January-March 2013

Macro and industry trends

In the first quarter of 2013, there was a setback to the recovering confidence in the euro zone, as two of the risks it was threatened with have materialized. First, the Italian elections have led to a stalemate in the formation of a government capable of continuing with the process of reforms and fiscal adjustment. Second, the resolution of the Cyprus bailout has demonstrated the need to improve governance in the area, in this case with respect to banking union. Against this backdrop, activity in the region has been depressed, although it has improved somewhat on the previous quarter.

In Turkey, the economy is showing signs of an upturn following the soft landing in 2012, when it grew 2.2% compared with the 8.8% of the previous year. After a 2012 in which the foreign sector was the main driver of the economy, domestic demand began to show signs of recovery. However, inflation continues in the upper range of its target and, after its reduction last year, the current-account deficit is beginning to reflect a change of trend in favor of domestic demand. The Turkish lira has gained 2.4% against the euro in terms of final exchange rates. In terms of average rates, there was a 0.1% decline in the same period.

The Turkish banking sector is still performing well, with strong levels of capitalization. Private sector credit rose slightly in the final months of 2012 and the start of 2013, in the wake of an easing of lending conditions and a cut in interest rates by the Central Bank of Turkey (CBT) in the second half of 2012. The aim of this move was to achieve financial stability and stimulate growth, while not overheating a level of credit that was already above the Central Bank target.

As a result of all the above, the rating agency Standard & Poor’s upgraded Turkey’s sovereign debt from BB to BB+ at the end of March, leaving it one notch from investment grade, which Fitch had already awarded it in the last quarter of 2012. The improvement is the result of the positive macroeconomic performance, a strongly capitalized banking system and the improved outlook in terms of political risk, following the moves made in recent months to resolve the problem over Kurdish territorial claims.

In China, the most recent data show mixed trends, but in general they are consistent with the maintenance of growth rates, mainly based on stronger foreign demand. The rate of growth of housing prices and the fragility of some agents in the financial system continue to be a focus of attention, but there is ample room to maneuver for economic policies; so much so that the overall tone of policy continues to be expansive, even with the recent downward correction of the inflation target. The Chinese Yuan gained against the euro over the last 12 months, in both final and average exchange rates.

The Chinese banking sector continues to record robust growth in earnings, despite its recent moderation. Net interest income has remained stable, although the Central Bank cut the interest rates on assets (loans) more than on liabilities (deposits) in 2012. The NPA ratio has risen, but the coverage ratio has increased considerably in response to the tougher requirements for provisions as a result of regulatory changes in the second half of 2012. Even so, the banks in the Chinese system continue to have adequate liquidity and capital ratios.