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Message from the Chairman 

Suzan Sabancı, CBE


2023 was a special year in which we proudly celebrated both the 100th anniversary of our country and the 75th anniversary of Akbank. On 6 February 2023, we unfortunately experienced one of the biggest natural disasters in our country's history. I once again wish God's mercy to our citizens and colleagues who lost their lives in the earthquake, and my condolences to their relatives and to our entire country. We will continue to provide uninterrupted support during the reconstruction of the region, which we have been providing since the first day of the disaster.

2023 was a year in which efforts were made to contain the inflationary pressures that strengthened on a global scale in 2022. To this end, central banks of developed countries continued to raise interest rates. In addition to monetary tightening, headline inflation has recently declined rapidly as supply-side problems due to the pandemic and the Russian-Ukrainian war eased. However, due to the strong course of economic activity and labor markets, core inflation rates remained stubbornly above the 2% target of the central banks of the advanced countries. On the other hand, geopolitical developments caused financial markets to remain volatile throughout the year.

Global economic activity maintained its growth trend in 2023, despite the tight monetary policies of the central banks. International organizations estimate that the global economy grew by around 3.0% in 2023. While emerging economies grew faster than developed countries, European countries, our main trading partner among developed countries, diverged negatively. In 2024, global growth is expected to slow down slightly further due to the lagged effects of monetary tightening and the weak outlook in China. Under the soft landing scenario, where inflation continues to decline without a sharp economic contraction, growth in 2024 is estimated at 2.9% by the OECD and 3.1% by the IMF. The European region is likely to remain relatively weak among developed countries.

With the downward trend in inflation, markets price that the interest rate hike cycle of the central banks of developed countries has come to an end and the easing cycle in monetary policy will begin in 2024. Against this background, global risk appetite and risk premia in emerging economies are improving. The improvement in external financing conditions supports the tendency of financial and non-financial corporations in Turkey to borrow in foreign currency.

In a challenging global conjuncture characterized by high uncertainty and volatility, Turkey was hit by a devastating earthquake at the beginning of the year. After this catastrophe, the total economic cost of which was estimated by the Presidency of Strategy and Budget to be $103 billion, the Turkish economy managed to recover rapidly. In 2023, another important agenda and source of uncertainty for Turkey was the elections. With the conclusion of the elections, an important political uncertainty was removed. Afterwards, with the change in the economic policy approach, a period of rebalancing was entered in which macro financial vulnerabilities started to reduce.

CBRT has raised the policy rate by a total of 36.5 points to 45.0% since June, while continuing to take selective credit and quantitative tightening decisions to support the monetary tightening process. Simultaneously, financial regulations for foreign exchange, credit and deposit markets are gradually simplified. The steps towards policy normalization contribute significantly to the improvement in sovereign risk with the support of global conditions. In this context, 5-year CDS rates fell below 300 basis points. Credit rating agencies revised the country outlook from "negative" to "stable". This outlook encourages foreign capital inflows and increases the appetite for external borrowing.

Despite the negative effects of the earthquake, Turkish economy grew by 4.7% yoy in the first three quarters of the year. In 2023 as a whole, we estimate that growth was close to 4.5%. Domestic demand was the main driver of growth, especially due to the expansionary financial conditions in the first three quarters. External demand, on the other hand, remained relatively weak. We expect the recent tightening steps to provide a rebalancing in demand components in the upcoming period.

Due to strong domestic demand and weak external demand conditions, external balance posted a high deficit in 2023 as well. Exports increased by 0.6% y-o-y to $255.8 billion, while imports decreased by 0.5% y-o-y to $361.8 billion. The main drivers of the deterioration in the external balance were the strong momentum in retail loans and the real appreciation of the Turkish lira, as well as gold demand due to dollarization. Despite the favorable course of tourism and related services revenues, the current account deficit remained high. In 2023, the current account deficit became $45.2 billion.

Inflation was 64.8% at the end of 2023, close to the previous year. Inflation, which fell below 40% in the first half of the year, started to increase again after the elections due to exchange rate and wage increases, as well as tax and administered price adjustments. We anticipate that annual inflation will continue to increase in the first half of the year due to the recent minimum wage and administered price increases and then decline due to base effects. In our baseline scenario, which envisages a controlled depreciation, a slowdown in loans and a moderate course in oil prices, we estimate that annual inflation will fall to 44% by the end of 2024. In this scenario, the CBRT's inflation forecasts of 36% for end-2024 and 14% for end-2025, and the high level of the FX-protected deposit (FXPD) stock, which is expected to be gradually eroded, point to an outlook in which the policy rate will remain high for a long time.

In 2023, the budget deficit reached TRY 1.375 trillion, lower than the Medium Term Program forecast (TRY 1.633 trillion). The budget deficit projections in the Program, which are determined by the planned expenditures for the reconstruction of the earthquake zone, indicate that the public sector will adopt an expansionary stance in 2024. In fact, next year's primary budget deficit is projected to be 3.4% of GDP.

Loan growth is slowing down due to the tightening in financial conditions. In 2023, TL loans increased by 54% y-o-y. FX loans, on the other hand, decreased by 2.6% in USD terms. Due to the measures, FXP stock declined to TRY2,626 billion ($89.5 billion) at the end of the year. Thus, the share of FXPD in total deposits declined to 17.7% from its peak level of 26.2% in August.

The first half of 2023 was a period in which the gap between TL loan rates and funding costs narrowed, banks' appetite for lending decreased and maturities shortened. During this period, banks' net interest margin narrowed, while many regulations limiting core operating profitability were in effect. With the monetary tightening and simplification steps that started in June, increased policy predictability creates a more favorable ground for the healthy conduct of banking activities.

As the Turkish economy enters 2024 with high inflation, a high current account deficit and a low level of reserves, economic policies as a whole are taking stabilizing steps to reduce macro financial imbalances. Accordingly, we are entering a rebalancing process in which the increase in borrowing costs and deposit rates curb domestic demand, reduce dollarization, and improve the current account balance and inflation. In this process, the anticipated improvement in the global risk appetite due to the monetary policies of advanced economies will also have a positive impact on macro balances.

This transition process brings some challenges for the banking sector in the short term. Despite the increase in net interest margins compared to 2023H1, the slowdown in loan demand and the decline in the loan/deposit ratio may limit core operating profitability. The rise in interest rates is also likely to have repercussions on asset quality to some extent. In such a conjuncture, the positive thing was that the banking sector maintained its strong structure under the challenging conditions in 2023. While the sector's non-performing loan ratio remained low at 1.6% as of December 2023, the core capital adequacy ratio remained above the legal limit at 15.1%.

The establishment of an environment of macroeconomic stability in which inflation can be brought back to single-digit levels and predictability increases, will support the long-term growth potential of the financial sector by lowering the country risk premium, expanding external financing opportunities and improving the investment environment. The keys to our success will be to maintain our risk management-based approach by continuing to think in a scenario-based manner and to take timely steps by correctly reading the risks looming on the horizon. As Akbank, I believe that we will maintain our position at the top of the competition in this period with the experience we have gained in past volatile periods and our agile management approach.

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