GLOBAL ECONOMY

After the rapid recovery in the global markets following the pandemic, as a result of the ultra loose monetary and fiscal policies implemented worldwide due to the pandemic, disruptions in the supply chain, the sharp rise in energy prices due to Russia-Ukraine war, inflation have reached the highest levels in the last four decades worldwide. Compared with previous periods, in an attempt to fight inflation, central banks, the Fed, first and foremost, initiated rapid interest rate hikes. Signs indicating that the peak level of inflation has been reached towards the end of 2022, there is now an idea forming about where the central banks’ interest rate hike process will end. However, despite sharp interest rate hikes, inflation is not anticipated to drop back to the levels targeted in previous years since it reached its highest levels in 40 years. The global economy, which completed the year 2021 with a growth rate of 6%, is expected to finish the year 2022 with a growth rate of around 3% due to the impact of monetary tightening.

In 2021, the US economy grew 5.7 percent beyond expectations, showing a positive growth performance following the sharp decline in 2020. This was how the country attained the highest growth seen since 1984. In 2022, however, the US economy grew by 2.1%, according to preliminary data. Together with recovery, there was some improvement in the unemployment figures, which stood at 4% in early 2022, followed by 3.5% in July, which corresponded with pre-pandemic levels, and 3.7% in the last quarter.

The upward inflationary trend in the US that started in 2021 continued in 2022 and exceeded the targeted level of 2%, driven by the pressure that supply chain disruptions exerted on prices and the steep rise in energy prices due to the Russian–Ukrainian war. Standing at 7.1% in early 2022, it reached 9.1% in June, the highest level recorded since 1981. The fact that inflation stood at 6.5% below expectations in December and dropped on an annual basis signaled the worst could be over in terms of inflation. The annual increase in inflation is expected to slow down in 2023, and inflation in the US is anticipated to drop back to 3.1% by the end of 2023.

Real Growth (y-y, %)

Source: IMF *IMF estimate

The economy of the Eurozone began 2022 with the risks caused by the Russia-Ukraine war. With its regional proximity and the energy reliance on Russia of some countries in the region, including Germany, Italy, and Hungary, expectations have risen that the Eurozone will enter into a recession. However, a relatively warm winter and an up to 80% reduction in natural gas prices mitigated the concerns for a recession in the region. According to the preliminary data for 2022, the Eurozone grew by 3.5%, and the Eurozone economy is expected to grow by 0.5% in 2023.

The Russian–Ukrainian war turned the scale as countries were just recovering from the pandemic in 2022.

The economic impact of the ongoing Russian–Ukrainian war that broke out on February 24 was felt across global markets throughout 2022. The effects of the war, which increased risk perception, and the pressure created on commodity prices such as grain and oil due to the fact that two countries that are important grain exporters are at war were among the main effects seen in the markets. The US, European countries, and Japan declared several sanctions in the face of Russia’s assault against Ukraine. The US ceased to buy oil from Russia. There were rapid hikes in gold and USD—both considered safe havens—due to the risk perception resulting from the war and the sanctions introduced afterward. There were increasing risks, especially for the energy market, as a result of these sanctions, which also had a negative impact on the economy of Europe, as it relies on energy imports from Russia.

3.5%

In 2022, the Eurozone economy grew by 3.5%, according to preliminary data.

While the impacts of Russia’s assault against Ukraine increased prices in global markets; commodity prices, primarily gold, were seen as being on the rise once safe haven purchases grew in number. Meanwhile, concerns regarding global growth in the last quarter of 2022 resulted in a drop in commodity prices, with oil prices dropping first.

Interes rate hikes were aggressive across the globe in 2022

Having declared its decision to diminish asset purchases in November 2021, the Fed made its first interest rate hike in March 2022, although the rise in inflation was thought to be temporary in the first months of the year 2022. Consequently, the Fed increased interest rates in the March meeting for the first time since November 2018. After adopting a more hawkish attitude in its March meeting compared with the past and increasing rates by 25 basis points, the Fed signaled a total of six interest rate hikes for the rest of the year. From March to December, the Fed increased interest rates by 425 basis points, slowing down the hikes in December. The Fed is projected to end interest rate hikes in the first half of 2023.

In its statements, the Fed expressed projections that hikes within the target range for the federal funds ratio would be appropriate for monetary policies to maintain a tightening attitude that would help reduce inflation down to 2% over time. According to its statements, the cumulative tightening of monetary policies, the delayed impact of monetary policies on economic activity and inflation, and economic and financial developments would be taken into account while determining the speed at which hikes would be introduced.

The ECB also made a transition to monetary tightening, having initiated interest rate hikes driven by concerns over rising inflation in 2022. Initially introducing a hike by 50 basis points in July, the ECB concluded its negative interest rate policy, which had continued for the past eight years. The ECB increased interest rates by 75 basis points in September and October, followed by a 50 basis point hike in December, which totaled 250 basis points for 2022. The interest rate on the main refinancing operations stood at 2.50%; the rate on the marginal lending facility stood at 2.75%; the rate on the deposit facility stood at 2%. The plan was for the ECB to maintain interest rate hikes for some time and continue monetary tightening during March 2023.

Unlike the central banks of other developed economies, the Bank of Japan (BoJ) did not use monetary tightening policies, instead continuing to keep the 10-year yield target at 0 and indicator interest rate below zero throughout 2022. As a result, the Japanese Yen was experienced one of the fastest value losses in its history. Despite Japan’s inflation rate being low compared with other countries, it reached 4% with its highest level in the past few years. BoJ stated such a rise in inflation was linked not to internal reasons but to external reasons. At the end of the year, BoJ increased its target band for 10-year yields of Japanese government bonds from 25 basis points to 50 basis points to introduce more flexibility into its monetary policy. In the BoJ’s statement, attention was drawn to rising inflation expectations while the economy maintained its growth. Despite widening the target band for the yield curve, BoJ maintained its 10-year yield target for bonds at 0%. The yield target for short-term bonds was maintained at -0.10%. Meanwhile, the surprising change BoJ made to the yield target band for 10-year Japanese government bonds was considered the first signal that BoJ’s monetary policy may change in the coming period.

Unlike many other countries that had started to end COVID-19 measures, China, being the center of the pandemic, insisted on a zero-COVID case policy. The Chinese economy entered a period of slow growth compared with previous years. This was due to several factors, including trade tensions with the US, the zero-COVID case policy in place, the supply chain bottlenecks arising from numerous firms’ extreme reliance on China as such firms moved their production plants and factories to other locations, and troubles in housing markets. However, quarantines were once again introduced as a result of the record number of cases in the Chinese finance capital Shanghai, followed by a zero-COVID case policy being adopted, considering China as foremost oil importer, caused charp declines in commodity prices and oil in particular. In the face of rising protests and growth concerns in December, though, China ended its zero-COVID case policy. Although this could add to the number of COVID cases in China in the short term, it signaled a transition to a growth-oriented policy in the mid-and long-term.

Fears of high inflation levels arising from rising costs across the globe in 2021 resulted in interest rate hikes by many central banks, including Brazil, Mexico, Hungary, and Russia. Central banks pursued tight monetary policies in 2022 as well. With the Fed and the ECB moving first, central banks of developed and developing economies opted for sharp interest rate hikes to curb inflation. The Swiss National Bank increased its policy rate from -0.25% to 0.50% at its September meeting. This was the end of a negative interest rate period that had lasted for eight years in the country. As the negative interest rate period has ended in Switzerland, Japan is the only developed economy maintaining its negative rate policy. It will be a matter of close follow-up as to whether Japan will continue with negative interest rates in 2023 in the aftermath of the latest change it introduced.

Central Banks Policy Interest Rates

Source: Reuters

250 bps

The ECB increased interest rates by 250 basis points.

TURKISH ECONOMY

Türkiye’s economy grew by 5.6% in 2022.

Türkiye’s economy grew by 5.6% in 2022. While services and industry, the tourism and refreshments sectors in particular, were the main contributors to growth, agriculture and tax did not contribute to growth in 2022. Construction, meanwhile, had a negative contribution to growth in 2022. Household consumption, a component of spending, was the greatest contributor to growth in 2022. Despite its higher performance thanks to revived domestic demand in the first half of the year, the contribution of household consumption weakened in the second half, resulting in a slowdown in growth. Rising investment spending, and similarly, the contribution of investment spending to growth in 2022, declined considerably compared with the previous year. The increase in the government’s final consumption spending was limited compared with the previous year. With the impact of the rising value of foreign exchange, net exports’ contribution to growth dropped significantly; however, it maintained its positive performance. In parallel with all these developments, Türkiye’s economy grew by 7.6% in Q1, 7.8% in Q2, 4% in Q3, and 3.5% in Q4.

Türkiye's Real Growth Rate (y-y, %)

Source: TÜİK

Although inflation rose throughout the year, it concluded 2022 with a decline.

Both consumer and producer inflation started the year 2022 in double digits and, after reaching high levels during the year, concluded it with a reduction with the contributions of the base effect. Mounting global inflationary pressure, increasing commodity prices, developments in exchange rates, and price pressure caused by global supply disruptions were among the factors that pushed the Consumer Price Index to 85.5% and the Domestic Producer Price Index to 157.7% in October. It was thanks to the stable performance of exchange rates, the base effect, as well as the decline in commodity prices—first and foremost, oil—that inflation rates dropped at the end of the year. Consumer inflation stood at 64.3%, and producer inflation at 97.7% as of the end of 2022.

Inflation Indicators (y-y, %)

Source: CBRT

64.3%

As of year-end 2022, consumer inflation stood at 64.3% and producer inflation at 97.7%.

The current balance rapidly increased in 2022 due to rising commodity prices.

Backed by a positive export performance during 2021, the current deficit widened in the beginining of 2022. This was closely linked to rising energy prices, coupled with increasing energy imports in terms of quantity and price due to harsher winter conditions compared with the previous year. In the first quarter of 2022, the current account deficit corresponded to USD 18.1 billion year-on-year. Despite a considerable increase in service revenues after the pandemic subsided, a defining factor for this high figure was the foreign trade deficit, coupled with the tensions between Russia and Ukraine, resulting in a 201% hike in commodity prices, primarily oil. In the cumulative total for the 12 months of 2021, the current deficit was USD 7.2 billion as opposed to USD 48.8 billion USD in 2022. The current account deficit is expected to drop to USD 22 billion in 2023.

Current Balance/GDP (%)

Source: CBRT

The budget balance experienced some recovery in late 2022.

Deteriorating in early 2022, it recovered toward the end of the year. With deficits due to the rising tax revenues resulting from inflation in January, followed by the profits transferred from the Central Bank of the Republic of Türkiye (CBRT) to the Treasury in February, the budget balance continued this trend in March and April. In addition to the sharp rise in corporate tax in May, combined with mounting inflation and foreign exchange rates increasing value-added tax charged on imports, the budget balance attained record surplus figures and recovered in the second quarter of the year. An increase in the current transfers in Q3 had a negative impact on the budget balance. In October, the still deficit-making budget recovered thanks to the stable performance of exchange rates. Followed by a surplus in November, the budget balance recorded a deficit in the last month of the year. A deficit of TL 139.1 billion in 2022, compared with a deficit of 201.5 billion in 2021 in the same period, showed that the budget had a stronger outlook than in the previous year and was stronger than what was targeted in the Mid-Term Program. When considered alongside the anticipation that Türkiye’s economy would conclude 2022 with some 5% growth, there are signs that the ratio of the budget deficit/GDP would stand much below the 3.4% declared in the Mid-Term Program.

Budget Deficit/GDP (%)

Source: CBRT

CBRT Interest Rates (%)

Source: CBRT

The CBRT lowered the policy rate by 500 basis points.

In 2022, the CBRT conducted a comprehensive policy framework review, named the Liraization Strategy, that prioritized the Turkish Lira in all policy instruments.

Maintaining its policy rate at a fixed 14% in the first seven months of the year, the CBRT then surprisingly lowered interest rates by 100 basis points. In September, October, and November, the CBRT also opted for interest rate reductions and cut the policy rate by 500 basis points to 9% in total in 2022.

1.41%

The budget deficit/GDP ratio was 1.41% in 2022.

BANKING SECTOR

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

Source: BRSA

Regulations in the banking sector marked 2022.

There was an upward trend, especially during the first eight months of the year, in the annual growth rate of loans, securities, and, therefore, assets in 2022. Driven by rising exchange rates, low-interest rates, and high demand for borrowing in an environment of high inflation, the annual growth rate of loans rose to 70.4% in August 2022, compared with 37% at the end of 2021. Additionally, the CBRT segregated loans and took several tightening measures in coordination with the Banking Regulation and Supervision Agency as part of the Liraization Strategy—the impacts of this move started to be felt as of October. These measures led to the annual growth rate of loans falling to 55% in December. However, the base effect from the previous year was also seen as playing a role in this fall. There was an upward trend in the annual growth rate of the securities portfolio owing to the base effect, a rise in foreign exchange rates, an increase in the value of CPI linked bonds, and the impact of the CBRT’s decision to keep bonds as required reserves. With the base effect reversing, though, the annual growth rate of the securities portfolio, which had risen to 80.5%, started to fall and reached 60.5% in December. In parallel, the annual growth rate of assets reached 86.3% in August, only to fall in December to 55.7%. Despite the increase in the annual growth rate of non-performing loans (NPLs) in 2022, the ratio of loans signed off as NPLs stood at a record low of 2.1% thanks to the higher annual growth rate of loans.

The growth rate of TL-denominated deposits also rose thanks to the FX indexed deposit accounts and the terms of the deposits extended.

Like the growing foreign currency deposits driven by rising exchange rates, the TL-denominated deposits continued growing thanks to the FX indexed deposit introduced in Q2 and the impact of CBRT’s decisions to increase TL deposits. This resulted in a 98% increase in the annual growth rate of deposits. However, this rate slowed down due to the base effect in Q4, retreating to as low as 67% by the end of the year. Non-deposit funds, which attained an annual growth rate of 76% during the year, rose by 27.4% in December.

Following interest rate cuts by the CBRT in 2022, the divide between banks’ local funding costs and the interest rates of loans on the side of assets broadened, while CPI linked bonds and valuations of securities increased. These developments all contributed to higher profits in the sector. The sector’s profit grew by 366.4% in 2022 on an annual basis. The capital adequacy ratio, in the meantime, stood at 19.50% in 2022, up from the 18.4% recorded at the end of 2021.

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

Source: BRSA