The World and Türkiye in 2024

GLOBAL MARKETS EXPERIENCED UNCERTAINTY THROUGHOUT 2024.

In 2024, the effects of ongoing wars factored into global markets as did the election cycle in the United States and Trump’s rhetoric.

Despite uncertainties around the election, the US economy thrived, driven by robust consumer spending, resulting in a preliminary growth rate of 2.8%. Additionally, declining energy prices and a modest downward trend in inflation positively influenced economic activity in the US. In contrast, leading indicators from Europe signaled continued weakness in economic activity, with the Eurozone economy growing by only 0.7% in 2024. Trump, who won the election to become the 47th President of the United States, continued to shape market perceptions through his rhetoric on withdrawing from international agreements and implementing new tariffs once in office. As a result, these anticipated tariffs, likely to disrupt trade with Europe, suggest that 2025 may pose significant challenges for the European economy. Meanwhile, in Asia, particularly in China, demand conditions remained subdued, prompting public authorities to announce various stimulus packages throughout the year. Consequently, the Chinese economy achieved its growth target of 5% in 2024. Although Japan’s economy grew above forecasts in the second quarter, it showed relatively slower growth in the third quarter. In 2024, factors such as the election process in the US, geopolitical uncertainties in the Middle East, and weak demand conditions in China—key concerns for global markets—contributed to a limited downward trend in oil prices.

GLOBAL REAL GROWTH ESTIMATIONS FOR 2024

Global markets in 2024 were characterized by the US election cycle, geopolitical uncertainties in the Middle East, and sluggish demand in China.

Interest rates declined in advanced economies, with the exception of Japan.

The new post-pandemic environment, coupled with the Russia-Ukraine war, exerted upward pressure on commodity prices. Consequently, central banks in developed countries, especially the US Federal Reserve (Fed), opted to adopt a tight monetary policy to curb inflation and align it more closely with target levels. These measures specifically helped inflation converge to the 2% target. Thus, for central banks in advanced economies, 2024 became a year of transition from tight to loose monetary policy, driven by concerns regarding stagnant growth.

In 2024, the European Central Bank (ECB) became the first central bank in a developed country to initiate interest rate cuts. The ECB reduced interest rates by 25 basis points to 4.25% in June and ended the year at 3.15%. Similarly, the Bank of Canada cut its interest rates by 25 basis points to 4.75% in June, lowering rates to 3.25% by year-end. The Bank of England (BoE) followed suit, cutting rates in August. The BoE’s first cut of the year was by 25 basis points, bringing interest rates down to 5%. After another cut, the policy rate concluded the year at 4.75%. In August 2024, as confidence grew that inflation was moving toward the 2% target, Fed Chair Jerome Powell indicated that “the time has come” for a policy adjustment and signaled a reduction. Consequently, the upper band of the policy rate was reduced by 50 basis points to 5% in September. At its final meeting of the year, the Fed cut the upper band of the policy rate by another 25 basis points to 4.5%.

In contrast to the rate cut decisions of central banks of other developed countries in 2024, the Bank of Japan (BoJ) raised interest rates in March for the first time since 2007. Subsequently, the long-standing interest rate of -0.1% increased to 0.1% in March. However, a decision was made to reduce government bond purchases.

In 2024, as many central banks of developed countries reduced interest rates, central banks of emerging economies largely followed suit, although some diverged from this trend. The Central Banks of Mexico and Chile both lowered their interest rates during the year; conversely, the Central Bank of Brazil opted to raise rates in November and December, halting the cuts it had initiated earlier in the year. Meanwhile, the Central Bank of Poland and the Reserve Bank of India maintained their interest rates at 5.75% and 6.5%, respectively, throughout 2024.

In 2024, the European Central Bank (ECB) became the first central bank in a developed country to initiate interest rate cuts. The ECB reduced interest rates by 25 basis points to 4.25% in June and ended the year at 3.15%.

Falling inflation, which began in May 2024, is expected to continue in 2025, while the easing of the CBRT’s monetary policy is anticipated to stimulate a recovery in growth.

TURKISH ECONOMY

The growth rate of the Turkish economy slowed after the first quarter of 2024.

In 2023, the economy ended the year with a 5.1% growth rate, driven by strong domestic demand. This momentum continued into the first quarter of 2024, with a year-on-year growth of 5.4%, largely fueled by household consumption. However, growth began to decelerate in the second quarter. Measures taken by the Central Bank of the Republic of Türkiye (CBRT) to tighten monetary policy since March, along with a reduction in domestic demand, contributed to this slowdown, resulting in a year-on-year growth of just 2.4% in the second quarter. The CBRT’s restrictive monetary policy aimed at combating inflation limited credit availability and reduced consumer spending, leading to a further decline in growth to 2.2% in the third quarter. While demand stabilization was evident during the first three quarters of 2024, this trend weakened in the final quarter. Domestic demand remained a positive contributor to growth, but external demand negatively affected it. Consequently, the Turkish economy grew by 3% year-on-year in the last quarter. Overall, the economy recorded a growth rate of 3.2% for the entirety of 2024 in compliance with the disinflation process, as the CBRT upheld its tight monetary policy to combat inflation. Falling inflation, which began in May 2024, is expected to continue in 2025, while the easing of the CBRT’s monetary policy is anticipated to stimulate a recovery in growth.

Inflation concluded 2024 at 44.4%.

After finishing 2023 at 64.77%, inflation experienced upward pressures during the first half of 2024. In January 2024, the monthly inflation rate surged due to rising prices for fresh fruits and vegetables caused by seasonal factors, as well as automatic hikes in the Special Consumption Tax (SCT) on fuel and alcoholic beverages. Additionally, toll increases on bridges and highways contributed to this rise. The impact of the minimum wage increase further fueled inflation, while the lagged effect of services inflation exerted additional upward pressure on overall inflation. Consequently, the Consumer Price Index (CPI) rose gradually until peaking at 74.45% in May 2024, before declining to end the year at 44.4%. Conversely, the Domestic Producer Price Index (D-PPI) peaked at 57.68% in May 2024, having ended December 2023 at 44.22%. Following its peak, the D-PPI also declined, finishing 2024 at 28.5%. In 2025, the ongoing slowdown in demand, stemming from the delayed effects of monetary tightening that began in the second half of 2023, is expected to continue supporting the fall in inflation.

The CBRT raised the policy rate by 7.5 points from the beginning of 2024 to December 2024, after keeping it at 50% since March 2024.

In 2024, the CBRT raised the policy interest rate by 5 percentage points.

In 2024, the CBRT continued the monetary tightening it began in June 2023 to combat inflation and ensure financial stability, alongside implementing various policy decisions. The CBRT raised the policy rate by 7.5 points from the beginning of 2024 to December 2024, after keeping it at 50% since March 2024. In December, the CBRT unexpectedly lowered the policy rate to 47.5%. In addition to these rate changes, the CBRT simplified its macroprudential framework by terminating the additional reserve requirement based on the leverage ratio in June. Furthermore, starting July 22, the minimum interest rate for Currency Protected Deposit (FXPD) accounts, whether opened or renewed, was reduced from 80% to 70% of the policy rate, and the additional returns offered by banks were eliminated. In August, the CBRT initiated additional Turkish Lira deposit buying auctions to manage excess liquidity. In December, the Bank implemented further policy measures to expedite the reduction of Foreign Currency Protected Deposit (FXPD) accounts, lowering the overall target for converting and rolling over FXPD to Turkish Lira from 70% to 60%. Additionally, the minimum interest rate for FXPD accounts was decreased from 70% to 50% of the policy rate, and the practice of paying interest or compensatory payments on required reserves for newly opened and renewed FXPD accounts was abolished.

In 2024, the decline in energy and gold imports effectively narrowed the current account deficit.

After finishing 2023 with a deficit of USD 40.4 billion, the annual current account deficit significantly decreased in 2024. A monthly surplus from June to October contributed to this reduction, bringing the deficit down to USD 5.6 billion for January-November 2024. The primary factor behind this contraction was the decrease in gold imports. Continued restrictions on gold imports from the previous year played a crucial role in reducing the current account deficit. Additionally, while the contraction in energy imports was not as pronounced as in the previous year, it also contributed to the decline in the deficit through the foreign trade channel. Furthermore, inflation and exchange rates became more stable due to the Central Bank of the Republic of Türkiye’s tightening monetary policy, which supported financing the current account deficit. This stability led to a noticeable increase in foreign capital inflows and reserves held with the Central Bank. Given these developments, the 12-month cumulative current account deficit is likely to close below the Medium-Term Program’s expectation of USD 22 billion, declining to levels seen in late 2021.

The budget deficit decreased in the second quarter of the year following the implementation of the austerity package.

In 2024, the central government budget contracted slightly compared to the previous year. During this time, budget revenues were insufficient to cover expenditures, resulting in an increase in the budget deficit. The rising trend in expenditures made it challenging to maintain financial discipline. The deficit continued to grow due to increased interest expenditures and economic fluctuations. Notably, revenue items saw a significant uptick in the first quarter, driven by a base effect from tax collections that had been postponed last year due to the earthquake. In 2023, the overall increase in expenditures was influenced by earthquake-related costs, as spending in the affected regions continued to rise. Additionally, the Treasury faced higher borrowing costs due to the Central Bank’s tight monetary policy, which exerted pressure on interest expenditures. Despite the growth in revenues, the budget balance recorded a significant deficit in the first quarter, largely attributed to the surge in interest expenditures. However, with the introduction of the “Public Savings and Efficiency Package” in May, budget expenditures began to decline, aiming for greater spending discipline while excluding earthquake-related and mandatory costs. The budget balance recorded a record deficit until July due to the ongoing rapid increase in interest expenditures. In July and August, although tax revenues saw a moderate rise, the significant growth in non-tax revenues played a crucial role in reducing the budget deficit. However, in September and October, despite increases in both tax and non-tax revenues, the deficit continued to widen due to the ongoing surge in interest expenditures. As the end of the year approached, a limited deficit was recorded in the said month of 2024, despite a surplus in November. Similar to the previous year, a deficit of TL 829.2 billion was recorded in December 2024, as expenditures were deferred to the last month of the year. Consequently, the budget balance for 2024 showed a deficit of TL 2 trillion 106.1 billion, achieving 79.4% of the budget deficit target. Based on MTP data, the budget deficit is expected to be 4.8% of GDP in 2024, with an estimated ratio of 3.1% for 2025.

International credit rating agencies changed Türkiye’s credit rating and outlook.

Agency	Rating	Last Review Date	Outlook	Previous Rating
S&P	BB-	November 1, 2024	Stable	B+/Positive
Fitch	BB-	September 6, 2024	Stable	B+/Positive
Moody’s	B1	July 19, 2024	Positive	B3/Positive

Fitch upgraded Türkiye’s long-term foreign currency-denominated sovereign credit rating by one notch from “B+” to “BB-” and set the outlook as “stable.” The report highlighted effects such as decreasing dollarization, reduced foreign exchange demand, and capital inflows. It noted that the Central Bank of the Republic of Türkiye (CBRT) raised the policy rate to 50%, emphasizing that this monetary tightening has led to a real appreciation of the Turkish lira, which is crucial for the government’s disinflation strategy.

S&P also upgraded Türkiye’s sovereign credit rating by one notch from B+ to BB- and revised the outlook from “positive” to “stable.” This marks S&P’s second rating increase for Türkiye this year. The statement indicated that the CBRT’s tight monetary stance has helped Turkish authorities stabilize the lira, lower inflation, rebuild reserves, and reduce dollarization within the financial system. Furthermore, Türkiye’s savings gap with the rest of the world has narrowed, as evidenced by a nearly four-percentage-point decline in the current account deficit-to-GDP ratio since 2022.

Moody’s upgraded Türkiye’s credit rating by two notches from “B3” to “B1” while maintaining a “positive” outlook. The upgrade was attributed to improvements in governance and, notably, a decisive and increasingly well-established return to orthodox monetary policy.

The rise in non-deposit sources reached a record high of 88.8%, fueled by improved access to foreign borrowing markets and the favorable impact of the implemented economic program.

BANKING SECTOR

The banking sector’s net profit amounted to TL 659 billion in 2024.

The rapid tightening of monetary policy that began in the second half of 2023 continued in 2024, leading to higher loan interests. As a result, the annual growth rate of loans declined, dropping from 54.04% at the end of 2023 to 37.5% by the end of 2024. Additionally, the annual growth rate of the securities portfolio slowed following the Central Bank of the Republic of Türkiye’s (CBRT) decision in May to completely abolish the Securities Portfolio practice. The growth rate of the Securities Portfolio, which was 67.4% at the end of 2023, fell to 31.6% at the end of 2024. Consequently, the overall annual growth rate of assets decreased from 64.1% at the end of 2023 to 38.7% at the end of 2024.

Deposits, a key funding source for banks, sharply declined from 67.6% at the end of 2023 to 27.3% at the end of 2024. This decline was primarily driven by a slowdown in the annual growth rate of foreign exchange (FX) deposits. The decrease in Turkish lira (TL) deposits was mainly influenced by the base effect and a shift towards money market funds. In 2024, the increase in non-deposit sources (NDSs) fluctuated. The rapid rise in deposit rates during the first quarter prompted banks to seek alternative funding sources. Notably, due to the positive impact of the economic program and improved access to foreign borrowing markets, the increase in Non-Deposit Sources reached a record high of 88.8% in the first quarter, ending the year at 65.8%.

The significant decline in the annual growth rate of profit in 2023, following a sharp increase in the previous year, continued in 2024. The sector’s net profit for the period, which had risen by 43.8% in 2023, increased by only 6.2% in 2024. Meanwhile, the capital adequacy ratio improved from 19.06% at the end of 2023 to 19.69% in 2024.