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bank lending this year has been to
those sectors, such as tourism as well as hospitality and transport, that are most vulnerable to ongoing social distancing and travel restrictions. (See Chart 3) Second, the authorities appear to be relying on credit as the main channel to stimulate demand. One sign of this is that lending to households has continued to rise at a rapid pace – consumer lending (including credit cards) is growing by around 10.5% on a 13w/13w basis, above to its peak before the coronavirus crisis escalated. (See Chart 2 again.) This stands in stark contrast to other parts of the world, where consumer lending has generally been scaled back as households have used any enforced savings to pay down debts or have been reluctant to borrow due to the uncertain economic environment.
Clearly, strong consumer lending is
not a major concern in the current environment and, if anything, is to
be welcomed if it helps to smooth consumption. But there’s clearly a major risk that this morphs into another credit- fuelled consumption binge that has been a key feature of Turkey’s boom-bust cycles seen over the past decade. What’s more, the rise in unsecured “personal finance” loans has coincided with a decline in
Chart 1: Bank Loans (FX-adjusted, % 13w/13w)
lending via credit card, which may be a sign that banks are “evergreening”. (See Chart 4) Third, the latest credit boom has exacerbated the trend of a rising share
of lending being undertaken by state banks. State bank lending has surged
in recent months (see Chart 5) and accounted for around two-thirds of the overall rise in credit so far this year. The result is that state banks’ share of total lending has risen to almost 50% – up from less than 30% six years earlier. (See Chart 6) We warned about the growing influence of state banks in a Focus last year. In short, lending by state banks tends to be driven by political priorities rather than economic rationale. For now, this doesn’t seem to be creating major problems – state banks’ share of bad loans is relatively low compared with other banks.
Nonetheless, research by the EBRD shows that, in the run-up to elections at least, state banks redirect their lending away from opposition-controlled provinces to those controlled by the ruling government. Those provinces that lose out tend to be among the most productive economically in Turkey.
In addition, lending by state banks tends to be geared towards some of
Chart 2: Bank Loans (FX-adjusted, % 13w/13w)
Turkey’s least-productive sectors, such as agriculture. And we’ve warned before that, in pursuit of faster economic growth, the Turkish authorities may loosen lending criteria of state banks. The resulting misallocation of resources runs the risk of a larger rise in non- performing loans than would otherwise be the case further down the line. In addition, it will ultimately harm Turkey’s long-run economic prospects.
Finally, the credit boom could ultimately add to the burden from the crisis on
the public finances. In the near term at least, we doubt that a rise in banks’ bad loans will result in the need for a round of government-funded recapitalisations. (See here.) But the government is on
the hook if loans guaranteed under the expanded Credit Guarantee Fund turn sour. And it’s not out of the question that the government becomes inclined to write off loans taken out by households and firms during the crisis (and reimbursing banks) in an effort to boost the recovery. We argued in a previous Update that Turkey’s public finances
are no longer a pillar of strength and any additional pressure on the budget resulting from the latest credit boom would further add to our concerns.
Chart 3: Bank Loans be Sector (% Change, Dec 2019-May 2020
Chart 4: Bank Consumer Loans (FX-adjusted, % 13w/13w)
Chart 5: Bank Loans by Type of Bank (FX-adjusted, % 13w/13w)
Chart 6: State Bank Loans (% of Total Loans)
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