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CBRT Financial Stability Report: Supply-side factors increase inflation

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https://www.tcmb.gov.tr/wps/wcm/connect/a14f39d3-85db-4aaa-98e0-e683315d5784/TamMetin.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-a14f39d3-85db-4aaa-98e0NT-e6833R984kn

 

The CBRT published the Financial Stability Report for the period of November 2021. In the report, the CBRT said that the recent acceleration in consumer price inflation was mainly due to rising food and energy import prices and supply chain problems. Other important topics in the report;

 

·        In 3Q21, the economic recovery was supported by exports and services.

·        The Central Bank sees a “significant” improvement in current account, thanks to exports, tourism and the decline in gold imports.

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·        The debt-to-asset ratio of households is at its “historic low” thanks to the decline in the borrowing rate and the increase in the value of financial assets.

·        Commercial loans are recovering thanks to the rate cuts implemented since September; The bank monitors the results of “macroprudential” measures aimed at slowing growth in retail loans.

 

Regarding the economic balances, the CBRT handles the global outlook cautiously and the domestic outlook optimistically. Although there is an ongoing global recovery in the net, the risk themes that have been introduced create reservations about the slowdown of the economies. Factors such as supply constraints and rising commodity prices due to supply chain disruptions, as well as simultaneous increase in demand, feed the global inflationary pressure. While the aim of controlling the economic and financial risks stemming from high inflation increases the expectations for the Central Banks to tighten their policies; There is a possibility that interest rate movements arising from policy transformation in developed countries may turn capital movements against developing countries. However, it will be necessary to take into account updated risk factors such as the new coronavirus variant emerging today.

 

In the domestic economic balances, exports and the services sector are shown as the main drivers of economic activity. The contribution in services has increased, especially with the revival of demand and activity after the closure period. The contribution of exports to growth, on the other hand, has a significant positive effect of the improvement stemming from foreign demand. In an environment where the measures against the Covid epidemic were eased, the rapid increase in export and tourism revenues and the lesser increase in gold imports caused an improvement in the current account balance. On the other hand, the economic repercussions of the fluctuations in the lira, the quality of financing and the increase in raw material and energy prices pose an adverse risk to the balance of payments. In terms of financing quality and foreign exchange movements, the situation of the CBRT reserves also comes into play. The sensitivity of the net reserve position continues against the gross reserves supported by swap agreements, SDR allocations and required reserves in the recent period.

 

In inflation, the main components are seen as developments in food and energy prices, but supply-related problems are stated as the effective factor. In the evaluation of the Central Bank on this issue, while emphasizing the temporary effect of inflation in the light of the aforementioned factors; It is expected that these effects will continue in the first half of 2022. This is an indication that the effect of high inflation will continue in our country in the same period of time as global price pressures. Although there is a slowdown trend in core inflation indicators, the continuation of the high course is stated; We do not find the price increases accelerated by the recent increase in the exchange rate, especially in core goods and services, to be positive in terms of the inflation outlook.

 

If we look at the financial indicators; While the household financial indebtedness / GDP ratio is 17%, below the peer countries and historical averages, it is noted that the risks in this channel are manageable. On the other hand; The increase in consumer loans and personal credit cards continues in terms of financial needs such as consumption trends and debt rollover requirement. In this context, macroprudential measures were taken to slow down the increase in consumer loans. On the other hand, factors such as high inflation and low TRY-based interest rates will increase the demand for fixed income instruments and TRY deposits, and the demand for FX-derived instruments and FX deposits. In this context, we think that the dollarization trend will continue at the threshold of the current dynamics.

 

In terms of real sector activity, positive contributions of sectoral openings are seen after the epidemic closures. Financial liabilities in foreign currency tend to be affected by both exchange rate increases and foreign borrowing costs. Therefore, higher foreign currency-based interest rates may occur on new borrowings, especially in terms of debt rollovers. In this context, some real sector firms are likely to increase the weight of domestic TL-based borrowing and restructure existing debts due to factors such as maturity, currency uncertainty and foreign borrowing profile.

 

In terms of the banking sector; The Central Bank sees the sector as resilient to liquidity shocks and emphasizes that capital adequacy ratios hover above legal levels and other countries, with a prudent approach. Despite the recent desire to slow down the growth rate in individual loans with macroprudential measures, it is desired to accelerate the cycle in commercial loans. In this context, after the interest rate cuts made by the Central Bank after September, equivalent discounts were made in commercial loan rates with the price leadership of public banks.

 

In terms of balance sheet risks of the banking sector, we expect NPLs to occupy a large place. Within the framework of the uncertainty in exchange rates, it is likely that price determination in commercial life will become difficult and the shortening of maturities will cause some slowdowns, especially in terms of payment cycles. Therefore, we think that the desired framework should be created by improving the investment environment and macroeconomic stability. Banks’ asset-liability management, maturity and foreign currency structure in loans, customer-based risk assessments, foreign currency positions (FX assets) and provisions will be important in terms of balance sheet values. The decrease in deposit rates is more positive in terms of profitability performance of banks. How moderate the NPL course will be and its effect on provision expenses will be important for the financial performance of banks. We do not expect any problems in syndicated loans and renewals.

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