Macroeconomic Overview and the Banking Sector

2009 was a year in which economic recession spread throughout the world and there was never any lack of either debate or speculation as to the timing and speed of economic recovery.

Global overview
2009 was a year in which economic recession spread throughout the world and there was never any lack of either debate or speculation as to the timing and speed of economic recovery.

Recoiling from tighter credit conditions inherited from the previous year, growth, consumption, investment, and consequently employment numbers dropped significantly all over the world in 2009. The hallmark concerns last year were concerned primarily with when and to what degree the recovery observed in financial markets (which were thought to have put the worst of the global economic crisis behind them) would make itself felt in the real economy and in employment numbers.

The deep impact of the crisis on the banking industry forced governments and central banks in many countries to take serious measures. A host of measures were taken to restore stability to financial markets ranging from rapid interest rate cuts and liquidity support to nationalization.

Throughout most of the year, central banks kept their interest rates at historically low levels and pumped liquidity into their markets with the result that financial asset prices appeared to be on the rise again in the second half of the year. Finding themselves awash with liquidity, stock exchanges in countries like Germany, the UK, and the USA generated average returns on the order of 20% while rises of close to 100% were experienced in some emerging markets like Argentina, Brazil, Russia, and Turkey.

In 2008 the euro lost ground against the US dollar in reaction to the USD liquidity crunch, with the EUR/USD exchange rate falling as low as 1.28. In 2009 the situation reversed itself somewhat as USD began to flow freely with global markets recovering and the euro began to appreciate once again.

In response to seriously depressed international demand, commodity prices had shrunk significantly in 2008 but began to regain their lost ground in 2009. In 2008 crude oil prices plummeted sharply to below USD 40 from their record-breaking USD 140/barrel high point. Although the price began to rise again in 2009, it nevertheless closed the year at the USD 78/barrel level.

Towards the end of 2009 the Dubai government released an announcement saying that Dubai World, an investment company in which it controls a stake, intended to ask for a “standstill” in its debt servicing while international credit rating agencies downgraded Greek government bonds noting that the country’s debt service abilities were fraught with long-range risks. Such events caused more turbulence in  financial markets that was exacerbated by worries over the euro when Fitch Ratings announced that it could not guarantee France’s or the UK’s AAA sovereign debt ratings if those two potent Eurozone countries did not take measures to enforce budget discipline.

As we entered 2010, it was still unclear as to how and when the USA, the UK, Eurozone countries, and Japan would put an end to their expansionist policies. The generally prevailing view of the period ahead is that the country risk map has been transformed and that Asian economies will be the engines of global growth, with those of China and India leading the way forward.

Turkish economy overview
Like other developing economies, Turkey embarked upon a period of sustained high growth in the 2000s. With the onset of the global economic downturn in 2008, economic growth in Turkey dropped to below 1.1%. In the first quarter of 2009, Turkey was the world’s most contracted economy excluding Baltic countries. As international efforts to revive the global economy met with varying degrees of success, measures taken by the government here in Turkey had the effect of slowing down the contraction.

In that contraction, depressed domestic demand had a significantly adverse impact on growth figures. An effort was made to prevent the recession from becoming deeper by maintaining government expenditures at existing levels–even in the face of shrinking tax revenues. The arrival of net export effects in the latter part of the year somewhat mitigated the seriousness of the contraction in GDP, which was nevertheless down 3.5% in the third quarter of the year. Growth in the Turkish economy is expected to have resumed in the fourth quarter of 2009 as a result of the low national income base effects that prevailed in the last quarter of 2008 and the first quarter of 2009 combined with the overall global recovery.

In 2009 there were sharp year-on-year declines in the industrial output index. The particularly dismal appearance at the beginning of the year however began to improve as government tax and investment incentive policies took hold and data suggesting that a global recovery was underway started coming in. The index, purged of its season and calendar effect had begun to fall around the middle of 2008 but began to recover as of February 2009.

Along with the rise in industrial output there were also some noteworthy increases in capacity utilization rates. The production-weighted capacity utilization rate, which was 64.7% in December 2008, was up five points to 69.7% in December 2009.

The consumer confidence index, which is based on the results of the monthly consumer sentiment poll conducted jointly by the Turkish Statistical Institute and the Central Bank, closed the year at 78.8. The real sector confidence index, which began rising in January, topped 100 in July but subsequently subsided and closed the year at the 92.2 level.

As the full force of the global crisis made itself felt in the last quarter of 2008, official unemployment figures entered the double-digit range and peaked at 16.1% in February 2009. In response to slower rates of contraction in industrial output and elsewhere in the economy, there began to be modest improvements in employment in the later months. The posted rate of unemployment at year-end was around 13%.

Inflation rates remained low and essentially flat as a result of very weak demand brought on by the global economic crisis. While there was something of a rise in the last quarter, that may be attributable to seasonal effects. The highest one-month increase last year was 2.41% and it took place in November.

The twelve-month rise in the consumer price index at the beginning of 2009 was 9.50%. By the end of the same year, this figure was down nearly three whole points to 6.53%. During the same period, the producer price index went from 7.90% to 5.93%. Demand picked up somewhat in response to the government’s investment incentives and economic stimulus package after the first quarter, which countered the effects of declining inflation and leveled the index out at around 5% from May on. As economic recovery began to push consumer prices upwards, inflationary trends became less relaxed. On the domestic front, tax cuts were the main reason for the partial recovery even as producer prices continued to push inflation down.

The low-inflation environment brought on by the downward trends observed in domestic and foreign demand prompted the Central Bank (TCMB) to cut its policy interest rates quite aggressively. In the twelve months to December 2009, the bank reduced its overnight rates no fewer than 8.5 points from 15% to 6.50%. As a result of this action, TCMB ended up as the monetary authority which had axed interest rates the most during 2009.

Having moved within a fairly stable–albeit broad–band during 2008, the Turkish lira (TRY) USD exchange rate continued to do so in 2009 as well and closed the year at around the TRY 1.50 level, pretty much where it had been for most of the time. In response to signals that normalcy was returning at both the global and the local levels, the dollar slipped to below TRY 1.50 as we entered 2010.

In the wake of the Lehman Brothers collapse in 2008, stock exchanges began dropping sharply nearly everywhere. Encouraged by the potentially beneficial results of the measures that governments were taking, buyers began returning to the markets however. Events at the İstanbul Stock Exchange (ISE) followed an almost identical course from March 2009 onward, with prices recovering nearly all of the ground that they had lost since the onset of the crisis. The ISE index opened the year at 26,284 points and bottomed out at 22,583 before embarking upon a reversal that was driven especially by demand for shares in banking industry firms. The market’s vigor reached its highest level towards the end of the year, with ISE generating an average net premium of 97%. When Fitch upped Turkey’s country rating, ISE broke its previous TRY 3.85 one-day trading volume.

In response to depressed domestic and foreign demand brought on by the global economic crisis, there were substantial declines in Turkey’s import and export numbers during 2009. Most of the losses were concentrated in the first half of the year however and there was something of a recovery nourished by modest monthly rises in the second. Nevertheless the overall picture was rather grim: CIF imports were down 30.3% year-on-year to USD 140.8 billion and FOB exports down 22.6% to USD 102.2 billion. Even Turkey’s “suitcase trade” suffered, dropping 22.9% to USD 4.8 billion last year.

With foreign trade volumes depressed by weak demand brought on by the global economic crisis, Turkey also had less of a need to import energy, the prices of which were in decline. One outcome of this was a significant contraction in the country’s current account deficit last year, which plummeted 67% year-on-year in 2009 from USD 41.9 billion to USD 13.9 billion.

Central government budget expenditures in 2009 amounted to TRY 267.3 billion and budget revenues to TRY 215.1 billion. While this brought the budget deficit up to TRY 52.2 billion, it also reduced the non-interest surplus to TRY 986 million. There was a 199.5% year-on-year rise in the budget deficit last year while the ratio of the deficit to GDP, which was 1.8% in 2008, is now thought to have been about 5.5% in 2009.

Banking sector overview
The Turkish banking industry distinguished itself in 2009 as the sector that was the least affected by the global economic crisis. It passed a very important test last year, increasing its profitability and attracting international attention by virtue of its not having had any need for a government bailout.

The sector’s total assets increased 14% in the twelve months to end-2009 and reached TRY 834 billion in value. During the same period, the banking industry’s total deposits increased 13% to TRY 515 billion although the overall rate at which deposits were lent out slipped four points from 81% to 77% as the economic crisis throttled the demand for credit. Participation banks appeared to have a somewhat greater willingness to lend than did deposit banks.

Overall growth in loans remained weak as banks cut back their lending particularly in the first quarter of the year. Total lending amounted to TRY 396.6 billion, corresponding to a year-on-year rise of just 7% while the ratio of loans to total assets fell to 47.4%.

Banks in general shifted their placements away from loans in favor of securities throughout 2009 and they showed a particular appetite for T-bills as the instrument of choice with which to build up their portfolios. The steady rise in the share of investment securities among total assets may be seen as out of keeping with banks’ function as financial intermediaries.

In line with expectations, one effect of the business recession on the banking industry was an increase in its non-performing assets. In 2008, 3.7% of the sector’s loans had to be marked as “non-performing”; in 2009, that ratio was up to 5.3%.