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International Monetary Fund. European Dept.
In Turkey, as in other countries, the human and economic toll of the COVID-19 pandemic has been severe. Thousands of lives have been tragically lost and many livelihoods compromised. The initial policy response to the pandemic—and subsequent sharp growth rebound—set Turkey apart from its peers. Rapid monetary and credit expansion and large liquidity support meant that Turkey was among the few countries to experience positive economic growth in 2020. But these policies also aggravated pre-existing economic and financial vulnerabilities. Higher inflation, increased dollarization, and a large shift in the current account position increased pressure on the lira and gave rise to heavy foreign exchange sales, which led in turn to steep reserve declines from already-low levels. A policy shift in late 2020—mainly towards tighter and more transparent monetary policy and slower credit growth—was both welcome and necessary. But the durability and depth of the shift were called into question in March 2021, following the change in central bank leadership, as the lira weakened markedly and interest rate spreads widened.
International Monetary Fund. European Dept.
Kosovo has been hit hard by the COVID-19 pandemic. Despite policy support, economic activity is estimated to have fallen 6 percent in 2020 on account of the combined effect of strict domestic containment measures and international travel restrictions. The fiscal deficit increased to 7.7 percent of GDP, given the large fall in tax revenues and the implementation of mitigation and recovery measures of 4.2 percent of GDP. The current account deficit is estimated to have increased to 7.5 percent of GDP mainly due to a large decline in diaspora-related inflows, most notably in tourism. Gross international reserves declined but remain adequate in part due to the purchase under the IMF’s Rapid Financing Instrument (RFI) in April 2020 and the use of other external financing. Banks have weathered the recession well to date, and the high pre-COVID19 liquidity levels and ample capital buffers bode well for the system’s stability.
Mr. Robin Koepke and Simon Paetzold
This paper provides an analytical overview of the most widely used capital flow datasets. The paper is written as a guide for academics who embark on empirical research projects and for policymakers who need timely information on capital flow developments to inform their decisions. We address common misconceptions about capital flow data and discuss differences between high-frequency proxies for portfolio flows. In a nowcasting “horse race” we show that high-frequency proxies have significant predictive content for portfolio flows from the balance of payments (BoP). We also construct a new dataset for academic use, consisting of monthly portfolio flows broadly consistent with BoP data.
International Monetary Fund. European Dept.
This 2019 Article IV Consultation with Turkey discusses that economic growth has since resumed, buoyed by expansionary fiscal policy, rapid credit provision by state-owned banks, and more favorable external financing conditions. The lira also recovered as market pressures abated. Import compression and a strong tourism season have contributed to a remarkable current account adjustment. Inflation has fallen sharply, and the central bank cut policy rates by 1000 basis points since July 2019. Inflation peaked at around 25 percent—five times the target—in October 2018 due, in large part, to high exchange rate passthrough and rising inflation expectations. However, strong base effects, relative lira stability, and a negative output gap have since contributed to a steep inflation decline, although inflation expectations remain well above target. State-owned banks are supporting rapid credit growth. While private banks have cut back on their lending, state-owned banks have engaged in a major credit expansion which picked up pace in early-2019.
Mr. George M Kabwe, Elie Chamoun, Riaan van Greuning, Mowele Mohlala, and Ms. Julia Cardoso
Safeguards assessments are a key pillar of the risk management arrangements for IMF lending. Safeguards assessments aim to mitigate the risks of misuse of Fund resources and misreporting of program monetary data under Fund arrangements. Safeguards assessment reports are confidential and therefore the IMF Executive Board is provided with a periodic report on safeguards activities on a biennial basis, in addition to high-level summaries in member country staff reports on key findings and recommendations. This update on safeguards activity covers the period May 2017 to end-April 2019 (the period).
International Monetary Fund. Statistics Dept.
This Technical Assistance report on Georgia highlights the external sector statistics (ESS). The main objectives of the mission were to assess the Geostat’s progress in the area of ESS and provide further recommendations on improving the data collection and compilation for producing the financial account components, including direct investment statistics, in an integrated format. With the mission’s assistance and based on the analysis’ results, a method has been agreed for filling the gaps in coverage of imported cars and for addressing the limitations in valuation of re-exported cars. The mission stressed the need for improving the coverage of transactions related to gambling that have shown a growing trend in recent years, with increasing nonresidents’ activities. With the increasing workload due to the compilation and dissemination of new products or to enhancing the coverage and quality of existing products, and bearing in mind the staff turnover, there is need to consider allocating additional staff to the External Trade and Foreign Investments Statistics Department. In order to support progress, the mission recommended a detailed one-year action plan, with priority recommendations carrying weight to make headway in improving Georgia’s ESS.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses the findings of the Financial Sector Assessment Program about interconnectedness and spillover in Spain’s financial system. Financial intermediaries in Spain are interconnected through conglomerate ownership, common exposures, and inter-sectoral claims. The main source of cross-sectoral connectedness appears to be insurance companies’ exposures to banks, while exposures of banks to insurers or to mutual funds appear limited at present. Empirical analysis using both exposure and market data suggest strong cross-border interconnectedness. Contagion within the domestic interbank market appears to be limited at present. There are also strong cross-sectoral linkages between banks and other parts of the financial system in Spain, but systemic risks from those linkages appear to be limited.
International Monetary Fund. European Dept.
This 2017 Article IV Consultation highlights that growth in Turkey has slowed following a strong performance in 2015. Investment is weak amid heightened uncertainty and a sharp deceleration of credit growth. Inflation has moderated but is still well above target. The current account deficit remains sizeable, as the decline in tourism offsets savings from low energy prices. Progress on structural reforms has been slow. Over the medium term, growth is projected to firm at about 3.5 percent. Inflation is expected to stay above target and the current account deficit to remain sizeable.
Ruud A. de Mooij and Mr. Shafik Hebous
Tax provisions favoring corporate debt over equity finance (“debt bias”) are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today’s rules) have no significant impact on debt bias—which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.