2014 ECONOMIC AND SECTORAL REVIEW

Just as the US Federal Reserve Bank was bringing an end to its monetary expansion by phasing out its asset-buying program, international capital flows heading towards the developing countries also slowed down.
In January 2014 the US Federal Reserve Bank, America’s central bank, began “phasing out” its USD 85 billion asset-buying program, which it had been conducting for more than a year, at the rate of USD 10 billion a month and terminated it entirely in October. The Fed’s decision to cut back its asset purchases now that the US economy appeared to be on the mend combined with worries over excessive credit growth in the Chinese economy curtailed the global appetite for risk.

Meanwhile with markets here in Turkey apparently suffering from mounting uncertainties, the Central Bank (CBRT) responded with a strong policy reaction in the form of an interest rate hike that it announced at a Monetary Policy Committee meeting held in January.
The effect of this was to bring exchange rate movements under control while also staving off further impairment in markets’ expectations. Although markets nonetheless remained frothy for the rest of the year owing to global uncertainties, CBRT remained committed to its monetary policy stance and continued to take measures to calm exchange rate-related jitters.

In the second half of the year, risk perceptions were informed by spreading violence in Iraq and by heightened tensions between Russia and Ukraine.
CBRT made frequent use of its interest rate corridor in order to mitigate the impact of market developments on exchange rates.

Turkey’s 12-month cumulative current account deficit continued to shrink owing to moderate growth, normalization in the gold trade, and a decline in oil prices after midyear.
The most important factor contributing to this shrinkage was a slowdown in domestic demand and consequently in imports as well. Between June and the end of the year, oil prices fell by nearly a half and this decline had a beneficial effect on the current account deficit, whose ongoing contraction was also aided by a net decline in gold imports. Although Turkey’s exports to Europe rose in the latter part of the year, its sales to Iraq and Russia fell owing to political developments unfolding in both countries. The opinion at this time is that the shrinkage in the current account deficit is likely to continue in 2015 as well.

Relatively high–and volatile–rates of inflation are one of the underlying reasons why interest rates in Turkey are still higher than many other developing countries.
If–and only if–inflation can be reduced to CBRT’s targeted 5% level and made to stay there may we expect to see a real fall in interest rates. Failing that, for inflation to remain at its existing levels can only mean that interest rates are also going to remain high. That said, inflation can be expected to continue to subside during 2015 if only owing to a number of favorable base effects and to weak oil prices.

There were also a number of conjunctural factors contributing to the slowdown in growth observed in the second quarter of the year.
Economic activity was quite strong in the first quarter of 2014 and this generated a rather high growth rate, the most important cause of which was public-sector expenditures. By the second quarter the economy showed signs of impending slowdown in growth that was brought on not just by CBRT’s interest rate hikes but also by the constraints that a number of BRSA-implemented macroprudential measures imposed on credit growth. While there was something of a recovery in the last quarter, it proved to be less than had been expected.

Growth will gain momentum in 2015.
Two factors that should be supporting growth in 2015 are the income effects of cheaper energy on the one hand and CBRT interest rate cuts in parallel with the decline in inflation. Owing both to its own growth dynamics and to moderate movements in global commodity prices, Turkey will continue to be a more attractive investment option than other developing countries in 2015. Developing countries’ growth prospects are overshadowed by persistently weak global growth everywhere but in the United States. China’s growth will most likely hit Far Eastern emerging economies the hardest while Middle European countries will suffer more from economic conditions in the European Union than Turkey does. For these reasons, the 3% or so rate of growth expected in 2015 suggests that Turkey will perform rather better on the growth front than will other countries in its category.