2010 Annual Report
2010 in the World and in Turkey
The World Economy
Growth rates display decoupling across the world.
Deceleration in the world economy that resulted from the global crisis caused emerging countries to cut down on their fast growth momentum, as well as developed countries. However, from the second half of 2009, emerging countries started to increase the pace of their growth with the growth rates across the world turning to positive.
While concerns over growth arising from the USA and Euro area started to augment by mid 2010, it was observed that the lead indicators of emerging countries lagged slightly behind the desired growth pace; yet, with the rises in production indicators subsequently published, expectations in relation to the growth rates of these countries turned to positive. After stepping into 2010 with the high public deficit issues of European countries, global economy is confronted with the threat of deceleration once again due to the recent loss of pace in the growth of developed countries.
Recently, particularly with the crisis in the Euro area, it was noted that developed countries had low growth rates while emerging countries had high ones, and that rates of growth exhibited decoupling. In view of the present situation, the expectation grew that, in the years ahead, emerging countries will sustain their fast growth performances of the past decade, depending on the slow course of production operations in developed countries.
The employment market is suffering from structural issues.
While the world economy sharply contracted in 2009, the employment market significantly narrowed down, as well. As the rate of unemployment rose to 6.2% due to the structural problems in the employment market in emerging countries, it also hiked sharply to 7.9% as a result of the greater impact the latest crisis bore on developed countries. Adding to that, developed countries suffered from a higher ratio of corporate bankruptcies, which resulted in the highest unemployment levels of late. In this vein, the IMF and the World Bank highlighted in their 2011 forecasts that unemployment is the biggest issue facing the global economy.
While stating that the world economy started exiting from the deepest recession ever since the World War II and that the pace of recovery differs in each region; the IMF underlined that unemployment will continue to float at high levels in the year ahead, despite the betterment to be observed in employment in developed countries this year.
Inflation forecasts are being revised once again.
The inflation rates, which rapidly surged across the world in conjunction with increased commodity prices in 2008, declined sharply due to the contraction in demand because of the financial crisis that started in the second half of 2007. Adopting a downward trend across the globe with the deceleration in economies and shrinkage in total demand, inflation maintained low levels in developed countries including the USA, Euro area and Japan in 2009, while the inflation rate in emerging countries were above that in developed countries in the same period.
Although the recuperation in the world economy that was seen by early 2010 caused increased inflation forecasts, high public deficit issues that arose in Europe and the slowdown in the lead indicators of the USA led to revision of inflation forecasts once again. Amid greater concerns hovering over growth, no steps were taken to exit the expansionary monetary policies introduced with the onset of the crisis; to the contrary, the said policies were continued particularly in the USA, as well as in the Euro area and Japan; while this is a development that might increase inflationist pressure, it has been observed that the rise in inflation rates remained limited as yet.
If sustained, expansionary monetary policies might increase inflationist pressures.
While continued expansionary monetary policies in the USA, Euro area and Japan is a development that can increase inflationist pressure, it has been observed that the rise in inflation rates remained restricted.
After stepping into 2010 with the high public deficit issues of European countries, global economy is confronted with the threat of deceleration once again due to the recent loss of pace in the growth of developed countries.
Central banks are beginning to launch recession exit strategies.
Positive growth figures that started to appear as of year-end 2009 in the economies that contracted due to the global recession led to interpretations that the recession exit process has started. While many central banks began to implement exit strategies in the first quarter of 2010, some central banks preferred to increase short-term benchmark interest rates in this frame, while some others decided to discontinue bond purchase programs they had enforced.
The countries displayed decoupling in their monetary policies as shown by the presence of central banks that continued with interest rate cuts, along with exit strategies. Interest rates remained below the pre-crisis level as a result of growth rates in developed countries, which failed to match their potentials, combined with higher rates of unemployment. It has been observed that many countries including India, China, Thailand, Brazil and Chile increased interest rates.
Overall, while high public deficit issues in the Euro area countries increased, along with the risks in relation to the economic recovery and growth outlook of the USA towards the middle of 2010, leading activity indicators pointed at a stronger growth tempo for emerging countries.
Inflationist pressures might increase in the global markets in the period ahead.
In view of the present situation, the expectation grew that, in the years ahead, emerging countries will sustain their fast growth performances of the past decade, depending on the slow course of production operations in developed countries. The structural problems experienced both in developed and emerging countries due to the global crisis are expected to linger on in 2011; in parallel, unemployment is expected to stand as the major problem facing global economy.
With greater concerns hovering over growth particularly in developed countries in 2010, it has been witnessed that no steps were taken to exit the expansionary monetary policies introduced with the onset of the crisis. To the contrary, the said policies were continued particularly in the USA, as well as in the Euro area and Japan; while this is a development that might increase inflationist pressure, it has been observed that the rise in inflation rates remained limited as yet.
On the developed countries front, the decline in inflation rates that occurred concurrently with the crisis is expected to be replaced by an upturn depending on the demand that started recovering, the employment markets that feature continued recuperation, and commodity prices that show increases. Interest rates remained below the pre-crisis level as a result of growth rates in developed countries, which failed to match their potentials, combined with higher rates of unemployment. The central banks of emerging countries, which came through the effects of the crisis more quickly as compared with developed countries, and thus started edging closer to pre-crisis growth rates and withdrawing expansionary monetary policies, are expected to start increasing interests in the period ahead.
The Turkish Economy
The Turkish economy outperformed the forecasts and attained 5.5% growth in the third quarter of 2010.
Following 4.7% contraction in 2009 that resulted from the impact of the global crisis, contracted borrowing facilities for the private sector, and declined investment outlays, the Turkish economy displayed strong growth figures of 11.8% and 10.2% in the first and second quarters of 2010, respectively. As opposed to the forecasts, the national economy preserved its solid performance by attaining 5.5% growth in the third quarter of the year. The growth figure that surpassed the forecasts in the third quarter was supported by the industrial production index which sustained its strong performance despite at a decreasing extent in the third quarter, combined with the high base effect that resulted from the continued contraction in the Turkish economy in the same period with a rate of 2.65%.
On the other hand, the 3-month moving average of the annual change in industrial production reveals that this ratio maintained its two-digit course in September, which corresponds to the last month of the third quarter. Similarly, the positive performance of the index net of seasonal effects supported our growth expectation, and the index net of seasonal and calendar effects, which grew by 0.3% in average in the second quarter, expanded 0.9% in average in the third quarter.
Within this scope, the Turkish economy, which will have captured quite a solid growth provided that it attains 8.5% growth in keeping with our forecast in 2010, is projected to display a declining growth performance in 2011, and will expand by 4.0%, below its potential growth and the average performance in the recent years.
The rate of unemployment was 11.0% in October-November-December 2010.
The rate of unemployment in the October-November-December 2010 period is published as 11.0%. 13.1% in the same period in 2009, the rate of unemployment decreased by 2.1 percentage points. On the other hand, the unemployment rate net of seasonality, which was 13.3%, went down by 2 percentage points to 11.2%.
With the termination of positive seasonal effects in the period ahead, the rate of unemployment might display an upward movement. Although our expectation of an upturn has a parallel frame with previous years, it is possible that the said rise might be in a more limited extent as compared with previous years. Within the scope of our industrial production and inflation rate forecasts, our estimation for the rate of unemployment for year-end 2010 indicates at 11.6%. For 2011, we project some expansion in the rate of unemployment and expect it to stand at 12%.
In 2010 when the Turkish economy captured a positive growth performance, the annual rate of inflation went down to its lowest of the past 32 years.
Rate of inflation went down to its lowest of the past 32 years.
According to Turkish Statistical Institute (TurkStat) data, the Consumer Prices Index (CPI) was 6.40% in 2010 on an annual basis. Thus, the inflation in 2010 remained below the CBRT’s projection of 7.5% and its target of 6.5%.
While the achievement of the inflation target in 2010 in an environment where the Turkish economy captured a positive growth performance indicates at the proper management of inflationist developments, the annual inflation for 2010 attracted the attention with a figure that represented the lowest of the past 32 years. While it was observed that the headline inflation followed a fluctuating course during 2010, the key determinant in the moves of the same was the main expenditure group of food and non-alcoholic beverages. The decline that went on since April in the annual CPI on goods excluding energy, food and non-alcoholic beverages, alcoholic beverages, tobacco and gold (Core I index) was deteriorated in November and December; however, the index closed 2010 at 2.99% on an annual basis, which is a historic low.
Having started after October, the downturn in the headline inflation is expected to continue in the first quarter of 2011 owing to the strong base effect, and the headline inflation is projected to drop down to 5.0%. However, while the movement particularly in commodity prices might prove to be significant following the first quarter of 2011, upward movements can occur in inflation driven by costs.
The upturn in inflation that will start in the second quarter of the year will possibly continue until the last quarter of the year, which might see a downward move once again. In the light of these assessments, the projected inflation for 2011 is 7.15%.
There was a remarkable decoupling between domestic and foreign demand in 2010.
Having declined to USD 38.8 billion in 2009 with the effects of the crisis, the foreign trade deficit amounted to USD 71.6 billion in 2010, which corresponded to an 84.5% surge on a year-to-year basis. In comparison with 2009, export and import figures went up 12% and 32%, respectively. While the ratio of exports to imports was 72% on an annual basis in 2009, the same slumped to 61% in 2010. The key factors that caused the sharp expansion in the foreign trade deficit in 2010 was the decoupling in the recovery of domestic versus foreign demand, while increased oil prices were also influential on the augmented foreign trade deficit.
Paralleling the foreign trade deficit in 2010, the current deficit, after going down to USD 14 billion in 2009, surged up to USD 48.6 billion in 2010.
While the continued downward volatilities in the global economy slowed down the recovery in foreign demand, developed countries stuck to expansionary monetary policies. These developments accelerated investment flows into emerging countries, while concurrently supporting revival in domestic demand. While this gave rise to a more pronounced decoupling between domestic and foreign demand, it also led to deterioration in the current account balance.
Although the quality of financing of current accounts showed some deterioration in the first months of 2010, direct investment flow went up by 3.8% to reach USD 7.1 billion in 2010 as compared with 2009, with the effect of the rise in December 2010. Short-term investment inflow and portfolio investments, on the other hand, increased as compared with 2009 and were worth USD 16.25 billion.
In 2011, the courses of oil prices and the Turkish lira are expected to be effective on the direction of the current account balance, and the rates of increase in foreign trade and current deficit are anticipated to lose pace with the expected recovery in the global economy. While the foreign trade deficit is projected to keep expanding and reach USD 83 billion in 2011 as well, the current deficit is forecasted to be around USD 53 billion. In this frame, the ratio of current deficit to the GDP may be 6.7%.
The CBRT continued with its arrangements within the frame of its exit strategy.
Due to the rapid increase of hot money inflow late in 2010, the CBRT announced some measures aimed at financial stability, on the grounds that the risks threatening price stability had weakened.
At its meeting in December, the CBRT decreased the weekly repo rate, i.e. the policy rate, from 7.0% to 6.5%. Notwithstanding, the CBRT diverted from traditional monetary policy instruments and moved to interest increases from April onwards, within the frame of exit strategies. At the December meeting, on the other hand, the CBRT distinguished between maturities in required reserve ratios and also encouraged longer terms by broadening the gap between interest rates on borrowing and lending.
With the cost-based inflationist pressure, the CBRT is expected to start increasing interest rates from the second half of 2011. However, in view of the recently increased uncertainties in the global markets, the possible continuation of the horizontal course in core indicators in 2011, particularly in spite of the decline in the announced core inflation indicators followed by the increase in food prices, might lead the CBRT to postpone interest rate increases based on growth-oriented concerns in its monetary policy stance.
The CBRT pulled the policy rate down to 6.5% from 7.0%.
The CBRT introduced maturity differentiation in required reserve ratios and encouraged longer terms by broadening the gap between the interest rates on borrowing and lending.
Paralleling the foreign trade deficit in 2010, the current deficit, after going down to USD 14 billion in 2009, surged up to USD 48.6 billion in 2010.
During the 12-month period to end 2010, the budget deficit slimmed down by 24.9% year-on-year, and stood at TL 39.6 billion.
The Central Government Budget displayed quite a solid performance in the twelve-month period to end-2010, thanks to the strong tax revenues and restricted increase in non-interest expenses, and dwindled by 24.9% year-on to TL 39.6 billion. Primary balance, on the other hand, increased by 1,876% at year-end 2010 and rose to TL 8.7 billion.
The central government’s revenues grew by 18% and its tax revenues by 22.1% year-on-year at the end of 2010.
During 2010, central government’s budgetary expenditures amounted to TL 293.6 billion, with the utilization of 102.3% of the TL 286.9 billion allowance projected for 2010. Interest expenses were down by 9.2% year-on to TL 48.3 billion. Therefore, 85.1% of the amount budgeted for interest expenses have been utilized in the reporting period. Capital expenditures, in parallel with the government’s desire to bring infrastructure investments to their completion, showed a 30.5% increase year-on-year and amounted to TL 25.9 billion.
The central government’s gross debt stock grew 7.2% year-on at the end of 2010.
TL 441.5 billion at the end of December 2009, the central government’s gross debt stock stood at TL 473.3 billion at the end of December 2010. The debt stock comprised of Turkish lira debts worth TL 347.3 billion and foreign currency debts worth TL 126 billion. Thus, Turkey’s central government gross debt stock was up 7.2% to TL 473.3 billion over the course of one year.
On the other hand, with TL 352.8 billion, the internal debt stock accounted for 74.5% of the total central government’s gross debts, and the external debt stock, standing at TL 120.5 billion, made up 25.5%.
Within the internal debt stock, TL 301.4 billion consisted of debts to the market, and TL 51.4 billion consisted of public sector debts. The external debt stock was made up of loans worth TL 52.2 billion (TL 32.3 billion from international institutions, TL 8.7 billion from IMF loans, TL 2.3 billion from SDR collections, and TL 9.5 billion from governmental agencies) and of bond debts worth TL 68.3 million.
Examining the inflation-adjusted change in real terms on an annual basis, the total internal debt stock had increased 12.72% in 2009 with the effect of the crisis, but the rate of increase slowed down to 0.49% in 2010.
On the other hand, total external debt stock, which declined by 0.78% in real terms in 2009, showed a limited expansion of 1.53% in 2010.
The Turkish Banking Sector
Despite the global financial crisis that started in the overseas markets toward the end of 2007 and affected the entire world, the Turkish banking sector was able to sustain its solid and strong performance throughout 2010, unlike the international banking industry. In this vein, the share of total assets within GDP, which was in the region of 70% at year-end 2007, rose to 87.4% at year-end 2009, and to approximately 92% in 2010.
Total assets of the Turkish banking sector, in which 45 banks are active, grew 20.7% year-on and reached TL 1,007 billion in December 2010.
The upward trend in the lending volume continued also in 2010.
Fitting and timely measures adopted during the crisis both by the government and the banking regulatory authorities enabled the sector to come through the crisis with the least injuries possible. TL 392 million at year-end 2009, lending volume expanded 33.9% to TL 525.9 billion and the share of loans to total assets went up to 52.2%.
The course of marketable securities, deposits and international loans...
With the downward move in interest rates weakening in 2010, the rate of increase in the marketable securities portfolio took a sharp downturn. The rate of increase in the marketable securities portfolio is expected to continue to decline in 2011.
Having receded to 26.5% at year-end 2008, the share of marketable securities portfolio to total assets rose to 31.5% as at year-end 2009, due to the rapid interest cuts of the CBRT and the public sector’s growing borrowing needs following the crisis.
As a result of the alleviated impact of the global crisis upon our country and increased competition between the banks with respect to lending in 2010, the share of marketable securities portfolio to total assets decreased to 28.6% in December 2010.
While total deposits available to the overall banking sector grew 19.9% year-on to reach TL 617 billion in December 2010, the ratio of marketable securities to deposits fell to 46.7% and the ratio of loan to deposit rose to 85.2% as compared with year-end 2009.
The ratio of loan to deposit rose to 85.2%.
While the lending volume grew 33.9% to TL 525.9 billion in 2010, total deposits available to the sector expanded by 19.9% and reached TL 617 billion.
Total assets of the Turkish banking sector, in which 45 banks are active, grew 20.7% year-on and reached TL 1,007 billion in December 2010, while net profit for the period increased 9.7% to TL 22.1 billion.
Having followed a positive course in general throughout 2010, syndication loans almost doubled and increased by 99.0% as compared with the previous year.
Having declined due to the effect of the liquidity crunch in the markets in 2008, syndication loans took an up-and-down course throughout the year with the effect of the recovery lived in the markets from the start of 2009. Having followed a positive course in general throughout 2010, syndication loans continued to rise except in July, and reached TL 21.7 billion in December, up 15.80% as compared with the previous month. Syndication loans registered a huge 99.0% increase year-to-year.
Performing solidly through the first three quarters of 2009 as compared to the same period in 2008, securitization loans started to decline towards the end of 2009 and sustained the same trend during the reporting period. Although they were up by 4.4% in December 2010 as compared with the previous month, securitization loans decreased 12% on annual basis and went down to TL 14.2 billion.
Having reached its highest level after the crisis period with 5.17% in January 2010, net interest margin started to go down thereafter, and stood at an all-time low when it declined to 3.8% in December 2010. This reduction in the net interest margin also led to a downturn in profitability ratios. Augmented interest income as a result of increased lending volume and reduced ratios of provisions set aside resulting from declined NPLs in connection with increased domestic demand contributed to the continued rise in profitability, although at a slowing pace.
An evaluation of the profitability indicators for the banking sector reveals that the return on equity slipped from 18.2% at year-end 2009 to 16.5% in December 2010, and the return on assets went down from 2.4% to 2.2% in the same period. The primary cause for this was the failure of the cumulative net profit for the period to match the growth in the banks’ assets and equities within the same period.
During 2010, the sector’s equity grew 21.3% and was worth TL 135 billion. On the other hand, the capital adequacy ratio, which had gone up to 20.62% at year-end 2009 due to the upward move in lending from October 2009, declined by one percentage point year-on and stood at 18.96% in 2010.
While loans represented the largest contributor to the growth in the balance sheet in 2010 in the banking sector, this sharp movement is expected to continue at a somewhat decelerating pace in 2011.
