Economic Stability: Economic Stability: Turkey’s Anchors and BeyondTurkey’s Anchors and Beyond

April 24, 2008

İbrahim H. ÇANAKCI

Undersecretary of Treasury

2

Global Environment

Slowdown in Global Growth

Rising Commodity Prices

Shrinking Capital Inflows

3

Risks

Monetary and financial

Conditions

Emerging market risks Credit risks

Market andliquidity risks

Macroeconomicrisks

Risk appetite

Closer to center signifiesless risk or tighter conditions

October 2007 GFSRApril 2008 GFSR

With Further Downside Risks...

Source: IMF

44

38,2

41,239,5

42,8 42,1

38,0

116,6

160,7

190,3

87,6

277,3

225,1

0

50

100

150

200

250

300

2002 2003 2004 2005 2006 2007

30

35

40

45

50

55

60

Foreign Trade Volume/ GDP (%) (rhs)

Foreign Trade Volume (Billion USD)

Turkey’s International Integration–Trade

Source: TURKSAT

5

1,1 1,82,8

10,0

19,9

22,0

0

5

10

15

20

25

1993-2002Ave.

2003 2004 2005 2006 2007

FDI Inflows (Billion $)

Turkey’s International Integration – FDI Inflows

Source: Central Bank of Turkey

6

Turkey’s International Integration–FDI Outflows

Source: Central Bank of Turkey

309499

859

1.078934

2.107

0

500

1.000

1.500

2.000

2.500

1993-2002Ave.

2003 2004 2005 2006 2007

FDI Abroad (Million $)

7

4.4

7.1

10.3

13.6 13.4 13.412.6

3

6

9

12

15

2003 2004 2005 2006 2007 Feb-08 Apr.11-08

Share of Non-Residents in Domestic Debt Stock (%)

Turkey’s International Integration–Government Securities Market

Source: Undersecretariat of Treasury

8

46,0

52,9

66,365,3

72,4 71,5

40

45

50

55

60

65

70

75

2003 2004 2005 2006 2007 'Mar-08

Share of Non-Residents in Istanbul Stock Exchange (%)

Turkey’s International Integration-Stock Exchange Market

Source: Central Registry Agency

9

42,1 43,1 49,063,7

82,9

118,3

158,0

0

40

80

120

160

200

2001 2002 2003 2004 2005 2006 2007

Private Sector External Debt Stock (Billion $)

Source: Undersecretariat of Treasury

Turkey’s International Integration – Credit Markets

10

234.7

114.2

730.8782.4

568.2521.0

347.8

-100

0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006 2007 2008*

Equity Investment Commercial Banks Others Total

(*) Estimate

Source: Institute of International Finance, “Global Economic and Capital Markets Forecasts”, March 6, 2008

Net Private Capital Flows to Emerging Market Economies(Billion USD)

11

34

44

54

64

74

84

94

104

114

124

Ja

n-0

5

Ma

r-0

5

Ma

y-0

5

Ju

l-0

5

Se

p-0

5

No

v-0

5

Ja

n-0

6

Ma

r-0

6

Ma

y-0

6

Ju

l-0

6

Se

p-0

6

No

v-0

6

Ja

n-0

7

Ma

r-0

7

Ma

y-0

7

Ju

l-0

7

Se

p-0

7

No

v-0

7

Ja

n-0

8

Ma

r-0

8

Source: IMF

Brent Crude Oil Prices (USD per barrel)

12

70

90

110

130

150

170

19020

00-1 5 9

2001

-1 5 920

02-1 5 9

2003

-1 5 920

04-1 5 9

2005

-1 5 920

06-1 5 9

2007

-1 5 920

08-1

Source: IMF

*Consists of grain, oil, flour, meat, sea food, sugar, banana and orange.

Index of Food Prices*

13

Short Term Macroeconomic Outlook for Turkey

Growth

... sub-trend economic growth

Inflation

... challenges on disinflationary efforts

Current Account Balance

... pressure on CAB due to rising commodity prices

14

Turkey’s Strengths Supporting Positive Medium Term Outlook

REMARKABLE DECLINE IN PUBLIC DEBT BURDEN

MORE RESILIENT PUBLIC DEBT COMPOSITION

COMFORTABLE FINANCING POSITION OF TREASURY

STRONG RESERVE POSITION OF TREASURY AND CBRT

SUBSTANTIAL DECLINE IN NET EXTERNAL DEBT TO GDP RATIO

STRONG FINANCIAL SECTOR

15

Gross Public Debt Stock (EU Definition, % of GDP)

EU-27 average

Source: Undersecretariat of Treasury

16

Public Sector Net Debt Stock (% of GDP)

26,231,3 30,0 31,3

27,8 25,9

35,4 23,919,1

10,4

6,53,2

61,5

55,2

49,1

29,134,2

41,7

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007

YTL FX Denominated/Indexed

Source: Undersecretariat of Treasury

17

Composition of Gross Public Debt (%)

2002

Foreign Exch.; 58,1

YTL (Floating);

26,4

YTL (Fixed);

15,5

2008 March

Foreign Exch.; 32,3

YTL (Fixed);

35,7

YTL (Floating);

32

Source: Undersecretariat of Treasury

18

Domestic Debt Stock / M2Y (%)

112,3

129,7

121,1

106,6

87,8

77,8 76,3

60

70

80

90

100

110

120

130

140

150

2002 2003 2004 2005 2006 2007 Mar.08

Source: Undersecretariat of Treasury, Central Bank of Turkey

19

91,9

88,4 89,4

76,3

79,5

70,0

60

65

70

75

80

85

90

95

100

2003 2004 2005 2006 2007 2008 Proj.

Total Domestic Debt Rollover Ratio

Source: Central Registry Agency

20

204

151

129

67

3429

0

50

100

150

200

250

2003 2004 2005 2006 2007 2008 Jan-Mar

Treasury Reserves / Average Monthly Debt Service (%)

Source: Undersecretariat of Treasury

21

Central Bank’s Gross FX Reserves (Billion USD)

10

20

30

40

50

60

70

80

Jan

-02

Ap

r-02

Jul-

02

Oct

-02

Jan

-03

Ap

r-03

Jul-

03

Oct

-03

Jan

-04

Ap

r-04

Jul-

04

Oct

-04

Jan

-05

Ap

r-05

Jul-

05

Oct

-05

Jan

-06

Ap

r-06

Jul-

06

Oct

-06

Jan

-07

Ap

r-07

Jul-

07

Oct

-07

Jan

-08

Ap

r-08

as of April 11, 2008 - $75.4 billion

Source: Central Bank of Turkey

22

Turkey’s Net External Debt (% of GDP)

39.9 38.4

31.6

26.3

20.4 20.520.2

10

20

30

40

50

2001 2002 2003 2004 2005 2006 2007

Source: Undersecretariat of Treasury

23

Capital Adequacy Ratio (%)

-449

187

-71 -97

184

-296

705

-800

-600

-400

-200

0

200

400

600

800

2002 2003 2004 2005 2006 2007 Mar-08

FX Position (Million USD) (%)

23.04

26.51

32.41

37.77

43.82

49.13

15

25

35

45

55

2002 2003 2004 2005 2006 2007

Loans to Assets (%)

21.2

11.5

6.04.8 3.8

3.57.6

1.3 0.8 0.6 0.4 0.50

4

8

12

16

20

24

2002 2003 2004 2005 2006 2007

Gross NPL Ratio Net NPL Ratio (gross-provisions)

Asset Quality

Banking Sector Indicators

24

Key Priorities

Preserving Macroeconomic and Financial

Stability

Controlling Current Account Deficit and

Ensuring A Sustainable External Financing

Position

25

Macroeconomic Policies

Monetary Policy

... aiming at price stability

Fiscal Policy

... sustaining the fiscal prudence

2626

Structural Reform Priorities

Labor Market Reform

Energy Sector Reforms

Continuing with Privatization Program

Further Strenghtening of Revenue Administration and Reducing Informality

Commercial Code

27

Policy Anchors for Turkey

IMF

EU

A Credible and Consistent Policy Framework

Ownership

Commitment

Institutionalization