In 2016, the Federal Reserve (Fed) increased interest rates by 25 basis points, stating that recovery in the US economy was proceeding at the desired rate. Conversely, emerging markets, particularly China, suffered slowing economies or even recession, again raising concerns over the future of the world economy.

The main expectations for 2016 was that the recovery in the US economy would continue and that the Fed would raise interest rates, European and Japanese central banks would maintain their expansionary monetary policies, oil producing countries would reach an agreement on oil production and that there would be a slowdown in the rate of growth of the Chinese economy.

Expansionarymonetary policies continued.

The Fed continued to apply monetary tightening at the end of the year by taking into account the recovery in the US economy. The ECB declared that it would continue to implement an expansionary monetary policy, citing low oil prices and declaring that the recovery in the economy had not yet reached the desired level. The trend of deceleration observed in the global economy started deepens considerably in China, where the growth rate declined to 6.5%. As in 2015, a slowing global economy set the stage for bigger budget deficits in those countries exporting commodities, especially oil and some countries were tipped into recession. Against this backdrop, oil producers agreed to cut production in order to support oil prices. However, the move did not lead to a meaningful recovery in oil and commodity prices due to the Fed’s tight monetary policy and interest rate hikes and there was a slowdown in capital inflows into emerging market economies.

With close to full employment in the US labor market during 2016 and the relative increase in inflation rates, confidence in the economic policy being implemented in the US increased. In a bid to prevent overheating going forward, the Fed hiked interest rates once again by 25 basis points in 2016, in addition to the interest rate hike in 2015. The US 10-year government Treasury bond yield also rose rapidly in the last quarter of the year, reflecting the Fed’s interest rate hikes in prices. The expectation that Trump, who won the US presidential elections, would implement expansionary fiscal policies in line with his election promises was another factor supporting the rapid rise in Treasury yields in the US. The Fed’s rate hike and the surge in 10-year Treasury bond yields set the stage for a rise in the USD in international markets, with yields rising across the globe. It is expected that the Fed’s monetary policy will depend on Trump’s economic policies and the state of the US economy, although there has been some speculation that the Fed could raise interest rates three times in the coming period.

Oil pricesbalanced at USD 50. (at year-end 2016)

While the recovery in the European Union (EU) remained moderate in 2016, the Brexit vote with the UK voting to leave the EU in a referendum presented new risks to the future of the EU. In this vein, the ECB continued to implement an expansionary monetary policy to support EU countries by taking into account market dynamics. However, the uncertainties observed in the global economy, rising interest rates and the failure to achieve the desired pace of recovery in the EU prevented the ECB from reaching its inflation targets. In addition, high rates of unemployment in many European countries and heavy debt stock are also a source of concern for the Eurozone economies. In addition to the negative impact of the Brexit vote on the EU’s economy, its political fallout may also be significant with the possibility of contagion with countries in the Union potentially demanding separation. The bond-purchasing program implemented by the ECB is expected to be completed by March 2017. The program was extended to EUR 60 billion per month from April to December, with a declaration that the duration and the volume of the purchases could be extended further, if necessary. In this context, it is thought that the ECB will continue to implement the expansionary monetary policy for a longer period of time amid continuing problems in the EU economy and sub-target inflation levels.

In 2016, the Federal Reserve (Fed) increased interest rates by 25 basis points, stating that recovery in the US economy was proceeding at the desired rate.

USDUSD gained value.

Leading the events affecting developing countries in 2016, there was a sharp decline in commodity prices, especially oil prices, mainly due to declining demand in the global economy, although this was later followed by a rapid increase. The slowdown in China’s growth rates was also negatively reflected to the world economy and affected commodity prices. In the first month of the year, oil prices fell to USD 25/bbl, while commodity exporters such as Saudi Arabia, Russia and Brazil suffered from high budget deficits resulting from low oil and commodity prices, which plunged many of these countries into recession, even though oil balanced at over USD 50/bbl later in the year. Despite the steps taken by OPEC members to reduce oil production, oil prices are well below their 5 year average levels. Although the prices of copper and similar raw materials increased in the last quarter in response to Trump’s election promise to boost infrastructure investments, rising interest rates limited this increase. The revision in trade contracts announced by Trump, another of his election promises, is expected to have negatively effect on the economies of some developing country economies, particularly China and Mexico.

The Turkish Economy

In contrast with commodity exporting countries, Turkey was positively affected by the fall in commodity prices, especially oil prices, thanks to having an economic structure of importing commodities but exporting finished and semi-finished goods. Turkey demonstrated an economic performance, which exceeded expectations in 2016, despite the geopolitical risks in its region, higher than expected inflation and the extraordinary political developments that took place at the middle of the year. Despite the uncertainty observed in the global economy, Turkey is expected to demonstrate a better growth performance in 2017 thanks to the authorities’ ability to reach quick decisions, the strength of the basic building blocks in the economy and the government’s experience in managing the economy.

In 2016, the steps that would be taken by the Fed in raising interest rates had an important bearing on determining capital movements in emerging markets. After concluding its quantitative easing program, the Fed increased its policy rate by 25 basis points in 2015 in what was the first rate hike in the last ten years. The Fed’s announcement at the beginning of 2016 that it could raise interest rates four times during the year precipitated a rise in financing costs for countries burdened by a high current account deficit, giving rise to a higher risk perception for Turkey. In the event, however, the Fed only raised interest rates once during 2016, by 25 basis points, suggesting that the Fed will not be able to realize its projection of raising interest rates three times during 2017, helping to soften attitudes to Turkish markets as well as other emerging economies.

8.53%inflation rate (at year-end 2016)

Turkey’s current account deficit continued to narrow in 2016 due to the depreciation of the TL against other currencies in the developed world, especially the US dollar and commodity prices trended at low levels during the year. The lion’s share of Turkey’s export revenues are denominated in Euros, given that the EU continues to account for the largest share of Turkey’s export market, while Turkey’s import expenditures are generally based US dollars. In particular, the fall of the Euro against the USD in the last quarter of the year had a negative impact on Turkey’s export performance in money terms. In addition, the problems experienced in Iraq, our main export market, due to low oil prices and geopolitical problems, along with the political tensions with Russia exerted pressure on Turkey’s export and tourism revenues. Nevertheless, Turkey succeeded in increasing its export performance in other markets and was still able to round of the year with an increase in exports when compared with the previous year. On the other hand, low commodity prices took some of the pressure off imports compared to last year. As a result, there was a modest decline in the current account deficit, with the ratio of the current account deficit to GDP falling to below 5%. While net exports did not contribute to growth in 2016, domestic demand driven growth was close to expectations and it is this, which drove the growth of the overall economy.

The rate of inflation came in at 8.53% in 2016, exceeding expectations on the back of the weaker Turkish Lira in the last three months of the year, when the currency depreciated by about 20% against the US dollar-Euro basket and the high trend in prices of some food products throughout the year. While exchange rate impact is expected to continue in the first quarter of the year, inflation is then expected to decrease thanks to the base effect from the second quarter of the year.

The slowdown observed in the global economy in the first half of 2016 was reversed in the last quarter of the year and bond yields rose sharply from historic lows.

50 bpsrise in policy rate

The CBRT announced that it would simplify the monetary policy that it had implemented in the second half of 2015 and carried out a significant reduction in the lending rate in 2016 in view of the global economic conditions and the downward trend in inflation. However, in the last quarter of the year, as global economic conditions changed, the Central Bank raised its policy rate by 50 basis points, implementing a tight monetary policy towards the end of the year with the aim of supporting the Turkish Lira. The steps taken by the CBRT to support the economy are expected to positively boost consumption and investment expenditures.

Despite the high debt ratios seen in the world, particularly in developed countries and the spending on the refugees residing in our country, Turkey was able to keep public debt low during 2016 thanks to its fiscal discipline. The same determination is expected to continue in 2017.

5%the ratio of the current account deficit to GDP

The slowdown observed in the global economy in the first half of 2016 was reversed in the last quarter of the year and bond yields rose sharply from historic lows. The US economy, in particular, began to recover in the second half of the year as the tightening steps taken by the Fed led to higher yields in the world. This precipitated a fall in the currencies of developing countries, including the TL. The sharp decline in commodity prices, particularly oil, in the first quarter of the year was partially offset by the actual intervention of oil and commodity exporter countries in the rest of the year. Nevertheless, current price levels make it impossible for these countries to attain balanced budgets. Although Turkey has a different economic structure than these countries, it too is adversely affected by this situation because of its inclusion in the developing country category. The Brexit decision aroused doubts over the future of the EU and began to exert pressure on the EU economy, which failed to achieve the expected economic recovery. In this context, the ECB declared that it would continue to implement an expansionary monetary policy in 2017. A potential recovery in the EU economy could have a positive impact on Turkey’s exports. On the other hand, the steps taken towards structural reforms will contribute to sustainable growth by shaping Turkey’s macroeconomic structure for the year 2017 and beyond.