The Turkish Economy and Banking Sector

THE TURKISH ECONOMY

In 2025, the Turkish economy displayed an outlook where the effects of tight monetary and fiscal policies were more clearly felt, the growth composition rebalanced, and the disinflation process gradually progressed. While rising global uncertainties and protectionist trends in trade policies pressured external demand, the tight domestic monetary policy stance focused on strengthening macroeconomic stability.

Growth and Inflation Dynamics

Throughout 2025, economic growth followed a more moderate course compared to previous years. While a significant slowdown in domestic demand was observed due to tight financial conditions, the loss of momentum in consumption expenditures was the main determinant of growth dynamics. In contrast, the weakness in imports and the relatively strong performance of tourism revenues supported net exports and moved the external balance to a more sustainable point. In this context, growth has evolved toward a more balanced and healthy composition. In 2026, in line with expectations of a gradual recovery in European Union economies and the forecast that the peak of uncertainty in foreign trade has passed, the contribution of net exports to growth is expected to increase.

On the inflation front, 2025 was a period in which the pace of price increases declined significantly, but rigidities were not entirely eliminated. While the tight monetary policy stance and the slowdown in domestic demand supported the disinflation process, inertia in services inflation, wage adjustments, and past pricing behaviors limited a faster convergence of inflation to its targets. Nevertheless, the decline in inflation from the 80% range to the 30% range is considered a significant achievement. Although the targets for 2026 are ambitious, the decisive stance of the economic administration supports expectations that these gains will be preserved and the disinflation process will continue at an accelerated pace. A decline in inflation to the low-20% range in 2026 will create significant room in 2028–2029 to achieve the 5% medium-term target.

External Balance and Fiscal Policy

A significant improvement was recorded in the current account balance outlook in 2025. The limited pace of imports due to the slowdown in domestic demand, the increase in tourism revenues, and the relatively stable outlook for energy prices contributed to the narrowing of the current account deficit. On the financing side, although direct investments remained limited, an outlook was observed where portfolio flows periodically strengthened and reserve accumulation was supported. The current account deficit to GDP ratio hovering around 1.6% during a period of achieving potential growth stands out as a significant development in terms of external financing needs.

On the fiscal policy side, steps supporting budget discipline came to the forefront in 2025; efforts to maintain fiscal balances through expenditure controls and revenue-enhancing measures continued. Despite rising interest expenses, the public debt-to-national income ratio remained at manageable levels; fiscal policy was conducted in a framework complementary to monetary policy.

2026 Outlook

Expectations for 2026 are for the continuation of the disinflation process and the gradual strengthening of macroeconomic stability. In parallel with the maintenance of a tight monetary policy stance and the improvement in inflation expectations, progress towards price stability is expected to continue in 2026. However, service inflation shaped by expectations and, in this context, expectations management will continue to be the key factors determining the pace of the disinflation process.

In 2026, economic growth is projected to show a limited but balanced recovery compared to 2025. A gradual rebalancing of domestic demand, an increase in investment appetite due to the normalization of financial conditions, and a strengthening of the contribution of net exports to growth are expected. Despite uncertainties in the global demand outlook, exports to the Middle East, Africa, and neighboring regions are projected to continue their supportive role.

In terms of the current account balance, while the rebalancing trend is expected to continue in 2026, improving the quality of external financing and encouraging long-term capital inflows will remain important. Maintaining fiscal discipline, preserving debt sustainability, and establishing a policy framework supported by structural reforms are important.

Overall, the priority for the Turkish economy in 2026 will be to make price stability permanent, that growth becomes more balanced and sustainable, and that external vulnerabilities are reduced. In this process, maintaining a predictable and consistent policy framework, supporting the reform agenda, and increasing resilience to global uncertainties will continue to be decisive for the medium- and long-term economic outlook.

The priority for the Turkish economy in 2026 will be to make price stability permanent, to give growth a more balanced and sustainable structure, and to reduce external vulnerabilities.

BANKING SECTOR

Strong Balance Sheet, Solid Performance

In 2025, the Turkish banking sector demonstrated a performance where the effects of tight monetary policy and the macroprudential framework became more pronounced, the balance sheet structure strengthened, and risk management was prioritized. The coordination between monetary policy and macroprudential regulations ensured that the sector’s growth rate was kept under control, while creating an outlook that supported financial stability.

Throughout 2025, macroprudential measures complementary to the tight monetary policy and regulations on liquidity management caused funding costs to remain relatively high. In this process, the attractiveness of TL deposits increased, and the share of TL in the deposit composition was maintained at approximately 60%. While loan growth was in the 30–35% range on an annual basis, the loan mix was largely concentrated in sectors that support manufacturing, production, investment, exports, and employment. In this context, attention was paid to the quality of credit expansion rather than its quantity.

When evaluated within the framework of BRSA data, as of October 2025, the total asset size of the Turkish banking sector is seen to have reached approximately TL 44.1 trillion, an increase of 35.1% compared to the end of the year. Loans increased by 34.5% compared to year-end to TL 21.6 trillion, while securities grew by 30.5% to the TL 6.8 trillion range. While total deposits exceeded TL 25.4 trillion, equity approached TL 3.8 trillion. The sector’s standard capital adequacy ratio was maintained in the 18–19% range, significantly above the legal limits.

The weight of TL in the sector’s balance sheet remained high in 2025; approximately 61% of assets were denominated in TL. Despite the slowdown in the growth rate of total loan volume, the share of loans in assets remained around 50%, preserving the banking sector’s fundamental intermediation function. Asset quality indicators generally maintained their resilience in 2025. The non-performing loans (NPL) ratio for the sector was 2.0%–2.2% and remained below historical averages.

On the profitability front, 2025 was a period in which net interest margins began to stabilize from the second half of the year. The net interest margin for the sector as a whole ranged between 3.5–4.0%. As of October 2025, the sector’s net profit was TL 0.7 trillion.

Assessments by international credit rating agencies have also been supportive of this outlook. As of 2025, the outlook for the Turkish banking sector is assessed within a balanced framework between the short-term pressures of high inflation and interest rates on asset quality and the support provided by the improvement in the policy framework. The continuation of the current economic program stands out as the base scenario.

Future Outlook

Expectations for 2026 are for a gradual normalization in monetary policy and a limited easing in financial conditions, in line with the disinflation process. Given the relatively short-term nature of TL deposits, the continuation of policy rate cuts is expected to have a positive impact on banks’ net interest margins.

However, in an environment where economic growth remains below potential, the risk of a limited increase in the non-performing loan (NPL) ratio, particularly stemming from loans to SMEs and commercial borrowers, should not be overlooked.

While banks’ access to external markets is expected to continue in 2026, this process is projected to be conducted with a more selective and opportunity-driven approach compared to previous years. Eurobond and syndication transactions are expected to focus on extending maturities and optimizing costs. The profitability and asset quality outlook will remain sensitive to potential changes in the regulatory framework, macroeconomic developments, and financial market conditions.

Overall, the prudent and balanced performance of the Turkish banking sector in 2025 has enabled it to enter 2026 with a strong capital structure, high provision ratios, and manageable risk indicators. The continuation of the current economic program, a predictable policy framework, and a strong balance sheet structure will remain the key determinants for the sector to maintain its resilience against potential shocks.

While banks’ access to external markets is expected to continue in 2026, this process is projected to be conducted with a more selective and opportunity-driven approach compared to previous years.