Is Turkey on the road to becoming a new Greece? The question has divided economists who have delved into what to make of the explosion of credit growth sanctioned by Turkish President Recep Tayyip Erdogan and government ministers.
Turkey has developed something of an addiction to soft credit this year thanks to the state’s introduction of a TRY250bn ($72.3bn) credit guarantee fund (CGF). Although more than 80% of the CGF has already been used to backstop bank lending, and the word is that the fund will not be expanded, it has driven a surge in credit expansion for non-financial companies. In turn, that has bolstered economic confidence and helped push up the Istanbul stock market to record highs.
As of August 11, loans had risen 13% this year to $522bn, according to Turkey’s banking regulator. What’s more, the ‘jet fuel’ provided by the CGF has pushed the country’s loan-to-deposit ratio to a record high.
Borrowers who shouldn’t borrow
When it comes to the question of whether Turkey has a ‘Greek future’, Charles Robertson, the London-based global chief economist at Renaissance Capital, has put the cat among the pigeons by telling Bloomberg: “What President Erdogan doesn’t understand is that private sector credit booms without productivity growth always end badly. What is worrisome in Turkey is that with the government credit programme, the companies that shouldn’t borrow have started to borrow as well. We’ll see these companies failing to pay debt and the government intervening.”
Robertson’s observations on Turkey’s chances of suffering Greek-style pain and even tragedy from swelling debt drew an immediate critical response from Timothy Ash, senior sovereign strategist at BlueBay Asset Management. “I totally disagree with this. Turkey is miles away from a similar crisis,” he said. “I mean Greece's problems were in public finance, they had a fixed exchange rate in effect because of the euro membership, whereas Turkey has a cheap and floating currency.”
Turkey, added Ash, has a public sector debt to GDP ratio of below 30%, whereas Greece’s, even before the international financial crisis brought on its government debt crisis, was at more than 100%.
But Robertson pointed out that Greece, Brazil and Russia have all had high credit growth, and crises and recessions as a result. With Turkey’s loan-to-deposit ratio taut, his fear is that Turkish banks will have to borrow more from abroad to make further lending viable, thereby hitching additional credit growth to dependency on international banks.
“When global rates rise and European banks become unwilling to lend to Turkish banks, we may have a situation where Turkish economic growth sees a total decline of 5% over two to three years,” Robertson warned.
The long-term viability of Turkey’s supercharged lending may well come down to whether banks have shown enough diligence and responsibility in utilising the CGF.
Looking at Turkey’s August economic confidence index — it moved up by 2.5% y/y to 106 in August, reaching its highest level since July 2012 — Ash was full of praise for Turkey’s “remarkable turnaround under the circumstances”, adding: “I guess we can pinpoint the impact of the credit guarantee scheme, plus also fiscal pump-priming, with the Ministry of Finance today suggesting that the budget deficit this year is likely to double to TRY60bn, and then the central bank which has moved back to a more orthodox monetary policy holding its average funding rate back around 12%.”
Additionally, analysts who are far more optimistic about the impact of the CGF than Robertson, have highlighted how the fund will only cover lending risk while a bank’s non-performing loan (NPL) ratio is below 7%. That in itself should keep lenders on the straight and narrow, they say. The current NPL ratio for Turkish bank lending to SMEs is around 4.5-5%.
Ash likes the look of Turkey’s cheap lira at around 3.5 to the dollar, with the real effective exchange rate still back at 2003 levels, something which has helped on the balance of payments front, underpinning portfolio inflows. He is also encouraged by the long-term underpinnings provided by strong banks, favourable demographics and Turkey’s pro-business culture and sound public finances.
But, on the downside, London-based Blackfriars Asset Management advised clients in early August that while it is positive on Turkey it has to pose the question of whether “the government has any more cards up its sleeves to keep this [bourse] rally going into 2018?” The CGF has undoubtedly played a pivotal role in the stock market boom by boosting bank stocks. The bourse’s benchmark index, the BIST 100, is bank heavy, at around 50% banking.
Given Turkey’s political strife — the state of emergency introduced after the foiled coup of July 2016 is still in effect, allowing Erdogan to rule by decree — and the wider regional geopolitical strife also unnerving investors, many analysts expected the country to struggle economically this year. But — again substantially thanks to the CGF — the Turkish economy grew 5% y/y in Q1, picking up from the 3.5% rebound seen in the previous quarter after the 1.3% slump experienced in the third quarter of 2016, data from national statistics office TUIK showed on June 12.
Nevertheless, taking into account the near-emptied CGF, Blackfriars is among many fund managers who think it may be that only an interest rate cut can maintain GDP growth momentum and stock market activity. The early summer saw Erdogan and Prime Minister Binali Yildirim ramp up their aggressive rhetoric calling for cheaper lending from the banks. The best hope for that is that Turkey’s sticky high inflation of around 9.5% falls in coming months, giving the central bank a long-awaited chance for a spot of loosening.