MILLIRE_2019_Annual Report

Milli Re Annual Report 2019 43 Activities and Major Developments Related to Activities Financial Status Risks and Assessment of the Governing Body Unconsolidated Financial Statements Together with Independent Auditors’ Report Thereon Consolidated Financial Statements Together with Independent Auditors’ Report Thereon General Information Financial Rights Provided to the Members of the Governing Body and Senior Executives Research & Development Activities quarter, with the positive impact of consumer expenditures, economic activity showed a growing trend once again. It is observed that relative recovery seen in the economy picked up the pace in the last quarter of the year, as low base effect started to kick in together with interest rate cuts implemented by the Central Bank of Turkey (CBRT) starting in July. While the domestic economic activity is expected to gain momentum in the first quarter of 2020 as a result of the low base effect and repercussions of deferred consumption expenditures, the growth during the year will be mainly determined by the geopolitical risks and the effects of coronavirus, which spread rapidly across the world. The slowdown in the economic activity was reflected on the external balance statistics as well. While imports dropped by 9.1%, exports have shown a limited increase of 2.1%. Foreign trade deficit registered as TL 31.2 billion, the rate of exports meeting imports rose to 84.6%. This situation had positive effects on current account balance as well. In addition to weakening domestic demand, falling oil prices and contributions of tourism which remained at strong levels, 12-month cumulative current account balance started to post surplus starting in June and reached an all-time high of USD 5.4 billion as of September. However, in the following months, current account surplus was subdued as a result of the expansion on imports, which was stimulated by the increased domestic consumption. Budget deficit continued to increase. In 2019, as a result of the local elections and the measures taken in order to support the economy, a rapid surge has been recorded in the budget deficit. While it was TL 72.8 billion last year, it reached TL 123.7 billion in 2019. Looking at the other yearly developments, 8.3% increase in tax income remained far below the inflation rate. In contrast, an upward movement has been observed both in primary expenditure and interest expenses. In 2019, with 35%, interest expenses registered the highest rate of increase since 2001. Generating TL 1.1 billion surplus last year, primary balance posted a deficit of TL 23.8 billion. However, one-time incomes limited the deterioration observed in the budget outlook. Budget-deficit- to-GDP ratio, which is estimated around 3% in 2019, is projected to be 2.9% by the end of 2020. Inflation entered a downward trend in the second half of the year. Consumer Price Index, which was 20.3% in 2018, realised as 11.8% by the end of 2019. In the Inflation Report published by the CBRT at the end of October, annual inflation was projected as 12%. Annual domestic-producer price index (D-PPI), which was registered as 33.6% at the end of 2018, declined to 7.4% by the end of 2019. As a result of the weak domestic demand conditions as well as TL remaining at relatively stable levels, high base effect and the modest movements in commodity prices; inflation entered a declining trend while the main expenditure groups that had the highest contribution to the consumer price index were food & non-alcoholic beverages and the transportation sectors. In the first inflation report of 2020, CBRT estimated inflation as 8.2%, despite the recovery in economic activity, it is projected that the total demand conditions would not present an inflationist outlook. CBRT quickly cut the policy interest rate in the second half of the year. In line with favourable global liquidity conditions stimulated by the recovery in inflation, weak global economic activity and the expansionary monetary policies adopted by advanced economy central banks, interest rate cuts have been introduced in the second half of 2019. Key interest rate, which was 24% at the beginning of 2019, declined to 12% with 1200 basis points total reduction adopted in July, October and December. Moreover, with the regulations on the required reserve ratio and changes in its practices, CBRT implemented policies favouring the financial stability as well. As low interest rate environment ruled globally and Fed continued to expand its balance sheet, while the trend of declining inflation became prominent in Turkey and country risk premium fell back, it is expected that the CBRT would continue with monetary policy loosening, even if not as aggressive as it had been in 2019. Source: TurkStat, CBRT, Ministry of Treasury and Finance