AN OVERVIEW OF THE ECONOMY AND THE SECTOR IN 2017

Although global growth acquired an evident momentum in 2017, inflation sustained a low course.

According to IMF estimations, worldwide GDP growth will be registered as 3.7% in 2017, up by 0.5 points year-on-year, before rising to 3.9% in 2018. Growth in developing countries, on the other hand, is projected to reach its highest point since 2013 and arrive at 4.9% in 2018. Nonetheless, average inflation in developed countries is anticipated to remain low at 1.9% in the year ahead, despite showing a limited rise of 0.4 points over 2017.

In the event the inflation remains low, central banks of developed countries are expected to sustain their monetary support.

Although central banks of developed countries tend to reduce the monetary support in the period ahead, their steps in this direction will be very slow, so long as inflation follows a low course. Although the Fed is anticipated to scale back its balance sheet by USD 450 billion and to carry out three rate hikes in 2018, European and Japanese Central Banks will sustain their monetary support. To this backdrop, a possible acceleration tendency in inflation will pose the primary risk for developing countries.

The GDP growth that noticeably gathered speed during 2017 will likely be unable to recapture the same momentum in the year ahead.

In 2017, the growth rate of GDP picked up from 3.2% in 2016 to around 7% owing to fiscal incentives the Credit Guarantee Fund (in Turkish: KGF) support. The KGF support was accountable for 1.5-2 points of the said rise. In the year ahead, KGF and fiscal support facilities are anticipated to continue but not at the same level. Along the line, growth rate is predicted to remain at 4%, slightly below the Medium Term Program target of 5.5%.

In view of the developments in exchange rate and recovery in demand, inflation will most likely float high.

During 2017, the fast increase in growth and demand conditions put an upward pressure on inflation. In addition, the uptrend in exchange rates stemming from overseas markets has also been telling on the rise in inflation. Having taken on double digits for the most part of 2017 and closed the year in the order of 11.92%, the CPI is projected to inch down to 9% only toward the end of 2018, after adopting double-digit figures for most of the year. The CBRT applied a measured increase in interest rates following the increased inflationist pressures in the last period, and upped the late liquidity rate to 12.75%.

The ratio of current deficit to national product increased by nearly 1.5 points.

In 2017, the ratio of current deficit to national product increased by nearly 1.5 points as compared with the previous year and exceeded 5% owing to the rising growth trend. On the financing side, portfolio inflows and reserve utilization got increased share in the current deficit financing in the first half of the year, and long-term borrowings showed an increase, even if it was limited. In the event that there is a moderate deceleration in growth trend in the year ahead, risks in relation to external deficit is anticipated to take on a more controlled course.