Turkey’s economic growth slowed in the third quarter from weakened demand, high interest rates, inflation and tighter government policies.

Why it matters: Monetary policy normalization and steady decline of macroprudential regulations have helped improve bank profitability and capital adequacy.

In the third quarter, Turkey’s economy grew less than expected (by 2.1%) and gross domestic product (GDP) dipped by 0.2%, Turkish Statistical Institute (TUIK) data showed, marking a second straight dip and a technical recession in Turkey.

High interest rates and inflation

Turkey’s economic decline is a result of ongoing inflationary pressures and elevated interest rates. The annual inflation rate in Turkey fell to 47.09% in November 2024, down from 48.58% in October, but above the expected 46.6%, according to a Trading Economics report. This marks the sixth consecutive period of gradual disinflation and the lowest rate since June 2023, primarily driven by lower inflation in housing, water, electricity, gas and other fuels

The Central Bank of the Republic of Turkey (CBT) left its key interest rate unchanged at 50% at its November 2024 meeting. It is the eighth month in a row that interest rates have been held at this level, in line with analyst expectations, maintaining a record-high since 2002. 

Decreased demand

Inflationary pressures and interest rates have weakened Turkey production and demand. The Purchasing Managers’ Index (PMI), which had increased to above the 50-threshold indicating expansion in Q1, fell to a 54-month low of 44.3 by September 2024, according to the World Bank Group.

Despite slight easing of annual inflation in October, ongoing economic challenges continue to suppress demand in the polyethylene and polypropylene markets, leading to further price declines, according to an S&P Global report.

Tightened monetary policies 

Tightening monetary policies expanded Tukey’s economy from 5.1% in 2023 to 3.8% (YoY) in the first half of 2024. Monetary policy normalization and steady decline of macroprudential regulations have helped improve bank profitability and capital adequacy. Although banks have eased commercial lending, high policy rates have driven up deposit and credit interest rates, constraining loan growth, per the World Bank Group. “The banking sector’s net FX position has improved, and the risk premium for external borrowing has declined, although external debt costs have increased due to global conditions,” the report reads. 

Diminishing regulatory forbearance may impact the capital ratio of some banks. However, capital buffers remain adequate. Meanwhile, tighter credit conditions have begun to take a toll on household credit and Micro, Small and Medium-sized Enterprises (MSMEs) with increasing credit card defaults and a gradual rise in insolvency and concordat filings, the World Bank Group reports.

Turkey is involved in regional conflicts, and relations with the West can be confrontational. Moreover, Turkey will continue to pursue a pragmatic and transactional relationship with the West, according to  Economist Intelligence. “Turkey has large external financing needs, and its private sector is heavily indebted in foreign currency, raising risks to financial stability,” the report reads. 

What’s next: Turkey’s economy is predicted to slow in 2025, with most projections estimating GDP growth around 2.6% to 3.2% due to tighter monetary policies aimed at curbing inflation, alongside subdued global economic conditions. However, some experts believe that inflation will gradually decrease while economic activity may pick up slightly in the later part of 2025.

Investors believe that the central bank may consider rate cuts in the near future, per Euronews. The central bank highlighted that it would be maintaining a tight monetary policy position until a marked decrease in monthly inflation has been seen for several months, and inflation comes under control.

“The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations,” the Central Bank of Turkey wrote. “Increased coordination of fiscal policy will also contribute significantly to this process. Consequently, the disinflation process will gain strength.”

By the numbers: Customers in Turkey have averaged 16 days beyond terms, with 37% saying payment delays are increasing, according to the FCIB Credit and Collections Survey.

The most common cause for payment delays is customer payment policies (63%).

What Survey respondents are saying:

• “Use a confirmed letter of credit only.”
• “With continued global inflation, war in Turkey and high interest, you need to know your true legal customer to prevent fraud and keep your A/R secured.”
• “Follow up with the customer’s Procurement Dept and Finance Dept as many times as necessary.”