Without external funds, incentives alone won’t boost Turkey’s economy

Without external funds, incentives alone won’t boost Turkey’s economy

The government claims that new incentives it recently announced will boost economic activity in Turkey in 2018. But these incentives alone will not be enough unless the economy manages to secure the necessary volume of external funds.

Cabinet ministers boast that the incentive measures foreseen in the omnibus bill amount to “structural reforms.” But these are exaggerated claims. Presenting a series of unrelated incentives that heavily rely on tax reductions as such only undermines the true meaning of the term “structural reform.”

For one thing, if these incentives are to work then a climate favorable for investments must be created. At the moment, there is no such investment environment. Investors cannot easily predict what is going to happen in Turkey in the future so they cannot make investment plans. Global financial conditions, Ankara’s tensions with other countries, the political climate in the country, the continuing state of emergency, regional tensions, and ongoing military operations are among the factors preventing the emergence of such an investment climate. If you cannot improve the investment climate, incentives provided by the Treasury to create more jobs, VAT incentives for exporters, and measures introduced for scrap vehicles to boost auto sales will only have a limited impact. If economic activity fails to pick up, the revenues that help the Treasury pay for those measures will not increase and the budget deficit will widen further.

The measures announced by the government designed to bolster the country’s technological capabilities are probably the most useful ones in the incentive package. But any positive effects from them will only be seen in years to come.

Meanwhile, the government’s measures aimed at helping low-income groups are not enough to resolve the woes of the construction industry. Problems have been accumulating in the construction industry for some time and may burst into the open. The reasons behind the sector’s problems are its fast and wild expansion in recent years. The rise in interest rates has added to problems, resulting from inflationary policies. State support for the construction sector has likely already reached its limits. Unless the investment climate improves and some normalization returns to the industry then the problems of the construction sector will only amplify.

Tight credit conditions

Bankers are saying that since the start of the year demand for credit has been stagnant and lenders do not have much appetite for extending loans. They point to the fact that even though the upper limit for Treasury-backed credit - extended under the Credit Guarantee Fund, which helped economic activity pick up last year – has been raised to 50 billion liras, this has not boosted demand for credit. All banks, apart from state-owned lenders, have been acting extremely cautiously and new credit from banks may not grow too fast this year.

Both the global environment and Turkey’s domestic economic and political outlook are forcing banks to act cautiously. Lenders are having problems securing external funds. One key reason for this is that people are keeping a close eye on the size and timing of possible fines to be levied on the Turkish banking industry. It is argued that the latest developments in the U.S economy may prompt the Federal Reserve to raise interest rates, which will curb hot money flows to other economies.

This is a period in which Turkey’s macro balances, particularly inflation and the current account deficit, are ringing alarm bells. So while the banking industry is having problems securing external financing, there may also be problems related to hot money inflows. This could have a significant, negative impact on currency rates.

In sum, the government’s efforts to boost economic activity with the help of the Credit Guarantee Fund are set to reach their limits. In order to secure necessary external funds and create a favorable investment climate, a “normalization” process must start.

Erdal Sağlam, hdn, Opinion