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34 I Southeast Europe bne August 2020
CAPITAL ECONOMICS:
A deep dive into Turkey’s latest credit boom
Jason Tuvey of Capital Economics in London
Turkey’s credit boom that started towards the end of last year has been turbocharged in recent months and this should provide some welcome support to the economy as it emerges from the coronavirus crisis. That said, the nature of the lending reinforces our concerns regarding another credit-fuelled consumption binge, the growing influence of state banks and the outlook for the public finances.
The latest weekly data show that lending by Turkey’s banking sector, adjusted
for exchange rate effects, has increased by around 14% on a 13w/13w basis (equivalent to a quarter-on-quarter rate) throughout most of the past couple of months. (See Chart 1) That is by far the quickest pace of growth since the weekly loan data began in 2014 and almost twice the rate recorded at the height of the credit boom in 2017 that ultimately
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laid the foundations for the currency crisis in the following year.
Banks’ willingness to lend has been supported by a raft of policy measures. As well as cutting interest rates by
a cumulative 250bp since March, the central bank further tweaked reserve requirements to incentivise banks to ramp up lending. Meanwhile, the government has doubled the size of its support to the Credit Guarantee Fund, which could help to support as much as TRY250bn (5.8% of GDP) of extra lending.
In the near-term, the credit boom will provide some welcome support for the economy. In particular, the jump in commercial lending will almost certainly have helped some firms to survive as the coronavirus crisis has caused their revenues to dry up. (See Chart 2) In turn, this will help to limit the rise in unemployment and long-term scarring
effects on Turkey’s economy from the crisis. It’s worth noting, too, that the steep rise in lending to firms mirrors with the picture in other parts of the world.
If economic activity and demand recovers rapidly over the coming months, many firms are likely to be in a position to pay back some of the “emergency” financing relatively quickly. That all being said, there are elements of the recent credit boom that ring alarm bells.
First, the allocation of credit in recent months means that banks will, sooner rather than later, have to nurse losses on their loan books. Some sectors will inevitably recover more quickly than others. The tourism sector, which is larger in Turkey than in many other parts of the region, is likely to suffer the biggest hit from the crisis. (See here.) A sizeable chunk of the rise in