Banking Sector Vulnerabilities in Turkey Worry Experts
Despite strong economic growth, Turkey’s banking sector is facing significant vulnerabilities that could have far-reaching consequences for the country’s economy.
Inflationary Pressures and Monetary Policy Concerns
A recent report has highlighted concerns about the Turkish lira’s depreciation and unorthodox monetary policy, which are driving inflationary pressures. The central bank has cut interest rates three times this year despite inflation reaching over 80% annually, a level not seen since the 1990s. This has led to a decrease in real income, hampering domestic demand.
Current Account Deficit and Foreign Exchange Reserves
The report warns of a widening current account deficit, driven by high energy prices and a reliance on short-term external financing. The country’s foreign exchange reserves are low and insufficient to cover its short-term external debt, which stands at $138 billion.
Banking Sector Exposures and Risks
- Negative net foreign asset position of around 10% of GDP
- High corporate debt, at 72.6% of GDP, mainly owed to domestic banks
- Exposure to shifts in global financial conditions
Central Government Debt and Business Environment Risk
- Central government debt remains moderate but is exposed to exchange rate risk due to its denominated currency
- Business environment risk falls within the most risky category (G/7) due to challenging macroeconomic conditions and difficult access to credit for the private sector
Short-Term Political Risk and Global Financial Tightening
Experts warn that the short-term political risk in Turkey is under pressure, with a rating outlook of negative. The country’s reliance on short-term external financing, low foreign exchange reserves, and large amount of short-term external liabilities make it vulnerable to global financial tightening.
Conclusion and Outlook
The report concludes that Turkey’s banking sector vulnerabilities are a cause for concern, particularly in the context of the ongoing energy crisis in Europe and the US slowdown. The government’s policies will be closely watched as they navigate these challenges ahead of the upcoming presidential and parliamentary elections.