The Strategist

Turkish President: We shouldn't intervene in the credit boom

12/04/2017 - 13:38

Against the backdrop of the conflict between Turkish President Recep Tayyip Erdogan and the Central Bank of the country, economists are discussing scenarios of possible problems associated with the credit boom in Turkey. The state has been stimulating credit growth for ten years. In recent years it resulted in growing inflation and, apparently, weakening of the Turkish lira.
Polemic of the leadership of the Turkish Central Bank and the administration of the Turkish president signalized of predictable systemic problems in the financial sphere of Turkey. Central Bank experts recommend starting increasing a number of rates of the Central Bank (on a very moderate scale - by 0.25 percentage points) to reduce the growth rate of the loan. The administration of Recep Tayyip Erdogan is strongly opposed: the ten-year credit boom in Turkey (with a loan increase of up to 10% a year), stimulated by the country's authorities since 2008, is the basis of the president's social policy. The Central Bank refers to the argument that in October 2017 Turkey neared 13-year peak inflation (11.9% yoy) and suggests that the country's overheating is already depressing economic growth. According to the forecast of the Central Bank, Turkey's GDP should grow by 3.5% in 2017 (after a decade of growth by an average of 5.7%), but on November 21, Mr. Erdogan stated: "No one will be surprised if the next year's growth will amount to 7%."

Since 2016, economists have been discussing the Turkish economy, overheated by the credit boom. This subject has already drawn attention of the Bank for International Settlements (BIS), cautious views of the IMF, investment company analytics; the topic is constantly monitored by Bloomberg experts. Yesterday, a report on possible scenarios for the credit boom’s ending was issued by Capital Economics (CE).

The document states: the scenarios of the "hard landing" of the Turkish economy apparently do not exist without stimulated credit expansion - the banking system is rather well regulated, and the quality of loan portfolios is indicative. The contribution of "credit expansion" to the growth of Turkey's GDP after 2008 CE is estimated at 0.5-0.7 percentage points with an average growth of 5.7% per year - nine-tenths of it is provided not by other items. Nevertheless, CE expects the growth of Turkey's GDP in 2018-2019 by 2.8-2.9% per year (the bottom of the forecast), noting the distinct signs of economic problems in the country, where the demand for loans was stimulated. In addition to the constant increase in inflation, these are bubbles in the industrial markets, a significant increase in the dependence of the economy on capital inflows and the growth of short-term borrowings in the banking system.

The credit boom in Turkey was roughly equally generated by state and private banks; subsidiaries of foreign banking organizations participated in it to a lesser extent. Almost all sectors of the economy used cheap loans, but so far a tangible consequence in them was a constant increase in the value of real estate. Now investments in real estate in Turkey are about 10% of GDP - significantly higher than in the US and China, and comparable to the level of Ireland and Spain. The growth of corporate loans is more indicative than lending to natural persons, although the mortgage was one of its drivers. According to the CE assumption, the "blowing out of credit bubbles" in the form of a decline in asset prices in Turkey began in the first quarter of 2017 and, according to the scenarios, can repeat the end of the credit boom in Hungary in 2009 and Brazil in 2015.