Turkish Central Bank Maintains Reservation Gains Following Persistent Foreign Portfolio Investment Influxes
Subtitle: A look at the current state of Turkey's economy, focusing on economic growth, labor market, foreign currency and gold reserves, banking sector, and fiscal and defense spending challenges.
The Turkish economy in mid-2025 is experiencing a slowdown, with growth primarily driven by the construction sector following post-earthquake rebuilding efforts. However, this growth is overshadowed by contractions in key sectors such as industry and agriculture [1].
GDP growth slowed to 2% in Q1 2025, a significant drop from the 3% growth in 2024 and the 5% growth in 2023, signaling a loss of momentum in the economy. Economic sentiment indexes in June 2025 showed slight improvement but remain below the long-term average, indicating cautious optimism with weaknesses in construction, retail, and employment expectations [4][5].
Unemployment stands at 8.4%, but underutilized labor, including part-timers and marginally attached workers, has risen sharply to 32.2%, reflecting hidden unemployment and underemployment problems, particularly affecting youth and women [1].
Recent trends indicate that Turkey has been managing volatile foreign currency and gold reserves amid external pressures. However, updated figures for these reserves as of mid-2025 are not available [6].
The Turkish banking sector's recent performance and stability in 2025 are not directly addressed in the sources, but historically, the banking system has been robust yet sensitive to currency fluctuations and economic volatility [7].
Turkey is committed to raising defense spending to 5% of GDP by 2035, with 2025 defense expenditure projected at around $46 billion, up 165% from the previous year even after inflation adjustment. This ambitious defense budget raises concerns about fiscal trade-offs, including pressure on public spending sectors and potential increases in borrowing costs, which may affect overall economic growth and external balances [3].
Despite these challenges, Turkey remains an emerging market economy ranked as the 16th largest globally by nominal GDP and 7th in Europe in 2025, with strong tourism and manufacturing sectors contributing significantly to GDP [2].
Recent trends suggest that foreign currency holdings have increased, contributing to the rise in foreign currency reserves, which reached $83.3 billion [4]. Foreign currency deposits held by domestic residents reached $194.04 billion, and foreign currency deposits increased by 1.5% to ₺7.79 trillion [4]. Gold holdings also increased, contributing to the rise in gold reserves, reaching $85.27 billion [8].
Foreign investors added to their equity positions, with the total stock of foreign-held equities approximately $31.95 billion, up from $31.85 billion a week earlier [9]. Foreign investors also purchased $209.4 million worth of Turkish equities in the week of July 18 [10].
The weighted average interest rate on consumer loans stood at 60.63%. The sector's total credit volume, including central bank financing, rose by ₺63.83 billion [11]. The central bank's net reserves also advanced, climbing to $62.8 billion [12].
In a move to boost economic growth, the Turkish central bank resumed rate cuts with a 300-basis point reduction [13]. This decision, along with the other trends mentioned, may indicate a strategic effort by the Turkish government to stimulate economic growth and address the challenges facing the country.
However, more targeted financial and central bank reports after July 2025 would be necessary to gain a clearer picture of the current state of foreign currency, gold reserves, and the banking sector in Turkey.
- The Turkish government, aiming to stimulate economic growth and address ongoing challenges, reduced the central bank's interest rate by 300 basis points in a strategic effort [13].
- Turkey's commitment to raise defense spending to 5% of GDP by 2035 is raising concerns about fiscal trade-offs, potentially increasing borrowing costs and affecting overall economic growth [3].
- Despite the economic challenges, Turkey continues to attract foreign investors, with foreign-held equities increasing to approximately $31.95 billion as of July 2025 [9,10].
- Personal-wealth management and business investors may find opportunities in the aging Turkish economy, given the growth in foreign currency reserves (at $83.3 billion) and gold reserves ($85.27 billion) [4,8].
- The Turkish economy, while facing a slowdown, remains significant as the 16th largest global economy by nominal GDP and 7th in Europe, with strong sectors contributing to GDP such as tourism and manufacturing [2].
