Dear stakeholders,

The monetary policy implemented by the Federal Reserve (Fed) in the US, the slowdown in China’s economy and the resulting plunge in commodity prices, the emerging problems in developing countries, and increasing geopolitical risks were the main events that marked 2015.

In 2015, while the USD and Euro gained significant value against the currencies of developing countries, the currencies of developed countries are expected to continue their rise in 2016 depending on growth rates and the direction of inflation rates.

The year 2015 was shaped by a policy of normalization that started to be implemented by the Fed while data releases for the US economy and employment figures exceeded expectations. Following a decline in the rate of unemployment in the US to 5% and as core inflation figures met expectations; the Fed hiked the interest rate by 25 basis points in the last month of 2015, in what was the Fed’s first interest rate hike of the last decade, demonstrating that the recovery in the US economy was on track. Although there some speculation that the Fed could then go on to raise interest rates four times in 2016, the strong USD started to hurt industry in the US and the slump in commodity prices was expected to lead the Fed to take a more cautious approach to interest rate hikes.

In 2015, the European Central Bank (ECB) implemented an expansionary monetary policy by raising bond purchases as well as reducing deposit rates, thus aiming to revive European economies. Despite an economic recovery in Europe in the first half of the year, Greece’s debt crisis was brought returned to the agenda and the problems seen in the global economy compromised the success of the policy implemented by the ECB.

The very low commodity prices prevented the ECB from meeting its inflation targets. Meanwhile, high rates of unemployment in many European countries and a massive debt stock have been increasing concerns regarding the Eurozone. With commodity prices (principally oil) remaining low and inflation still below the targets, the ECB is expected to continue implementing an expansionary monetary policy.

The slowdown in growth rates in the Chinese economy, slump in prices of commodities, especially oil, and the move from the Fed to an interest rate hike process were the main factors behind the outflow of capital from emerging economies.

The slowdown in the Chinese economy started to negatively affect investor perceptions of the future of the Chinese economy. A wave of sharp selling was seen in the Chinese market, putting pressure on the Chinese economy and exacerbating capital outflows, sending the Chinese Yuan lower. On the other hand, the slowdown trend seen in the country - which is the world’s largest commodity importer - caused a sharp fall in commodity prices. This drove budget deficits and current account deficits higher among commodity exporting countries. In case the rates of growth in China fail to recover their previous levels in the country’s transition from export-led growth model to a domestic consumption-based growth model, we should expect to see a continuation of the low levels of commodity prices and deterioration in the economic outlook of commodity-exporting countries.

The increasing volatility in the global economy and mounting geopolitical risks increased the risk premium of Turkey, along with that of other developing countries, and precipitated a fall of around 20% in the value of the TL against the currency basket. Nevertheless, despite a negative contribution from net exports to Turkey’s economic growth, Turkey posted a rate of growth in excess of expectations with domestic demand and government spending being the main factors behind the growth. Turkey is expected to demonstrate a better economic performance in 2016 than in 2015.

Inflation in Turkey ended 2015 higher than expectations, at 8.81%. High food prices throughout the year and the depreciation of the Turkish Lira were the main culprits behind the higher than expected inflation readings. Inflation is expected to decline from the second quarter of the year, supported by the base effect.

In addition to the slump in commodity prices (mainly oil), the increase in automotive exports and higher gold exports set the stage for a rapid improvement in the current account balance in 2015. However, the decline in oil prices put pressure on the economies of Iraq and Russia, while the geopolitical problems with these countries also prevented exports to these countries from reaching the targets. Turkey’s exports are generally Euro based but its expenses are USD based; therefore, the fall in the EUR against the USD was another factor putting pressure on Turkey’s export performance. Maintaining fiscal discipline in the public sector, continuity of extension of the maturity of debt and the growth in consumer loans to have been at the desired level stand out as factors that will continue to improve the current account balance in the coming period.

The Central Bank of the Republic of Turkey (CBRT) continued to implement a tight monetary policy in 2015, whereas it stated that it may simplify the monetary policy depending on market volatility and steps to be taken by the Fed. In 2016, the CBRT declared that it would convert the interest-rate structure into a symmetrical structure around the one-week repo interest rate by narrowing the interest rate corridor.

Despite the high volatility in the markets in 2015, the Turkish banking sector was able to realize active growth in line with its targets due to the effective control mechanisms and professional management competencies, and the banking sector posted higher profitability than in the previous year.

According to figures released by the Banking Regulation and Supervision Agency (BRSA), retail loans posted a low rate of growth, in line with the targets, whereas the growth in corporate loans appealing to the real sector was robust.

Starting operations in 2015, Ziraat Participation was the first state-owned participation bank in the sector. Ziraat Participation underwent rapid growth and expansion in its branch network in the second half of the year, and aims to increase its market share rapidly in the sector, to contribute to the sector to work more effectively and efficiently with its competitive and innovative structure.

We have complete faith that Ziraat Participation, the newest member of the Ziraat Finance Group, will bring a breath of fresh air and inject new excitement to the Turkish banking sector, and soon demonstrate the service difference in participation banking.

On behalf of myself and our Board of Directors, I would like to thank our entire team who shared their dedicated efforts with us since the establishment of Ziraat Participation and for their 2015 performance. I also extend my respects to our stakeholders, and especially to our valued customers.

Hüseyin AYDIN
Chairman