Macroeconomic and Sectoral Outlook

2011 was a year in which the Turkish economy maintained its high growth rate despite the uncertainty affecting global economy and the deepening public debt crisis in the Eurozone.

The Turkish banking industry continues
to grow despite the financial structural
problems affecting the banking
sectors of developed countries.

OUTLOOK OF THE GLOBAL ECONOMY

The trend towards a recovery in the global economy that was observed in 2010 gave way to a volatile and fragile environment in 2011 in which concerns of global recession increased.

The key factors which stunted the global economic recovery in 2011 were the earthquake in Japan at the beginning of the year, as well as high commodity prices, the debt crisis in Europe and related problems arising in the Eurozone, as well as the large scale borrowing in the USA.

On the other hand, signs of overheating were observed in some emerging economies, particularly some Asian economies, raising the prospect of tight fiscal policies being introduced. Accordingly, in February, China and Russia raised their policy interest rates and their required reserve ratios in a bid to keep inflationary pressures under control.

Tight fiscal and monetary policies to be implemented by major emerging markets could affect commodity prices in global markets. The tight monetary policy could also lead to a contraction of capital flows into such countries.

In its report entitled “The Global Economic Outlook”, IMF projects that the global GDP growth rate will edge down from 5.2% in 2010 to 3.8% in 2011 and to 3.3% in 2012.

Developed countries are expected to have chalked up 1.6% growth in their GDP in 2011 and a further 1.9% growth in 2012. This projection is based on the assumption that European policymakers keep the debt crisis under control and establish a reasonable balance between the policies to support the EU economy while at the same time reducing budget deficits. Also basing its projections on the assumption that there is no worsening in the volatility in the markets, the IMF stressed that the developments surrounding the debt crisis in the Eurozone have reached such a level that they have begun to threaten global economic activity.

Emerging markets, which generally demonstrated a strong growth performance in the first half of 2011, are expected to post weaker growth rates in 2012.

Mounting concerns over the Eurozone
The deterioration in public finance in Europe associated with swelling public debts and budget deficits, as well as the problems in the banking industry and high unemployment rates do not only threaten the Eurozone, but place an increasing burden on the global economic recovery. Fears that some European countries such as Spain and Portugal could suffer the same problems as Ireland and Greece gained traction when ratings agencies downgraded the sovereign ratings for Spain, Italy, Ireland, Portugal and France.

Projections indicate that a slight recession may be observed in the Eurozone in 2012. Recession in the Eurozone may affect the global economy through two channels; the contracting demand in the Eurozone, which is the world’s largest export market, could limit global foreign trade volume. On the other hand, the structural problems facing financial institutions in the Eurozone are expected to take their toll on global economic activity through global credit conditions.

Inflationary pressure from rising energy and commodity prices
The rising trend in energy and commodity prices, which began in the second half of 2010 and continued in 2011, pushed the rate of inflation up in both developed and developing countries.

Data related to the USA and the Eurozone indicate that inflation has increased beyond expectations. The central banks of some emerging markets increased interest rates, while others preferred non-interest instruments like the required reserve ratio in order to cool down overheated economies.

In 2012...
•   The debt problem afflicting the Eurozone will remain the most important global risk factor.
•   In the global economy, inflationary pressures are expected to be relieved with the effect of declining domestic and foreign demand.
•   A more negative trend is expected in liquidity conditions in the coming period in terms of market depth and buy-sell spreads, that reflect market dynamism.
•   The slowdown in developed countries will begin to have a knock-on effect on emerging economies in 2012.

The Turkish economy maintained its high growth rate and financial discipline, preserving its prominent position, especially among emerging markets and European economies.

OUTLOOK FOR THE TURKISH ECONOMY

2011 was a year in which the Turkish economy maintained its high growth rate despite the uncertainty affecting the global economy and the deepening public debt crisis in the Eurozone.
Although concerns with respect to global economic developments unsettled the Turkish markets from time to time, the Turkish economy maintained its high growth rate and financial discipline, preserving its prominent position, especially among emerging markets and European economies.

Data pertaining to Q3/2011 indicates that the Turkish economy continues to grow strongly and is estimated to have grown by about 8% in 2011, while growth is expected to slow down in 2012 because of the base effect and worsening global conjuncture.

Turkey’s 12-month rolling current account deficit reached US$ 77 billion and was on course to have reached 10% of GDP by the end of 2011. A combination of the problems currently affecting countries in the Eurozone and the mounting risks over global economic growth will limit export growth. Accordingly, the current account is expected to remain a risk factor. Since energy importing countries, like Turkey, are known to exhibit a positive relationship between economic growth and the current deficit, the current account deficit is expected to contract in 2012 on the back of the likely slowdown in economic activity as well as the impact of the undervalued TL.

It has been argued that the quality of current account deficit financing is lower, because long-term direct capital inflows have been replaced by portfolio entries and short-term funds during the crisis period. The gradual worsening in the financial structure of European banks and faltering risk appetite are deemed as fundamental factors which could lead to more difficulty in financing during 2012. Unless permanent solutions are found that will reduce Turkey’s energy dependency, the current account deficit is expected to remain one of the most important structural problems facing our economy.

Bond yields in Turkey increased later in the year, on the back of a combination of factors, including the rising perception that the weaker TL was here to stay, combined with uncertainty abroad, Turkey’s rising country risk premium and the CBT’s tight monetary policy.

The annual rate of PPI inflation ended 2011 at 13.3% with CPI inflation of 10.5%, exceeding expectations. In its evaluations, the Central Bank cited strong domestic demand, rising unprocessed food and energy prices and the pass through effect as the key factors behind the upside surprise in inflation.

In 2012...
It is clear that the financial crisis, which so corrupted macroeconomic balances that took many years to establish and which set the stage for a number of new developments, affected and will continue to affect our country. The biggest difference between this crisis and the crises of the past is that the causes of the present crisis stem from external shocks, not from negative domestic economic conditions.

The fact that economic growth in Turkey continued unabated in 2011 despite the increasing uncertainty and further undermining of trust globally should be perceived as positive for the coming period.

Economic stability was maintained as the political risks, which had negatively impacted Turkey’s economic performance in the past, have gradually eased in recent years and decisions are now made according to economic requirements and Turkey’s position within the international conjuncture, and not on the basis of political priorities.

The impacts of the financial crisis on the Turkish banking industry are expected to remain relatively mild when compared to Europe in 2012, thanks to the robust capital structure and asset quality of Turkish banks.

DEVELOPMENTS IN THE BANKING SECTOR

The Turkish banking industry continues to grow despite the financial structural problems affecting the banking sectors of developed countries.

Following the crisis in early 2000, the subsequent restructuring of the Turkish banking industry, the tightening of monitoring and supervision in the sector, the increase in capital adequacy and the buttressing of the risk management and liquidity management approach within the sector have all played a major role in shoring up the resistance of the industry against the negative impacts of the global financial crisis since 2008.

The banking industry’s net interest margin contracted in 2011 as interest rates began to increase, as funding costs increased because of tight monetary policies and as the re-pricing period of liabilities became shorter than that of assets. Rising personnel costs and other non-interest expenses, as well as provision costs were among other factors to compromise profitability in the sector. Declining profitability paved the way for lower rates of return on assets and returns on equity.

The banking industry has undergone a significant change in its asset composition. According to BRSA data, the loans to assets ratio, which stood at 44.9% in 2006, had risen to 56.6% by the end of 2011.

2011 was a year marked by rising credit demand in the national banking sector.
An analysis of the sector finds that loan volumes have increased on the back of the rising competition between banks. Thanks to the Central Bank’s precautionary interest rate decisions in 2011, as well as its disciplined position in its financial policy and the new measures taken by the BRSA, credit conditions were tightened in a bid to slow the growth in credit. In line with these efforts, the rate of increase in credit was observed to moderate from September.

In 2012…
The impacts of the financial crisis on the Turkish banking industry are expected to remain relatively mild when compared to Europe in 2012, thanks to the robust capital structure and asset quality of Turkish banks.

Loan volume is expected to continue in a balanced manner in 2012 with a slight increase in the ratio of SME and consumer loans in total loan volume. The loan growth rate is projected to come in between 16-20% in 2012, with deposits projected to grow by around 15%.

Copyright © 2012 Türkiye Cumhuriyeti Ziraat Bankası A.Ş.

Powered by Tayburn