FE502

1. Global Imbalance

Globalisation

Global Imbalance

Global Saving Glut

Global Banking Glut

Dollarization

Strong Dollar

2. Financial Sector

Fiat monetary system

The primary role of money

Who controls the money supply

Outside money, inside money

Banking System

Who creates money

Private banking sector

Bank money is "inside money"

Government's true constraint: inflation

Limits to money creation by the banking system

• 1.Monetary Policy

• 2. market force

• 3.Coping with extra Risks

Central Bank Money, Bank Money

What is bank capital ? (equity capital)

Capital adequacy ratio (CAR)

Solvency and Illiquidity

3. CBRT Balance Sheet

CB Assets

CB Liabilities

Central banks are public bodies

How money is created

The CBRT and MP

Central Bank Balance Sheets

CB operates in a fiat currency system

• Bretton Woods
• Fiat Money

Central Bank Balance Sheet

Would CB insolvency matter?

• CB balance sheet negative

what about Turkiye

World CB balance sheets and Currency Liabilities

• large share of the FX liabilities reduce the power of the CB to control MP

World CB Balance sheets and Reserve Accounts

Costs of accumulating assets (Central bank money creation)

• Social costs of reserves
• expansion in money supply produces inflation

The CBRT implemented implicit inflation targetting 2002-2005, explicit inflation targeting 2006

CBRT main objective

• achieving and maintaining price stability

The Central bank of the Republic of Turkiye

• Law Articles

Analytical framework

• reserve money
• external position
• claims on the public sector

Accounting frmaework: Market valuation of the analytical balance sheet

Reserve Money

Data are disseminated on the analytical accounts of the CBRT

EX: CBRT is Asset driven 2002-2009

Liability driven or asset-driven?

IMF View and Analytic Balance Sheet

• short-term interest rates
• reserve money

central bank Analytic Balance Sheet: what does central bank control?

Base Money & Reservs

What happens to central bank Analytic balance sheet if:

• Central bank purchases fx
• gov makes payment from CB
• CB buy gov security
• Demand for cash increases before holidays

What does central bank control (on the liabilities side)?

• Balance Sheet liability side shows “how much CBRT affects the market”. Shows the strength of the CBRT

Instruments of Liquidity management= Instruments of used to impose MP

• short term interest rate
• payment systems
• increase efficiency of monetary policy

4. CBRT Analytic Balance Sheet

Monetary policy is a short run demand management

Understanding CBRT balance sheet

• balance sheet is liability-driven

  • Australia CB

• balance sheet is asset-driven

  • CBRT

Sustainable growth higher potential growth rate is posssible with price stability

• but nothing to do with long term

Turkish QE: outright purchases

• Credits to public sector : DIBS portfolio GBonds portfolio

Reserve Money (Or base Money)

OMO and GDDS difference

• Difference bettwen the OMO is that instead of GDDS commercial papers are exchanged

redicount credits to exports

ALL ASSETS ARE LIABILITY TO THE ISSUER and asset to everybodyelse

Reserve Option Mechanism (ROM)

The liquidity Management at CBRT

• For central banks, liquidity essentially refers to the total reserves of the banking system

Expected interest rates could change the behavior of banks

SFI: system Funding NEED : sistemin fonlama ihtiyacı

O/N rates ve liquidity relation

CBRT’s monetary policy is tight 2001-2016

CB is Cautious 2006-2009

• As risk goes down Exchange rate goes down

MONETARY POLICY INSTRUMENTS

• Direct controls or instruments
• Indirect instruments

instruments used in monetary operations

• OMO

  • OMO and CBRT FX Positions

• SF

• Reserve Requirements

After February 2019 there is an expansion, in the Base Money

Base Money (% GDP)

M3 and Base Money

SF and Corridor

• Policy and Short Term Rates %

Money, is a liability to Central Bank

5. TCMB - Open Market Operations

Open Market Operations started in

1987 and established by first Rüştü Saraçoğlu

Open market operations are conducted only for monetary policy purposes

The CBRT cannot purchase debt instruments

issued by the Treasury or public institutions

The policy rate set by the Central Bank is the one-week repo rate.

Large volatility at the CBMoney shows

instability !!!

Types of OMO

• Outright Purchases & Sales
• Repo
• Reverse Repo
• Liquidity Bills
• Deposits

If money goes into Banking System and

not the CB, it is a ‘repo’

• CBRT has to acquire securities from the secondary market
• Repo eksi işaretli likidite verilir

OMO transactions

• When the CBRT thinks that money is tight, CB

  • Buys securities permanently from the bank and injects TL into the market (permanent outright purchases)
  • CBRT gives temporary liquidity : engages in REPO, Repurchase transaction

• When CBRT wants to absorb excess liquidity

  • Sells government securities to banks (permanent outright sale)
  • CBRT draws temporary liquidity: engages in Reverse Repo transaction

6. Fiscal Policy (G Budget)

The borrower country has to pay a Primary Balance > 0 in order to bear it's interest burden

Fiscal policy refers to any uses of the

government budget to affect the economy

Overall balance called CONVENTIONAL

BALANCE … cd: conventional deficit

BUDGET

• Central Government Deficit
• General Government Deficit
• Public sector deficit

INTEREST IS A FLOW BUT IT IS THE RESULT OF A DEBT STOCK

DOMESTİC AND

EXTERNAL DEBT CREATES AN INTEREST BURDEN

Because Expenditures are current expenditures interest expenditures

are different : why do we pay interest because we have sins in the past : in the past we had a large debt so these interests come from the balance sheet

primary surplus is the standard indicator

used in monitoring fiscal developments in many EMs

What was the dictum?, to establish stability

give always primary surplus !!

IMF program defined is much

larger than the G defined

The tax revenues increased more than doubled

External Debt Stock

CBRT Reserve including Gold As % of Short term External Debt

• External debt burden can be analysed with this ratio, since 2012 its vulnarable
• Guidotti measure

Export / Import Coverage Ratio

The higher share of USD in the external debt

currency composition the higher the FED MP changes on the TR economy

AFter 2018 gross and net they are converging to each other

NET DEBT IF THE STATE SELL ALL

THE ASSETS UNDER ITS OWN HANDS İS İT FAİR?

7. Debt-Sustainability

Turkish debt-based growth model is reducing the potential growth rate of the economy

TR GROWTH has become dependent on

consumption and imports instead of production: excessive borrowing of the private sector

a structural change is very important for all macro

balances of the economy and the future of borrowing

The public is currently paying both high interest rates and high exchange rates. Almost two-thirds of total debt has become rate-sensitive: so increases in the exchange rate now bounce off the public debt burden quickly. While other countries are using public resources to support their people in abundance during the pandemic, we have

wasted the existing resources by increasing our foreign exchange debt and exchange rate with our own hands.

Total debt/GDP

Growth rate decreased due to DEBT-BASED

growth model

Because the paybacks have the effect of reducing consumption as the debts decrease

IMF 2001 Stabilization Program

By increasing primary surplus Made debt service relax

The interest-rate-growth differential is essential to understanding long-run fiscal sustainability

1.Model (Simple Model)

• If the r real interest is smaller than g real growth rate then DEBT/GDP ratio will decrease

• Real interest rates (Comp. Ann %)

  • Governments often ignore real interest rates as they find it difficult to reduce inflation and mitigate risks. Instead, they aim to raise the growth rate. Thus, while appealing to the voters, they transfer resources to those who can save with high interest spending

2. Model (The accounting approach to Fiscal Sustainablity)

• THIS model works for countries where External DEBT is not large and important internal debt is important
• the net government debt-to-GDP ratio (d)
• primary deficit ratio (-pb)
• net interest rates payments on the previous period’s debt
• There is a widespread belief that a country’s national debt burden is sustainable if the interest rate on its debt is less than its expected GDP growth rate.

3. Model (main Model)

• Buiter ve Wijnbergen

• 3rd model at the same time tells us that growth must be kept sustainable

  • With tight monetary and fiscal policies

• Public sector deficits

• What happens when exchange rate is introduced

Primary deficit: deficit without interest payments

Credit Easing

• USA made credit easing bought back bonds ..USA has budget and interest payments to finance world by collecting dollars funded its deficit

İf your solution > trouble

You reduce your debt

8. Money Supply

Main theory after WWII: Monetarist Theory

• Its basic hypothesis is that price inflation in the ‘real’ economy occurs and accelerates if the money supply rises much faster than production in an economy.

• monetary phenomenon

  • Milton Friedman

quantity theory

The classical theory of money

• Fischer

  • fisher equation

• MV=PY

  • velocity
  • use credits
  • with cash

• triplet deficit

• The theory provided that changes in the quantity of money effect the changes in the price level

• DIRECT LINK BETWEEN MONEY SUPPLY AND INFLATION

the monetarist school of thought,

associated with Milton Friedman

• Predictable Money Multiplier

  • PredictableVelocity
  • Moneyand Inflation
  • M/P real money demand
  • So inflation is a monetary phenomenon (Friedman)

The monetarist theory has been proven

wrong, particularly during the COVID slump.

• During 2020, money supply entering the banking system rose over 25% and yet consumer price inflation hardly budged and even slowed.
• M0, M1, M2 and Price
• The link between money and inflation since 2008

What is Money Supply (simply)

• Sum of monetary values that can be used to purchase goods and services (real economy
• MSupply

Money Supply definition

(AFTER 2007

Friedman’s Modern Quantity Theory of Money

• RELATIONSHIP AMONG THE GROWTHS RATES OF MONEY, VELOCITY, PRICES, AND OUTPUT
• THERE IS A VERY CLOSE RELATIONSHIP BETWEEN MS AND INFLATION AND GROWTH
• ACCORDING TO THE QUANTITY THEORY CBRT CAN CONTROL INFLATION BY CONTROL THE AMOUNT OF THE MONEY SUPPLYr
• Quantity theory of money (Miktar teorisi) M.V=P.Q

Which one is right? Long-run price level is

proportional to money supply

Money multiplier

model does not work!

LR link between money and

inflation weaken

• the long-run link between money growth and infation and (ii) the link between credit growth and financial crises.
• money growth and inflation
• credit growth and financial crises

Conventional theory assumed that all

money is used for GDP transactions

• Effective Money = nominal GDP
• MV = PY with constant or stable V
• But: asset transactions are not part of GDP

divide money into two : M = MR + MF

• Money used for GDP transactions, used for the ‘real economy’ (‘real circulation’) (MR)
• Money used for non-GDP transactions (‘financial circulation’) (MF)

The M measures are not in a stable and

reliable relationship to economic activity (‘velocity decline’, ‘breakdown of money demand’)

• Boughton, 1991

The quantitive theory of Credit instead of quantitive theory of money

• Banks create Money – out of nothing
• Werner 1997

9. Monetary Policy

4 steps, 2 Goals, 2 Strategies in MP1, MP2

Linkages Between Central Bank Tools,

Policy Instruments, Intermediate Targets, and Goals of Monetary Policy

Money multiplier strange and restrictive view

• In the model, a bank that has excess reserves will always want to loan these to someone

QE and money multiplier model

• M0,, M1, M2, MULT

Last time, we discussed the monetarist

school (Monetary Targeting)

• the MS money supply is nowadays generally considered a poor strategy for CBs…

• Monetary Targeting is a poor strategy for CBs for a number of reasons

  • 1. Uncertain Money Multiplier:

  • 2- Uncertain Monetary Velocity

  • 3- Weak Link Between Money and Inflation

Monetary Targeting (MT) and

Exchange rate Targeting (ET)

• So how to manage the need of an organizing framework and a nominal anchor to guide and coordinate inflationary expectations.?

Modern Central Banking approach

• Ensure that central banks are independent of political control so they focus on the long-term target of price stability.

• increase CB independence

  • Inflation Targeting:

  • De-Emphasising Fiscal Policies:,

  • Monetary Financing

    • make illegal the use of central bank money creation powers to finance government spending

IMF 5 Pillars

Much depends on monetary policy credibility

• makes investing in local currency assets less attractive

• Turkey

  • Edward Parker, head of Fitch sovereign

CDS

• WHY to look at CDS?

It's not just about interest rate. The

capacity and credibility of the authority in this regard is actually much more decisive, more decisive than the interest instrument

Where will the MB use it? Why is it

independent

• an anchorage,
• CB's Independence increases, its ability to anchor, that is, its ability to bring inflation expectations closer to its own target, this relationship is both very strong and very clear and positive.

No anchor, no credibility, high risk

premium

• improving the independence

Because US Monetary Policy transmission to the rest of

the world! Operating through changes in risk perception (risk spillovers )

• These risk spillovers are higher for emerging markets than for advanced economies; they interact with country risk.
• For emerging markets, the pass-through of domestic monetary policy is also affected by international capital flows.
• So the best policy is to prefer flexible exchange rates, as flexible exchange rates can, tosome extent, smooth out risk shocks. (this is best choice in the trilemma )
• UIP (TR risk premiım) = exchange rate dolar/ TL- (interst US-interest TR)= UIP TR deviation
• Risk premium= global + country
• TR loan rate= policy rate + TR risk premium
• But flexible exchange rates do not perfectly insulate emerging economies: monetary policy in emerging markets cannot fully offset international risk spillovers. Hence, policymakers ought to decrease the risk sensitivity and volatility of capital flows through the build up of better institutions. Policy also ought to aim at decreasing foreign currency debt
• İn US risk premium is almost zero, in EMs it is very high, especially in TR , risk premium is high (WHY Turkish risk premium is so high?)

Capital Flow Management (CFM) and

UIP risk premia

FX Revaluation Account

• Government money creation

Mishkin

• seven pillars of monetary wisdom

  • 1. monetary policy is “neutral” (“neutral”) in the long run
  • 2. voluntary decisions (keyfi, discretionary) gives negative results in the long term
  • 3. Inflation has real and rather high economic costs
    • time inconsistency means

  • 4- Monetary policy is "disabled" by the "time inconsistency" problem.

    • Of course, no Central Bank can be completely independent from the government

  • 5- Monetary policy should be removed from the direction of politics in order to ensure economic efficiency and stability.

  • 6- In the Rules / Voluntary Measures dilemma, it would be appropriate to adopt a more rule-oriented attitude and to rely on the autonomous functioning of market forces.

  • 7- Successful monetary policy implementation needs solid nominal anchors.

Must be independent for a successful monetary policy

approach CB: where should it be independent to be successful?

• Treasury financing very low
• CB accountability
• The appointment of governors and directors should be nongovernmental
• budgetary independent

Goals of Monetary Policy

Monetary Policy Strategy, aiming to

final target there are 2 types of strategies

• MP1-(AH)- intemediate targets (AraHedefleme)
• MP2- (IT) select directly the final target like inflation (Direct Inflation Targeting)

MP 4 components

• MP tools
• operational targets
• intermediate target
• final destination

CBRT 2-stage

processes

• MP (1) is doing, then the final destination is with intermediate targeting
• if MP (2) does it, it achieves the final goal with operational goals

MP and 3 targets alone or together used

• (AH) monetary aggregates

  • Nominal anchor-direct

    • These nominal anchors play very important roles as intermediate quantitative targets which the CBs need to achieve in the long run.

  • nominal anchor: A nominal variable such as the inflation rate, an exchange rate, or the money supply that monetary policymakers use to tie down the price level.

• (AH) Exchange rate

• (IT) direct control of inflation (inflation is Nominal anchor) CBRT analytic balance sheet is targeted.

Countries besides Germany failed

Monetary Targeting because

• the variable of ultimate goal and intermediate goals
• failures in the USA, Canada, and the UK

3 targets

• Exchange rate targeting
• inflation targeting
• Monetary targeting

İntermediate Target: if Nominal

Anchor is Exchange rate

• Exchange Rate Targeting (AH) ( TR tried it in 2000, it didn't work.),
• Monetary Targeting (AH) (TR tried it in 2001 )

Monetary targeting (MT)

• It is a widely used monetary policy strategy until the 1990s

• Base Money (PT) targets for 2001-2004

  • according to quantity theory

• (IT ) inflation Targeting (2006- present).

  • Base Money often is the operating target
  • inflation forecast is the intermediate target.

Monetary Policy Strategy

Summary of Monetary policy

• Non-borrowed reserves represent the numerical difference between total reserves minus funds that have been borrowed from the FED discount window

• Policy tools

• END GOAL

  • 2010, 2011 turkiyede ne oldu?

Main Monetary Policy Instruments

• Policy İnterest rate

  • (Discount rate for USA) [works through reserve money]

• Reserve requirement

  • [works through money multiplier]

• OMO

  • most common; works through reserve money

broad money

• Base (or reserve) money is the liability of the central bank toward the public and commercial banking sector, while broad money is the liability of the entire banking sector toward the public (money supply also called broad money)

New Transmission

• The impact of monetary policy on the real economy becomes visible via the transmission mechanism.
• Intermediate variables

Why the CB chooses inflation as the

ultimate target rather than growth

• two-stage MONETARY TARGETING MONETARY POLICY

Money Target anchor(AH) Advantages

Money Target anchor(AH)

disadvantages

Performance criteria indicative target

The choice of exchange rate anchor is affected by the exchange rate regime in the country

• In fact, exchange rates cannot be an intermediate target variable

Back indexation

Exchange Rate anchor(AH) disadvantages

• Balance of Payments Determines liquidity and interest rates

After 1980s, during 1990s world of finance interrelated developments profoundly influenced the

implementation of MP

Central banks rapidly abandoned quantitative tools such as interest rate ceilings

10. Inflation Targeting

A monetary policy based on, the market

(indirect), but at the same time based on Intervention (discretionary)

Much of the debate on choosing an exchange rate regime misses the boat..

its institutions basically the most important ... Ex: TR

Therefore what the literature would

suggests

• Stick to Inflation Targeting

• Tighten fiscal policy

• Use macro prudential policy

• Accelerate structural reforms

  • capital inflows problem

• Keeping the dollar exchange rate around 18.65 liras thanks to the capital controls put in place under the name of macroprudential measure ,... How much longer will they be able to cost?

High food prices and strong USD are double burden for Developing Countries

Hasan Ersel 2007

Exchange Pass Trough has a stronger effect than policy rate, 2006 da para politikası etkin değil (is not effective)

• CPI
• WPI

CBRT interest rate hike results in TL

appreciation, until the end of the year

• Because the CBRT is a net TL buyer in this market. (sterilization)
• would not be sustainable because costs associated with sterilization are often high, with domestic rates typically hovering much above foreign rates.
• TERS Repo
• CBRT Stand-by balance sheet and OMO
• Policy Rate
• Furthermore CBRT net TL seller in the market!!

The foundation of inflation Targeting is formed by the rational expectations hypothesis.

• inflation Targeting
• rational expectations hypothesis
• Rational Expectations

After 2008, EMH?

• Efficient Market Hypothesis

IT is proposed by Taylor, is known as

the TAYLOR RULE

• inflation and deviations from potential output
• The theoretical foundation of this comes from Rational expectations hypothesis

interest rate rather than a rate of

nominal money growth

GOAL of IT

• IT: a CB that changes the policy rate will affect both output and inflation

• Inflation Targeting (classic or flexible): Aiming to bring inflation closer to the target and the level of production closer to its potential (output) a monetary policy that works through monetary transmission mechanism using short-term interest rates

• Goal One:

  • "inflation gap".

• GoaL Two

  • "output gap."

• IT Goal = (inflation-Inflation Target)+ (production - potential growth)=0

Economic theory:

• relationship between real interest and production

• The IS curve between r and y is downward sloping.

  • interest rate falls, investment demand increases

  • increase, causes a multiplier effect on consumption

    • national income and product rises.

IT how it works?

• demand differs

As real interest rates rise, demand and

production fall

• As real interest rates rise
• As real interest rates fall
• Real echange rate and demand

IT is a an optimization problem

• Optimization Result Real interest = potential real interest + a (r * - potential *) + b (π - π target) + c (Y - Y potential)

If you follow IT, real interest rates

should be given against inflation

• real interest = (1+nominal interest)/(1+12 month forward exante inflation)

• If we follow a normal monetary policy (IT as targeted), some real interest should be given against high inflation

  • the reason why real interest rates remained high in 2001-2006 is that the people do not believe in the disinflation process and the risk premium is high (UIP risk premium (country+global)

TAYLOR RULE

• Real interest = potential real interest + a (r * - potential *) + b (π - π target) + c (Y - Y potential)

MPolicy and IT

• interest rate is the key policy instrument
• inflation is the long term objective
• Base money PT is the operating target
• inflation forecast is the intermediate target

F/X purchases affecting liquidity (EM)

NOMINAL ANCHOR

LOST POWER IN THE SYSTEM ???!

Before 2008

Advantages of IT

Disadvantages of IT

Flexible Inflation Targeting (orthodox)

• Türkiyede uygulaması: 2001-2006 (örtük EH), 2006-2010kasım (EH)

Emerging Markets and MP

• MP practice between advanced and emerging market economies converged over the past decade.
• But there exist some key differences too:
• Trilemma arised as a bigger complication in EMs, than in advanced economies and (IPF is being adapted recently)– and related to this point:

Expectations Problem

• Expectations and inflation
• Expectations and output:
• Expectations and asset prices

Phillips Curve

• the Phillips curve (inflation is determined by the Phillips curve)
• We know that monetary policy actions have only temporary effects on the unemployment rate

Taylor gives a choice between

• lowering the variability of output at the cost of more variability in the inflation rate
• have only temporary effects on the unemployment rate

Taylor Curve and Unemployment

Concerns

• natural rate theory

What is Taylor Rule?

• Rate hike Will curb inflation in the Long Run
• CPI and D-PPI inflation

NOMINAL ANCHOR

LOST POWER IN THE SYSTEM ! Because inflation targeting is not working

• Resident FX Deposits
• DEPOSIT RATE= POLICY RATE + 1.5 = NOT TO LET FX SPECULATION
• Deposit Rates

What drives Exchange Rates?

11. Trilemma

it describes a situation in which someone faces a choice among three options, each of which comes with some inevitable problems.

Impossible Trinity

• exchange rate stability
• independent monetary policy
• free capital flows

Pure Float

İs IT

Mundell Theorem

• (Impossible Trinity)Mechanics:

  • The theorem’s building blocks are PT Base Money and UIP

• Base Money = Net Foreign Assets + Net Domestic Assets

• UIP: (never holds especially after 2002)

UIP puzzle explained by risk premium

• Interest Rate parity (UIP+CIP)
• i=i*+ (Δe/e) + risk premium (curency risk +globalinterest risk)
• A related interpretation of the UIP puzzle asserts that high interest rate currencies pay positive risk premiums.

UIP risk premium holds pretty well in the real world without this premium you dont have UIP identiy

Impossible Trinity trilemma in finance?

Impossible Trinity trilemma and Financial Stability or crisis?

• 1-Make the country’s economy open to international flows of capital
• 2- Use monetary policy as a tool to help stabilize the economy
• 3- Maintain stability in the currency exchange rate.
• You will choose two out of 3 (what happens if you don’t ?, a financial crisis will happen)

If we have an open capital account, we

essentially have to trade-off exchange rate flexibility to monetary independence…

• COUNTRIES ARE GOING DIFFERENT WAYS
• but best choice is free capital mobility and independent monetary policy

Europe Trilemma: gives up MP

• The European Central Bank sets interest rates for Europe as a whole.

China Trilemma: gives up capital

mobility

• restrict the international flow of capital

Trilemma in USA: gives up currency

stability (best choice)

• volatility in the value of the dollar in foreign exchange markets

The last 10 years Canada , UK and US

can do it easily but Ems have problems

• WHY is it difficult for Ems?:
• exchange rate pass through

WHY EMs are that vulnerable? Global

Financial Cycle!

• you want to bring in capital, but at the same time you can't put any influence on the volatility
• the global financial cycle, Helene rey explained it in 2013: the hands of the monetary policy
• the fear of floating exchange rates

Credibility ! Fear of Float, exchange

pass through

• This is issue of Exchange rate pass through

• FROM EXCHANGE RATE TO INFLATION and DOLLAR DEBT:

  • When there is too much fluctuating exchange rate, companies with dollar debt have gone bankrupt in 2008, 2013, 2018 we have seen

WHAT ARE THE SOLUTIONS

• the monetary policy will not interfere with the exchange rate !

• Integrated policy Framework (IPF )

• what will you do against the fear of floating exchange rates?

  • it was cheaper to borrow dollars after 2008, so you need to keep it under control that borrowing
  • you'll affect the investor badly so rather apply (IPF)
  • IPF, (DAS, gopinath, kalemli)

MP Easing, MP Tightening

Trilemma example using the Turkish

CBRT corridor

• CBRT has undertaken attempt around the so-called Trilemma, trying to distribute the burden of adjustment more evenly between the interest rate and the F/X market by using the corridor
• O/N Borrowing
• O/N Lending
• One week repo Rate
• CBRT Funding Rate
• BIST Money Market Rate

Trilemma violation 2013

• CBRT exercise within the corridor

Trilemma for EME: Turkish Case

12. IIP (UYL)

International Investment

Position

• uluslararası yatırım pozisyonu
• STOCK EQUIVALENT OF EXTERNAL BALANCE: IIP

TR has 2 important Macro imbalances current account and inflation, trying to solve one with the other

STOCK EQUIVALENT OF EXTERNAL BALANCE: IIP

İt is clear that the current account deficit’s

short-term financing from external sources for it, put pressure on Turkey's international investment position. Insufficient increase in assets on the other hand like FDI, disrupts the balance on a net basis.

Factors that affect CAD

sustainability

Current (flow) and stock

discrimination

• Can a sustainable net liability be defined?
• We owe outside at the end of 2020, about 50% of GDP

The international investment position (IIP)

• “Net External Wealth of Nations”.

  • ratio of the sum of a country’s total assets and liabilities to its GDP
  • net exposure of all its residents
  • Net international Investment Position % of GDP

• NIIP helps us to see

Asian 1997 crisis

• is due to disorder based on the defects in the balance sheet structure of the corporate sector and / or the banking sector

It is not enough to have a proper balance

sheet of the banking sector: IIP is the mirror

• An important part of this deficit is in the corporate sector
• Long story short: The exchange rate is our problem. If such sudden jumps and leaps of increased violence spread to Turkey would not be good for the economy.

EMs are genuinely stronger but...

• Fed takes their time in normalizing monetary policy
• serious weaknesses in the EMs world
• Crises arise mainly due to underlying financial weaknesses in a country

Contagion is difficult to define and

measure

• International contagion
• transmission of crises

BOP numbers show financing turned negative

in 2020 but turned positive since 2021

• Financial Account
• Long Term Corporate Borrowing
• Direct Investment

Balance of Payments (BOP) show flow numbers, IIP

shows the stock realization of them

Net DFI (IIP)

• Apparently it is; The calculations made with TL, which depreciated in real terms at the end of 2019, decreased the value of domestic direct investments and created an image that there is a decrease in the net IIP. The opposite happened in 2022
• Net FX position changing a lot : Direct investment in TR is computed by taking as reference BIST data..that shows the main cause of the change.
• Direct Investment Liabilities

IIP accurate way to measure hot money

• These resources are called hot money for short.

Banks NIIP

• Foreigners Deposits at TR Banks

IIP: An important part of this deficit

in TR is in the corporate sector!

Other sectors NIIP, corporates have large FX

denominated debt to TR banks

Net liabilities increase is subject to

adversely affect the exchange rates

Offshore-Deposit dollarization bank

deposits abroad is increasing

Those US Bonds are they sold to buy gold

and to suppress the exchange rates ?

• Reserve assets
• Monetary Gold
• Securities
• Portfolio Investment of Foreigners

Both Banks and Corporate Sector since they could not

find domestic financing from TL deposits they borrowed from abroad, noncore liabilities?

Hot money definition

• Portfolio investment+ BANKS FX deposits (foreigners)

WHAT IS THE STOCK OF A

COUNTRY EXTERNAL DEBT?

• INTERNATIONAL INVESTMENT POSITION IIP (UYP)

Turkish assets overseas

• This is the amount of what TR government citizens and companies owe to outside TR with GDP( of approximately 663 billion) $owes 250 to outsiders at the end of 2022 almost 296/250 =118%. All assets 296 bn $.. at the end of 2022, 118% of the net position
• 1-Turksh G,TR companies Owns company overseas 57bn$
• 3-2 Turks FX deposits Abroad 69,926 banks and other places overseas
• 2-Turks invested in foreign securities 2721 bn$ Breakdown of ASSETS: direct investment+portfolio investment+other investment
• Us Bonds owned by CBRT 9030 (this number was 31000 in 2018) Foreign claims owned by banks Are 32,106 in 2020, 60704 in oct 2022
• The government does not have liabilities in Sr most of the liabilities is in private sector

13. BOP

Balance of Payments

• Balance of Payments Table
• The balance of payments keeps track of all the transactions between a countries and the rest of the world during a year.
• GNP = GDP + Net Foreign Factor Income (NFFI)
• GNP= GDP + Net Income(net factor receipts) + Net Transfers
• Current Account Balance = Net Exports + NFFI
• GNP = C + I + CAB= Absorption (Domestic Demand: C+I) + Current Account (Foreign Demand: NX+NFFI)
• Resource balance = S - I = Y- (A)Domestic demand = CAB
• Current Account Deficit (CAD)= Capital İnflows= Foreign Savings = Change in (net external Debt + non-debt flows such as FDI and Equity

NIIP, Net International Investment

Position

Widening CAD why? What are the Reasons

• Remember that Resource balance = S - I = CAB
• Government’s saving-investment imbalance is bad for macroeconomic stability

Yes investment-driven CAD; But excessive

consumption driven CAD is unsustainable

• The widening is driven by the private sector increases

Is this investment goes to productive

tradable industries?

• TR’s FDI inflows
• Investment Growth

impact of energy prices, adverse effect

coming from terms of trade

• Energy Deficit

Terms of Trade Shock after 2015

• Since Aug 2020 terms of Trade adverse shock is due to high oil prices and parity worsening
• TR’s imports being increasingly denominated in dollars and exports in euros, thereby benefitting from weakness of the dollar against the euro in 2000-2007. After 2015 the parity benefit dissappears
• After Covid all global activity in the world has made V movements Therefore, this has also benefited Turkey, this is cyclical and world demand dependent 2021 european and german demand, 2022 russian demand helped futhermore exports

Availability and Quality of CAD

financing is getting worse

• availability as well as the quality of external financing
• risk ok
• risk off
• GDP Growth and Credit Impulse

Quality of CAD financing

• Financial accunt
• Long term corporate borrowing
• Direct Investment

Current Account Sustainability

• A large CAD is bad
• CAD is typically out of sustainability
• current account must be sustainable

Relationship with NFA position

EXTERNAL SUSTAINABILITY (ES)

APPROACH (IMF)

• nica ; non interest current account (net exports and transfers) > (r-g)nfa
• CPI AEs
• Core CPI Aes
• CPI EMs
• Core CPI EMs
• CPI LIDCs

there is

an increasing inflation problem in the world, but TR is outside of this because it is outside the Y axis.

• TÜRKİYE should discuss this MAIN PROBLEM

BAP is a double-entry statement

• Current Account + Financial and Capital Account = Change in Reserves

The BOP is a summary statement of a

country’s transactions with the rest of the world through trade in goods, services, and finance

• The capital and financial account

The capital and financial account records

purchases and sales of financial assets

• Since the beginning of 2018, the foreign exchange open position of the non-financial companies has decreased significantly, but the public FX OPEN POSITION has increased more.

The currency basket since 2020

The foreign currency denominated debt portion is

increasing putting pressure on the TL, pushing up inflation

• TL Stocks
• FX Stocks
• Unfortunately, our choice of financing has greatly narrowed our room for maneuver in fiscal policy.

FX Reserves are Assets

• Ex: gold, government securities of major industrialized economies, foreign bank deposits, and special assets created by the IMF

BP accounting principle: general

balance CA + K & FA = 0

Analysing the structure of BOP

• Capital and Financial Account balance

• ERRORS AND OMISSIONS(

  • statistical discrepancy

• CAB + Capital and Financial Account balance + Error and Omissions = Balance of Payments

the implications of a

current account deficit on the exchange rate

• Exchange rate depreciation does not necessarily lead to an immediate improvement of the trade balance
• The imports have been largely in machinery and transport equipment, manufactured goods and oil products for industrial purposes
• goods are of machinery and equipment to rollout public investments
• However if imported goods are basically consumption goods TL will stay weak in the long-run

TR has a floating exchange rate regime

and a liberalised capital account

How is the deficit financed?

• It is financed through net private and/or official capital flows.
• net direct investment
• net portfolio investment
• Capital inflows in TR are predominantly portfolio flows
• Similarly, portfolio flows react to the changing risk profile of the country

Real and Nominal Exchange Rates

• Real effective exchange rate

  • CPI Based

• Bottom line: the real exchange rate is a measure of the international competitiveness of a country

• Suppose, TR price level increases by 5%at the same time, the TL underwent a nominal depreciation equal to 5%,

flow-stock

• Flow is a like an income statement for a company Stock is like a balance sheet for a company

Accordingly we have a document describing income statement and cash flow statement

• Always write the money transaction first then write the commodity transaction, look at the money

current account

• Between jan and nov 2020 TR lost35 billion worth of trade
• Between jan and oct 2021 TR lost8,4 billion worth of trade
• Between Jan and Oct 2022 TR lost 38,176 billion worth of trade

Δdebt + ΔR + Δgoods=0

BOP General Balance 2020

BOP General Balance: 2021

Exports have low value added

(düşük katma değerli)

Core Current Account Balance: quo

vadis?

• Core balance: Nonenergy nongold balance

Quality of financiang is poor

• FDI 12 month rolling as % of current account deficit

Energy is a big problem as an importer

• the economy is weakening and imports should therefore remain weak, but exports are not doing so well either; the energy base effect should also continue to weaken

Due to Covid the drop in tourism had a severe

effect on the economy

• Net Tourisim Revenues

PUSH factors in an accomodative

global environment makes TR resilient

• There is a deterioration in the quality of financing, net error to deficient inflows increased addiction is awesome interest rate cuts create fund outflows

The entire financing is from Net errors

and omissions+reserves

From jan to

nov2020 Turkey lost 35249 Worth of trade. Actually it imported More than it exported

Floating Topic