WHILE THE FEDERAL RESERVE (FED) DECIDED TO CUT INTEREST RATES THREE TIMES AFTER A 11-YEAR BREAK IN 2019, IT IS COMMONLY EXPECTED TO WITNESS “WAIT AND SEE” POLICY IN 2020, THE PRESIDENTIAL ELECTION YEAR.

2019 was a year in which the outcome of the trade tension between the USA and China were closely monitored. Brexit uncertainty, Hong Kong protests and increasing geopolitical tensions also seem to have led to the slowdown especially in the manufacturing sector. In the light of these developments, the negative effects of the global slowdown have been balanced by the looser monetary policy actions of the central banks of developed countries and the increasing possibility of signing the trade agreement.

In the last quarter of the year, the US economy has shown a positive outlook with the sound employment market and the decreasing of trade tensions. Achieving the Phase 1 agreement between the US and China indicates that the US economy will continue its longest-term growth cycle by alleviating recession concerns about 2020. While the Federal Reserve (Fed) decided to cut interest rates three times after an 11-year break in 2019, it is commonly expected to witness “wait and see” policy in 2020, the presidential election year. In the last quarter, Fed continued its repo operations in order to expand its balance sheet and to normalize the negative factors in the money market. As a result of the customs tariffs, the foreign trade balance of the US with China has improved last year, however, as a result of the global weakness, the foreign trade deficit against other countries has increased due to the decrease in demand for American goods. Phase 2 talks involving challenging topics may determine the story of 2020 and technological superiority struggle between US and China is not expected to be resolved before the elections in November.

2019 was a period in which the weakness in the manufacturing sector became evident due to the global trade tension in the Euro Area and the inflation remained far from the target. With the support of the European Central Bank (ECB) and the Phase 1 trade agreement the Euro zone have outperformed the worst and the economies have been balanced in the beginning of 2020. ECB seems to have started to state more that monetary expansion should be supported by fiscal expansion. The ECB, former IMF President Christine Lagarde, who is supposed to continue pigeon attitude was appointed instead of Mario Draghi. Anti-pension reform demonstrations in France and elections in Spain increased uncertainty in the Euro Area. In addition, Sweden, one of the countries that implemented negative interest rate at the earliest, raised the interest rate to 0% and became the first country to end the negative interest period.

The Brexit problem has been partially resolved. As of January 31, the Brexit process has been concluded as a result of the agreement between the EU and the UK and the election victory of Boris Johnson. In the next period, the Scottish issue, the Irish border, and whether Britain can make a trade agreement with the EU until the end of the year will be the main agenda items.

The US-China trade war, which started in mid-2018, increased its pressure on the global economy in the past year. In order to prevent the deceleration in its growth, China has maintained regulations so as to reduce borrowing costs. The tariff tension between the EU and the US, the increasing trade tension between Japan and South Korea, and the US tariff to aluminum and steel products put in practice for Brazil and Argentina showed that trade wars continued on other dimensions as well. While protests continue in Hong Kong, this has been a tension increasing factor on trade negotiations between the US and China. OPEC’s production cutback decision and geopolitical tensions increased upside risks in oil prices. However, the US policy tracked in oil production and the slowing trend in the global economy enabled oil prices to stabilize below 70 USD/barrel. 2019 has been a year in which rebalancing of the economic activity has been completed faster than forecasts and the financial markets have been positive. While Turkey’s 5 year CDS improved by 80 basis points in 2019, the BIST 100 Index has been ranked among the highest-ranked exchange among global exchanges with 25% gain. While leaving behind a year of a positive GDP growth and a current surplus, there has also been significant improvement trend observed in inflation. In the growth model of 2019, the focus has been changed from net exports to private consumption, while public spending continued to support growth. In 2020 a growth in the range of 4.5-5% seems possible with the support of base effect, increased loan growth, although limited exports and deferred domestic demand.

International financial institutions have revised upwards their GDP growth forecasts for 2020 with the faster than anticipated recovery in the Turkish economy. In the light of positive developments, Fitch Ratings revised the credit rating outlook. However, the rating agencies who downgrade quickly are expected to react slowly in the rating upgrading process however it is possible to anticipate rating upgrades under the conditions followed by the continuation of the disinflation trend, sustainable and moderate current account deficit in the growth GDP cycle, the continuation of the fiscal discipline and the improving risk premium indicator.

Turkey has left behind a busy agenda from geopolitical issues in 2019 as well. Increasing tension in the Eastern Mediterranean, Peace Spring Operation and US sanctions threats were closely monitored and caused fluctuations in the markets from time to time.

More stable Turkish Lira, domestic demand conditions, base effect, improvement in expectations and supply-side factors enabled inflation to recover 8.5 points in 2019 compared to the previous year. With the support of the disinflation process and global conditions, the Central Bank (CBRT) has made 1,200 bps rate cut in 2019. In the first monetary policy meeting of 2020, CBRT continued its support to the economy with a moderate interest rate cut as the inflation outlook and expectations continued to improve.
The Central Bank, which will focus on the steady decrease in inflation in 2020, is expected to continue moderate interest rate cuts rather than sharp interest rate cuts and reserve requirement regulations will continue to play an active role in monetary policy this year.

Exports continued to increase with the support of competitive exchange rate in 2019. While our exports of high-tech products increased due to items such as the sale of unmanned aerial vehicles, the current account balance resulted a cumulative surplus after 17 years with the contribution of the strong tourism revenues as well as limited import growth. The current balance, which resulted a USD 27 billion deficit in 2018, is expected to result a surplus of USD 1.5 billion in 2019. Although it is expected that the upward trend in exports will continue in 2020, it is considered that the contribution of net exports to GDP growth may decrease due to the effect of the increase in imports due to the deferred demand. While 2019 was a bright period in terms of tourism revenues, the number of foreign tourists visiting Antalya hit a record within the year. The diversification of the tourism sector as in the case of exports has come to the fore in 2019, and it is considered that this will help alleviate the shocks specific to the country. A current account deficit of about USD 10 billion seems likely this year, with changes in the production structure of firms, moderate level of energy and gold imports and strong tourism revenues.

Along with the improved current balance outlook, our foreign exchange requirement has also decreased. The country’s annual foreign exchange requirement, which reached a record amount of USD 240 billion in 2018, is expected to be limited and realized around USD 175 billion in 2020.