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that the post-recession recovery cycle is running up against Turkish corporate sector debt that has doubled to 70% of GDP since 2008.
The cost of borrowing from Turkey’s commercial banks has certainly descended but so far all the evidence is that the limited lending revival is being driven largely by the country’s three state-owned banks, and with officials right at their back, it’s not like they’ve had much choice in the matter. “Under normal circumstances, such a decline in lending rates should strengthen credit demand,” Ulku was quoted as saying. Yes, there was “some higher credit demand from households, especially for mortgages”, but on the other hand corporate investment contracted in the first half of the year as business confidence remained shaky.
Seriously pissed. For all his efforts at stimulation—and the government appears to be seriously pissed with the private banks failing to sufficiently turn on the credit taps, as demonstrated last week when, deciding enough was enough, the country’s banking regulator ordered the banks to write off Turkish lira (TRY) 46bn ($8.1bn) of loans by year-end and set aside loss reserves so they could get on with some fresh lending—may find he’ll get frustratingly little action from companies that are drowning in debt.
Of course, since July last year Erdogan, thanks to the adoption of a new constitution making him Turkey’s first ever executive president with only a diminished parliament to answer to, has almost unlimited powers. Should he want to drive even harder for that 5% target, there’s little to stop him.
But the IMF and World Bank would wince. They have constantly beseeched the Erdogan administration to dispense with the idea of a short-term sugar high in favour of structural reforms that will pave the way for longer-term economic stability and sustainable growth.
Best not forget, though, that this is the populist Erdogan who is holding the reins, so that idea was always for the birds.
“The move highlights, once again, that credit growth rather than a comprehensive package of structural reforms remains the government’s preferred approach to support Turkey’s ailing economy,” Wolf Piccoli, co- president and political risk analyst at Teneo Intelligence, wrote in a memo last week shared with Al-Monitor.
He added: “Sustained political interference in the banking sector—including pressure from the government to dismiss and/or sideline executives who are not perceived as ‘cooperative’—will continue to cloud the outlook for the banks for the foreseeable future.”
Turkish central bank seen “cranking up the stimulus” as it cuts remuneration rate on required lira reserves. Turkey's central bank will cut the remuneration rate applied to required reserves for Turkish lira by 5 percentage points as of October 4, according to information posted on the national lender's website on September 23.
A remuneration rate of 10%, compared to the current 15%, will be applied to banks with a loan growth rate between 10-20%.
The rate will be 0% for banks with less than a 10% loan growth rate, compared to the current 5%.
“Cranking up the stimulus...that said, the lira barely moved on the news, which suggests the market is sanguine now about the near-term prospect of further [central bank] easing,” commented Timothy Ash, an emerging markets strategist at BlueBay Asset Management.
The move is designed to encourage local banks to extend more loans to boost demand. The Turkish economy is still struggling to overcome the crisis
19 TURKEY Country Report October 2019 www.intellinews.com