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After its onset in China at end-2019, the coronavirus pandemic swept the world led by European countries -the main trading partners of Turkey- in the first quarter of 2020. It not only significantly weakened the global growth outlook, but also caused a decline in the risk appetite, an increase in volatility in international markets and a tightening in global conditions. The evolution of the coronavirus disease into a pandemic significantly weakened the global growth outlook. Amid concerns over growth, advanced and emerging market economies started to implement expansionary monetary policies to help the financial system function effectively, by way of rate cuts, asset purchase programs and macroprudential tools. The easing of mobility restrictions all over the world in May and June 2020, and supportive measures taken during the pandemic period led to a recovery in economic activity above expectations, and partially reduced uncertainties.
The key sources of fragility for financial stability in 2020 were the course of the pandemic, vaccine developments, and uncertainties over the duration of pandemic measures, as well as the capacity of policies to respond, weak economic activity and the banking sector’s profitability outlook, high levels of debt, and sudden liquidity shocks. However, the extensive international reforms put in place after the Global Financial Crisis, the reinforced capital and liquidity structure of the banking sector, along with unprecedentedly comprehensive measures taken immediately by central banks and financial authorities, curbed the pressure that might be placed by the pandemic and related social isolation measures on the financial sector.
The strong course of economic activity in Turkey, which started at end-2019 on the back of domestic demand, prevailed into January and February 2020. On the other hand, the coronavirus pandemic has inhibited economic activity through foreign trade, tourism and domestic demand since mid-March 2020. The adverse effects of the pandemic on economic activity deepened in April. The deceleration in economic activity became evident particularly in response to the interruption of international transportation and trade, which was accompanied by significant disruptions in supply chains. Due to the comprehensive monetary and fiscal measures implemented to limit the adverse repercussions of the pandemic on the Turkish economy, economic activity posted a strong recovery in the third quarter. As the course of the pandemic eased, temporary practices specific to this period began to be phased out. While the recovery spread widely across sectors, the partial continuation of global travel restrictions and the restricted mobility driven by the pandemic continued to impede the recovery in the services sector, particularly in tourism activities. As a result of the increase in imports due to the rapid credit growth and gold demand, as well as weak tourism revenues, the current account deficit widened in 2020 despite the relatively positive course of exports.
Measures and credit stimulus policies implemented in the second quarter of 2020 helped somewhat meet the liquidity and working capital needs of the pandemic-hit households and the corporate sector. As a result of these measures, the exchange rate-adjusted annual loan growth rate gained pace and increased to 25% in August from 17% in May 2020. Loans extended to alleviate the effects of the pandemic led the financial indebtedness ratio of the corporate sector firms to rise by 13 points to 69% in August from 56% in January 2020. On the other hand, the decline in the corporate sector’s FX debts persisting since 2018 continued, and the sector’s FX liabilities, which were USD 307 billion in August 2019, declined to USD 295 billion in August 2020 and reduced the sector’s vulnerability to exchange rate volatilities. On the households front, households’ financial liabilities grew slightly more than assets due to the credit campaigns launched during the pandemic period. The household financial leverage ratio, which has been on the decline in recent years, flattened at 36% during the pandemic. On the other hand, the household debt to GDP ratio in Turkey, which is around 15%, still hovers well below the EME average.
Taking into account the reverberations of the rapid economic recovery led by the strong credit impulse on inflation and external balance, gradual tightening steps have been taken in the monetary policy. On the back of coordinated policy steps accompanying the monetary tightening, the credit growth rate decelerated, and the annualized value of the 13-week FX-adjusted commercial loan growth, which was approximately 60% in June, decreased to 10% in September and to 4% by the end of the year. Similarly, the annualized value of the 13-week growth rate in retail loans, which was recorded above 100% in July, approached 10% by the end of the year.
The widespread restructuring in loans and postponing of installments during the pandemic contributed to individuals’ debt service capacities, firms’ cash flow cycles, and the asset quality outlook of the banking sector. The BRSA’s regulation to extend the classification periods into Stage 2 loans and non-performing loans (NPLs) curbed the pandemic-driven additional deteriorations in the asset quality and the credit risk outlook. These regulations and practices curbed the pandemic’s effect on the switches into NPL accounts, thus the NPL balance remained relatively stable. The surge in loans accompanied by the fast rebound in economic activity stimulated the volume of performing loans, thus pulling the NPL ratio down to 4.1% in September 2020. As loans posted an increase across all scales and types, the asset quality indicators improved in all loan categories.
The post-pandemic global and national liquidity steps provided flexibility in the banking sector’s liquidity management and financial conditions tightened due to the policy steps taken in the second half of the year. In this period, the sector’s liquidity coverage ratios, calculated for total and FX assets, were well above the minimum legal limits. Deposit growth supported the strong loan growth, and the sector’s loan-to-deposit ratio remained flat at 100% as of December 2020. Credit growth was more remarkable in TL credits, thus this became a determinant in the uptrend of the TL loan-to-deposit ratio. The weak FX loan demand and strengthening FX deposit preferences of depositors led to a decline in the FX loan-to-deposit ratio. As a result, the difference between the TL and FX loan-to-deposit ratios widened in 2020, standing at 157% and 54%, respectively in December.
Amid rising TL loan growth and depositors’ preference for FX deposits, the TL liquidity need of banks increased and the net amount of TL funding that they received from the currency swap market rose. Maturity and limit facilities offered by the CBRT for currency swap transactions supported domestic funding conditions. On the other hand, the global decline in interest rates due to expansionary policies reduced the costs of access to international resources, leading to a rise in external debt rollover ratios.
The sector maintains the strong level of capital buffers. Risk-weighted assets that increased with the widespread loan growth in the first two months of the year played a significant role in the decline in the Capital Adequacy Ratio (CAR). On the other hand, the increase in CAR during the March-May period was mainly driven by the regulations on capital calculation and the capital support provided to state-owned banks. Although CAR decreased somewhat following the acceleration in loans, it flattened out due to the slowing loan growth in the recent period. As of December 2020, CAR stood at 18.7%.
Profitability of the banking sector, which mostly remained relatively flat in 2020, continued to underpin the capital structure. In the January-February period, profitability indicators rose significantly due to the strong loan growth, the positive duration gap, and favorable asset quality developments. With negative economic impacts of the pandemic becoming visible in March, banks adopted a cautious stance for the rest of the year and increased their loan provisions. Although this had a dampening effect on profitability indicators, provisions will curb any potential pressure driven by an increase in NPLs in the period ahead. On the other hand, the recent rate hikes may have a lowering effect on profitability as they will be reflected relatively faster in the pricing of shorter-term deposits. As of December 2020, the return on equity and the return on assets were 10.9% and 1.1%, respectively.
The CBRT continued to carry out work on international financial platforms that would enhance its representation and effectiveness and contribute to financial stability. During the global pandemic in 2020, meetings were held virtually and via teleconferences. The CBRT pursued senior level participation at the Plenary and Standing Committee meetings of the Financial Stability Board (FSB), which aims to enhance global financial stability by coordinating the work of national financial authorities and international standard setting bodies, and developing as well as enforcing strong regulatory, supervisory and other financial sector policies. The CBRT also participated in and contributed to the meetings of technical subgroups of the FSB as a member. It also followed at the senior level the work of the FSB Official Sector Steering Group (OSSG) that is responsible for the coordination of benchmark interest rate reforms. Accordingly, a National Working Group, consisting of relevant authorities and the banking sector, was established to ensure sound transition to alternative interest rates in Turkey complying with the international transition procedure.
The CBRT attended the virtual meetings of the FSB Regional Consultative Group for the Middle East and North Africa (MENA) on 2 April 2020 and 19 September 2020, with Governor and Deputy Governor as lead speakers. The meetings addressed the financial and economic impacts of the pandemic, vulnerabilities and policy responses, and the implications of benchmark interest rate reforms for the MENA financial system.
The Basel Committee on Banking Supervision (BCBS) is entrusted with the task of setting general standards applicable to bank supervision, consulting member jurisdictions, and establishing new international standards particularly regarding capital and liquidity frameworks. The CBRT attended the BCBS meetings at the senior level, and participated in and contributed to various BCBS working subgroup meetings at the technical level.
The CBRT also took an active part in the regulatory activities of the Islamic Financial Services Board (IFSB), whose fundamental duty is to develop and improve the global interest free financial services sector in line with the developments in the international financial system.
The common focus of all the work carried out in 2020 with international organizations of which the CBRT is a member was the detection and elimination of global pandemic-driven vulnerabilities, and the existing and possible future policy responses. In the design of the roadmap for this work, securing financial stability was set as the main goal. The work within international institutions was carried out in active cooperation with the relevant authorities in Turkey to gain the maximum benefit from their contributions.
In 2020, in which international exchange of information was particularly critical, the international organizations’ periodic requests for information to be used in the consolidation of the measures and policies of member jurisdictions were met. The efforts to consolidate measures, which enabled exchange of information and experience between member jurisdictions, were shared with the relevant Turkish authorities and concluded under cooperation. The weekly list of policy measures prepared at the BCBS and the daily list of measures published by the FSB are among these efforts towards exchange of information.
