​​Market volatility was elevated and developing country markets became increasingly more fragile in 2018 due to rising protectionism across the globe, trade wars between the United States and China, Brexit, Italy’s debt concerns, normalization of the Fed’s monetary policy, and geopolitical developments. Markets may continue to exhibit sharp fluctuations in 2019 because of continued uncertainty regarding the United States-China trade war despite some recent progress in negotiations, slowdown in the Chinese economy, ongoing uncertainty regarding the Brexit process, recent data releases pointing to weakening economic activity in Europe, the course of Fed’s interest rate policy, and geopolitical developments.

​​The domestic economy has entered a rebalancing period in the second half of the year. The economy grew at an annualized rate of 1.6% in Q3 due in part to the volatility in financial markets. Private consumption slowed down considerably while contraction in investment lowered growth. On the other hand, affirmative outlook in net exports stemming from contraction in imports as well as higher exports and tourism income supported growth. In our assessment, this trend continued in the last quarter and the rebalancing process will continue in 2019. We project 2.5% growth for the full year in 2018.

​​Inflation in October 2018 reached its highest level since the middle of 2003 due to the sharp drop in the value of the Turkish lira and high oil prices. Subsequently, inflation rate fell and ended the year at 20.30% as a result of the stabilization in the exchange rate, falling oil prices after October, success of the Full-Scale Fight Against Inflation Program, and sales tax reductions in certain industries. We expect the falling inflation trend to become evident in the second half of 2019.

​​The budget deficit for 2018 came in at TL 72.6 billion, close to the target stipulated in the New Economic Program. Budget revenues were up 20% annually while budget outlays increased 22% for the year.

​​The banking sector successfully renewed its syndication loans in 2018 despite the volatility in financial markets. The sector’s capital adequacy ratio remains high at 17.3% as of December 2018.

​​Monetary policy of the central banks of the United States and Europe, geopolitical uncertainties, and developments regarding global trade will play a key role in the outlook for financial markets.