As a result of US Federal Reserve’s (Fed) signal that it would slow down monetary expansion, a volatile trend was observed in global financial markets
In May, the FED announced that it may eventually terminate its bond purchase program by gradually tapering the volume of purchases. Immediately after this announcement, there was a significant increase in bond yields in both developed countries and emerging markets, while the currencies of emerging markets were devalued as a result of slowing capital flows. Having begun to taper bond purchases in December, FED is expected to end its balance sheet growth program in 2014 and increase interest rates in 2015. Despite the strong outlook for the US economy, economic growth remains weak in the Eurozone. Furthermore, the European Central Bank may well implement an additional monetary expansion program in view of the mounting risk of deflation. Still, the likelihood is that the FED’s revised policy will dominate over other developments in the world as far as global financial markets are concerned, and that the changes in global liquidity conditions will limit capital flows into emerging markets.

Volatility in financial markets have only a limited impact on economic activity in Turkey in 2013.
Turkey’s credit rating was raised to investment grade by Fitch at the end of 2012 and Moody’s at the beginning of 2013, a situation that accelerated capital inflows.

Increase in Turkey’s credit rating to investment grade by Fitch at the end of 2012 and Moody’s at the beginning of 2013 accelerated capital inflows. However, this rosy state of affairs proved short lived and capital inflows began to dry up after the FED’s announcement. As a result, the interest rate of the 2-year benchmark bond, which had fallen to less than 5% in May, climbed to 10%. Similarly, the value of the Turkish Lira plunged by about 20% against the US$ between May and the end of the year. Despite these developments in the financial markets, domestic economic activity remained robust as the CBT continued to follow a loose monetary policy. As a result, Turkey’s GDP is expected to have grown by 4% in 2013. On the other hand, however, the rate of GDP growth is expected to fall to 2.2% in 2014 due to tightening monetary and financial conditions in Turkey and abroad. In addition, the political uncertainty we have recently witnessed in Turkey and ongoing fluctuations in financial markets represent a primary risk, putting downward pressure on economic growth.

The annual rate of inflation ended the year 2013 at 7.4%, exceeding the CBT’s inflation target.
Because of the devaluation of the TL, tax hikes and high food prices, CPI rate is significantly higher than the 5% target rate. Similarly, the rate of core inflation which is 7% is above the expectations. The inflationary outlook for 2014 will be adversely affected by rigidity in service sector, weak TL, tax hikes imposed at the beginning of the year and possible increases in energy prices. Thus inflation for 2014 is projected to be 8.2%.

CBT tightens monetary policy in the second half of the year.
The CBT cut the policy interest rate by 1 point to 4.5% in the first half of 2013, when capital inflows were strong following the volatility precipitated by concerns that the FED would change its policy, the CBT raised the reference interest rate to 7.75%. However, considering the current inflation rate, the Bank’s monetary policy continues to support economic growth. In order to limit the devaluation of the TL, the CBT sold a total of US$ 18 billion worth of FX since the middle of 2013. On the other hand, as a result of the repayment of accrual loans used by exporters, the decline in the CBT’s net reserves was limited. In addition, the Bank continued to apply the reserve options mechanism that allows banks to keep TL-based required reserves in the form of foreign exchange or gold. Meanwhile, the Bank continued to increase reserve options coefficients (ROC) that determine FX or gold provisions, which will be allocated in per unit TL-based required reserves. In conclusion, even after selling US$ 18 billion in foreign exchange, the CBT’s gross reserves increased by US$ 12.5 billion in 2013 to reach US$ 132.9 billion. However, the Bank’s net reserves fell by US$ 5.4 billion to end the year at US$ 48.3 billion.

Current account deficit remains high.
Despite the devaluation of the TL, imports continue to climb due to the strong domestic demand. An exceptional US$ 5.7 billion in net gold exports in 2012 were reversed in 2013, another factor contributing to the increase in the current account deficit. As a result, the current account deficit/GDP ratio increased from 6.1% in 2012 to 7.9% in 2013. Unless there is a contraction in domestic demand or significant fall in oil prices, Turkey is expected to continue to be challenged by a wide current account deficit. Accordingly, the current account deficit/GDP ratio is expected to stand at around 6% in 2014.

Turkey’s external financing needs are projected at US$ 216 billion in 2014, including US$ 39 billion of medium-long term debt payments and a short-term debt stock of US$ 129 billion. Turkey’s massive need for external financing will remain element of fragility in fending off foreign shocks. On the other hand, if economic activity turns out to be weaker than projections, the current account deficit may shrink much more rapidly than has been forecasted.

Turkish Banking Sector Data


2012 December

2013 December

Total Assets

TL 1.37 trillion

TL 1.73 trillion

Credit Volume

TL 795 billion

TL 1.05 trillion

Marketable Securities Portfolio

TL 270 billion

TL 286.7 billion

Deposit Volume

TL 772 billion

TL 945.8 billion

The Turkish banking system maintains its strong structure.
The sector’s total assets climbed from TL 1.4 trillion by the end of 2012 up to TL 1.7 trillion by the end of 2013. Asset growth is mainly due to loan growth. Accordingly, the sector’s capital adequacy ratio, which had stood at 17.9% at the end of 2012, fell to 15.3% by the end of 2013; however, it remained considerably higher than the 12% limit, which is required for growth.