Crisis amplifies risks for lenders

Hurriyet Daily News with wires

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The unemployment problem continues to be "a component of the credit risk that the banking sector carries," according to the latest edition of the "Financial Markets Report" released Friday by Turkey’s Banking Regulation and Supervision Agency, or BDDK.

In the report, which covers the month of December, the BDDK said the unemployment rate, at 15.5 percent as of January, presents an "even more negative outlook" today than pre-crisis. "Unemployment especially in manufacturing has rapidly increased," Reuters quoted the report. "This is a negative development for the revenue-generation capacity of households. It also poses a risk for indebted households to pay their debts. Thus, it continues as a component of the credit risk that is carried by the banking sector."

The BDDK foresaw that financial discipline would become more important in the period ahead, as economic activity slows down. This trend may also affect tax revenues negatively, the report stated. "Thus, expenditures should be made in a planned fashion," it said. "The increase of budget expenditures to above-target levels shows that the balance will be harder to maintain this year."

Export contraction versus woes of importers
The agency also noted that despite the depreciation of the Turkish Lira, falling demand in overseas markets has resulted in a contraction of exports. "Recession in European economies and the U.S. dollar appreciating against the euro may affect Turkey’s export performance negatively," the report said. "The decline in imports is positive for the current account, but as imported goods become more expensive, costs for domestic companies that import intermediate goods might increase."

One issue as important as growth, fiscal discipline, inflation and the current account deficit is the development in foreign and domestic debt, the report said. "Taking the short- and long-term debts of the private sector into account, it is seen that the dependence of the real sector on the global credit market has increased," the BDDK report said.

Attaining the growth performance of the past few years in banking will be hard in 2009, as the slowdown is being felt since the last quarter of 2008, the report said. "Linked with this slowdown, unemployment levels may increase, thus credit cards will be used more in the following period, potentially increasing non-performing loans."

According to the report, the asset size of Turkey’s financial sector reached 947.8 billion Turkish Liras ($585 billion) by the end of 2008, having increased 177.7 billion liras compared to the corresponding period in 2007. The ratio of financial sector assets to gross domestic product, meanwhile, stood at 99.8 percent.

Foreign investors choose to offload portfolios

Portfolio investments of local actors increased 18.7 percent year-on-year, to 544 billion liras. Portfolio investments of foreign actors, meanwhile, decreased 36.6 percent to $67 billion.

"The banking sector continued to grow in 2008," Anatolia news agency quoted the report as saying. "Number of branches rose by 1,187, while number of staff rose 14,907 people." Total assets of Turkish banking sector grew 26 percent in 2008, reaching 733 billion liras. The rise was led by credits, which rose 29 percent.

In 2008, investments by locals in stocks decreased 35.5 percent, while such investments by foreign investors fell 40.6 percent, reflecting the decline in Turkish shares. The benchmark IMKB-100 index of the Istanbul Stock Exchange declined 50.9 percent throughout last year, while it has gained 8.9 percent since Jan. 1 this year, largely on expectations that the government will sign a standby accord with the International Monetary Fund. In 2008, net profits of Turkish banking retreated 10.5 percent compared to 2007.