ZIRAAT BANK MONITORS MEGATRENDS AND MARKET DEVELOPMENTS TO MINIMIZE THEIR POSSIBLE IMPACTS ON ITS OPERATIONS AND ITS STAKEHOLDERS, AND DEVELOPS POLICY AND ACTION PLANS WITHIN THE SCOPE OF ITS DAILY BUSINESS CYCLE.
Ziraat Bank may be exposed to risks, market developments and uncertainties which may affect its short, medium and long-term performance, liquidity, brand value, growth potential, sustainability performance and corporate reputation. In this context, risk management goes far beyond being a legal obligation for the Bank; it is a fundamental function and one of the foundations of the decision-making process.
Ziraat Bank monitors megatrends and market developments in order to minimize their possible effects on its activities and stakeholders, and develops policy and action plans and implements them within the scope of its daily business cycle.
The rapidly developing energy crisis and the ongoing climate crisis were among the main issues closely followed by global and national markets during 2022. At the same time, the Bank closely followed developments in the global economy and the Turkish economy as external factors, and necessary measures were taken under a proactive approach.
Detailed information on risk management activities and processes at Ziraat Bank is presented in the FINANCIAL INFORMATION AND RISK MANAGEMENT section of the report.
Developing and underdeveloped economies, whose economic cycles depend on imported energy, were forced to compete with developed economies in the race for more expensive energy.
ENERGY CRISIS
The energy crisis has emerged as one of the most far-reaching economic consequences of the war between Russia and Ukraine, which has been continuing since last year.
After Russia’s attempt to invade Ukraine, the European Union (EU) and the United States (USA) started to impose harsh sanctions against Russia, a major producer and exporter of energy. This situation precipitated interruptions to the energy supply and paved the way for a rise in prices.
In 2021, Russia provided more than 40% of the EU’s gas, 27% of its oil and 46% of its coal.
The International Energy Agency (IEA)’s World Energy Outlook 2022 report, published in October, alluded to the fragile state of global supply chains, pointing out that Europe, which increased its liquefied natural gas (LNG) imports in the face of the sharp decline in gas transferred from Russia through pipelines, lacked sufficient LNG storage capacity.
Developing and underdeveloped economies, whose economic cycles depend on imported energy, were forced to compete with developed economies to access high-priced energy. In this process, while US energy exporters recorded substantial profits, regions with vast natural gas reserves such as North Africa focused on increasing their exports. As a result of the energy crisis, volatility in commodity and food prices has increased with many countries entering a cycle of high inflation.
High energy prices to ratchet up inflationary pressure further in the coming period
In the absence of any change in geopolitical conditions or the global supply-demand balance, energy prices are predicted to remain high with energy supplies coming under strain in the short term. According to the Oil Market Report released by the IEA in December, there could be a crude oil shortage in the third quarter of 2023.
In its Commodity Market Outlook Report published in October, the World Bank predicted that energy prices would decline by 11% in 2023 and by 12% in 2024, but remaining 50% higher than their 5-year average throughout 2024. According to the report, the combination of high energy prices with increased transportation and electricity costs will affect businesses and production through secondary channels, sustaining inflationary pressures.
According to the S&P Global Commodity Insights 2023 Energy Outlook Report, although average natural gas, coal and crude oil prices are expected to edge lower in 2023, the European gas and electricity markets will remain dogged by difficult conditions unless structural reforms to reduce dependence on natural gas are taken.
Despite being affected by the global repercussions of the energy crisis, Turkey is presented with opportunities to draw on the advantages of its geopolitical position.
Beyond providing energy supply security with its international natural gas pipelines, four LNG power plants (of which two are floating) and two underground natural gas storage facilities, our country stands to be of key importance in overcoming the crisis for Europe, which has suffered from bottlenecks in gas supply due to the Russia-Ukraine war.
THE CLIMATE CRISIS
Efforts to tackle climate crisis being closely followed, with new decisions taken accordingly
The climate crisis is closely monitored with the participation of governments at the annual COP (UN Conference of the Parties) meetings, and new decisions are taken in tackling the climate crisis. However, the COP27, held in Egypt in the autumn of 2022, took place in the shadow of a negative geopolitical and economic global backdrop, and its results were limited.
The most tangible result of COP27 was the agreement of the parties to establish a Loss and Damage Fund for countries most vulnerable to the climate crisis.
The fund is intended to help developing countries, which are exposed to the adverse effects of climate change, to compensate their losses and damages.
At COP27, countries also initiated a process that includes 25 new actions of cooperation in the fields of energy, road transport, steel, hydrogen and agriculture.
In the UN Intergovernmental Panel on Climate Change held at the COP27, it was noted that greenhouse gas emissions would need to be reduced by 45% by 2030 in order to limit global warming to 1.5°C.
On the other hand, on the subject of transition financing, which is one of the most important issues in the transition to a low-carbon economy, it was emphasized that the global transformation would require between USD 4-6 trillion in annual investment. At this point, the joint action and synergetic cooperation between all national and international financial institutions will be of tremendous importance.
The EU, Turkey’s largest export market, announces EU Green Deal in a bid to make Europe the world’s first carbon neutral continent by 2050.
Turkey expected to be affected by the “green transformation” in the EU, which accounts for around half of Turkey’s exports.
The EU Green Deal aims to put Europe, Turkey’s largest export market, in the position of being the world’s first carbon neutral continent by 2050. As the EU moves towards a zero-carbon economy, it plans to put the Border Carbon Regulation mechanism in place in order to eliminate the negative effects of the process on its economy.
Under this mechanism, duties will be levied on countries which do not have carbon pricing for exports to the EU. With the EU accounting for around half of Turkey’s exports, Turkey stands to be affected by the EU’s green transformation.
The Border Carbon Regulation will come with a burden on Turkey’s GDP and increase costs in energy intensive and high carbon emission sectors. One implication is that unless Turkish companies establish permanent policies and practices to tackle the climate crisis, they may experience difficulties in accessing finance.
In order to mitigate the possible negative effects of the regulation, an Action Plan containing 32 objectives and 81 actions under nine basic criteria was announced under the leadership of the Ministry of Commerce with the coordination of both the public and private sector. The plan, which is a roadmap, aims to strengthen Turkey’s competitiveness in exports while attracting green investment into our country.
Although the Border Carbon Regulation will present a burden to Turkish exporters, it is important that our country sees this situation as an opportunity in the transition to a circular economy. This point will provide an important opening for the banking sector, both by increasing the share of green finance in loan portfolios and benefiting from know-how in the field of sustainability and ESG in the transformation of the real sector.
THE GLOBAL ECONOMY
The year 2022 was a year in which the negative impacts of the Covid-19 pandemic were alleviated with the support of the vaccination rollout, but the ongoing war between Ukraine and Russia weighed down on global economic growth.
Although the global economy started 2022 with hopes that pandemic-related restrictions would be eased and the central banks of developed countries could gradually normalize their monetary policies, the black swan of geopolitical risks dramatically increased uncertainty.
Increasing commodity prices, mounting food security concerns and disruption to the supply chain, along with geopolitical risks, led to higher and persistent inflation, while also bringing the need to tighten financial conditions to tackle inflation.
The tightening in global financial conditions over the last year, combined with a sharp tightening in policy implementations among countries, the effects of the war on economies through a variety of different channels, strict pandemic measures in China and the problems facing the real estate sector all increased the risk of global recession.
In the light of these developments, the IMF revised its growth forecasts for the global economy downwards with its updated Global Economic Outlook Report published in January 2023. The IMF announced a global growth forecast of 3.4% for 2022, with growth projections of 2.9% for 2023 and 3.1% for 2024.
Turkey aims to strengthen its competitiveness in exports and attract more green investment to our country.
European economies struggle with headwinds in 2022.
The Ukraine-Russia war increased risks regarding commodity prices, the supply chain and energy supply, depressing expectations, especially in the Euro Zone. The sanctions imposed against Russia set the stage for a surge in natural gas prices in Europe during the summer months, raising concerns over mounting problems in energy supply in 2023.
However, these concerns were somewhat alleviated by milder than expected weather later in the year, with leading data releases in the last months of the year suggesting that the European economy had bottomed out, helping calm fears of an impending deep recession in Europe.
Tightening in financial markets and repercussions of the war usher in a slowdown in the US economy.
While impact of the interest rate hikes on the US economy was more evident, especially in the PMI data, confidence indices and the housing market, the slowdown in the employment market remained quite limited. Helped by tight monetary policies and, in particular, declining energy prices, inflation slowed in the second half of the year to end the year at 6.5%.
Central Banks left with a dilemma in 2022 amid the worsening inflationary environment and risks to the growth.
The US Federal Reserve (Fed) followed an aggressive policy of increasing interest rates to tackle inflation. The European Central Bank (ECB), on the other hand, was somewhat late to the party, delaying its rate hikes due to the European economy’s dependence on Russia for energy.
While the Fed raised interest rates by a total of 425 basis points in 2022, it sticks to its guidance that it will not lower interest rates in 2023, contrary to market expectations. The ECB also raised interest rates by a total of 250 basis points last year in a bid to bring down CPI inflation, which had reached double-digit levels in the Euro Zone. Standing apart from its peers and maintaining its expansionary stance in monetary policy, the Bank of Japan staged a surprise intervention in the Yen in the last month of the year, its first such intervention since 1998, widening the yield target band in the mechanism by which it controls long-term bond rates. Developments in the UK in 2022 also led to an intensification of the discourse regarding the country’s financial stability.
Ultimately, although we may have seen the peak in global inflation in 2022, inflation is expected to remain above the tolerance ranges for central banks in 2023.
China’s economy still under the shadow of the Pandemic in 2022
A significant slowdown in growth was recorded last year due to China’s insistence on maintaining its zero-Covid strategy in tackling the coronavirus pandemic as well as the problems in the housing sector. Although Chinese officials adopted an expansionary policy to alleviate the vulnerabilities in the economy, marking a decoupling from other countries, the 3% growth in the country’s economy in 2022 was the slowest rate of growth since 1976, excluding the pandemic period.
Global economy starts what is expected to be a difficult year with a better than feared outlook.
The IMF had been shaping its expectations for 2023 on the expectation that the slowdown in economic activity would continue, mainly with the effect of developed countries, both due to the repercussions of the tightening process and the ongoing conflict in Ukraine. The IMF predicts that the global growth will come in at 2.9% in 2023.
A slowdown of this extent would mark the weakest growth outlook for the world since 2001, excluding the years most impacted by the global financial crisis and the pandemic. However, it is considered that the world economy started the year 2023, which is expected to be a difficult year, with a better outlook than the projections. With the fall in energy prices in Europe easing concerns of recession and the opening of the Chinese economy potentially being a factor which could support global growth, especially in the second half of the year, there is a sense of renewed optimism.
THE TURKISH ECONOMY
The Turkish economy recorded a relatively buoyant 7.6% rate of growth in the first six months of 2022.
Despite the challenging global conditions, the Turkish economy demonstrated a strong growth performance in 2022 with the contribution of domestic and foreign demand.
The Turkish economy posted a relatively strong growth rate of 7.6% in the first six months of 2022. This was followed by a slowdown in growth in the third quarter with the rate of growth for the first three quarters of the year slowing to 6.2%. Despite some softening in industrial production in the last quarter of the year, GDP ended 2022 with 5.6% growth on the back of increased private consumption expenditures.
In this period, financial and insurance activities posted a 21.8% contribution to added value, service activities with a 11.7% contribution, with professional, administrative and support service activities contributing 9.9%, information and communication activities 8.7%, other service activities 5.8% and public administration, education, human health and social service activities contributing 4.8%, followed by real estate activities (4.3%), industry (3.3%) and the agricultural sector (0.6%).
It is thought that supportive fiscal policies, additional credit support in selective sectors and the increase in the minimum wage increase could support growth through the domestic demand channel, especially in the first half of 2023. Although the slowdown in global growth left exports at risk from volatility in foreign demand, a positive trend in tourism receipts may help limit the slowdown in growth. Ultimately, the positive performance in growth is expected to continue in 2023 as well.
Tourism revenues exceed projections in 2022 despite repercussions of war in Ukraine.
With the support of long-postponed holidays and the diversification of tourism activity in many fields and on a country basis, tourism revenues demonstrated a strong performance in 2022, exceeding projections despite the repercussions of the war in Ukraine. Tourism receipts surged by 53.4% YoY in 2022 to reach USD 46.3 billion, exceeding the USD 39 billion recorded in 2019, which is often viewed as the golden year for tourism. The positive trend in early reservations indicates a positive start to 2023 for tourism, with tourism income of USD 56 billion targeted for 2023.
The positive budget performance in 2022 is expected to offer additional room for manoeuvre for fiscal policies in 2023.
The widening in the current account deficit became more evident in 2022 due to energy and gold imports.
The record level rise in service revenues with the contribution of tourism and transportation revenues and the positive course of exports despite the challenging conditions were the main factors limiting the increase in the current account deficit. The 12-month cumulative current account surplus excluding gold and energy in 2022 remained significantly higher than in 2021 - an indicator of how energy prices could actually affect the current account balance.
The current account deficit ended the year 2022 at USD 48.8 billion. The main factors behind the increase in the current account deficit were the low level of energy prices and the increase in gold imports. The current account deficit is expected to approach its historical averages in 2023 on the expectation of an easing in energy imports and stronger support from tourism receipts to the current account balance than in previous periods, despite risks related to domestic demand.
Continuing to diverge positively from peer countries in terms of employment
The strong course of economic activity in the past year led to an improvement in employment with a positive divergence from peer countries continuing with the developments recorded after the pandemic period. Total employment recorded a significant increase with the support of the industrial and construction sectors, led by employment in services supported by a positive performance in the tourism sector. The rate of unemployment, which stood at 11.2% in the last quarter of 2021, declined to 10.2% in 2022.
In 2023, the expectation of a slowdown in foreign demand and hike in the minimum wage indicate that there may be a weakening in employment. However, both the preservation of the strength of service employment and the decrease in the labor force participation rate are considered to be factors that may limit the rise in unemployment.
Higher than expected revenues on back of strong economic activity limit budget deficit.
Government spending increased in 2022 in a bid to alleviate the fallout of the geopolitical risks and inflation on the economy. However, a combination of buoyant economic activity and the positive course in revenues kept the budget deficit under control, with revenues exceeding the projections set out in the government’s Medium Term Plan while spending remained below projections, and the budget deficit decreased by 31% compared to the previous year to be realized at TL 139.7 billion in 2022, significantly lower than the budget deficit forecasted in the Medium Term plan. As a result, the budget performance maintained its robust performance in 2022 when compared to peer countries. The budget deficit/GDP ratio also fell within the Maastricht Criteria, which is taken as a basis for international comparisons.
This positive budget balance performance in 2022 is expected to help provide additional room for manoeuvre when it comes to the 2023 fiscal policies.
Inflation records sharp decline in the last month of 2022 on the back of the base effect.
Inflation dominated the agenda both in the world and in Turkey in 2022 with energy, food and agricultural commodity prices all surging on the back of geopolitical developments and supply constraints in various sectors. In the last month of the year, a sharp decline in inflation was observed with the base effect, while the annual rate of CPI inflation is set to decline, especially in the first half of 2023, on the back of the base effect.
The Central Bank reduced interest rates by 500 basis points in total, citing that with uncertainty continuing to hang over global growth and heightened geopolitical risks, supportive financial conditions would be critical in ensuring the continuity of the structural gains in supply and investment capacity obtained after the surge in industrial production and the rising trend in employment.
