Since 2001, Turkey has been subject to profound and remarkable economic and financial transformations that have led this emerging market to become the 17th largest economy in the world, with a nominal GDP of $800 billion. After the banking crisis that hit the country at the beginning of 2001, Turkey underwent a period of incredible socio-economic growth: from 2002 to 2011, the GDP yearly growth rate was on average approximately 6% and per capita income increased to $10,500 from a modest initial value of $3,500. When the global financial crisis knocked out the US and subsequently Europe, Turkey suffered a significant slowdown in its economic activity like the majority of emerging markets all around the world. However, what was surprising of this newly industrialized country was the speed of reaction with which the Turkish economy bounced back: in 2010 and 2011 the annual growth rate was respectively 9.2% and 8.8%; to better understand the proportion of such figures, consider that in the same years, the GDP growth rate of the US was 2.4% and 1.8% (World Bank data). What are, then, the main reasons and drivers behind these incredible results? What was unique to the Turkish situation?
First of all, if on one side the Banking Crisis of 2001 bumped up the unemployment rate (14,875 jobs were lost only in the first eight months of 2001) and total losses for the state of c.a. $39.3 billion, on the other side it opened the way for a much needed financial restructuring program. In order to promptly intervene, the role of the Central Bank of the Republic of Turkey (CBRT) and of the Banking Regulation and Supervisory Authority were enhanced, allowing them to operate independently. The regulatory and supervisory framework was strengthened by various revisions of banking laws, in line with international best practices and in particular with EU directives. To minimize financial risks, capital requirement for Turkish banks was set at 12%, which is even higher than the minimum requirement imposed by Basel (8%). Through the Savings Deposit Insurance Fund (SDIF), at the end of 2001 the government had injected into the market $22 billion. The purpose of the injection was to enhance the capital structure of state banks. Finally, to help banks covering their negative foreign exchange positions, government securities held by Turkish private banks were exchanged for dollar-denominated bonds. All these measures reinforced the solidity and the confidence of the banking system. Therefore, putting together this updated system with the fact that CDOs were, back then, not yet very popular within the Turkish market, it is easy to understand why the financial structure did not crash in Turkey as it did in other supposedly more advanced countries.
From the monetary side, the independence gained at the beginning of the 2000s, allowed the Turkish Central Bank to promptly react when the first crisis signs became evident. To avoid a contraction in credit availability that would have caused a slowdown of the entire economy and to pursue its price stability target, the CBRT drastically cut down interest rates (the overnight rates at which the CB lends to commercial banks under its jurisdiction). From a pre-crisis level of 18%, rates dropped to around 6% by the end of November 2009. The impact on the market was positive: after an initial reduction, investments started again, moved by a good internal demand. In addition, to achieve its new objective of financial stability the Turkish Central Bank has taken other significant actions more recently: a restructuring program started in 2010 and still ongoing, the introduction of new monetary instruments (Interest Rate Corridor and Reserve Option Mechanism) and implementations on the foreign exchange rate regime in order to limit the high volatility typical of the Turkish Lira.
Another fundamental factor that helped Turkey to “impact” the 2008 financial crisis was the excellent public finance situation, deriving from years of fiscal consolidation processes. Fiscal adjustments took place especially on the expenditure side. In 2008, public debt was less than 40% of GDP, an incredible decline considering that the same datum was 74% of GDP in 2001. This reduction was possible not only thanks to the continuous primary surpluses targeted by the Government, but also thanks to the increasing revenues coming from the privatisation process, that contributed for a roughly 4% decrease. The many auctions called by Turkey have created a very large amount of business for sell side advisors, making Turkey a very relevant player in recent years. The new fiscal policies led also to a reduction of the Central Government Budget Deficit that in 2008 stood at 1.8% of GDP, down from as much as 11.9% in 2001.
A more resilient banking sector, an increased macroeconomic stability, a prompt response by monetary institutions and a proactive fiscal policy are the main drivers that allowed Turkey to efficiently react to the global financial crisis. Obviously, this does not mean that the Turkish economy did not suffer from it. The collapse of external demand and the diminished inflow of capital from developed countries are issues that the Government still has to face. However, the positive signals derived from the recent past and the effort put forth to become a developed market make Turkey an important player in the world economy.