Turkey may have the wrong cure for what really ails its economy.
President Recep Tayyip Erdogan’s government has rolled out measures to break credit bottlenecks still holding back growth after recession, in the hope of generating the kind of spark that produced double-digit economic leaps only a few years ago.
But this time is proving to be different. Lending remains subdued as banks fearing for their asset quality tread carefully after last year’s currency shock. And as private companies try to restructure debt and strain to pay back foreign-currency borrowings, banks have to navigate an economy littered with unprofitable firms propped up by government support or surviving only because lenders have no way of pulling the plug.
“The core problem in the economy is there are way too many zombie companies,” said Umit Ozlale, a professor of economics at Ozyegin University in Istanbul. “The government insists on offering monetary solutions to fix problems in the private sector. Instead, zombie companies need to be cleared off the system, and should be replaced by more innovative firms with better business plans and export capabilities.”
Erdogan has looked to turn on the credit taps after a crash in the lira last year brought loan growth to an abrupt halt and dragged the economy with it.
Gross domestic product probably had an annual contraction for a third straight quarter and may have near-zero expansion in July to September, according to a survey of analysts. Turkey’s statistics agency will publish data on GDP last quarter on Monday. Economists polled by Bloomberg this month lowered their forecasts for growth next year and 2021.
Despite the government’s push to reignite lending ahead of this year’s elections and a record cut in interest rates in July, efforts to rev up the credit engine have sputtered.
On an annualised basis and adjusted for foreign-currency fluctuations, loan growth is hovering below 5 per cent after briefly touching 20 per cent in April. Companies are in no mood to borrow even though the average rate on lira loans fell near 19 per cent, from a peak of almost 34 per cent last year.
In its latest attempt to kick start lending, the central bank unveiled changes this month that tie the amount of cash banks must put aside as reserves to how much credit they extend. Results will probably disappoint, according to Fitch Ratings Inc.
“Most banks have a limited appetite to accelerate loan growth given the volatile operating environment and we think the incentives are unlikely to sway them, in most cases,” Fitch analysts including Huseyin Sevinc said in a report.
The distress is playing out on banks’ balance sheets. Non-performing loans as a share of total credit rose to 4.4 per cent in June from 2.9 per cent at the beginning of 2018, according to the regulator, which predicts the ratio could climb to 6 per cent this year.
Several challenges are now in the way of Turkey’s credit-driven growth model, according to Kubilay Ozturk, an economist at Deutsche Bank AG.
Lenders continue to suffer from the confidence shock and spillovers on asset quality after last year’s lira meltdown, resulting in a drag on credit. What’s more, “financing is still an issue with banks’ external debt rollover rates remaining fairly subdued,” he said.
The corporate sector’s foreign-exchange liabilities stood at $309 billion at the end May, equivalent to almost 40 per cent of Turkey’s GDP. When netted against their international assets, the shortfall is $180 billion, down from a record $220 billion in March 2018.
“The country as a whole, in particular the corporate sector, is more leveraged than a decade ago,” Ozturk said. “Hence the marginal impact from the credit impulse on the real economy is diminishing.”