In line with the urging of the president, Turkey’s central bank has been throwing open the credit taps since July and it appears consumers have started rushing to take advantage. The headache for Turkish leader Recep Tayyip Erdogan, however, is that companies are showing a reluctance to join in the dash for fresh debt.

In early July, the regulator’s benchmark interest rate stood at 24%. Then, Erdogan fired the central bank chief by decree, arguing he was not adhering to an acceptable monetary policy. His successor, Murat Uysal, dismissing the idea that the national lender no longer enjoyed independence in policy making, proceeded to oversee the slashing of the key rate in half, to 12%, with a series of decreases spread over around five months. The average cost of consumer loans, meanwhile, has declined to 16% from the 38% peak seen a year ago, central bank data shows.

Erdogan, under significant political pressure with two allies-turned-rivals putting together new political parties and renewed weakening in the Turkish lira that could mean more economic trouble, appears strongly intent on an accelerated juicing of the economy with cheaper money as he seeks to make the summer 2018 currency crisis and the bitter recession that followed seem like a distant memory. As well as bringing in rapid monetary easing, the central bank has also delivered measures to free up capital in the country’s banks to spur credit flows.

Through December 6, Turkey’s annualised foreign-exchange loan growth stood at more than 20% according to central bank data, a big contrast to the 10% contraction recorded at the beginning of 2019. Consumer loans leapt around 45% as commercial debt grew around 15% over the same period.

“Pent-up demand”

“The rise in consumer loans are mostly due to pent-up demand and refinancing as consumers want to take advantage of lower costs,” Cagdas Dogan, a banking analyst at BGC Partners in Istanbul, was cited as saying by Bloomberg. “We need to see commercial and investment loans following the trend [if it’s to be sustainable].”

“The government is aware that economic growth can’t be achieved only relying on consumer loans and therefore regulator’s latest decision tries to encourage longer term commercial and mortgage loans,” Dogan added.

The persistent calls for cheaper credit from Erdogan—who wants to move from 2019’s anaemic GDP growth in Turkey to as much as 5% next year—have mostly triggered action from the country’s state-owned banks. Loan growth at the state lenders rose 16% this year through December 6. That compares with just 2.6% at the private banks.

Not unexpectedly, the state banks’ willingness to lend has taken a toll on their profits. Their combined profit has declined 15%, while their average return on equity has fallen below the inflation rate, figures from the banking regulator show. But there are signs that private banks are now starting to bear more of the strain of extra lending, prompted by the lower central bank rates and incentives attached to new reserve requirements.

In a note, Tomasz Noetzel, European banks analyst at Bloomberg Intelligence, concluded: “Deteriorating asset quality remains a major risk for lenders, with their bad-debt ratios set to surpass 6% in 2019.

“The renewed plan to establish a bad bank in 1Q could prove critical to cleaning up balance sheets and freeing capital to reinvigorate lending and support a GDP recovery.”