The year 2016 was shaped by the monetary policy implemented by the US Federal Reserve (Fed), the presidential elections in the USA, the British vote to leave the EU in the Brexit referendum, the fall of local currencies in emerging markets and the significant volatility in commodity prices and bond yields. In 2016, the US dollar climbed high against the currencies of both other developed countries and developing countries.

Our Sectormaintained its asset quality.

Despite the stronger than expected employment figures in the USA in 2016, the Fed acted with caution on interest rate hikes as inflation remained slightly lower than the targets. The signs of stagnation observed in the global economy in the first half of the year took bond yields to historic lows, especially in developed countries. However, this trend was broken by the announcement of a fall in the rate of unemployment in the USA to below 5% and Trump’s win in the US Presidential election and a sharp rise in USA bond yields ensued, as Trump had promised the implementation of expansionary fiscal policies. Contrary to its earlier projection of four rate hikes, the Fed raised interest rates only once in 2016, with a 25 basis point hike in the last quarter of the year, while signaling a faster pace of interest rate hikes for the future. Although the Fed is likely to raise interest rates three more times in 2017, a lot will depend on Trump’s economic policies and the course of the US economy during the year.

One of the most important factors affecting the European economy in 2016 was Brexit. The European Central Bank (ECB) aimed to stimulate European economies by increasing bond purchases, reducing deposit interest and implementing an expansionary monetary policy, while taking precautionary measures aimed at containing the risk from Brexit. With elections this year in Germany, the Eurozone’s largest economy and in France during 2017, the ECB has extended the period of its asset acquisition program until the end of the year.

Developing countries suffered a flood of capital outflows, due in large part to plunging commodity prices in early 2016. The capital outflows continued, albeit at a milder pace, for the rest of the year. China lost about 9% of its reserves during the year due to the slowdown in growth rates in the economy and structural problems in the country. At the same time, as the world’s largest importer of commodities, the slowdown in China precipitated a sharp decline in commodity prices while also paving the way for a widening in budget deficits and a worsening in the current accounts of commodity exporters. Unless China can restore its earlier growth rates as it undergoes the transition from an export-based growth model to one based on domestic consumption-based growth, the downward trend in commodity prices and deterioration in the economic outlook of commodity exporters is set to continue.

The Fedcontinued to increase interest rates.

The increase in geopolitical risks in 2016, higher volatility in the global economy and the monetary policy imposed by the Fed caused volatility in Turkey, as well as in other emerging economies. After a faster than expected growth rate in the first half of the year, a combination of the extraordinary political developments experienced in the second half of the year and volatility in foreign markets led to weaker growth in the second half of the year. However, in a global context, Turkey’s growth rate could still be considered strong despite the negativity. Domestic demand contributed more to economic growth, while the contribution of net foreign trade was limited.

However, the continued recovery in Europe is expected to stimulate the Turkish economy towards a better performance in 2017 than in 2016 with an increased contribution from foreign trade in 2017.

With the increase in oil prices towards the end of the year and the exchange rate impact, inflation in Turkey ended 2016 at 8.53%, exceeding expectations. The fallout of these developments is expected to continue in the first quarter of 2017, but with inflation then expected to decrease with the contribution of a higher base effect from the second quarter of the year.

The tourism sector failed to meet its targets due to the political crisis with Russia in 2016. Geopolitical risks and mounting concerns over economic growth in the world also curtailed exports during the year. Despite this, Turkey’s foreign trade deficit continued to contract during the year thanks to lower commodity prices (especially oil) when compared to the previous year. Even through the Fed’s tight monetary policies in the coming period look set to precipitate an increase in capital outflows, a combination of improving relations with Russia and steps to ease geopolitical risks with dialogue are likely to be reflected positively to Turkey’s current account deficit.

BREXITThe EU’s future is questioned.

Within the framework of the simplification steps implemented in its monetary policy, the Central Bank of the Republic of Turkey (CBRT) sharply discounted its lending rate in response to the downward trend in inflation. However, after continued cuts in interest rates until the last quarter of the year, the Central Bank increased its policy interest rate by 50 basis points towards the end of the year in a bid to support the Turkish Lira, to reflect the change in global economic conditions. The steps taken by the CBRT to support the economy are expected to support investment and consumption spending.

Despite the high volatility seen in the global economy in 2016, the Turkish banking sector grew in line with its targets, maintaining its asset quality thanks to its professional management ability and effective supervision mechanisms. The sector’s profitability was higher than in the previous year due to the effect of falling funding costs.

Ziraat Participation, which rounded off its first year of operation in 2016, was the first publicly funded participation bank in the sector. Ziraat Participation increased its market share by branching rapidly during the year and the Bank’s asset volume more than tripled in 2016. With its competitive and innovative structure, Ziraat Participation supported the sector’s growth by growing in a way which would contribute to the more effective and efficient operation of the sector.

On behalf of myself and our Board of Directors, I would like to express our gratitude to our team, the architects of our successful performance, for their devoted efforts and to our customers for the confidence they have placed in Ziraat Participation.

Hüseyin AYDIN
Chairman of the Board