Turkey’s Banking Sector: Picture of Health (Registration required)

Once Turkey’s Achilles Heel, the banking system dramatically turned around following the 2000-01 financial crisis and is now one of the country’s main strengths. The Turkish economy contracted a sharp 13.8% y/y in the first quarter of 2009 as high unemployment, weak external demand and slowing capital inflows took a toll. Nevertheless, the soundness of Turkey’s banking system, in comparison to earlier this decade and relative to many of its peers, will help speed up the country’s return to growth. As the IMF notes: “[S]lowdowns and recessions preceded by banking-related stress tend to last longer and be associated with larger average GDP losses than those preceded by other types of financial stress or by no financial stress at all.”

Bottom Line: The banking sector is in good shape in the wake of reforms implemented after the 2001 crisis, meaning Turkey will likely experience a faster return to growth than those countries experiencing financial sector distress. While 2009 will not be a banner year for the Turkish economy, the tide could turn quickly next year.