh 2016 on
ontarget percent
private
private of sector
5 sector
percent.
in 2017, exceeding
confidence.
confidence.
Inflationary
Central
expectations
Bank’s
have risen,
targetofof5 percent.
target 5 percent.Inflationary
Inflationary expectationshave
expectations have risen,creating
risen, creatingupwardupwardinertia inertiaininprice
pricepressures
pressures(Figure (Figure13). 13).
growth
The
12.
TheCPI
12. Demand
todiffusion
CPI stability
diffusionindex,
Demandhas
index,which
hasovershot
whichmeasures
overshotsupply
measuresthethefraction
supplycapacity capacityand
creating
fractionofofCPI
and
upward
CPIcomponents
macroeconomic
macroeconomic
inertia
componentsrising in price pressures
rising(or(orfalling)
imbalances
imbalances have
(Figure
falling)inintotal
havewidened.widened.
13).
total
components,
components, followed
followed an upward
anaccelerated
upward trend
trend in7in 2017
2017 (Figure
(Figure The
14). CPI
Almost diffusion
8080 percent index,
ofof which
CPI measures
components the
rose fraction
above of
Headline
Headline
11. Monthly inflation
inflationdata(CPI) (CPI)
point accelerated
to 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 components
exceeding
exceeding
CPI components rising (or falling) in total components, the the
Central rose
Central above
Bank’s
Bank’s
thethe
target
inflation
inflation
target
of of5 percent.
target,
5target,
percent.
exceeding
exceeding
Inflationary
Inflationary
historical
historical
expectations
averages.
averages.
expectations have have risen,
risen, creating
creating upwardupward inertia
inertia in price
in price pressures (Figure 13).
2018, though economic confidence indices have followed an upward trend in pressures
2017 (Figure(Figure 14).13).Almost
The
The CPI CPI diffusion
diffusion index,
index,increased which
which measures measures the fraction
the fraction80ofpercent of CPI
CPI components components rising
risingincrease
(or (or falling) in total
started toFigure
decline
Figure 13: 13: with
Rising
Rising inflation
inflation
macroeconomic
expectations
expectations Figure
Figure of14:
14: CPI components
Broad-based
Broad-based rosefalling)
increase above
in in
in total
the
prices
prices inflation
components,
components,
imbalances. followed
followed
Industrial an an upward
upward
production trend
trend in 2017
in 2017
continued to (Figure
(Figurerise 14).14). Almost
Almost 80 80 percent
percent of of
CPICPI components
components rose rose above
above
the inflation target, exceeding historical averages. target, exceeding historical averages.
bytheover
inflation
10 percent target, perexceeding
monthhistorical
in earlyaverages.
Inflation & Inflation Expectations (yoy % change)
2018. This is
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
Figure
90 90 14:14: 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 Expectations
Expectations (yoy(yoy % change)
% change)
70Inflation
Inflation Diffusion
70 Diffusion Index,
Index, (in percent)
(in percent)
139 13
9
90 90
60 60
117 11
7 80 80
50 50
70 70
95 59 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, StaffWB
WB WB
Analytics, 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 rate
ratedepreciation
depreciation (proxied
(proxied bybyterms
terms of of
trade)
trade) accounted
accounted forfor
almost
almost half of of
half thetheincrease
increase in in
consumer
consumer
prices
prices in in
2017. Inflation
2017. Inflationdynamics
dynamics werewerealso 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, particularly
policy, particularly in in
thethe
lastlast
quarter
quarter of of
2017. Along
2017. Along with
with a strong
a strongcyclical
cyclicalrecovery,
recovery,
thetheslack
slack in in
demand
demand hashas
vanished,
vanished, which
whichhashas started
started to toexert
exert higher
higherpressure
pressure onon inflation,
inflation, signaling
signaling a risk
World a riskforfor
Bank Group
inflation
inflationoutlook.
outlook.Subtracting
Subtractingthetheshocks shocksoffoffinflation
inflationleaves
leavescorecoreinflation
inflationat ataround
around8.58.5percent
percentin in2017,2017,
STRICTLY
suggesting
suggesting
STRICTLY that CONFIDENTIAL
theCONFIDENTIAL
that implicit
the implicit inflation –target
inflation – is higher
target is higher thanthan thethelegislated one
legislated one(Figure
(Figure 16). 16).
May May 21, 21,
20182018
Figure
Figure 15:15:
Demand-side
Demand-side factors,
factors,cost-push
cost-push and and Figure
Figure 16:16:
Higher
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 to to
price
pricepressures
pressures thethe
legislated
legislated oneone
cy contributed to price pressures legislated one
13.13. Demand-side Demand-side factors,
factors, cost-push
cost-push andand LiraLiradepreciation
depreciation all all
contributed
contributed to inflation
to inflation (Figure
(Figure 15).15).
Exchange
2.5 rate
Decomposing depreciation
Decomposing Inflation (%
Inflation (proxied
(% by
contribution,terms
contribution, of trade) accounted for
Decomposingalmost
Decomposing half
Inflation of
Inflation
Exchange rate depreciation (proxied by terms of trade) accounted for almost half of the increase in consumer
2.5 15 15 (% the
(% increase
contribution) in
contribution) consumer
prices
pricesin standardized)
2017.
standardized)
in 2017.Inflation dynamics
Inflation dynamics were alsoalso
were significantly
significantly driven
drivenby cost push
by cost factors
push (wage,
factors rental
(wage, costcost
rental of capital
of capital
etc.)etc.)
andand expansionary fiscal policy, particularly in the last quarter
10 10 of 2017. Along with a strong cyclical recovery,
expansionary fiscal policy, particularly in the last quarter of 2017. Along with a strong cyclical recovery,
thetheslack in demand has vanished, which has started to exert higher pressure on oninflation, signaling a risk forfor
0.5 0.5slack in demand has vanished, which has started to 5exert higher pressure inflation,
5 core inflation at around 8.5 percent in 2017,
signaling a risk
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 thatthat
thethe
implicit
implicitinflation target
inflation is higher
target is higher than 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, andand
cost-push Figure 16: 16:
-5 -5Figure Higher implicit
Higher inflation
implicit target
inflation than
target than
currency contributed
currency to price
contributed pressures
to price pressures thethe
legislated oneone
legislated
Residual
Residual Government
Government Interest raterate
Interest
Decomposing
2.5 2.5 Decomposing
Cost-push
Cost-push
Inflation (%
Inflation
FX contribution, Demand
FX(% contribution, Demand pullpull 15 15Decomposing
Core
Core
DecomposingInflation (% contribution)
Government
Government
Inflation (% Interest
contribution) raterate
Interest
standardized)
standardized)
Inflation
Inflation Cost-push
Cost-push FXFX Demand
Demand pullpull
Sources: Haver Analytics, 10 10
Sources:
Sources: Haver
Haver Analytics, WBWB
Analytics, WBStaff
Staff estimates
Staff estimates
estimates

0.5 0.5 5
14.14. Strong demand and rising commodity prices 5
contributed to to
a widening current account deficit
Strong demand and rising commodity prices contributed a widening current account deficit
13.
in in Demand-side
2017
2017 and and thetheearly factors,
earlypartpartof 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 to5.6all
5.6 contributed
percent
percent in in
2017 to(US$47
2017 inflation
(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 ononina 12-month
2017
a 12-month (US$47rolling billion
rolling
basis)
Exchange
basis)
-1.5 (Figure
-1.5 (Figure 17). Rising
rate depreciation
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
a of
12-month
value of
energy
energy
accounted imports
imports rose
for almost roseby 37of
by
half percent
37 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
energyfromfrom 1414
prices toand 1616
to gold
percent
percent
prices in 2017. between
between 20162016 and and
Inflation dynamics 2017.
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 billion
byCost-push
cost pushinfactors
billion
Cost-push
2017
in FX(rising
2017 (rising
(wage,
FX
to over
to
rental over US$12
cost US$12 billion
of capital
Demand
Demand pull billion
pull
invalue
January),
in CoreCore with
January),
of energy with imports
imports
imports accelerating
Government
by 37rapidly
accelerating
Government
rose
Interest
rapidly in in
rate
Interest
percent inthethe
rate 2017,
second
second halfhalfof
Inflation the
of theyear
yearand andin January
in January 2018.
2018. At Atthe same
the same time,time, Cost-push
gold goldand andenergy
Cost-push energy FX
adjusted
FX current
adjusted current Demand
account
account
Demandpull
figures
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 0.70.7to to 2.92.9 percent of of
the indicate sustained domestic consumption. Net portfolio flowsto 16recovered sharply (from percent
Sources: Haver
Sources: Analytics,
Haver WB
Analytics, StaffStaff
WB estimates
estimates
last quarter of 2017. Along with a strong cyclical 14 percent between 2016 and 2017. The net trade
GDPGDP between
between 2016
2016 and and2017)
2017) (Figure
(Figure 18), though
18), though netnet FDI 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 rising
andon rising commodity
commodity prices contributed
pricestocontributed to a widening
toUS$9.9
a widening current
current account
account deficit
deficit
started
in 2017 toand
Figureexert
Figure
the higher
17: Rising
17:
early pressure
Rising
partcurrent
current
of 2018 inflation,
account
account deficitsignaling
deficit aFigure
Figure deficit
18: ofStrong
Strong
18: billion
recovery
recovery in inportfolio
2017
portfolio
in (rising
flows
flows to over
in 2017 and the early part of 2018 (Figure 17). The current account deficit increased from 3.8 percent GDP
(Figure 17). The current account 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$53 billion in February 2018 a 12-month rolling
inflation
basis)
Current
Current
basis) leaves
(FigureAccount core
17).
Account
(Figure inflation
Rising
components
17).componentsenergy at around
prices and8.5
Rising energy prices and gold importsNet percent
gold imports in were
Netrapidly
Foreign
were in
important the
Flows
important
Foreign second
drivers
(US$
Flows drivers of half
this
Million, FXof
of this
(US$ Million, the
increase.
& year
FXincrease.
& The and
The in
value 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 the
Effect
Price same
Effect imports
Adjusted) time,
Adjusted) gold
increased and from energy
14 to adjusted
16
percent
higher than
20000 between
20000
percent between 2016
the legislated andand
2016 2017.
one 2017.TheThe
(Figure net
16). trade
net in gold
trade in goldwent went from
current from a surplus
aaccount
surplusof US$1.8
figures
of US$1.8 billion
indicate
billionin 2016 to atodeficit
insustained
2016 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$12 billion 1,300January),
consumption.
in
1,300 January), with withimports
Netimports accelerating
portfolio accelerating rapidly
flows recovered rapidlyin the
insharply
the
14.
second Strong
halfhalfofdemand
the yearyearandinrising
and January commodity
2018. At Attheprices
same time, gold andand
-20000
-20000
second of the and in January 2018. the same (from
time, 0.7
gold toenergy
2.9
energy adjusted
percent
adjusted current
of GDP
current account
between
account figures
2016
figures and
contributed
indicate
-40000 to a domestic
sustained
-40000 wideningconsumption.
current account NetNet deficit flows recovered sharply (from 0.7 to 2.9 percent of
portfolio
indicate sustained domestic consumption. portfolio flows
2017) recovered
(Figure 18), sharply
though (from
net 0.7
FDI to 2.9
flows percent
declined of by
inGDP2017 and the
between
-60000
-60000 2016early
andandpart
2017) 2018 (Figure
of(Figure 18),18), 17). net
though TheFDI-700 -700 declined by 19.2 percent.
flows
GDP between 2016 2017) (Figure though net FDI 19.2 flows declined by 19.2 percent.
percent.
-80000
-80000
Figure 17: 17:
Figure Rising current
Rising account
current accountdeficit
deficit Figure
-2,700 18: 18:
Figure
-2,700
Strong recovery
Strong in portfolio
recovery flows
in portfolio flows
Figure 17: Rising current account deficit Figure 18: Strong recovery in portfolio flows
Energy
Energy Gold
Gold
Current Account
Current Accountcomponents
Merchandise components
Merchandise Services
Services NetNet
Foreign Flows
Foreign (US$
Flows Million,
(US$ FX FX
Million, & &
(US$ Million,
(US$ 12-m
Million,
Primary rolling)
12-m
Income
Primary rolling)
Income Transfers
Transfers Market Price
Market Effect
Price Adjusted)
Equity
Effect Market
Equity Market Bond
Adjusted) Market
Bond Market
20000
20000
Sources: Haver
Sources: Analytics,
Haver WBWB
Analytics, Staff estimates
Staff estimates
0 0 1,3001,300
-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 Analytics,
Sources: WB WBStaffStaff
estimates
Sources: HaverHaver Analytics,
Analytics, WB Staff estimatesestimates

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 21,21,
macroeconomic 20182018imbalances 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 ofcontributed
have contributed
public to to
transfers a sharp depreciation
avolatile
sharp flows in
depreciation
capital thethe
in
from Lira
abroad. (Figure
Lira 19).19).
(Figure
The A finds
literature A
depreciating
depreciating free float
free has
float hasbeen
beenan important
an importantshock
shockabsorber
absorberfor the
for economy.
the
in the 2018 Budget, including in the form of direct that increased credit is associated with less growtheconomy. It has
It contributed
has contributed to the
to the
recovery
recoveryin exports andand should helphelp moderate import demand (particularly for for consumables. It also helped
subsidies forinprivate
exports sector should
employers (Box moderate import
3). These demand
volatility(particularly
up to a certainconsumables.
point, but too It also
muchhelped
credit
accelerate customs
accelerate customs receipts
receipts to contain
to contain thethe
budget deficit.
budget Accordingly,
deficit. Accordingly, thetheRealReal
Effective
Effective Exchange
Exchange Rate hashas
Rate
may be
dropped supplemented
by by
close to 20 by additional
percent since stimulus
2015, measures
thethe
sharpest can
among increase
a selected volatility
group (Figure
of EMDEs, 21). 9 This is both because
whilst the the
LiraLira
dropped close to 20 percent since 2015, sharpest among a selected group of EMDEs, whilst
proposed
raterate to the
against
againstParliament
USUS
the dollar inand
dollar theandpast
the thetwo
EuroEuro months.
also Given by close
depreciated
also depreciated of the
by tosize
close 20 of credit
to percent
20 ininthe
percent inGDP (and
pastpast
the twotwo associated
years. leverage),
Currency
years. Currency
the positive
depreciation output
depreciation gap,
accelerated
accelerated however,
in most
in most the
recent fiscal
recentweeksmultiplier
duedue
weeks is and a lack
to atocombination
a combination of global
of global
of diversification
liquidity in financial
tightening
liquidity andand
tightening instruments.
investor
investor
expected
sentiments,to decline
sentiments,which
which inled
led 2017.
to atonet outflow
a net of portfolio
outflow debt
of portfolio This
andand
debt could
equity flows
equity bein exacerbated
flows February
in February ifMarch.
andand growth
March.is concentrated

Figure 19: 19:

Figure Sharp 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 andand
dollar Euro 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 RealReal
Effective Exchange
Effective RateRate
Exchange (2010=100,
(2010=100,
5.0 5.0 CPICPI
deflated)
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 IndiaIndia
TL/$
TL/$ TL/EURO
TL/EURO Indonesia Russia Turkey
Indonesia Russia Turkey
Sources:
Sources: Haver
Sources:
Haver Analytics,
Haver WBWB
Analytics,
Analytics, Staff
StaffWB 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

8 Policy
Policy
Kara, H. adjustments
adjustments
(2016): could
“A brief assessment ofcould help
Turkey’s help reduce
reduce
macroprudential policythetherisks
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 mitigaterisks of macroeconomic
risks of macroeconomic imbalances
imbalances from unraveling
from unraveling
8into a sharp
into a sharpcyclical downurn.
cyclical downurn.Despite strong
Despite growth,
strong there
growth, are are
there signs thatthat
signs fiscal 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 employers(Box
(Box3). 3).
These maymay
These be besupplemented
supplemented by by
additional stimulus
additional stimulus
measures
measuresproposed
proposedto Parliament in the
to Parliament pastpast
in the twotwomonths.
months.Given
Giventhethe
positive
positiveoutput gap,gap,
output however,
however,the the
fiscal
fiscal
 sector,
sector, including
including those
those transmitted
transmitted through
through highly
highly volatile
volatile capital
capital flows
flows from
from 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 thatthat
World havehave
Bank 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 thanthan short-term
short-term demand
demand management.
management. 10 10

Figure
Figure 21: 21: Financial
Financial sector
sector development
development matters Figure
matters Figure
22: 22: Manufacturing,
Manufacturing, trade
trade andand construction
construction
Figure 21: Financialfor
sector development
growth volatility matters for Figure 22: Manufacturing,
fueling tradecredit
private and construction
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 0.020.00 0.00
0.04 0.04 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
Individual Credit Other Construction
HighHigh Credit/GDPMedMed
Credit/GDP Credit/GDPLowLow
Credit/GDP Credit/GDP
Credit/GDP Manufacturing Wholesale & Retail
Manufacturing Wholesale & Retail
Source:
Source: Haver
Sources: Haver
Analytics,
Analytics,
Haver Analytics,
WB
WBStaff
WB Staff Staff estimates
estimates
estimates
Source:
Source: Haver
Haver Analytics,
Analytics, WB WBStaffStaff estimates
estimates

19. TheThe recently

recently imposed
imposed restrictions
restrictions on foreign currency borrowing to contain realreal and financial
19.sectors
in that havefromrelatively higher levels ofontroubled
foreign currency
has part borrowing
a large net opento contain
position because and offinancial
dollar imports
risks arising from currency mismatch could in part support alignment of monetary andand
risks arising currency mismatch could in support alignment of monetary
assets and higher outstanding
macroprudential
macroprudential policies.
policies.
credits (Figure 22).
11 Accommodative
11 Accommodative This policies
monetary
monetary
and Lira
policies sales, but where
in developed
in developed
Lira
markets
markets
denominated
hashas led led
to atosharp
sales
a sharp in the
riserise
requires
in foreign currency borrowing by corporates, not just in Turkey but among other EMDEs also. Recent bouts price
in strong
foreign macroprudential
currency borrowing regulations
by corporates,focusednot on
just indomestic
Turkey butmarket
among areotherindexed
EMDEs to the
also. US
Recentdollarbouts
financial sector stability
of depreciation
of depreciation therefore rather
therefore than short-term
negatively
negatively affect
affect demandandand
profitability
profitability of imported
debtdebt 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 a
which has which can spill over into the financial sector. In response to this, effective from May this year, to
major this,
source effective
of from
long-term May this
finance, year,
which
Turkish
Turkish residents will
onlyonly be
ableable to borrow in foreign currency
cannot be if they
substituted have foreign
quickly currency
by Lira income or or
denominated
19. Theresidents
outstandingrecently will
foreign imposed
currency
be restrictions
loans
to borrow
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 thetherefore
loans, time of borrowing.
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 toloans
avoid and associated
maturity mismatch. risks, though
support
a few alignment
points needof monetary
to be and
considered: macroprudential
a few points need to be considered: (i) companies without US$15 million in foreign exchange debt maymay
(i) companies without US$15 million in foreign exchange debt be be
policies. 11 Accommodative
borrowing 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) someforex
reformsdemand, to at
the least till
secured May; (ii) some
transactions
sectors
developed
sectors have have
markets a natural
a natural hashedge hedge
led to(e.g. (e.g.
a sharp energy,
energy,risewhichwhich
in foreign has a large
has a largesystem net
net open open
could position
positioncontribute because
because of of
to dollar dollar imports
the financial
imports and and
sector’s
LiraLira
currency sales,
sales, butbut
borrowingwherewhere
byLiraLira denominated
denominated
corporates, sales
not just sales in the
inin Turkey
the domestic
domestic market
market
counter-cyclical are are indexed
indexedcapacity to the
to the US US
and dollar
dollar
improve priceprice
of of
supply
but imported
imported
among fuel);
fuel); andand
other (iii)(iii)
EMDEs foreign
foreign also. currency
currency
Recentloansloanshave
bouts have of been
been a major
aresponse.
major sourcesource
During ofcyclical
long-term
of long-term finance,
finance,
downturns, whichwhich
SMEs’ cannot
cannotaccess to
be substituted
be substituted
depreciation quickly
quickly
therefore by Lira
bynegatively
Lira denominated
denominated
affect loans, loans, therefore
therefore
profitability complementary
complementary
finance becomesmeasures measures
even to increase
to increase
more restricted Lira
Lirathan deposits
deposits
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. beH. able
(2016):
(2016): to “A
“A briefbrief
borrow assessment
in foreign
assessment ofcurrency
Turkey’s
of Turkey’s ifmacroprudential
they even
macroprudential policy
policy approach:
forapproach:
profitable 2011-2015”,
or innovative
2011-2015”, Central
Central Bank
projects.
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 et al
or(2012)
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 the the
Decree No.No. 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 generate
Communiqué on capital.
the
20. Thisofshould
the Valuehelp of thecontain
Turkish Currency;
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
in recent months as part of an Omnibus Law14
aimed at improving the overall investment climate.
The legislative package expanded the use of collateral
to future or after-acquired assets as well as to proceeds
and replacements of the original assets, which will
allow a wider selection of goods to be used as collateral
for businesses. Banks will be able to expand loans to
riskier borrowers at more affordable rates, whilst SMEs
can scale up and improve productivity. This can be an
important enabler for higher growth through deeper
supply side capacity. In the future, the collateral
amendment could be further aligned with global best
practices by establishing a single center for monitoring
and reviewing the collateral registries of companies by
creditors and developing new products for asset-based
lending to increase the utilization of movable collaterals.
23. The Omnibus Law adopts several other
measures to improve the investment climate. Firstly,
to simplify business registration, ID verification and
certification of company books by notaries are now
moved to the Trade Registry Office, and 25 percent
paid-in minimum capital requirement is removed.
Moreover, inspection from the tax office requirement
was eliminated and entrepreneurs are now able to
complete their social security system registration process
electronically. Secondly, to improve the system for
construction permitting, an online application process
will be introduced for more transparency on guidelines,
fees, documents and pre-approvals via municipalities’
webpages. Thirdly, land registration and transfers
will be simplified and done through a web registry
system, which allows for online verification of non-
encumbrance information. In addition, an independent
complaints mechanism related to land-specific disputes
has been established. Lastly, contract enforcement
reforms were adopted through introduction of a small
claims procedure for cases below TL 100,000 and
number limit to adjournments, provision of electronic
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
24. Further measures to improve the investment
climate were introduced relating to bankruptcy
and insolvency procedures.15 The existing procedures
were costly and inefficient, and a major hurdle in the
business environment. Since the introduction of the
Bankruptcy Law in 2003, only 2 percent of the 3524
enterprises that filed for this procedure recovered from
insolvency. In practice, this means that most insolvent
businesses are terminated informally and that viable
businesses that could stay in the market end up being
liquidated. On the other hand, resolution of insolvency
procedures last around 5 years on average, which is more
than twice the average across Europe and Central Asia
(ECA). Recent reforms aim to address these issues. A
new ‘concordat’ procedure has been introduced, which
enables authorities to set timelines for the procedure, and
puts a heavy focus on business continuation rather than
its liquidation through new financing, confirmation
of contracts and sale of essential assets in bankruptcy.
These reforms should help businesses to go through a
more efficient and faster insolvency procedure focused
on saving the business.
25. Ongoing discussions to reform the tax
system are also geared to improving private sector
competitiveness. The draft Law on Value Added Tax
submitted to Parliament in February 2018 has several
features in this regard.16 They include measures to
improve the availability of VAT refunds and limit the
possibility that the VAT acts as a tax on investment.
This is in addition to administrative proposals to clear
the existing backlog of VAT refunds, which will need
to be sequenced carefully to avoid fiscal pressures. The
draft Law also aims to simplify the VAT regime for small
businesses. The latter will need to be complemented
with reforms to simplify VAT accounting and reporting
for small businesses. On the other hand, the current
draft also sees the proliferation of VAT exemptions and
concessions, which reduces the overall efficiency of the
VAT and may be worth considering further.
 volatility could arise poorer
(particularly from shocks to permanent
households with lower income
savings); or a breakdown
consumption in financial
is usually the mostand/or
stable jobs marketso
component
intermediation. Growth
volatility could volatility
arise fromis shocks
also associated with volatility
to permanent income or in investment,
a breakdownwhich can translate
in financial and/or into
jobs lower
market
per capitaintermediation.
GDP growth Growth
over thevolatility
long-term (Figure
is also 24).17with
associated Thevolatility
degree inofinvestment,
volatility can depend
which on the into
can translate typelower
of
17 The degree of volatility can depend on the type of
exogenouspershock
capita(e.g.
GDPcommodity
growth overprices,
the long-term
capital (Figure
flows), 24).
structural rigidities, economic buffers, and Worldpolicy
Bank Group
responses.exogenous shock
Pro-cyclical (e.g. can
policies commodity
amplifyprices, capital
economic flows),
swings structural
through rigidities, economic
overshooting buffers, of
and the erosion andfiscal,
policy
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
Figure
Figure 23: Growth in 23: Growth
Turkey in Turkey is volatile
is volatile Figure
Figure 24:Consumption
24: Consumptionand
andinvestment
investmentvolatility
volatility

Volatility inVolatility
per capita GDP,
in per PPP
capita (constant
GDP, PPP (constant Growth volatility
Growth andand
volatility C/I volatility
C/I volatility
2011 international US$, annual
2011 international US$,change,
annuals.d.)
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.)(s.d.)
volatility
Sources: World Development Indicators, WB Staff estimates
Sources: World
Sources: World Development
Development
Note: inIndicators,
CountriesIndicators, WB WB
the sample Staff Staff estimates
estimates
include Argentina, Brazil, Chile, China, Hungary, India, Indonesia, Korea (Rep.), Malaysia, Mexico, Poland,
Note: Countries
Note: Countries ininthe
Romania,thesample
sample
Russian include Argentina,
Federation,
include South
Argentina, Brazil,
Africa,
Brazil, Chile,
China,China,
Thailand,
Chile, Turkey. Hungary,
Hungary, India, Indonesia,
India, Indonesia, Korea
Korea (Rep.), (Rep.),Mexico,
Malaysia, Malaysia, Mexico,
Poland, Poland,
Romania, Russian Federation,
Romania, Russian
South Africa, Federation,
Thailand, Turkey. South Africa, Thailand, Turkey.

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 wasinpublished
structural reforms,
in the skills, technology
Office Gazette dated
26.
16 LawPolicyApril adjustments
6, 2018. as noted above are and innovation. The greater
No.177104 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 V.A.prone
Ramey (1995):
to in “Cross-country
the past. evidence on
Growth the link between
investment and volatility
efficiency andof growth”,
resourceAmerican
allocation. In
Bank; Loayza, N.V., R. Ranciere, L. Serven, J. Ventura (2007): “Macroeconomic Volatility and Welfare in Developing
Economic Review,
volatility inCountries: No.
Turkey An 85 (5); Easterly,
hasIntroduction,”
historicallyThe W.,
been R.
WorldIslam,
high J.E. Stiglitz
Bankrelative (2000):
Economic Turkey, “Explaining
Review (V.this growth
is reflected
21, No. volatility,”
in labor
3); Dabusinskas, The World
A., D.shifting
Kulikov, increasingly
M.
toBank;
otherLoayza,
Upper N.V., (2012):
Randveer R. Ranciere,
Middle-Income L. Serven,
“The Impact
Countries,J. Ventura
of Volatility (2007): “Macroeconomic
on Economic
or countries Growth,”
into less Bank ofVolatility and Welfare
Estoniasub-sectors
productive Working PaperinSeries
Developing
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
Impactthe 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 – efficiency in harnessing human and physical capital for for
contributions from Total Factor Productivity (TFP – efficiency in harnessing human and physical capital
growth),
growth), the the potential
potential growth growth rateTurkey
rate Gap
for for 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 growthgrowth rate Figure
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 GrowthGrowth 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

Potential
Potential Capital Capital
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 HPMultivariate
filter, filter, Multivariate filter, Cobb-Douglas
filter, Cobb-Douglas Production
Production and CES production
and Malaysia,
CES 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
Global
potential
potential growth trends in potential growth
Globalpotential
Global potentialgrowth
growthis iswell
wellbelow
belowitsitspre-crisis
pre-crisisaverage
averageininboth
bothadvanced
advancedeconomies
economiesand and
Global
emerging potential
emerging market
market growth
and isdeveloping
well below
anddeveloping its pre-crisis
economies
economies average inDespite
(EMDEs).
(EMDEs). both advanced
Despitea arecent economies
recent and
acceleration
acceleration emerging
ofof global
global
market
economic and
economic developing
activity,
activity, economies
slowdown
slowdown (EMDEs).
in inpotential
potential Despite
output
output a recent
growth
growth acceleration
continues
continues of27).
(Figure
(Figure global economic
27).This
This activity,
broad-based
broad-based
slowdown
slowdown inmainly
potential
slowdownmainly output
reflects
reflects growth
weaker
weaker continues
capital
capital (Figureslowing
accumulation,
accumulation, 27). This
slowing broad-based
productivity
productivity slowdown
growth
growth mainly reflects
anddemographic
and 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 WBG
4 419 (2016), “Turkey’s Future Transitions: Towards Sustainable Poverty Reduction and Shared Prosperity.”
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 itsits 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. The
The
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
investment and
and spread
spread
growth. toto emerging
emerging
The slowdown in
market
market developing economies after the crisis. Unless focus is shifted from cyclical
productivity started well before the GFC in advanced economies and spread to emerging market to
developing economies after the crisis. Unless focus is shifted from 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 CONFIDENTIAL – –
half
MayofSTRICTLY
2017
21, 2018
CONFIDENTIAL
is likely 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
30. AThere
moderate growth
is highgrowth in 2018 with
in 2018 with
probability 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,
strong Growth
29. 29. growth in in
Growth theTurkey
inrun upisto
Turkey projected
iselections
projected toinmoderate
to2018 andto 4.7
moderate percent
tosupported
4.7 percent in
by2018.
in Private
2018. consumption
Private
a transparent consumption
and is expected
predictable is adjustment
expected
to be
2019. weighed
to be
Twoweighed down
sets of down by rising costs
by rising
elections and declining real
costs and simultaneous
are scheduled: wages
declining real wages (Figure 29),
(Figure
to policy though
29),and
rates thoughemployment growth
employment growth
macroprudential 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 thatthat
suggest
stability, the recent
the
could helppick
recent up up
pick
better in in
anchor
machinery
and machinery and equipment
and equipment
local elections investment
in March investment in
2019. Severalthe second
in the half of 2017
second halfeconomic
incentive is likely to continue
of 2017 isexpectations. in the first half of 2018
likely to continue in the first half of 2018
(Figure 30),30),
(Figure particularly as capacity
particularly utilization
as capacity utilizationrates have
rates already
have hit hit
already high levels
high andand
levels imports
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 growth.
moderate construction sector growth.
Figure 29: 29:
Figure Declining realreal
wages Figure 30: 30:
Sustained investment spending
Figure 29: Declining realDeclining
wages wages Figure
Figure Sustained
30: Sustained investment
investment spending
spending

RealReal
wages (yoy(yoy
wages % change)
% change) Survey: Investment
Survey: Expenditure
Investment Expenditure
(SA,(SA,
3m-o-3m)
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 and and
Trade services
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 driven
policies by by
driven thethedesire to maintain
desire to maintain
strong growth
strong growth in the runrun
in the up up
to elections in 2018
to elections andand
in 2018 2019. Two
2019. Two setssets
of elections areare
of elections scheduled: simultaneous
scheduled: simultaneous13
Presidential andand
Presidential Parliamentary
Parliamentaryelections in June
elections in June2018; andand
2018; local 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 investmentandand
employment
employment (TL(TL
17 17
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); andand
billion); a further extension
a further to the
extension to theCredit
Credit
 STRICTLY
TEM, STRICTLY CONFIDENTIAL
the External Gap –
CONFIDENTIAL
May 2018: Minding –
May
May21,21,
2018
2018

Box 3: Turkey’s
Box 2018
3: Turkey’s Budget
2018 andand
Budget Medium-Term Program
Medium-Term Program

Turkey’s
Turkey’sBox
2018 2018 3:Budget
Budget Turkey’s
waswas approved 2018
approved by by Budget
Parliament
Parliament and
on Medium-Term
December
on December 22,22,2017. TheThe
2017. Program
Budget
Budget is based
is based on on a a
Medium-Term
Medium-Term
Turkey’s 2018 Budget Program
Program (MTP) released
(MTP)byreleased
was approved by
Parliament the
by onMinistry
theDecember of
Ministry of Development
22,Development
2017. The Budgeton September
on September 27
is based on a27 last year.
last year.
Medium-Term
Macroeconomic
Program (MTP) released
Macroeconomic assumptions:
by the Ministry
assumptions: TheTheBudget andand
of Development
Budget MTP onassume
MTP September
assume an anoptimistic
last year.5.55.5
27optimistic percent
percent realreal
growth
growth perper
year 2018-2020,
year 2018-2020,
Macroeconomic with unemployment
with unemployment
assumptions: falling
The Budget and to
falling
MTPjust below
to assume
just below 10 percent
10 percent
an optimistic by
5.5by2020. Inflation
2020.real
percent Inflation is
growth is projected
perprojected
year 2018-to to
abate
2020, quickly
abate
with quickly to 7 percent
to 7 percent
unemployment in 2018,
in 2018,
falling dropping
to justdropping further
below 10further to 5 percent
percenttoby5 2020.
percent by the end
by the isend
Inflation of the program
of the program
projected period.
period.to 7
to abate quickly
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
Overall current surpluses.
surpluses.
conditions The MTP
The MTP
are expected projects
to projects a
deteriorate budget
a slightly deficit
budget in close
deficit
2018,close to 2 percent
to 2 narrower
including percent of ofGDP GDP
primary
in
andin2018 and 2019,
2018 surpluses.
current and 2019,The before
before falling
MTPfalling to 1.3 percent
projectstoa budget
1.3 percent in 2020.
deficitinclose
2020.Yet
to 2Yetgeneral
general
percent government
of GDP government
in 2018 andrevenue
revenue as a share
as a share
2019, before of of
falling
GDP GDP
to 1.3 is projected
is projected
percent to
in 2020.to decline
Yetdecline slightly
generalslightly over
government the program
over revenue
the program period,
period,
as a share despite
of GDPdespite tax reforms,
tax reforms,
is projected large tax gaps,
largeslightly
to decline tax gaps, and
overandathea
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 34.8 to
34.8 to
economy. 32.7
As32.7percent
percent
a result, of GDP.
of GDP.adjust down
expenditures
from
Budget34.8 to
policy32.7 percent
priorities: of GDP.
(i) (i)
Maintain macroeconomic stability; (ii) (ii)
Increase human capital andand labor
Budget policy priorities: Maintain macroeconomic stability; Increase human capital labor
quality;
Budget (iii)
policy enhance
priorities:high value-added
Maintain production;
macroeconomic (iv) Improve
stability; (ii) business
quality; (iii) enhance high value-added production; (iv) Improve business and investment environment;
(i) 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
TaxTax distribution.
reforms approved by byParliament in December include: (i) increasing thethe CITCIT raterate(20(20to to
Revenue: reforms approved Parliament in December include: (i) increasing
22 22percent),
Revenue: Tax (ii)
percent), reduced
reforms
(ii) reduced corporation
approved taxtax
by Parliament
corporation exemption
inexemption
December forinclude:
immovable
for property
(i) increasing
immovable the(from
property CIT(from 75 75
rate to
(20to50 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
introduction of of
property VAT VAT liability
benefited from
liabilityfor75 non-residents
for percent engaged
exemption
non-residents rate);in(iii)
engaged e-commerce;
in introduction
e-commerce; (iv) removal
of(iv)
VAT of of
liability
removal tax breaks
for tax
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 growth growth
in 2017.of ministries
Finance is planned
and Treasury to moderate
budgets drive closeslightly
to halfto
of 12.7 percent,
overall spendingcompared
growth.
to an estimated 16.7 percent growth in 2017. Finance and Treasury budgets drive close to half of overall
Other big contributors are the Defense Ministry (30 percent increase in budget allocation, contributing 12ofpercent
to an estimated 16.7 percent growth in 2017. Finance and Treasury budgets drive close to half overall
spending
spending growth. Other
growth. Otherbigbig
contributors areare
contributors thetheDefense Ministry
Defense Ministry(30(30percent
percentincrease
increasein in
budget
budget
of overall growth), and the Labor and Social Security Ministry (contributing 8 percent to planned spending growth).
allocation, contributing
allocation, 12 12
contributing percent of of
percent overall growth),
overall andand
growth), thethe
Labor andand
Labor Social Security
Social Ministry
Security Ministry
(contributing
Supplementary 8 fiscal
(contributing percent to planned
stimulus:
8 percent 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
isSupplementary
estimated to costfiscal
Supplementary stimulus:
TLfiscal
17.3 billion
stimulus: OnOn
(likely February
over 22,22,
3 years).
February thetheParliament’s
Measures include: (i)Plan
Parliament’s andand
subsidies
Plan Budget
to Commission
private
Budget companies
Commissionfor
approved
“minimum
approvedan Omnibus
wage
an support”
Omnibus Bill
and for Parliament’s
payment
Bill for of socialconsideration
Parliament’s security premiawith
consideration fiscal
forwith
workers stimulus
employed
fiscal stimulustobetween
boost employment
to boost2018 and(ii)
and 2020;
employment and
investment.
additional TheThe
income
investment. package
tax packageis estimated
and revenue to to
stamp duty
is estimated cost TLTL 17.3
exemptions;
cost billion
(iii)
17.3 VAT(likely
billion over
exemption
(likely 3 years).
on
over Measures
purchase
3 years). of include:
new machinery
Measures (i)
and(i)
include:
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 andand
2018 2020; (ii) (ii)
2020; additional income
additional taxtax
income andand
revenue stamp
revenue duty
stamp exemptions;
duty exemptions;
(iii)(iii)
VAT exemption
VAT on on
exemption purchase of new
purchase machinery
of new andand
machinery equipment.
equipment.

FigureFigure
Figure
31: 31: 31:
Slight Slight deterioration
Slight
deterioration in fiscalin
deterioration fiscal
in fiscal in
conditions Figure 32:32:
Figure
Figure 32: …with smaller
…with
…with primary
smaller
smaller 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 (% (%
balances of GDP)
of GDP)
1.5%1.5%
21.9% 21.8% 21.8%
23%23% 21.3%
21.3% 21.9% 21.8% 21.8%
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% 20152015 20162016 20172017
e e 20182018
b b
20152015 20162016 20172017
e e 20182018
b b
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
May
STRICTLY
May CONFIDENTIAL – –
CONFIDENTIAL
21, 2018
21, 2018
May
May 21, 2018
21, 2018CONFIDENTIAL
STRICTLY
STRICTLY – –
CONFIDENTIAL
MayMay
21, 21,
20182018

Figure Figure
Figure
33: Revenue33:estimate
Revenue
33: Revenue forestimate
estimate
2018 for
forare2018 2018
relatively Figure
are are Figure
Figure 34…with
34…with
34…withslow slow growth
growth
slow growth in in in
tax tax collections.
collections.
tax collections.
Figure 33 :
flat…Figure 33: Revenue
Revenue estimate
relatively
relativelyestimateflat… for
flat… for 2018 are 2018 are Figure 34…with slow growth in tax
Figure 34…with slow growth in tax collections. collections.
Figure 33: 33
Figure Revenue
: relatively
relatively
Revenue flat…
flat…
estimate for 2018
estimate for are are Figure
2018 34…with
Figure 34…withslowslow
growth
growthin tax collections.
in tax collections.
Central
Central Government
Government Revenues
Revenues (% of(% of GDP)
GDP) Central
Central government
government revenue
revenue (Index,
(Index, 20152015
= = 1)
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%
Central
21%Government 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
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Note:Note:
this isthis is ministry
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20
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ministry functional general government, or public sector spending. therefore
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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
is projected to to
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 will
2018:will
Mindingaffect
affect Turkey.
Turkey.
the External
21 The overall impact on the trade balance may not be that significant; indirect
The
21Gap 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.

Figure
Figure 39:39: Global
Global growth
growth projected
projected to rise
to rise in 2018 Figure
in 2018 Figure 40:40: Continued
Continued exportexport growth
growth in EMDEs
in EMDEs
32. Global
32.Figure 39:Globalgrowth
Global in 2018
growth
growth is expected
in 2018
projected isto rise into2018
expected remain
to remainsupportive
supportive
Figure 40: of Continued
Turkey’s
of Turkey’sstrong export
strong
export export
growth performance
performance
in EMDEs
from fromthethe
pastpast
year, 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
8 8
further
accelerate thanks
further to
thanks a
to rebound
a rebound among
among commodity
commodity
6 6 exporters
exporters(Figure
(Figure39 and
39 Figure
and Figure40). Recent
40). Recent
protectionist
protectionistmeasures however
measures howeverpose concerns
pose concerns for for
global trade.
global US US
trade. tariffs on on
tariffs steelsteel
(25 (25
percent)
percent)andandaluminum
aluminum
(106(10
percent) willwill
6 percent) affect Turkey.
affect 21 The
Turkey. overall
21 The impact
overall on on
impact the the
trade balance
trade maymay
balance notnotbe that significant;
be that indirect
significant; indirect
4
impacts through
impacts throughturbulence in financial
turbulence markets
in financial markets andand
flows,4 protectionism
flows, protectionism andand
currency
currencyvolatility maymay
volatility be more
be more
severe.
4severe.
4
2 2
Figure
2 39: 39:
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 0Growth
Growth (yoy(yoy
% change) 0 0
% 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 ECA SARSAR EAPEAP LACLAC SSASSA MNA
ECA 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. Global
largely due growth
to energy in 2018
imports, is expected
which accountto remain
for around 33. 15-20 Turkey’s
percent
largely due to energy imports, which account for around 15-20 percent of total imports. Brent oil averaged
2 2 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).
022 22 Prices
the
0 past rose again
year, in
though late March
risks amid
to concerns
global tradeof sanctions
largely against
due to
41). Prices rose again in late March amid concerns of sanctions against Iran. This points to sustained pressure 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
LiraLira
theincreased. given
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20Growth thethe recent
recent
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decline
EMDEs inprojected
foreign
inisforeign exchange
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reserve coverage
coverage
percent (Figure
of (Figure
total 42)42)
andand
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aBrent
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oil averaged
to capital
capital
accelerate inflows.
inflows. further
World
World thanks
Advanced to economies
economies
Advanced a rebound EMDEs ECA SAR EAP LAC
among US$65 per barrel in February – a 5 percent (mom) drop
EMDEs ECA SAR EAP LAC SSA SSA MNA MNA
commodity
Source: WB WB
Source: exporters
Global Economic
Global (Figure
EconomicProspects39 and
(January
Prospects Figure 40).
2018)2018)
(January 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
trade.
33. 33.USTurkey’s tariffs
Turkey’soncurrent
steel
current (25 percent)
account
account and in
deficit
deficit aluminum
2018
in 2018 sanctions
is expected
is expected against
to remain
to remain Iran.
over 5This
over 5 points
percent
percentoftoGDP.
sustained
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ThisThisis is
Crude oil (RHS) and natural
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Turkey.
imports, (LHS)
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21 The prices
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around
100for around15-20
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given
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more RHS)
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theand
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recent Brentoil oil
averaged
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averaged
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(months of imports,
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US$65
the US$65
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65.00per barrel
per
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65.00 in
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mayFebruary
in not be–that
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indirect from
drop 9 January
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seven months
(Figure of
42)gains
ofand (Figure
gains (Figure
a slowdown
140,000
140,000
41). 22 Prices
41). rose
22 Prices again
rose againin late
in March
late
impacts through turbulence in financial markets March amid concerns
amid concerns of
80 80andsanctions
of sanctions against
in8 capital Iran.
against
inflows. This
Iran. points
This to
points sustained
to sustainedpressure
pressure
Natural gas index

8
Natural gas index

130,000
on onthe theLiraLira
given more
given more the the
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may exchange
in foreign beexchange reserve coverage
reserve coverage (Figure 42) 42)
(Figure andanda slowdown
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Crude oil price

flows, protectionism and currency volatility

Crude oil price

$ million
7
Months

$ million
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capital inflows.
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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
Figure25.00
41: Commodity prices increasing 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 gas gas
natural (LHS) prices
(LHS) prices 100 100 Gross reserves
Gross (US$(US$
reserves million, RHS)
million, and and
RHS)
coverage (months
coverage of imports,
(months LHS)
of imports, LHS)
65.00
65.00
Crude
Crude oil, oil,
BrentBrent ($/bbl)
Natural
gas gas
($/bbl)
Natural index
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 Analytics,

WBWB Global Economic Monitor
Crude oil price

Source: World Bank Commodity Prices Source: Haver Analytics, Global Economic Monitor
$ million

7 7
$ million
Months
Months

45.0045.00 120,000
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
15 percent of total iron and steel exports from
25.0025.00 40 40Turkey in 2016 were bound for the US (and 2 percent of
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
thethe
USUS 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
Crude oil,Economic
Crude 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: World
Source:
World BankBank
World
Bank Commodity
Commodity Prices
Commodity
Prices Prices Source: Haver
Source:
Source: Analytics,
Haver
Haver WBWB
Analytics,
Analytics, Global
WB Economic
Global
Global Monitor
Economic
Economic Monitor
Monitor

20
21 Around 15 percent
21 Around of total
15 percent ironiron
of total andand
steelsteel
exports from
exports Turkey
from in 2016
Turkey werewere
in 2016 bound for for
bound the the
US US
(and(and
2 percent of of
2 percent
aluminum
21 aluminum
Around 15exports).
exports).
percent Around
of total iron and4-5
Around percent
steel4-5 percent
exports ofTurkey
from total
of total
iniron
2016and
iron steel
wereand
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 it the
4-5making
percent ofittotal
theiron and
sixth largest
sixth
steel imports seller
largest ofcomes
seller
by the US iron
of ironandTurkey,
from steelsteel
and to the
making US.
toitthe US.largest seller of iron and steel to the US.
the sixth
22 WB,
22 “Global Economic Monitor” (March
22 WB,WB, “Global
“Global EconomicEconomic
2018)
Monitor”
(March
Monitor” (March 2018)
2018)
18 18

16
 34.
34. Tighterglobal
Tighter globalliquidity
liquidityconditions
conditionsinin20182018affects
affectsTurkey’s
Turkey’saccess
accesstotoandandcost
costofofexternal
external
finance, an important lever of growth for the country.
finance, an important lever of growth for the country. Following the US Federal Reserve’s decision totoraise
Following the US Federal Reserve’s decision raise
policy rates by 25 basis points (from 1.5 percent to 1.75 percent) on March 21, and the Chairman’s
policy rates by 25 basis points (from 1.5 percent to 1.75 percent) on March 21, and the Chairman’s assessment assessment
ofofthe
theUS
USeconomy,
economy,markets
marketsraised
raisedthe
theprobability
probabilitythat
thatthe
thepolicy
policyrate
ratewill
willbebehiked
hikedfour
fourtimes
timesinin2018.
2018.2323
World Past
Bank
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
portfolioflows
portfolio flowstotoTurkey
Turkey(Figure
(Figure43),
43),and
andcurrency
currencydepreciation
depreciation(Figure
(Figure44).
44).
STRICTLY
STRICTLY CONFIDENTIAL
CONFIDENTIAL – –
May May
Figure 21,
43:2018
21, 2018
Figure Externalflows
flowsvulnerable
vulnerabletotomonetary
monetary Figure44:44:Exchange
Exchangerate ratedevelopments
developmentsalso also
Figure 43:43: External
External flows vulnerable
tightening in the to monetary tigh-
US
Figure
Figure 44: Exchange rate developments
closely linked also closely
tening in the US tightening in the US linked closely linked

Turkey’s
Turkey’s
USFed
US Fedrate
rate external
external
and
and change
change buffers
buffers
ininportfolio
portfolio against
against
flows
flows tightening
tightening financial
financial
US Fedrate conditions
rateconditions
increases have
have
andTL/US$
TL/US$ declined
declined
US
15000Fed increases and
15000 1.5 movements
movements 4.0

Net portfolio flows US$ Mil

1.5 4.0
Tighter
34. 34.1.5Tighter
1.5 global
global liquidity
liquidity conditions
conditions in in
20182018 affects
affects Turkey’s
Turkey’s access
access to and
to and costcost of external
of external

Net portfolio flows US$ Mil

10000
finance,
finance, an important
an important lever lever of growth
of growth for10000
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
1.751.75 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 raised
raised the the probability
probability
0 thatthat
the the policy
policy raterate
will will be hiked
be hiked fourfour times
times in 2018.
in 2018. 23 Past
23 Past
0
episodes
episodes of US
0.5of US monetary
monetary tightening
tightening werewere associated
associated withwith
0.5 sharp
0.5
sharp slowdowns,
slowdowns, and and occasional
occasional reversals,
reversals, of net
3.0
of3.0net
0.5 -5000
portfolio
portfolio flows
flows to Turkey
to Turkey (Figure
(Figure 43),43),
and and currency
currency depreciation
-5000 depreciation (Figure
(Figure 44).44).
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
developments alsoalso
tightening
tightening in the
in the US US 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
rate
and
Haver and change
change
Analytics,
Analytics, US
US Federal
in portfolio
inFederal
portfolioWBflows
Reserve,
Reserve, WB
Staff
flows
Staff estimates US Fed
US Fed rate rate increases
increases and TL/US$
and TL/US$
Sources: Haver Analytics, US Federal Reserve, WBestimates
Staff estimates
1500015000 movements
movements
Net portfolio flows US$ Mil 1.5 1.5 4.0 4.0
Net portfolio flows US$ Mil

Turkey’sexternal
35. 1.5 Turkey’s
35.
1.5 externalbuffersbufferstotowithstand
withstand furtherfinancial
1000010000further financialtightening
tighteninghave havereduced
reducedrelative relativetoto
Turkey’s
prior external
episodes of buffers
financial against
tightening.
prior episodes of financial tightening. Compared Compared to 35.
to 20072007 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 1
“Taper 1 Tantrum that followed the announcement of US
1 5000
of USfinancialmonetarytightening
policynormalization),
normalization),
have reduced Turkey’s
relative external
to prior
tightening
“Taper
position
Tantrum
has
financial
that followed
deteriorated.
conditions
External
the announcement
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. Compared
(Figure 45), whilst external debt stock has risen to 2007
declined
sharply0.5 from
0.5 37 percent of GDP
sharply from 37 percent of GDP in 2007, to 39 in 2007, to 39 percent
percent in 0.5 and to around 53 percent in 2017 (Figure
0.52012,
(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
Otherthan
Other than SouthAfrica,
Africa,selected
selectedEMDEs’EMDEs’ -5000 external financial requirements anddebt
debtare arelower
lower thanTurkey’s.
Turkey’s.
34. TighterSouthglobal liquidity conditionsexternal in 2018 financial requirements
Tantrum and
that followed the than
announcement of US
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 45:
Figure 45:lever Large external
Largeofexternal financing needs Figure 46: Increased external debt stock
an important growthfinancingfor theneeds country. position Figurehas 46: Increased
deteriorated. external
Externaldebt stock
financing needs
Following the US balance
Federal FedReserve’s
Fed rate rateleft
(%, left decision
(%,axis) axis) to raise remain large (Figure 45),
Fed(%,
Fed rate whilst
rateleft
(%,axis)external
left axis) debt stock has
Currentaccount
Current accountbalance (%of
(% ofGDP)
GDP) Externaldebt debttotoGDP
GDP(%) (%)
policy 6 rates by 25Analytics,
basis External
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, WB1.5Staff
Reserve, percent
WB Staff estimates
estimates
percent) 4 on March 21,
2007
2007 and the Chairman’s assessment 50
percent in 2012,2007and to around 53 percent in 2017
50
4 2012 2007
of35.the35.USTurkey’s
economy, 2012
Turkey’s markets
external
external
2017 raised the
buffers
buffers to probability
to withstand
withstand that (Figure
further
further 46).tightening
financial
financial Other 2012thanhave
tightening
2012
South
have Africa,
reduced
reduced selected EMDEs’
relative
relative to to
2 2017 40
the
prior 2prior
policy episodes
rate will
episodes of be ofhiked
financial
financial four tightening.
times
tightening. in 2018.
Compared
23
Compared 40
Pastto 2007 external
to 2007
(beforefinancial
(beforeonset requirements
onset of the
of the GFC) and
GFC) anddebt
and are(before
20122012 lower
(beforethan
“Taper
episodes
0
“Taper
0 Tantrum
of Tantrum
US that that
monetary followed
followed the
tightening the announcement
announcement
were associated of of
US 30 US monetary
Turkey’s.
monetary
30 policy
policy normalization),
normalization), Turkey’s
Turkey’s external
external
with position
positionsharp has deteriorated.
hasslowdowns,
deteriorated. and External
External
occasional financing
financing needs
reversals, needs
ofremain
net remainlargelarge (Figure
(Figure 45),45),
whilstwhilst external
external debtdebt stock stock
has has
risenrisen
-2 20
-2sharply
sharply from from
37 37 percent
percent of of
GDP GDP in in
2007, 2007,
to 39to 39 percent
percent in in
202012, 2012,
and and
to to
aroundaround53 53 percent
percent in in
2017 2017 (Figure
(Figure 46).46).
portfolio flows to Turkey (Figure 43), and currency
Other Other
-4
depreciationthan than South
South Africa,
Africa,
(Figure 44). 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 45: Large
Brazil external financing needsSouth Argentina
Figure Brazil
46:Brazil
IncreasedIndia Indonesia debt
Russiastock
South AfricaTurkey
Argentina India Indonesia Russia Africa Turkey Argentina India external
Indonesia Russia South AfricaTurkey
Africa
Current
Current
Source: account
account
IMFWorld
World balance
balance
Economic (%
(% of of GDP)
GDP)
Outlook External
External
Source: debt
WB debt to GDP
to GDP (%)
International (%)Statistics
Debt
Source:
6 6 IMF 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 2WB, “Global Economic Monitor (Monthly)” (March 2018)
0 0 30 30
1919
-2 -2 20 20

-4 -4 10 10

-6 -6 0 0
Argentina
Argentina Brazil BrazilIndia India Indonesia
Indonesia RussiaRussia
SouthSouthTurkeyTurkey Argentina
Argentina Brazil Brazil
India India Indonesia
Indonesia RussiaRussia
SouthSouth AfricaTurkey
AfricaTurkey
AfricaAfrica

Source:
Source:
Source: IMF
IMF IMF
World
World World
Economic Economic
Economic Outlook
OutlookOutlook Source:
Source: WB
Source: WB International
WBInternational
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
 are are
no no
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 belowbelow100100percent (Figure
percent (Figure47).47).
In terms
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 notnot
does pose significant
pose sustainability
significant sustainabilityrisks. ButBut
risks. external
externalshocks cancan
shocks quickly change
quickly change
thisthis
TEM, scenario:
May scenario: (i) A
(i) steeper
2018: Minding Athe riserise
steeper
ExternalinGap
energy
in energyprices could
prices push
could thethe
push external
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 realreal
depreciation
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 putsputs
This external debt
external sustainability
debt sustainabilityat risk (Figure
at risk 48).48).
(Figure

Figure 47: 47:

Figure Short-term debt
Short-term vulnerability
debt lowlow
vulnerability 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 debtdebt
Short-term (% of
(%total reserves)
of total reserves) Baseline
Baseline i-ratei-rate Growth
Growth
125 125 CA CA 30 %30baseline
% baseline Combined
Combined
20072007
20122012
20162016 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 BrazilBrazil
Argentina Indonesia IndiaIndiaRussia
Indonesia RussiaTurkey
TurkeySouthSouth 40 40
Africa
Africa 20142014
20152015
20162016
20172017
20182018
20192019
20202020
20212021
Source:
Source: WB
Source:
WB International
WB
International Debt
International DebtStatistics
Debt Statistics Statistics Source: WB
Source:
Source: Staff
WB
WB estimates
Staff
Staff estimates
estimates

Pressures onon
Pressures corporates 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-
remains
37. 37. sustainable, vulnerability to adverse shocks
A large
A large portion
portion of of Turkey’s
Turkey’s external
external financing financial
financing needsneeds risks
belongs
belongs have
to risen which
corporates,
to corporates, which have havea a
has increased
sizeable
sizeable andand with
rising the
rising recent
netnet open open rise
foreign in
foreign external
exchange
exchange debt.
positions.
positions. Almost
Almost halfhalf
of the total
of the external
total debt
external debtincrease
increase
Despite
stemmed thefrom
stemmed drop
from in the
the international
corporate
corporate debtreserves,
debtin 2017 there
in 2017 are no
(Figure
(Figure 37. The
49).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 overinexternal
dollars
dollars January
in January liquidity
2018 2018 – the
(Figure 50).ratio
(Figure TheThe
50). needs
share of FX
share belongs
corporate
of FX to
corporate corporates,
loans
loanswith with which
maturities have
maturities a 5sizeable
of 5ofyears years
ofandshort-term
longer
and longermake make
debt upto more
up more than
reserves thanhalf
hashalfof the total
of the
declined FXFX
total
though loans and
loans rising
of the
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 ofglobalgloballiquidity,
(Figure 47).and
liquidity, Inandpersistentof liraAlmost
persistent
terms lira half of the
depreciation
depreciation total external
corporate
corporate balance debt
balance increase
sheets
sheetswould stemmed
would be be
strained. Although
strained. Although banks banksare not
are allowed
not
solvency, total external debt is projected to increase to allowed to hold
to net
hold open
net from
opencurrencythe
currency corporate
positions,
positions, debt
defaults in
defaults 2017
in the
in (Figure
corporate
the corporate 49). The
sector
sector net
could alsoalso
could have havean adverse
an adverse impact
impact on the banking sector FX
through open position
credit riskrisk of
channels. corporates reached US$221.5
56.3 percent by 2021, which does noton the
pose banking
significant sector through credit channels.
billion dollars in January 2018 (Figure 50). The share
sustainability risks. But external shocks can quickly
38. 38. Corporate
Corporate vulnerability
vulnerability of companies
of companies listed onof
listed theFX
on the corporate
stock exchange
stock loansinwith
exchange Turkey maturities
in Turkey hashas of 5 years
increased
increased in inand
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 IndexIndex(CVI (CVI– see
– seeBoxBox 3 for methodology)
3 for methodology)suggests total FX
24 suggests loans
thatthat
could
corporatepushvulnerability
corporate the externalin debt
vulnerability most
in most ratio
EMDEsEMDEsto has
59.4has percent
risen since
risen 2013
since of2013(Figure
the (Figure52).52).
banking The increase
The
sector. In has
increase anhasbeen particularly
been
adverse particularly
scenario of
ofsharp
GDP
sharp in
forfor 2021;
Turkey.
Turkey. (ii)
TheThe a
debt permanent
debtin firms
in firms 30
thatthat percent
are are
financiallyrealvulnerable
financially vulnerable in 2inor
significant 2 more
or more
tightening indicators
indicators
of global increased
increasedsignificantly
liquidity, significantly
and persistent
depreciation
from 14 percent
from shock
14 percent to 37tocould
percent
37 percentincrease
of total external
reported
of total reporteddebt
debt oftolisted
debt Turkish
of listed
lira Turkishfirms
depreciation between
firms between
corporate2015 2015and 2017Q3
and
balance 2017Q3 25 (Figure
sheets (Figurebe
25would
GDP
53).53).to Firms’
86.8vulnerability
Firms’ percent in is2021.
vulnerability 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),54),
banks deterioration
are deterioration
not allowed of interest
of
to interest
hold net
coverage
coverage
sustainability ratio
STRICTLY at (i.e.,
ratiorisk more
(i.e., more
(Figure
CONFIDENTIALfirmsfirms
48). with ICR
with ICR< 1)
< (Figure
1) (Figure 55). As
55).
open a
As result,
a rollover
result,
currency rollover risk
positions, is
risk increasingly
is
defaults increasingly
in the becoming
becoming
corporate asector
a
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
impact are
liabilities
on rising
are
the from
rising
banking from
sector
May May 21, 2018
21, 2018
lowlowlevels (Figure
levels (Figure 56).56).
TheseThese 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
49: Net
Net Net Open
Open FX FX Position
FXPosition
Position of Corporates
ofofCorporates
Corporates Figure
incre- Figure 50:50:
Figure 50: Contribution
Contribution to to
Contribution to Increase
Increase in External
ininExternal
Increase 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, E., E.,
24 Feyen, N. Fiess, I.Z.I.Z.
N. Fiess, Huertas, L. Lambert,
Huertas, “Which
L. Lambert, “WhichEmerging Markets
Emerging andand
Markets Developing Economies
Developing FaceFace
Economies Corporate
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
81988198250
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
GeneralGeneral Banks Banks Non-Financial
Non-Financial
Net FXNet FX Position
Position Assets Assets Liabilities
Liabilities Government
Government Corporations
Corporations

Sources:
Sources: CBRT,CBRT,
CBRT,
Sources: Treasury.
Treasury.
Treasury.

Box
Box 3:
18 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 sectorsector in EMDEs
in EMDEs by using
by using balance-sheet
balance-sheet information
information of listed
of listed nonfinancial
nonfinancial
firmsfirms (Feyen
(Feyen et al. et2017).
al. 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
TheCorporate
The Corporate Vulnerability
Vulnerability IndexIndex
(CVI) is(CVI) is calculated
calculated to track
to track financial financial
conditions conditionscorporate
of non-financial of non-
financial
sector corporate
in EMDEs sector
by using in EMDEsinformation
balance-sheet by using balance-sheet 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 keyinformation, the CVI
aspects of financial measuresthat
vulnerability fourhave
key
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(iii)financial
Leverage distress:
Rollover Risk; (i) Profitability/Market
and (iv) Debt Service Capacity;
value. (ii) Leverage (iii) Rollover Risk; and (iv)
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
(ICR); (ii)Ratio;
Liabilities Leverage Ratio;Ratio;
(v) Quick (iii) Net
(vi) Debt
ReturntoonEBIT
Assets(Earnings
(ROA); andbefore Interesttoand
(vii) Market BookTax) Ratio;
Ratio (iv) 51).
(Figure Current
Liabilities to Long-term Liabilities Ratio; (v) Quick Ratio; (vi) Return on Assets (ROA); and (vii) Market
to Book Ratio (Figure 51).
Figure 51:51:Structure
Figure Structureof
ofCorporate VulnerabilityIndex
Corporate Vulnerability 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 theonshare
CVI is based 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
(orindicator
industry) Yassociated
at time with
t andfirms
country c where
that are deemedY financially
denotes one of seven
vulnerable. DaRindicators.
is defined For each
as the shareofofthe
corpo-
rateindicators, firms are
debt in a country thatclassified as financially
is considered vulnerable
vulnerable according toifindicator
an indicator breaches
Y at time an industry-specific
t and country c where Y denotes
onethreshold at time tFor
of seven indicators. (Table
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 )𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄 =
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.
 For
 For Leverage
Leverage Ratio,
Ratio, Net DebtNet DebtRatio,
to EBIT to EBIT Ratio, to
and Current and CurrentLiabilities,
Long-Term to Long-Term Liabilities,
the vulnerability the
thresholds
vulnerability
correspond to the thresholds correspond
90th percentile to respective
value of the the 90th indicators
percentile
forvalue of the
all firms respective
within the same indicators
industry and
across
forcountries.
all firms within the same industry and across countries.
 For
 For Quick
Quick Ratio,
Ratio, Return
Return on Assets,
on Assets, and Market
and Market to Book to Book
Ratio, theRatio, the thresholds
respective respectivearethresholds
equal to theare
10th
equal to
percentile theof10th
value 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 is used as highly
immediately a threshold for ICR, since firms with profits less than interest expenses are
vulnerable.
immediately
 For Leveragehighly
Ratio,vulnerable.
Net Debt to EBIT Ratio, and Current to Long-Term Liabilities, the
TEM, May For
 2018: Leverage
Minding Ratio, Gap
the External
vulnerability thresholds Netcorrespond
Debt to EBIT
to theRatio, and Current
90th percentile to ofLong-Term
value 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 firmsRatio,
Quick within the same
Return industry
on Assets, and
and acrosstocountries.
Market Book Ratio, the respective thresholds are
 For Quick Ratio, Return on Assets, and Market
equal to the 10th percentile value of the indicator to Book Ratio, the respective thresholds are
by industry.
equal to the 10th percentile value of the indicator by industry.
Table 1: Thresholds to classify
Table 1: aThresholds
firm as financially 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 “At(profits
<1 risk” Thresholds
less than interest expenses)
• Interest
Interest CoverageRatio
Coverage 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 >90 th
percentile
of all firms withinwithin
value of all firms the same industry,
for thepercentile value 2006Q4-2017Q3. the same industry,
th
Net Debt/EBIT whole sample One number per
• Debt/EBIT
Net Net Debt/EBIT
Current Liabilities / Long-term Liabilities for the whole sample 2006Q4-2017Q3. One number per per
industry
for the 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 value 2006Q4-2017Q3.
<10thsample ofvalue
percentile all firms
of allwithin the same
One
firms within number industry,
the same per
industry,
Return on Assets
Market-to-Book (ROA)
Ratio
• Return on Assets (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 isis extended
assumption
YY
extended
is thattoto multiple
multiple
debt that indicators
indicators to measure
to measure
is associated with the “intensity”
the firms
“intensity”
that ofare
debt ofatdebt
risk. at
Therisk.
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 to multiple indicators is more risky. It provides a stronger signal-to-noise ratio. In according to vulnerable
multiple indicators
this is
according
more risky.
regard, DaR Itto≥Xmultiple
provides a indicators
stronger
, which captures theis proportion
more risky.ofIt total
signal-to-noise ratio. Inprovides
this a stronger
regard, DaR
corporate ,
debt
≥X signal-to-noise
which captures
in a country thatthe 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 indicators
is held by same
at the
firms that are according to X or more at the debt
sameintime,a country
where thatX ∈ [0,7]:
time, that X
firmswhere [0,7]:
are∈ 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 )𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = Total debt firms financially vulnerable according to X or more indicators, country c time t
(DaR≥X )𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 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,CVI
CVIisiscalculated
calculatedasasthe average
the DaR
of of
average DaR for country c and time t:
≥X≥X for country c and time t:

7
1 7
CVIct = 1 �(DaR≥X )𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
CVIct = 7 𝑋𝑋𝑋𝑋=1
�(DaR≥X )𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
7
𝑋𝑋𝑋𝑋=1
where 0 ≤ CVIct ≤ 1.
where 0 ≤ CVIct ≤ 1.
where
The Corporate ct ≤ 1.
0 ≤ CVIVulnerability Index (CVI) shows how vulnerable are firms across 7 financial indicators. The index
Thefrom
goes Corporate
0 to 1, whereVulnerability
0 representsIndex (CVI)areshows
that firms 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 Vulnerability
The7 indicators.
index goes from Index
0 to(CVI) shows
1, where how vulnerable
0 represents are are
that firms firms
notacross 7 financial
vulnerable in any
indicators.
indicator, and The1 index goes that
represents fromall0 firms
to 1, are
where 0 represents
vulnerable in all 7that 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
the stock exchange in Turkey has increased in 2017. A
recently developed Corporate Vulnerability Index (CVI
– see Box 4 for methodology)24 suggests that corporate
vulnerability in most EMDEs has risen since 2013 (Figure
52). The increase has been particularly sharp for Turkey.
The debt in firms that are financially vulnerable in 2 or
more indicators increased significantly from 14 percent
to 37 percent of total reported debt of listed Turkish
firms between 2015 and 2017Q325 (Figure 53). Firms’
vulnerability is mostly driven by high levels of leverage
ratios (Figure 54), deterioration of interest coverage ratio
(i.e., more firms with ICR < 1) (Figure 55). As a result,
rollover risk is increasingly becoming a problem as debt at
risk (DaR) for Quick Ratio and Current Liabilities to Long-
term liabilities are rising from low levels (Figure 56). These
challenges have been compounded by an overall decline in
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 – –
MayMay21,21,
2018
2018 World Bank Group
STRICTLY
STRICTLY CONFIDENTIAL
CONFIDENTIAL – –
May
May21,21,
2018
2018
STRICTLY
STRICTLY
Figure
FigureCONFIDENTIAL
CONFIDENTIAL
52: CVI
52: in Turkey
CVI in Turkey –
– deteriorates
deteriorates 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 52:52:
Figure CVI in in
CVI Turkey deteriorates
Turkey deteriorates Figure
Figure 53:53:
Firms with
Firms DAR
with > 2>more
DAR 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:
Q3CVI
CVI Q3in in Turkey
Turkey deteriorates
deteriorates Figure
Figure 53:53: Firms
Firms with
with DAR
DAR > 2>more
2 more than
than
50 50
Corporate Vulnerability
Corporate Indices
Vulnerability 2006-2017
Indices 2006-2017 Debt at Risk
Debt ratio
at Risk ratio doubles
> 2> 2doubles
0.220.22 Q3Q3 40
50 5040
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
0.220.22 Q3Q3 40 4030
0.120.12 50 50
20
30 3020
0.020.02 40 40
10
0.120.12 20 2010
0.020.02 30 30
0
Brazil
Brazil India
India Indonesia
Indonesia 10 100
20 20
South Africa
South Africa Turkey
Turkey
0.020.02 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 55:55:
Deterioration in debt service capacity
Figure
Brazil
Brazil Sharp rise in leverage
India
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 55:55:
Deterioration
service in in
Deterioration
capacity 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
Leverage Figure
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 4030
40
30 4030
40
Leverage
Leverage Debt
Debt service
service capacity
capacity
20 3020
30
40 40 20 3020
30
40 40
10 2010
20
30 30 10 2010
20
30 30
100 100
20 20 100 100
20 20
0 0
10 10 0 0
Leverage
Leverage NetNet
Debt to EBIT
Debt to EBIT 10 10 ICRICR
0 0
Leverage
Leverage NetNet
Debt to EBIT
Debt to EBIT 0 0 ICRICR
Figure 56:56:
Figure Rollover riskrisk
Rollover becoming a problem
becoming a problem Figure 57:57:
Figure Compounded by by
Compounded falling earnings
falling earnings
Leverage
Leverage NetNet Debt
Debt to EBIT
to EBIT ICRICR
Figure 56:56:
Figure Rollover risk
Rollover becoming
risk a problem
becoming a problem Figure 57:57:
Figure Compounded
Compoundedbyby
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
Compounded
Profitability/Market
Profitability/Market value by by
value 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
213 23 8 12
12 8
1 4 4

102 12 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, StaffStaff
estimates
estimates 0 0
Curr/Lg Liabilities
Curr/Lg Liabilities Quick Ratio
Quick Ratio ROA
ROA Market to Book
Market to Book

Sources: Bloomberg,
Sources: WBWB
Bloomberg, StaffStaff
estimates
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, WBWB
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.”
𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑡𝑡𝑡𝑡
30 Rojas-Suarez,
Rojas-Suarez, L.,L.,
2015:
2015: where
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑐𝑐𝑐𝑐𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑖𝑖𝑖𝑖is𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹
the threshold 𝑖𝑖𝑖𝑖𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 = (∆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
for credit −boom ) ∗ (∆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
∆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑡𝑡𝑡𝑡and the threshold
𝑡𝑡𝑡𝑡 − ∆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 for)credit ∆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏
where bust. The thresholds is the threshold for credit boom
are determined by using the𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑡𝑡𝑡𝑡
and ∆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 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) filter to calculate
multiplying the standard the cyclical component
deviation for theofsample
credit growth,
period thenby 1.5 and
multiplying the the
-1.5 to obtain standard
boomdeviation and bustfor the samplerespectively.
thresholds period by 1.5 and -1.5 to obtain the boom and bust thresholds 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),58),
andandprotect fiscal
protect buffers
fiscal buffers(Figure 59).59).
(Figure Solid fiscal
Solid positions
fiscal in other
positions in otherEMDEs
EMDEs prior to to
prior thetheGFC,
GFC,enabled
enabled
themthemto implement
to implement strong stimulus
strong stimulusprograms.
programs.This more
This recently
more hashas
recently ledled
to atodeterioration
a deteriorationin fiscal positions,
in fiscal positions,
exacerbated
exacerbated forfor
somesome by by
declining commodity
declining commodity prices. In In
prices. Turkey, a broader
Turkey, a broader setset
of fiscal space
of fiscal indicators
space (Table
indicators (Table
2)272)May
TEM, confirms
27 confirms thatthat
2018: Minding the government
the
the Gap is in
government
External a strong
is in a strongposition to to
position finance
financeits its
long-term
long-term commitments
commitments (Table 2: 2:
(Table
Government
Government debt sustainability
debt indicators),
sustainability andand
indicators), thatthat
thethe
composition
composition of of
public debt
public does
debt notnot
does unduly
undulyexpose
expose
thethe
authorities
authoritiesto atosudden
a suddenchange
changein financial market
in financial market conditions (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 net net
lending/borrowing General Government
General NetNet
Government Debt (% (%
Debt of GDP)
of GDP)
Government lending/borrowing
(% (%
of GDP)
of GDP)
5 50 50
5
200720072012201220172017 200720072012201220172017
40 40
STRICTLY
STRICTLY CONFIDENTIAL
CONFIDENTIAL ––
0 0
May
May 21,21, 2018
2018 30 30

-5 -5 20 20
Figure
Figure 60:60: Deviation
Deviation of of inflation
inflation from
from target
target Figure
Figure 61:61: Real
Real policy
policy rates
rates areare positive
positive
10 10
-10 -10
Deviation
Deviation of of
Argentina inflation
inflation
Brazil
Argentina from
BrazilIndiafrom its target
itsIndonesia
target
Indonesia
India Russia
RussiaSouth
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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 IMF
Source:
Source: IMF 21,World
IMF
World2018
WorldEconomic
Economic Outlook Outlook
Brazil
Brazil Economic Outlook Source: IMFIMF
Source: World Economic
World Outlook
Economic Outlook
May 21,
30 30 2018 Turkey
Turkey
25 25 4%4%
40.40. Tightening global
Indonesia
Indonesia
Tightening global financial
financial conditions
conditions together
together with
withelevated
elevated levels of of
levels external
external andandprivate
private
20
20 debt
sector
sector debt have have the potential
the potential to rapidly
to rapidlyerode
erode fiscal space.
fiscal
2% space. Turkey’s
Turkey’s dependence
dependence on external
on externalfinance
finance
2014
2014

Figure
Figure 60:
60:relative Deviation
Deviation of inflation
of inflation from from target
target
2% Figure
Figure 61: Real
61:2:Real policy
policy rates
rates are positive
are positive
remains 15high
15 60:
Figure
remains Deviation
high relativetoinflation
of other
to otherEMDEs,
from
EMDEs, with
target some
with some exceptions
Figure(Table
exceptions 61: Real
(Table External
policy and
rates
2: External are Private
andpositiveSector
Private SectorDebt).
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10 10 if downside
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,andandPublic Private
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Deviation of inflation from its target Real policy
Deviation
Partnerships of –inflation
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5 5 all from
of which
–(squared)
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exposed
are exposed to currency
Africa risks
toAfrica
currency
South
South –Real
risks policy ratesrates
materialize,
– materialize, thisthis
maymay
create contingent
create contingentliabilities forfor
liabilities
thethe
35 35
government. (squared)
This may explain partly why, despite strong
6% 6%
fiscal buffers, market perceptions of risk towards
0government.
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 5relatively
10 10high
5relatively 15(Table
high 202:
15 (Table 20Market
Turkey 25 25 Perception).
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30 30 Brazil USUS
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Turkey
Turkey 4% Africa
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25 25 2007 4% 2012 2017
2012 2017
Indonesia 2007
Indonesia
41. 41. 20 20
Sources:
Sources:
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IMF The
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possibility
WEO,
WEO, National
National
forCentral
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monetary
for monetary
Banks,
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policy
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to torespond
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Source:
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to adverse
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Haver
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Analytics,
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Staff
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estimates
estimates
is is
moremore
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),60),
28 whilst
28 whilst thetheCentral
Central Bank’s
Bank’s average
average
Russia costcostof offunding
funding is already
is0%alreadyat 13.5
at 13.5 percent
percent andand positive
positivein real terms
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10 10 Russia
(Figure
42.
42.(Figure 61).
In In Therefore,
Turkey,
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61). this
Therefore, if
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challenge
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liquidity need to to
cool
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leads slower
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credit-to-GDP
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5 SouthSouth Africa
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been
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meaning inflation.
meaning that
that
high inflation. credit
credit growth
growth hashas been
been above
above itsits long-term
long-term trend
trend
0 0to to -2%-2%
pointing
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potential erosion
erosion of of countercyclical
countercyclical buffers
buffers (Figure
(Figure 62).
62). Further
Further
31 31
Brazil US Fed evidence
evidence
Russia of of excessive
excessive
South credit
credit
Turkey
0 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 whenwhen computing
computing thethe threshold
threshold forfor credit
credit growth
growth that
that determines
determines
Africa
Africa whether
whether
20072007 201220122017 2017
thethe observed
observed growth
growth in in credit
credit cancan bebe 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 WBStaffStaff
sector) fragilities as Source: Haver
discussed Analytics,
above, WB
then Staff
high estimates
inflation constrains
tightening
Sources:
Sources:
26 Parts
IMFIMF exposes
WEO,
of this
WEO, financial
National Central
National
section draws
(and
Banks,
Central
on on
WB
real
Staff
Banks,
thetheapproach
sector)
estimates
WB fragilities
in Rojas-Suarez,
as discussed
Source:
Source:
L., L.,
2015.
Haver
Haver above,
Analytics,
Analytics,
“Emerging
then
WBWBStaff
Market
high inflation
estimates
Staff estimates
Macroeconomic
constrains
Resilience
thethe
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 datadata
in this section is taken from: Kose, M. M.
Ayhan, Sergio Kurlat, Franziska Ohnsorge, andand
Naotaka Sugawara
42.42. InFigure
27 The In Turkey,
in this
Turkey,section
this this
is takenchallenge
from:
challenge Kose, is exacerbated
Ayhan,
is GDP Sergio
exacerbated Kurlat,by by
Franziskaa need
a needOhnsorge, to cool
toFigure Naotaka
cool credit
Sugawara
credit expansion.
expansion. The The credit-to-GDP
credit-to-GDP
(2017). "A Figure 62:62:
Cross-Country High
High credit
credit
Database to to
GDP
of recent
Fiscal gapgap Policy
Space." Research Figure
Working 63: 63: Indications
Indications
Paper 8157, of of
World credit
credit
Bank, boom
boom
Washington,
gap
(2017).
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gap in in
62:Turkey
"A
Turkey High has has
credit
beenbeen
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Database
GDP
high in in
gap
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years, meaning
Space."
meaning Policythat that
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Figure
credit 63:
growthgrowth
Working
Indications
has has
Paper
been been
8157,
of above
World
credit
above boom
its its
Bank, long-term
Washington,
long-term trend
trend
DC. DC.NotNot
pointing all countries’
all
to datadata
countries’
potential for for
2017
erosion 2017hashas
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been updated,
countercyclical therefore
therefore
buffers 2016
2016datadata
(Figure is
62).used
is to illustrate
31used to
Further developments
illustrate developments
evidence of compared
compared
excessive credit
pointing
to Credit
2007 to potential
(prior to GFC erosion
onset) of
andand
2012 countercyclical
(prior to “Taper buffers
Tantrum” (Figure
and 62). Further
collapse
31
in evidence
commodity pricesofinexcessive
2014. credit
toCredit
2007
expansion to to
GDP GDP
(prior togap
gap
(credit (%
GFC (%
boom) of GDP)
ofonset)
GDP) 2012
is evident (prior
when to “Taper
computing Tantrum”
the and
threshold
400400 collapse
Financial
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 that
constraints
2007
2007 determines
imposed
2012 2017 onwhether
the
28 Rojas-Suarez,
the observed L., 2015:in “Deviation of inflation fromwithits announced target captures the 322012
constraints 2017
imposed onfinancial
the
the observed
implementation
implementation ofgrowth
growth of in creditcredit
countercyclical can
countercyclical
can
be
monetary be
monetary
associated
associated
policy with
when
policy when the a boom
a boom
economy
the or aisorbust
-100
economy
-100
a bust
facing
is
(Figure
(Figure 63).63).
inflationary
facing inflationary
32 If If international
international
or deflationary
or 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 financial
shock.”
the time of the shock.” (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.
24-600demand.
-600

Figure
Figure 62: 62:
HighHigh credit
credit to GDP
to GDP gapgap -1100 Figure 63: Indications of credit boom
-1100 Figure 63: Indications of credit boom
-12
-12Credit -1600
-1600
Credit to GDP
to GDP gapgap
(% (% of GDP)
of GDP) 400 400 Financial Fragility
Financial Fragility
-2100
-2100 200720072012201220172017
8 Argentina -100-100
8 Argentina Brazil
Brazil Indonesia
Indonesia
India
India Russia
Russia Turkey
Turkey
South
South Africa
Africa -600-600
Sources:
Sources:
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International Settlements
Settlements
Settlements Sources:
Sources: Haver
-1100Haver
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Analytics,
Haver Analytics, WBWB
WB Staff
Staff Staff estimates
estimates
estimates
-1100

-1600
-12 -12 -1600

-2100
-2100
Argentina Brazil Indonesia
24 Bank
31 31 Bank
forfor International
International
Argentina Settlements:
Settlements: “The
Russia “The
Brazil 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
IndiaIndia Russia Turkey
ratio
ratio andand
its its
longlong
South
South Africa run
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trend.
Africa TheThe credit-to-GDP
credit-to-GDP ratio
ratio as as published
published in in
thethe BIS
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total credit
credit to to
thethe private
private non-
non-
financial
financial
Sources: sector,
sector,
Bank capturing
capturing
for total
total
International borrowing
borrowing
Settlements from
from all all domestic
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foreign
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sources,
Haver is used
is used
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input
Staff data…The
data…The
estimates gapgap
Sources: Bank foradopted
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indicator
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32 32 ����
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 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

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 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.

Source: WB, World Development Indicators

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TEM, May 2018: Minding the External Gap
References
Aldan, A., Yunculer G., 2016. “Real Wages and the
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