Turkey: macro-financial situation

Rationale Turkey is identified annually as a material country for the Spanish and euro area banking systems. Moreover, Turkey and Spain are linked by major trade and financial flows. It is therefore important to monitor the country’s macro-financial situation and main weaknesses. Takeaways. • The Turkish economy continued to post very high inflation rates at end-2022, while economic activity began to slow in Q3, following its strong previous momentum. All of this in the context of sizeable external financing needs, foreign currency debt and low international reserves. • Fiscal policy performed better than expected, and the country’s accounts remain healthy. In terms of monetary policy, in August the Turkish central bank resumed the process of reducing the policy interest rate initiated a year earlier, with the real interest rate standing at -75.5% in November. • Nonetheless, macroprudential and regulatory measures were implemented to keep credit growth in check and encourage only lending to certain productive sectors. Meanwhile, the banking sector’s balance sheets remain relatively healthy, although some indicators have worsened.