Turkey: macro-financial situation

Abstract

As in other countries, the effect of the pandemic and the global recession on the Turkish economy was mitigated by the fiscal, financial and monetary support implemented by the country’s authorities. In fact, Turkey was one of the few economies of significant size to record positive GDP growth in 2020 as a whole. However, this policy support also exacerbated the pre-existing macroeconomic imbalances. First, the sharp increase in credit is among the determinants behind the growth in domestic demand. Second, a notable weakening of the lira was observed, leading the already-high inflation rate to rise further. However, in the final stretch of the year the Turkish central bank shifted towards more orthodox monetary policy, helping to restore – at least in part – investor confidence. The banking sector has remained healthy, although overall asset quality has deteriorated as exposure has increased.