Markets ignore pressures for lower interest rates

Markets ignore pressures for lower interest rates

Last week, the pressure on banks for lower interest rates intensified.

The renewed calls for lower rates were led by ministers and presidential aides. The aides this time even specifically indicated what the interest rate levels should be.

When I talked to bankers about the mounting pressure for lower interest rates I observed that they simply shrug off those calls. They pointed out that politicians make such statements but the reality is always different. “We may start to feel uneasy only if such statements come from Deputy Prime Minister Mehmet Şimşek and the Central Bank’s top officials. We do not think the statements from other individuals very much have an impact,” they say.

When I told a bank manager that the government seems to be willing to do everything in its capacity to make sure that economic growth achieved last year continues well into this year, the manager said: “If they really press hard for this, interest rates would come down within a month, but one month later they will climb back to where they should be. Politicians would not do much about it.”

The bankers said that such incidents had happened in the past but the pressure on the banks only produced higher interest rates and politicians are now well aware of this. Asked if this is the case to why the pressure on lenders still continues, they said “politicians simply do this all the time.”

The bankers told me that everybody, including ministers and bureaucrats, are aware that Turkey does not have enough resources, so they [ministers and bureaucrats] have commonsense. So far this commonsense has prevailed in policy implementations, thus they do not feel very anxious, the bankers said.

Interest rates on deposits

Politicians try to make their cases for lower rates by pointing at high profits the banks are making. The bankers, however, say a better measure should be the profit to equity ratio which is much lower in the banking industry than in other industries.

It is obvious that the country has been going through a period which poses challenges to macroeconomic balances and the banks. Banks’ external debt has ballooned as they last year supported the credit expansion under the Credit Guarantee Fund (CFG) scheme. However, the sectors, such as construction, that have served as the engine of economic growth, are having problems paying back their debts. Construction companies, thus, have started to exert pressure on politicians. Those companies want the interest rates on the loans they take out from banks and the rates on housing loans to be lowered. Some large companies that have difficulties repaying their debts have requested banks to restructure their loans, raising questions as to whether “more companies would follow suit.”

The period ahead could be more challenging because political pressure may become even more intense due the elections scheduled for 2019; a snap poll is also possible. Political pressure is indirectly affecting the economy while the pressure on the banks is mounting because politicians want a prolonged economic growth.

Statements from politicians suggest that the pressure on state-owned banks is set to increase in the period ahead.

A presidential aide recently said “the interest rates on working capital loan should be 15.30 percent, which is the average interest rate charged for the loans extended under the CGF facility.” When I asked a banker about his thoughts regarding the aide’s comments, he replied: “Then they should tell us what the interest rate on deposits should be.”

The banker underlined that deposits are limited and external funding is getting scarce and inflation is running high and asked: “Given this outlook, what are the banks supposed to do?”

I hope - and this is also the banks’ wish - the pressure on banks is only rhetorical.

Erdal Sağlam, hdn, opinion