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INTRODUCTION
MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES
FINANCIAL INFORMATION AND RISK MANAGEMENT

Macroeconomical and Sectoral Outlook

Despite positive developments taking place in the US economy, Euro-zone macroeconomic data–especially with respect to growth–remain weak at best.

Outlook for the Global Economy

2013 has been a year which;

  • The US economy was facing a positive outlook, despite mixed economic data releases,
  • Economic growth generally remained weak, despite some relatively positive signs,
  • There was a slowdown in economic growth in emerging markets, while global economic growth remained below the pre-crisis pace.

 

As in 2008, global financial markets were largely steered by the policies applied by the central banks of developed countries during 2013.

7.4%
CPI rise in 2013

26.4%
Banking sector growth rate in 2013

15-20%
Projected sectoral credit growth rate in 2014

Positive developments in employment and housing statistics in the US raised expectations that the Fed would taper its bond purchases and gradually wind down the process. Macro indicators in the US were monitored closely during the period and global risk appetite was closely dependent on the data releases. After the Fed signaled a change in its policy, there were significant fluctuations in risk appetite, especially in the second half of the year; and emerging markets experienced short-term capital outflows amid concerns of a decrease in the cheap and abundant liquidity.

Countries vulnerable to current account balances and in need of direct capital or portfolio investments experienced the effects more profoundly.

The recovery in US economic growth and in employment statistics led to the beginning of a normalization process after 5 years. The Fed’s liquidity tapering and finalization of the bond-buying program, along with achieving macro indicator targets in the mid-to-long run, will pave the way for interest rates to be raised from the current historic low levels to more normalized levels.
Against this backdrop, a depreciation in emerging market currencies and rise in interest rates was observed. Moreover, there was a wave of downside revisions to emerging market economic growth forecasts. Despite signs of a recovery in the US, the weak performance in the Euro-zone - especially in economic growth dynamics - continues. A positive growth outlook for Germany, the Euro-zone’s most powerful economy, became more pronounced - but this was not replicated elsewhere in the Euro-zone.

Being the Central Bank of a region which is facing deflationary risks, the ECB continued to apply an expansionary monetary policy. The Bank cut interest rates twice during the year in a bid to stimulate the loan market with the aim of increasing economic activity in the region. The Euro-zone is expected to enter a period of slow recovery in the coming period.

Japan continued to tackle its economic stagnation by applying expansionary monetary policies and stimulatory measures aimed at bringing the curtain down on the deflationary era. The risks caused by public debt stocks will be the focus point in the coming period. The monetary and fiscal policies that have applied to bring the value of the Japanese Yen down to a level where Japan can regain its competitive potion in the export market, and thus secure economic growth, appear to have been successful. However, the Japan’s public debt, at 2x its GDP, remains the main problem facing the country.

Emerging markets, the key driver of global economic growth, maintained their position by outperforming developed countries - albeit with decreasing momentum. The Fed’s strategy to exit QE, as well as the failure of the Euro-zone to achieve a satisfactory recovery in its macroeconomic outlook - along with the different structural problems facing these two economic blocks, gave rise to a pessimistic outlook.

In China, one of the main driving forces of global economic growth in emerging markets, the era of high rates of economic growth has passed. High property prices and the liquidity-squeeze in the banking sector are the key concerns facing China. The performance of the reforms planned for the economy will be monitored closely. It should be borne in mind that China can wield as much of an impact on global financial markets as the Fed’s policies.

Outlook for the Turkish Economy

Turkey’s economy kicked off 2013 on a stronger footing than in the previous year; however, like other emerging economies, Turkey did not escape unscathed from the global economic concerns.

Turkey enjoyed domestic consumption driven economic growth in 2013 on the back of recovering domestic demand conditions. The weak performance in global economic activity, especially in the last quarter, changing risk perceptions driven by Fed’s QE exit strategy and domestic issues could negatively affect economic growth dynamics in the next few quarters.

Even though the under-valued TL could have a supportive impact on exports, the potential for negative effects should not be overlooked either. With a stabilized currency, the contribution of exports to growth will improve the prospects of sustainable growth and the achievement of the targets set out in the Medium Term Program.

The heightened uncertainties over global monetary policies led to a revaluation of all financial assets, with the local currency depreciating to record levels. The real-effective currency index - the main measure of value - confirms that the Turkish Lira has recently been trading at historically low levels.

The sector's total equity increased by 6.5% year-on. Banks' strong equity structures have been bolstered by rules that encourage them to curtail their dividend payments and to retain their profits.

4.0%
Turkish economic growth in 2013

3.6%
2013 world economic growth estimates (IMF)

60.5%
Turkish banking industry 2013: Ratio of loans to total assets

The volatility in food prices and the sudden fall in the value of the TL gave rise to inflationary pressures, with inflation ending the year at 7.4% - exceeding the Central Bank’s 6.8% year-end expectation.

The Central Bank underlined the importance of the price stability during this period and expects inflation to ease after a further period of remaining at high levels. However, attaining the Central Bank’s Medium Term Program target of 5% is now expected to take more time.

Even though the sensitivity of the current account balance to capital flows increased during this period, there have been no financing difficulties.

Excluding the gold trade, a gradual recovery was seen in the current account deficit. The current account balance is expected to improve on the back of a slowdown in economic activity, the measures taken to prevent excess borrowing by households and the steps taken to encourage saving.

The smooth progress continues on the back of the stable and disciplined fiscal policies. Despite the positive contribution of public investments and public spending on economic growth, there have been no signs of any deterioration in budget discipline, confirming Turkey’s sound macroeconomic prospects. The 2014-2015 period will be marked by three elections in Turkey, and the stable fiscal management is expected to be maintained in this period.

The Central Bank’s policies applied since 2010 have provided extra financial policy products, supporting financial stability, contributing to the development of the economy through multiple-product and multi-purpose monetary policies.

The Central Bank appears to have shifted to a policy composition that is aimed at limiting the volatility brought about by the new global conjuncture which starting from the second half of 2013, and preventing any deterioration in inflationary expectations, in line with its priority of price stability.

With more contractionary monetary policies, strategies aimed at balanced growth and inflation management have been applied. Communication is another financial tool which has been applied by the Central Bank, with the aim of shaping future expectations. Interest and balance sheet tools are applied to keep the exchange rate at reasonable levels, with inflation targeted to be brought to reasonable levels by increasing the emphasis placed on price stability.

2014 to be a year of normalization for emerging markets
Other countries are in a broadly similar situation, with authorities frequently emphasizing Medium Term Program targets.

Despite the risk of deviation from macroeconomic indicators, the implementation of necessary measures will raise the probability of reaching the main goal. The progress of the global economy, commodity prices, geopolitical risks and other similar elements will affect the macro-outlook and policies. Those countries able to quickly adapt to these changes will be successful.

Developments in the Banking Sector

As one of the most important players in the economy, the Turkish banking sector emerged from the 2008 global economic crisis successfully in terms of asset quality, funding structure and profitability. The growth trend continued in 2013.

The Turkish economy grew strongly in the first half of 2013, driven by booming domestic consumption, but growth dynamics suffered downside pressures in the second half of the year amid increasing risk perceptions. However, the deterioration in the global economy did not affect the structure of the banking sector, and the sector continued its financing function without any problems and maintained its sound stance.

In 2013, Turkish banking sector grew by 26.4% primarily as a result of the increase in loans.
The sector’s equity posted 6.5% YoY growth in 2013. The sector maintained its sound equity structure by limiting dividend payments and measures to encouraging profits to be left in the banks. While consumer loans were adjusted to healthy levels, regulations setting out higher savings ratios and structural and macroeconomic regulations were implemented to maintain stability in the financial sector with the aim of providing a more stable structure for the banking sector, as well as targeting improved predictability during 2014.

The sector’s profitability increased by 5% YoY in 2013 thanks to the decrease in deposit costs and relatively low cost of non-depository resources. This structure decreased interest expense and increased net interest income. In the second half of the year, however, increasing interest rates reduced the sector’s net interest margin.

Loans have the lion’s share of the banking sector’s asset structure, while deposits account for the majority of liabilities. The rate of loan growth exceeded the rate of deposit growth, leading to an increase in the deposits/loan conversion rate to above 100%.

In 2014...
Macroeconomic measures taken to ensure balanced growth are expected to pave the way for a healthy transformation in the banking sector’s balance sheet structure. The share of consumer loans in total loans is expected to decrease in the medium to long run. The weight of loan growth is projected to shift to real sector credits, which support investments and employment dynamics. Any slowdown in economic growth amid global concerns, or upside movement in interest rates could lead to lower loan growth, a contraction in net interest margins and, therefore, a decrease in profitability.

Loan growth is expected to be realized at 15-20% in 2014 with deposit growth forecasted at 10-15%. The banking sector’s profitability is expected to contract slightly.             
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