The Covid-19 pandemic, which began in 2020 and continues to have an economic impact in 2021, remained on the global agenda throughout 2021. Although concerns began to fade away as the gradual normalization practices began with the impact of vaccination that started in January 2021 and has grown worldwide, emerging variants like Delta and Omicron fueled concerns and led to new lockdown decisions. In 2021, developments in China, the world’s second-largest economy, were closely monitored. The inability of Evergrande, one of China’s major real estate corporations, to pay its debts resulted in significant losses in its stock, as well as a long-term impact on the markets due to concerns over a global crisis. In 2021, when normalization prevailed, global markets followed a fluctuating course in general due to inflation concerns, while national economies pointed to a recovery. With the recovery of the world economy, which concluded 2020 with a 3.1% contraction, it is expected that 2021 will be completed with 5.9% growth.

In 2020, the U.S. economy contracted by 3.5% in the aftermath of the Covid-19 pandemic, its worst performance since 1946. In 2021, the country’s economy grew 5.7% beyond expectations, showing a positive growth performance following the sharp decline in 2020. Thus, the country’s economy recorded its highest annual growth since 1984. In 2022, the US economy is expected to grow by 4%.

Employment data improved with the recovery in 2021. The unemployment rate, which hit a record high of 14.8% in April 2020, stood at 6% at the beginning of 2021 and 4% in the last quarter of 2021. The unemployment rate fell to 3.9% in December. Thus, data dropped below 4% for the first time since the pandemic began.

As a result of the pressure created on prices due to disruptions in the global supply chain, as well as rising energy costs and rising consumer demand, inflation rose in the U.S. in 2021, bringing the inflation rate to over 2%, the target level. At the end of the year, inflation in the U.S. rose to 7%, the highest level in 39 years. The stiffness in the downward movement of inflation is being driven by the increase in real wages due to the labor market deficit. At first, inflation was characterized as temporary by Fed members, however, following the upswing, some statements were made that it may not be temporary. While in its November meeting, the Fed’s statement that “inflation is not permanent” was replaced with “it is not expected to be permanent,” at the December meeting, the Fed’s statement that “inflation is temporary” was removed altogether. In addition, it is considered almost certain that Fed is to start its interest hike in 2022.

Real Growth (y-y, %)

Source: IMF *IMF estimate

Having closed 2020 with a 3.1% contraction, the world economy is expected to complete 2021 with 5.9% growth as a result of the recovery.

U.S. President Joe Biden’s proposal for a USD 1.9 trillion Covid-19 aid package was approved by the House of Representatives in February and by the Senate in March. Under the fiscal stimulus scheme, unemployment benefits were set at USD 300 per week. It was also announced that USD 1,400 in cash will be extended to those who meet the criteria. U.S. President Joe Biden also signed a USD 1.9 trillion package that is planned to be implemented in the face of the outbreak. Biden said the package has to do with rebuilding this country’s spine, giving people, employees, middle-class people, and people who build the country a fighting chance. In addition, he announced that the economic assistance package will create new jobs for 7 million people.

In 2020, the European Continent was heavily affected by the Covid-19 pandemic, while the daily cases and total human losses reached record levels. Despite the recovery in Europe in 2021 with the impact of vaccination, closures came to the fore again, especially in Europe, with the effect of the variants that have emerged recently. The Eurozone economy, which shrank by 6.6% in 2020, contracted by 0.3% compared to the previous quarter and by 1.3% year-on-year in the first quarter of 2021 due to the slow vaccination. As of the second quarter, with the quarantine measures slackened and economic reopenings beginning, the Eurozone economy, which experienced positive growth rates, grew 5.2% in all of 2021. In 2022, the Eurozone expected growth is 4.6%.

The CPI in the Eurozone reached a record high in December due to rising energy costs and disruptions in the supply chain. CPI rose to 5% year-on-year in December and reached the highest level seen in 25 years since when the data began to be recorded. The core CPI also increased by 2.6% year-on-year. At the same time, ECB President Christine Lagarde said inflation would remain above 2%, the target level for some time, and would then achieve the targeted 2%. In Germany, the Eurozone’s largest economy, inflation registered 5.3% year-on-year in December, the highest increase since 1992.

Japan’s economy shrank by 4.5% in 2020 due to the negative impact of the Covid-19 outbreak and registered a slow recovery in 2021. Ongoing emergency measures, the growing number of cases limiting consumption, and global chip supply problems slowed growth in Japan in 2021. As a result, the country’s economy grew by 1.6% in 2021. On the other hand, the economy of Japan expected growth is 3.2% in 2022.

The CPI in the Eurozone reached a record high in December due to rising energy costs and disruptions in the supply chain.

China, the country where the Covid-19 outbreak started, had decided for the first time since the 1990s not to set a target for the gross domestic product (GDP) in 2020. Having grown by 2.3% in all of 2020, the Chinese economy grew by 18.9% in the first quarter of 2021, which is the fastest growth since 1992 when the quarterly records started to be kept, and by 7.9% in the second quarter. China’s economy grew by 0.2% in the third quarter, compared to the previous quarter, by about 4.9% year-on-year, near expectations. China’s economy grew by 4% year-on-year in the last quarter and grew by 8.1% in all of 2021. In line with the decisions taken in 2022, the Chinese economy is expected to slow down somewhat and grow around 5%.

While central banks mostly continued their expansionary monetary policies in 2021, 2021 was a year in which concerns about inflation were felt more acutely.

While the Federal Reserve (Fed) did not make changes to interest rates in 2021, it was decided to reduce asset purchases starting in November. The European Central Bank (ECB), meanwhile, announced in December that it would discontinue its net asset purchases under the Pandemic Emergency Purchase Program by the end of March, as planned.

The annually increasing inflation in the US economy, which started in 2021 with the new stimulus package introduced by US President Biden, caused discussions over asset reduction and interest rate hikes. The Fed thus announced its resolution for asset reduction, as expected during its November meeting. The Fed announced that it will begin reducing asset purchases in November by USD 15 billion a month. In December, it increased the reduction in asset purchases to USD 30 billion a month. In the resolution text, it was stated that inflation has risen due to the pandemic and disruptions in the supply chain. Statements suggesting that inflation was temporary were removed from the text. Fed Chairman Powell made a statement that even though Fed pursues its full employment target if it sees a threat of inflation increase in the upcoming period, it may raise interest rates early if necessary.

In 2021, the European Central Bank (ECB) did not regain interest and asset purchase speed, keeping the policy interest at 0%, the marginal funding interest at 0.25%, and the deposit rate - at 0.50%. The ECB agreed during the last meeting to increase the monthly bond purchase amount from EUR 20 billion to EUR 40 billion under the Asset Purchase Program (APP), following the termination of the Pandemic Emergency Purchase Program in March 2022. According to the statement, the monthly purchases of assets under APP will amount to EUR 30 billion in the third quarter of 2022 and be reduced to EUR 20 billion monthly in October 2022. “Net purchases under PEPP may continue if negative shocks related to the pandemic emerge,” the ECB said in its statement. While ECB President Christine Lagarde stated that inflation will remain high in the short term, signaling that it is not likely that interest rates will be increased in 2022.

During its meeting held in June, the National Bank of Japan (BoJ) decided to extend support programs for the Covid-19 pandemic beyond September 2021. BoJ, which has not made a change in interest rates during the last 49 meetings, has also not changed its basic relaxation instruments at its December meeting and extended its special support for the country’s pandemic-damaged businesses, which is predicted to expire in March. Citing more favorable funding for large enterprises, the BoJ said it will gradually reduce private-sector bond assets to pre-pandemic levels starting in April. The bank is not expected to change the interest rates in the coming period.

The European Central Bank (ECB) has made no changes to interest rates and the pace of asset purchases in 2021.

The Central Bank of China (PBOC), which fixed the benchmark interest rate during 2021, set the base loan interest rate for the one-year loan at 3.80% in November, down from 3.85%. This marked the first reduction since April 2020. The move follows the PBOC’s decision at the beginning of November to reduce the amount banks must hold on reserve, releasing cheap long-term funds of 1.2 trillion yuan (US 188 billion) for banks. The PBOC is expected to implement a cautious monetary policy due to rising income inequality and a bubble in the real estate market in 2022 and it is believed that the PBOC can pursue looser policies when needed to support the economy.

In 2020, the central bank of many developed and emerging countries underwent interest rate cuts and monetary expansion to support the country’s economy due to the coronavirus outbreak. In 2021, the monetary policy implemented by the central banks was closely followed. Many central banks, such as Brazil, Mexico, Hungary, and Russia, have raised interest rates due to the fear of high inflation caused by rising global costs.

Central Banks Policy Interest Rates

Source: Reuters

Many central banks, such as Brazil, Mexico, Hungary, and Russia, have raised interest rates due to the fear of high inflation caused by rising global costs.

TURKISH ECONOMY

Following the positive growth experienced in the second half of 2020, Turkey’s economy started with positive growth in the first quarter of 2021 with the base effect and stocks’ contribution compared to the same quarter of the previous year. The base effect caused by the fast slowdown in the economy resulting from the lockdowns after the pandemic in the second quarter of last year resulted in double-digit growth for the second quarter of 2021 on an annual basis. Due to the base effect and disruptions created by raw materials and supply chains around the world, growth slowed in the third quarter on an annual basis compared to the second quarter, and the Turkish economy grew below market expectations. The Turkish economy grew more than expected, achieving 11% growth in all of 2021 due to rising consumer demand that supported growth in the last quarter of the year, driven by the deterioration in inflation projections both globally and domestically. The Turkish economy expected growth is 5% in 2022.

In 2021, the central government budget performed better than expected. Even though the increase in especially tax revenues in the first half of the year has led to a rise in the budget deficit, in the second half, the increase in tax revenues reduced the budget deficit, with the impact of the removal of restrictions due to the Covid-19 pandemic and the overall recovery in the economy. As a result, the year ended with the budget deficit/GDP ratio at 2.7%, below the 3% projected at the beginning of the year.

Turkey Real Growth Rate (y-y, %)

Kaynak: TÜİK

In 2021, the central government budget performed better than expected.

Inflation followed an upward trend in 2021.

Inflation, which stood at double-digit levels throughout 2020, started with an upward motion in 2021. Consumer inflation, as well as producer inflation, have experienced the highest levels in recent years with the impact of exchange rate developments during the year and of price pressures caused by disruptions in the global supply chain, especially natural disasters like fires in the summer months. After an upward trend in the first four months of the year, the Consumer Price Index (CPI) dropped in May for the first time after seven months on an annual basis. The decline was attributed mainly to the lockdown experienced in the services sector in May. After the period of full lockdown, there was a spreading increase in inflation with the effect of the openings beginning in June and the rise in the exchange rate. After a generally upward trend in the second half of the year, inflation ended the year at 36.08%, the highest level of the 2003-based series. Core inflation (C index), which does not include uncontrollable items such as food and energy and shows the main trend in inflation, closed the year at the highest level of the 2003-based series with 31.88% on an annual basis, the Domestic Producer Price Index (D-PPI) rose by 79.89% on an annual basis to the highest level since December 2001.

Inflation Indicators (y-y, %)

Source: CBRT

After an upward trend in the first four months of the year, the Consumer Price Index (CPI) dropped in May for the first time after seven months on an annual basis.

In 2021, the CBRT reduced the policy interest rate to 14%.

Following an interest rate hike of 100 basis points in March, the Central Bank of Turkey (CBRT) remained on hold until September and ended 2021 with successive interest rate cuts in September, October, November, and December. Thus, the CBRT cut the policy interest rate to 14% with a 500-basis points interest rate cut.

In 2021, the CBRT changed the reserve requirements as well. Initially, Turkish lira reserve requirements were increased by 200 basis points in all maturity segments and liability types in February. The maximum rate of establishment of Turkish lira reserve requirements in foreign currency was decreased from 30% to 20%, and the maximum rate of establishment in standard gold was decreased from 20% to 15%. In July, the maximum rate of the possibility of establishing reserve requirements of the Turkish lira in foreign currency was reduced from 20% to 10% to increase the effectiveness of the money transfer mechanism. By the establishment date of October 1, 2021, this possibility was completely ended. In November, the CBRT has reduced the maximum rate of the possibility of establishing reserve requirements of the Turkish lira in standard gold from 15% to 10%. In July, the rates of reserve requirements for foreign currency deposits/participation funds increased by 200 basis points in all maturity segments. In November and December, two increases of 200 basis points each were made. The CBRT also resolved to exempt the amounts, which are held in foreign currency deposit/participation fund accounts on 25 June 2021 and then converted into Turkish lira deposit/participation funds after this date from the reserve requirements, and apply additional interest to TL reserve requirements to increase the share of the TL in the total deposit/participation funds within the banking system. In November, the CBRT lowered the interest/remuneration rate applied to TL-denominated reserve requirements from 12.5% to 10.5%. As part of the program to convert from foreign currency deposits/participation funds to TL deposits/participation funds; the rate, applied as 18%, has been reduced to 16%. In December, the CBRT cut the interest/remuneration rate applied to TL reserve requirements by 100 basis points to 8.5% through a technical adjustment.

The rate of unemployment, which soared during the first quarter of the year due to the negative impact of the Covid-19 pandemic, gradually fell to 10.9% in November, following the first quarter.

CBRT Interest Rates (%)

Source: CBRT

In 2021, the CBRT changed the reserve requirements.

The increase in tourism revenues was positively reflected in the current balance in 2021.

In 2021, the current account deficit has narrowed sharply with tourism revenues boosted by the opening process following the lockdowns carried out due to the Covid-19 pandemic, the competitive exchange rate, the geopolitical advantages created by the disruptions in the supply chain, and an increase in exports. However, even though the rise in energy costs over the past year was creating pressure on imports, the fact that exports have increased more than imports supported the narrowing of the current account deficit. Thus, in the first 11 months of the year, the current account deficit decreased by 66% compared to the previous year and amounted to USD 10.8 billion.

On the financing side of the current balance, it is observed that in 2021, there was a capital inflow of USD 761 million from portfolio investments, USD 7.7 billion from direct investments, and USD 19.4 billion from other investments. In the said environment, foreign exchange inflow through the net errors and omissions item was realized as USD 10.5 billion. Thus, the current account deficit/GDP ratio, which was expected at 3% levels at the beginning of the year, was realized at 1.8% in 2021. In 2022, if tourism revenues return to their pre-pandemic levels with the narrowing of the foreign trade deficit, a current account surplus may be encountered in the annual aggregate.

The rate of unemployment, which soared during the first quarter of the year due to the negative impact of the Covid-19 pandemic, gradually fell to 10.9% in November, following the first quarter.

BANKING SECTOR

In 2021, the banking sector experienced a slowdown due to the base effect of last year.

Loan extensions have increased in the banking sector to support the real economy, which has been negatively affected by the Covid-19 pandemic that started in 2020. There was also a sharp rise in the securities. The slowdown in loans and securities in 2021 resulted in a significant fall in the annual growth rate of assets as a result of the high base effect and rising interest rates in 2020. Thus, the annual growth rate of assets fell from 36% at the end of 2020 to 17.4% in the third quarter. The annual growth rate of loans decreased to 13.6% in the third quarter from 34.7% at the end of 2020, and the annual growth rate of the securities portfolio dropped to 13.7% in the third quarter from 54.7% at the end of 2020. At the end of the year, due to the rapid increase in exchange rates, the annual increase rates went up sharply with the effect of rising foreign currency items. Thus, assets ended the year with a 50.9% increase, while loans increased by 37.04% and MDP by 44.4%. As a result of the base effect from the previous year and the continued implementation of the BRSA to increase the waiting period for overdue loans to be transferred to non-performing loan accounts from 90 to 180 days, there was a drop in non-performing loans till October. After the implementation was partially removed, the NPL’s annual growth rate turned positive again in October. At the same time, with the impact of the decrease in the NPL during the year, the non-performing loan ratio has gradually declined throughout the year and at the end of the year, it was realized at 3.16%, the lowest level since August 2018.

Loans (Adjusted exchange rate, y-y, %)

Source: BRSA

The annual growth rate of loans decreased from 34.7% at the end of 2020 to 13.6% in the third quarter.

In 2019, deposits maintained their weight in total liabilities.

The base effect of 2020 was decisive in liabilities as well. Deposits became the main funding item of the industry in 2021. The annual growth rate of deposits decreased from 34.6% at the end of 2020 to 19.2% in the third quarter but increased again due to the increase in the exchange rate at the end of the year to 53.5%. The annual rate of increase in non-deposit resources decreased from 43.3% at the end of 2020 to 14.8% in the third quarter. At the end of the year, the increase in exchange rates was also reflected in an increase in the non-deposit resources, and the annual growth rate of non-deposit resources rose to 55.9%.

Capital adequacy experienced a decline in 2021.

Even though the sector began 2021 with a decline in profits, the profit growth improved during the year, and by the end of the year, the sector’s profit had climbed by 54.7% on an annual basis. The capital adequacy ratio, which was 18.7% at the end of 2020, decreased throughout the year, falling to 18.3% at the end of 2021.

Capital Adequacy Ratio (CAR)

Source: BRSA

Even though the sector began 2021 with a decline in profits, the profit growth improved during the year, and by the end of the year, the sector’s profit had climbed by 54.7% on an annual basis.