2014 Annual Report
Macroeconomic and Sectoral Outlook

In 2014, the US economy started to reap the benefits of its policies; however other economies such as those in Europe, Japan and China faced some slowdown in growth. Concerns over global growth came to the forefront in 2014.

USD 50

Oil prices plunged to USD 50/bbl in the second half of 2014.

growing geopolitics risks

Outlook for the World Economy

In 2014, the US economy started to reap the benefits of its policies; however other economies such as those in Europe, Japan and China faced some slowdown in growth. Concerns over global growth came to the forefront in 2014.

In what was a packed year in terms of the economic and geopolitical agenda, the year 2014 started with positive expectations for the future. Despite fluctuations in short term risk perceptions after the Fed started to taper its bond purchases, the general outlook was not significantly changed. However, general concerns started to mount, especially in the wake of the increased geopolitical risks in the first half of the year; at the same time, economic indicators in Europe did not bear out the expected improvement, and the rate of global growth decelerated. Oil prices plunged to USD 50/bbl in the second half of the year as supplies were not reduced in response to the decline in demand. A combination of the progress achieved towards finding alternative technologies for energy resources, the shale gas boom and concerns for global growth were instrumental in this sudden and sustained drop in oil prices. Lower oil prices are, of course, positive for energy importers such as Turkey but have saddled an additional burden on some emerging economies which are dependent on oil exports, which have been hit hard by geopolitical developments.

The recovery in the rate of growth in the US economy and the rise in employment in 2014 enabled the country to roll out its plans for the normalization process. The monetary expansion policy, which had been applied by the Fed since the beginning of the global crisis, was wound down, and is expected to give way to the “lift-off” in the coming period where the Fed will start to gradually hike interest rates. Shifting expectations regarding the timing of these impending interest rate hikes have sometimes resulted in market volatility while concerns such as the deceleration in global growth, geopolitical risks and problems in Europe remain under the spotlight. Although some central banks, notably the European Central Bank (ECB) and the Japanese Central Bank, have maintained their expansionary monetary policies, and a deterioration in global liquidity conditions is not expected, sensitivity to the US macro-economic data releases which will have an important bearing on the Fed’s interest rate decisions continues. However, the economic recovery in a country which had been so seriously affected by the crisis could be considered as an important development on a global scale.

European economies completed the year 2014 with disappointment. While the weakness in growth continued, economies have struggled with credit mechanisms and problems related to inflation, which has gradually approached the deflation limit. Structural problems such as the high rate of unemployment and the levels of public debt remain issues which need to be resolved. After global concerns mounted toward the middle of the year and the steps taken previously did not have the desired impacts, ECB took another step and applied negative deposit interest rates. Since this action was not sufficiently effective, the ECB implemented new expansionary actions for the rest of the year and continued to take measures, in addition to those taken at the beginning of the year, announcing a monetary expansion program which went beyond expectations. The ECB cited the deceleration in growth as affecting Europe as well as the global economy, concerns of a further decrease in inflation due to the decline in oil prices as the reasons for this move. Clearly, more time is required before being able to conclude that the European economy is on a path to normalization.

Japan exited its deflationary period thanks to expansionary monetary and fiscal policies. However, the country faces recession risk as a result of economic inertia. High public debt stock and inflation’s inclination to decrease are the issues for which precautions should be taken. The Government restored trust through elections held within the year and postponed its plan to raise sales taxes again. Efforts are in place to lead the Japanese economy through communication policies regarding the increasing the volume of monetary expansion and spending.

Developments in the global economy have a pronounced impact on developing countries. In contrast with previous years, there was a noticeable decoupling between these countries. Although geopolitical risks affect all developing countries, those countries geographically closer to the zones of tensions were affected more. Furthermore, while the plunge in oil prices was problematical for oil exporters such as Russia and Brazil, oil importing countries such as Turkey and India benefited from this development. Russia, in particular, paid a heavy toll due to its problems with Ukraine, the sanctions that were imposed on the country and the movements in oil prices. The Russian Rouble plummeted in value, the country’s foreign exchange reserves declined, bond yields rose and the economy started to contract. The decoupling is expected to continue in the coming period. This environment is expected to provide a suitable backdrop for structural reforms, especially for energy importing countries which will benefit from an easing in problems such as the current account deficit.

China, providing the most significant contribution to global growth, was not immune to the problems in the global economy. The country’s growth rate dipped to its long term trend rate to come in at 7.4% in 2014. The Chinese government has sought to stimulate the economy by lowering policy rates and introducing measures aimed at promoting spending.

The Turkish Central Bank continues its flexible but tight monetary policies in line with developments in the global economy.


CPI in 2014

improvement in current account deficit

Outlook for the Turkish Economy

Along with other developing countries, Turkey was exposed to the impacts of global economic developments in 2014. The rate of growth in the Turkish economy declined as a result of the developments in surrounding countries, the macro-prudential measures which were introduced, tight fiscal conditions and weak global demand.

Turkish economy had grown on the back of rising domestic demand in 2013, leading to a widening in the current account deficit. As we enter 2014, domestic demand came under pressure with the macro-prudential policies taken to prevent this situation and an export driven growth trend started on the back of the improved external conditions. This manifested itself in the first quarter of the year in the form of a brisk pace of growth in corporate and entrepreneurial loans, despite a decline in the issue of retail loans and robust exports, especially to Europe and Middle East. In the second half of the year, though, a cocktail of problems including heightened geopolitical tensions, disappointment regarding the economic recovery in Europe and problems in Russia and the Middle East necessitated a downward revision in expectations. Another issue was the dashed hopes over inflation, due to the drought.

Uncertainty over global monetary topped the list of concerns at the beginning of 2014. Pricing of financial assets reached record high levels; however all countries responded to this by taking necessary measures through monetary policies. The Central Bank of the Republic of Turkey (CBRT) also took necessary steps and further tightened its monetary policy. The CBRT started the new year with interest rate hikes and could curbed volatility through liquidity implementation. In the second half of the year, CBRT cut interest rates to a limited extent on the back of the improvement in conditions. Although risk perceptions exhibited a more positive trend than in the previous year, the CPI was well above expectations due to the increased food prices inflation after the dry winter. After the sharp plunge in oil prices and a slow normalization in food prices, the rate of CPI inflation ended the year at 8.17%, which was in fact lower than the CBRT’s own expectation of 8.9%.

The current account deficit tended to narrow in 2014, and approached the target set out in the Medium Term Program of USD 46 billion on the back of the slowdown in imports and the rise in exports, along with the windfall of falling energy costs, especially in the last quarter of the year. The general consensus of expectations is that oil prices will remain near their current levels for some time. With these expectations, a further improvement in the balance of payments is likely in 2015.

The elections held in 2014 did not lead to any deviation from the determined and disciplined implementation of fiscal policies, and the fiscal performance continued to improve. There are no concerns regarding the attainment of the target budget deficit to GDP ratio, which stands at 1.4% in the Medium Term Program for 2014. A more challenging budget deficit of 1.1% of GDP is targeted for 2015. This indicates that the steady fiscal management will be maintained going forward.

Central Bank continues its flexible but tight monetary policies in line with developments in the global economy. Central Bank has sought to achieve this by using multiple tools. The main monetary policy tools are the policy rate and the interest rate corridor. These two tools have ensured that the Central Bank has been able to maintain a tight monetary policy while decreasing interest rates. The impact of the 550 basis point interest rate hike, implemented in response to the volatility seen at the beginning of 2014, was effective in reducing the level of volatility.

An improvement in conditions later in the year set the stage for 175 basis points in rate cuts in the second half of the year. However, with inflation well above the targets, the Central Bank turned its focus to price stability in its policies and called a halt on its interest rate cuts. A fall in inflation expected is expected going forward, especially in the first half of 2015, following the decrease in energy prices, normalization of food prices and the contribution from the base effect, which will leave the Central Bank more comfortable. The CBRT already started gradual rate cuts without deviating from its tight monetary policy at the beginning of 2015.

The trend in oil prices, and the opportunities as well as the challenges that will arise from this deserve a special mention in an evaluation of 2014. Oil prices have been declining, especially in the last six-month period, due to a combination of factors, including the continuous increase in energy efficiency, weakness in demand as a result of weak global economic growth, no cuts in supply and producers’ fears of losing market share. At this juncture, oil exporters will face problems such as reduced oil revenues and, consequently, a slowdown in growth rates. On the other hand, energy importers currently struggling with chronic problems such as current account deficits and inflation will reap the benefit of lower oil prices. Domestic demand is expected to recover in Turkey in 2015. While this may negatively affect the current account deficit, this will be offset by the decrease in the energy bill. Likewise, the windfall of lower oil prices will also be observed on inflation. With inflation already on a downtrend and helped by the base effect, it would not come as a surprise to see inflation decline to the CBRT’s target of 5.5%, which is below the 6.3% target for 2015 set out in the Medium Term Program.

In short, the level of oil prices at the end of 2014 is a welcome development for Turkey. Clearly it will bring benefits to Turkey’s macro-economic indicators such as the current account deficit, inflation and growth. This creates an opportunity for Turkey to realize structural reforms. The expectations for 2015 are positive within a general framework. However, structural solutions should be implemented for gains to be permanent. Measures which are spread to a wide perspective are shared with the public through the “Preferential Transformation Program Action Plans” and the importance placed on this issue is frequently mentioned. The steps that have started to be taken will provide permanent, steady, sustainable growth and a macro framework which is compatible with this by creating permanent benefits in the medium and long term.

Developments in the Banking Sector

The banking sector maintained its growth trend in 2014, significantly contributing to Turkey’s economic growth.

The Turkish Banking Sector recorded a more moderate rate of growth due to the measures taken in the first half of 2014 by the BRSA and CBRT, which curbed domestic demand, along with the monetary policies implemented by the Fed and ECB, the devaluation of TL and uncertainties ahead of the election. In the second half of the year, domestic demand did exhibit some improvement in the wake of the CBRT’s interest rate cuts and the easing in political uncertainties. The banking sector posted 15% growth in 2014.

Loans remained the most important item on the sector’s balance sheet, increasing by 18% YoY. In particular, there was tough competition in the corporate segment; most of the growth was realized in this segment. Regulations aimed at bringing down the current account deficit set the stage for a healthier expansion in consumer loans.

The share of loans in the sector’s total balance sheet increased by 2 percentage points when compared to the end of 2013 and the deposit/loan ratio approached 120%.

The sector’s strong shareholder’s equity structure was maintained and shareholders’ equity grew by 20% in the space of one year. The capital adequacy ratio increased from 15.3% to 16.3%.

There was very little YoY change in the sector’s profit in 2014, which came in at TL 24.7 billion. Despite a 14% YoY increase in net interest income, the sector’s net profit did not increase, due to fall in net profit from capital market transactions and increases in provisions and operating expenses. The banking sector’s return on equity deteriorated by 2 percentage points to 12.2% when compared to the previous year, while the return on asset decreased by 0.3 percentage points to 1.7%.

In 2015…

The Turkish Banking Sector operates under a healthy and objective regulation-supervision function. The sector is expected to maintain its contribution to economic activity and growth, sustaining its strength in terms of asset quality and sound capital structure, maintaining a broadly similar general risk profile. However, in a negative scenario, companies may struggle to pay their debts back in line with developments in external conjuncture and faltering economic growth. But the increase in non-performing loans is expected to remain within reasonable and manageable limits.

In 2015, the sector’s total asset size is expected to grow by 15-16%, with loan volume growing by 16-20% and deposits posting growth of 12-14%. The weak trend in banks’ profitability seen in 2014 is expected to continue, albeit at a slower pace, with the sector projected to post an increase of around 8-12% in its net profit.