Looking back now…

There’s been a visible improvement in January survey of expectations, and while everybody was thinking that the momentum would continue at least for a little while more, something unexpected happened, something that doesn’t exactly match the expectations.

The real sector confidence index had only slightly improved just like the decline in other confidence indexes as well, except for the service sector. This surprising development clearly shows us that this year will be a better year than 2019 but it might take longer than expected to breathe a sigh of relief.

In the meantime, CBRT lowered its key policy rate by 50 basis points to 10.75% on its February Monetary Policy Committee meeting. Speaking to press after cutting rates, CBRT Chair said that inflation indicators maintained a moderate course in the last quarter, and the current outlook mostly matches the year-end expectations.

Emphasizing that this recent cut is rather moderate when compared to previous rate cuts, CBRT forecasted further improvement in the economic activity, assuring that, as Turkey’s Central Bank, it is monitoring very closely the possible impacts of global factors, such as protectionist measures and coronavirus outbreak, on Turkish Economy. This statement goes to shows that, from now on, CBRT will lower rates gradually, and that would be the reasonable thing to do. As there is still no consensus whether or not inflation will hit single digits, it would be more rational of CBRT to make its decision after seeing the inflation rate at the beginning of each month. Although CBRT Chair hasn’t exactly confirmed my expectations in a press conference he held recently in Bursa, I want to preserve as much hope as possible.

This February was also marked by a sharp rise in FX rates, which was partly caused a swift decline in Euro/Dollar pair, partly by Coronavirus- struck markets and ongoing concerns about the future of Turkish Economy.

“No need to panic yet over exchange rates…”

As I have mentioned in my previous reports, Turkey’s economy had a tolerance limit for the Dollar/TRY pair which was 6.35. Under the circumstances, the ceiling limit can be raised to 6.50, which, however, would cause the inflation trend to go off the rails. It looks like we are heading towards a period where both exchange rates and inflation rates will simultaneously rise.

On the other hand, it’s a good thing that capacity utilization rates have not fallen below 75%, which is in fact still considered high because companies are not increasing their capacity utilization rates. Especially in exporting companies, the capacity utilization rates tend to follow a stable trend around 80%.

Although February hasn’t been a real morale boost in terms of economic parameters, it still gives us hope for 2020. Banks’ recent loan growth, in particular, and the visible improvement in loan-to-deposit ratio doesn’t go unnoticed. It’s a good thing indeed that the loan-to-deposit ratio, which was quite high over the past two years, has finally declined to a mild level.

Meanwhile, the fact that the number of foreign currency-denominated deposits is growing everyday causes banks to experience some difficulties in terms of their portfolio composition. Both Banking Regulation and Supervision Agency of Turkey (BDDK) and the Central Bank are doing their best to implement effective measures to prevent the number of Foreign Exchange Deposits from rising against Turkish Lira Deposits but no decline can be achieved despite low interest rates.

We can only hope that things will improve once people will have more confidence in Turkish lira. I think it would be better if CBRT took measures that don’t scare people of Turkish lira but that make people want to invest in it, without of course forgetting the fact that Turkey is still using a dual monetary system.

To achieve this end, the necessary amendments to laws and regulations that govern justice, human rights, education and freedoms must be made and implemented in such a manner so as to restore investor confidence as quickly as possible.

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