THE ECONOMIC ENVIRONMENT AND OUTLOOK FOR THE SECTOR IN 2019

Growth forecasts were revised downward for the world in 2019, but were revised upward for Turkey.

While the IMF had set a forecast of 3.3% global growth for 2019 in its April 2019 report, this figure was revised to 2.9% in later reports. The same institution has also lowered its growth forecasts for some countries, such as the USA, China, Germany and France, for 2020.

Following the IMF’s revision of its growth forecast for Turkey for 2019, from predicting a 2.5% contraction to forecasting 0.2% growth, and its revision for 2020 from predicting 2.5% growth to predicting 3% growth, the OECD and World Bank also revised their growth forecasts upward. The OECD and World Bank's 2020 growth forecasts for Turkey are stand at 3%.

2019 has been a quiet year in the financial markets.

In foreign borrowings made after the exchange rate shock in August 2018, Turkish issuances received significant demand from international markets and risk premiums declined as global risk appetite recovered.

Turkey's risk premium, which had stood at 360 basis points at the end of 2018, decreased to 280 basis points at the end of 2019 in line with these developments. The yield on Turkey's 5-year Eurobond also fell by about 150 basis points. Although the dollar/TL exchange rate increased from 5.28 at the beginning of the year to around 5.95 at the end, the depreciation of the Turkish Lira remained below the rate of inflation; in other words, the real effective exchange rate strengthened.

Interest rates, on the other hand, were slashed significantly. Compared to December 2018, there was a fall of 1,200 basis points in the CBRT benchmark interest rate, 1,240 basis points in the banking sector average TL deposit interest rate, 1,450 basis points in the commercial loan interest rate, and 1,700 basis points in the consumer loan interest rate.

Treasury domestic borrowing interest rates also declined. TL denominated Treasury bond yields with 2-year and 10-year terms fell by more than 795 and 420 points, respectively.  

In parallel with the trendfalling inflation trend, the CBRT has reduced its benchmark interest rates.

The Central Bank of the Republic of Turkey (CBRT), which implemented a strict monetary policy in 2018, started to cut interest rates after June 2019. The CBRT cut the benchmark interest rate by 425 basis points at its meeting on 25 July, and reduced the rate by 325 basis points in its September meeting, 250 basis points in its October meeting and 200 basis points in December meetings. It is anticipated that the Central Bank, whose benchmark interest rate was 12% at the end of the year, will continue to cut interest rates in 2020. 

The current account yielded a surplus in 2019 for the first time since 2001.

While slowing growth in the first half of 2019 limited import volumes, the growing volume of exports, supported by a competitive exchange rate, the strong course of export markets and policies aimed at supporting exporters, contributed significantly to achieving a current account surplus.

According to November’s balance of payments figures, there was an annual improvement of USD 36,1 billion in the current account balance, with USD 24,9 billion of this figure derived from lower import volumes, USD 5,8 billion from increased export volumes and USD 4,3 billion from the increase in net tourism revenues. 

As far as net financing is concerned, while there was a net outflow of USD 2,1 billion from annual portfolio investments, banks and companies made a total of USD 16,3 billion in bond and loan repayments to non-residents. Net foreign direct investment income of USD 5,9 billion was generated, while foreign exchange reserves increased by USD 7,7 billion.

Economic growth in Turkey, which accelerated in the last quarter of 2019, is expected to continue in 2020.

With the improvement in financial conditions and the recovery in credit growth, economic growth of over 3% is possible in 2020. While household consumption is expected to provide a strong contribution to growth, the slow recovery in EU economies and the course of the TL real exchange rate may reduce the contribution of net exports. Achieving a high and sustainable growth performance in the coming period is contingent on increasing investment expenditures, providing necessary incentives and direct commercial credit volume to promote efficient investments.