The Turkish Economy and the Development of its Financial Sector
The recovery of the economy has been rapid, reflecting high levels in growth rates. This was partly due to a comprehensive anti-inflation program that was adopted at the beginning of 2000. The main pillars of the program were tight fiscal and monetary policies, ambitious structural reforms, and the use of a pre-determined exchange rate path as a nominal anchor. Monetary policy was conducted under a currency board type arrangement with liquidity expansion being strictly linked to foreign currency inflows. The disinflation program had a major impact on banks’ balance sheets. First and foremost, with the initial sharp decline in market interest rates and the expectation of a further fall in these rates, the banks also reduced deposit and lending rates. The banks increased their exposure to fixed rate treasury securities during this period. On the other hand, the pre-announced exchange rate path and the real appreciation of the Turkish lira meant lower cost of funding for foreign currency liabilities. As a result, a number of banks borrowed in short-term foreign currency terms and lent in longer-term Turkish lira terms. This led to a sharp increase in maturity mismatch and the foreign currency open position of the private banks. On the other hand, Turkish banks are adequately capitalized; their foreign currency and off-balance sheet risks are almost non-existent; they have relatively clean balance sheets. In retrospect, a buoyant banking sector in Turkey today is the product of important economic and financial reforms carried out after the 2001 contraction of the economy. Then the macro-economic crisis was the result of problems caused by the banking sector mismanagement. Since 2001, in order to rectify these management problems Turkey’s financial sector has undergone tremendous change. Credit decisions by banks were placed under extremely rigid controls that deterred bank managers from making the kind of casual decisions of the 1990’s. They were held personally responsible for failed and non-returned loans. Now, it seems, this rigid system has come to an end, as consumer credits have begun to expand. The expansion, however, created a rather slippery financial ground that might have endangered the inflation-targeting policies of monetary authorities. The new banking sector arrangements have created a less rigid credit expansion framework. Banks, instead of transferring ultimate savings to
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SEDAT AYBAR