ISTANBUL BLOG: Erdogan wants 5% growth out of his cheap money mount but is he flogging a dead horse?

 ISTANBUL BLOG: Erdogan wants 5% growth out of his cheap money mount but is he flogging a dead horse?
By bne IntelliNews September 23, 2019

Debt and power junkie Recep Tayyip Erdogan remains up in the saddle, steadying his mount for the ride of its life as he tries to bring back the credit-fuelled boom years that Turkey has enjoyed for so much of his 17-year rule. But this time around, will he find himself flogging a dead horse?

President Erdogan, who faces some new political challengers determined to unseat him in the wake of Turkey’s 2018 currency crisis and consequent first recession in a decade, needs a V-shaped economic recovery across 2020, and he’s aiming high—the strongman has determined that Turkey can grow by as much as 5% next year.

Some might say he’s made his way to the starting gates in good shape, having in July fired a central bank governor who was proving rather sluggish in getting around to some monetary easing and replaced him with a fella who’s knocked 750 bp off interest rates in just two months. Private banks, you might think, should be gearing up for some serious lending but—as pointed out by Ugras Ulku, an economist at the Washington-based International Institute of Finance (IIF) in the Financial Times on September 23—there’s a serious difficultly in 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.”