“Officially the GDP growth forecast is 3.5 percent, but it will probably be higher than that, nearer to 5 percent,” he explained in a recent interview with Arab News.
“Public debt to GDP ratio at the time when the Turkish financial crisis in 2001 was close to 100 percent, now over the years we have a primary surplus of 6.5 percent. On average we had a primary surplus of 5.5 percent for five consecutive years. In 2008 the public debt to GDP ratio decreased to less than 40 percent, but increased to 45 percent in 2009. We anticipate it will increase a bit more in 2010 and 2011, and will stabilize and decrease after 2012. At most it is not going to be higher than 47 percent,” he added.
Yilmaz is a strong advocate of government fiscal discipline, which to him was the core lesson learned from the Turkish financial crisis in 2001, which saw the closure of some 40 banks including the sole Islamic bank, Ihlas Finans.
Turkey paid a heavy price in the 2001 crisis. Bank restructuring cost the country, almost one third of its GDP at the time.
“What was behind this banking crisis is fiscal indiscipline, political instability and loose monetary policy. This crisis in 2001 brought us to our senses. No country in the world today can know better than Turkey how valuable fiscal discipline is. It is in a sense a social contract between society and the government. As long as public finances are fine, the long-term benefits for individual and the public at large are there, and are better than the short-term gains. If you lose discipline you can put the future of your country and people at stress,” he explained.
The governor praised Turkey’s sound and resilient banking system today. In the aftermath of 2001, the country had important choices to make — fiscal discipline; getting rid of the foreign exchange control regime; opening up the economy; integrating the economy into the international environment; giving the Central Bank of Turkey independence and adopting the inflation targeting regime. Based on that, the government also introduced a floating rate exchange regime.
These choices gave rise to the stable economic and financial platform of today. According to Yilmaz the Turkish banking system is very strong. The capital adequacy ratio (CAR) of Turkish banks is over 20 percent. The Basel minimum is 8 percent. The Turkish authorities introduced a threshold of 12 percent. If any bank goes below then they are not allowed to open new branches although they have the legal right to have a CAR as low as 8 percent.
Last year was a good year for Turkish banking, with good profitability and low non-performing loans (NPLs), which is currently about 8 percent. Similarly, the return on assets (ROA) for the Turkish banking sector is 3.5 percent, and return on equity (ROE) is close to 20 percent.
“We have a very resilient banking system. As the economy picks up Turkish banks have the power, capital and ability to lend to support domestic demand, unlike their European and American counterparts. Even if the confidence and credit increases, the banks in Europe and the US do not have the power in because of their weak capital base,” he added.
However, while the Turkish banking sector was not affected at all, and the government was one of the few ones not to extend any deposit or any other guarantees to rescue any banks or financial stimulus program.
Turkey’s real economy, especially exports to the European Union, was badly affected. In 2008, Ankara’s total exports in absolute terms amounted to US$132bn, of which US$32bn were to European markets.
When the global financial crisis started, the European economies were badly affected and the bulk of Turkish exports to these markets shrunk especially to the UK, Germany, France and Italy.
“Our financial system remains very resilient but because of our problem in our trading partners, exports collapsed and the real economy was hit. This had a knock-on effect on our labour market. Subsequently, unemployment increased from 9 percent to 14 percent at one stage. But it is now coming down,” explained Yilmaz.
The governor stressed that inflation has been public enemy number one. The country has lived with 80 percent inflation for 35 years. Only those born after 2001 can remember single digit inflation.
In 2002 when the Central Bank implemented its inflation target, it was close to 75 percent. Over the years it has brought down inflation but foreign direct investment (FDI) was not flowing in because of perceived instability in this respect.
Once this problem was eliminated from the mind of the investor, and macroeconomic stability maintained, capital began to flow into the country even at lower real interest rates. When the real interest rates came down to 20 percent to 10 percent, Turkey attracted US$20 bn of FDI.
“I can’t say we have defeated inflation. We are not at the desired price stability level. The Central Bank of Turkey’s mandate is to maintain price and financial stability. If we do this we can in time break the backbone of inflation and we will go into an era of sustained price stability. Businessmen will not ask what the inflation rate will be when they make their business decisions. Our inflation target is 6.5 percent for 2010; coming down to 5.5 percent in 2011 and 5 percent in 2010. The headline inflation at end April 2010 was 10.1 percent, this increase was because of the base effect of the previous years’ economic contraction, public sector price hikes which accounted for 1.9 of the inflation rate, and food prices. We anticipate inflation will converge on the target in the first months of 2011,” he added.
On Turkey issuing a sovereign Sukuk, Yilmaz explained that this is not the domain of the Central Bank, but that of the Turkish Treasury. “I believe the Treasury is working on this. A sovereign Sukuk issuance is still on track and remains a possibility,” he added.
Turkey’s four participating Islamic banks account for about 6 percent of the total assets of the Turkish banking sector.
Yilmaz believes that they are serving a good purpose for Turkish small-and-medium-enterprises (SMEs).
And the Central Bank of Turkey fully supports the participation banking sector, because “they are part of our financial system and they are on equal footing like any other financial institution in Turkey. The only constraint is that their transactions do not involve the interest rate”.
Yilmaz however clarified an important aspect of the government debt instrument and bond program in relation to the participation banking sector which is keen for Turkey to issue Islamic instruments to accommodate the capital and reserve requirements of such banks.
“We have several monetary policy instruments,” he explained. “But we are not at a stage at the moment where we can design instruments specific to those participation banks. They have to find the answer in the outside Sukuk issuance and markets. We can educate the management. I don’t want to create an impression or raise a false expectation that we are working on it. We are implementing monetary policy within the use of already existing instruments and nothing else.”
