The European economy has steadily improved over the course of 2013. Although in year-on-year terms GDP has declined by 0.4%, positive growth rates have been registered at the end of the year. One favorable aspect worth noting in the European recovery process is that it has not been limited to the core countries only; economic activity has also improved in the peripheral countries thanks to the reduced drain caused by the fiscal consolidation measures, and because financial tensions have been kept tightly in check, despite the existence of various factors that could have generated an upturn in sovereign risk premiums. These include: instability in some governments in southern Europe, reservations about the need to extend certain financial programs (offset in part by the completion of the Spanish and Irish programs) and problems managing the financial program in Cyprus.
As regards the banking sector, as explained in the “Economic, banking and regulatory background” section, the European political leaders have continued to make progress toward banking union. On October 23, the ECB released information on the process for comprehensive assessment of the balance sheets of the nearly 130 banks it will supervise in the second half of 2014. The results of this process will be of great importance in allaying doubts about the solvency of the European banking system, recovering investor confidence and quantifying the problems inherited from the crisis, which will have to be resolved at national level.
In Turkey, 2013 has been a year of two different macroeconomic settings. In the first half of the year, the Central Bank’s loose monetary policy resulted in the yield of the 10-year bond falling to all-time lows, around 6.2%, and economic growth recovering after the soft landing in 2012. This scenario, together with the structural reforms implemented, such as the pension reform, paved the way for the upgrading of the Turkish credit rating, with Moody’s rating the country’s debt as investment grade and Standard & Poor’s giving a rating one notch below. In contrast, the second half of the year was marked by social protests and the international markets anticipating a possible withdrawal of monetary stimuli by the Fed in the United States. In this situation, even though Turkey performed well in terms of GDP, interest rates rose, with the yield of the 10-year bond exceeding the 10% mark. This caused an outflow of capital from the country, stock market declines and a significant depreciation of the Turkish lira, which led the Central Bank of Turkey (CBT) to apply a more restrictive policy on the use of reserves and liquidity injections. This, in turn, increased the cost of finance for companies in general, and for the financial sector, in particular. Against this background, both the government and the CBT opted for a strategy to increase savings and stimulate the productive fabric, through a number of measures to slow down lending growth and improve financing to SME and export sector. The most relevant measures include: an increase in generic provisions for credit cards and consumer finance (to a lesser extent financing for exports and SMEs); an increased risk weighting in credit cards and loans for the auto industry; shorter maturities for consumer finance; and shorter payment periods for credit cards.
In this context, the Turkish financial sector maintains sound levels of capitalization and a high level of profitability, although the recent monetary policy tightening measures and interest rate movements are putting downward pressure on the margins of banking institutions. In recent months, the year-on-year rate of growth of lending seems to be slowing down, although it remains at levels above 20%, while gathering of customer funds continues to improve, but at a slower pace than lending. Lastly, the sector’s asset quality does not seem to be worsening and the NPA ratio remains contained.
In 2013, the Chinese economy continued to grow strongly in year-on-year terms, at 7.7%, similar to the figure registered in 2012, despite the “soft patch” seen in the first half of the year. The fast growth in the second half of 2013 has been underpinned by a number of piecemeal fiscal stimulus measures and increased confidence after the uncertainty surrounding the economic policies derived from the political transition in the country was dispelled. The new authorities remain committed to institutional reforms, but also to the maintenance of the growth targets, and seem to be more determined to tackle some of the problems afflicting the economy. In particular measures are being taken to address the financial weaknesses stemming from the shadow banking sector. Worth mentioning in this regard is the audit conducted on local financial institutions as well as the plans to liberalize interest rates open the country up to foreign banks and introduce a deposit guarantee scheme.
The strong growth in lending has continued in recent months, despite the government’s efforts to limit the risks of high indebtedness, which has led to moments of liquidity tension in the interbank market. There has also been a moderate upturn in the NPA ratio, particularly in small and medium-sized banks, in which small companies have a greater weight (and which are therefore more vulnerable to a less favorable economic environment).
Lastly, regarding the exchange rate, the Turkish lira depreciated strongly in the second half of the year, although this was partially offset by the measures applied by the Central Bank of Turkey. In order to provide a better understanding of trends in business and earnings in the area, the figures below on percentage changes refer to constant exchange rates, unless indicated otherwise.
