Growth concerns create a Turkish dilemma

Growth concerns create a Turkish dilemma

It is obvious that there is “growth concern” behind every decision that has been taken lately in the economic sphere.

The new phase that started on New Year’s Eve with the hike on the minimum wage and continued with a tax amnesty and new incentives is the monetary relaxation.

Together with the normalization that followed the July 15 coup attempt, decisions that foresee relaxation have gained speed.

Following the decision of the Central Bank to cut reserve requirement ratios by 50 basis points, another series of decisions is expected to come. As the clues were given by Prime Minister Binali Yıldırım, there are plans to extend the terms for consumer credit and credit cards. 

The restructuring of credit was made possible in tourism and energy; there are rumors that the same will be done for other sectors.

In the meantime, the practice of decreasing down payments while lowering interest rates in housing credits that has been started by TOKİ, Turkey’s housing authority, is spreading fast. Everyone has lined up to implement President Recep Tayyip Erdoğan’s statement that “interest rates on housing credit should drop to 9 percent.”

The housing sector has again been picked as key for growth. That’s why the open pressure of the government and the Banking Regulation and Supervision Agency (BDDK) is being felt to lower interest rates, one way or another. Yet it is difficult to lower interest rates without the entry of foreign capital. That’s why, while there are some high drops in short-term interest rates, the same is not true for the 10-year term.
When you add the tax and social security premium amnesty, it is clear that all these are being done to revive domestic markets, boost investments and thus increase domestic demand-driven growth rates.

In other words, growth driven by only public spending is not enough. As foreign demand remains limited, there is a push on domestic demand to increase growth.

It is obvious that the government wants to see domestic demand increase but from what I see, the banking sector is supporting these efforts.

Remaining cautious

A banker summarized it like this:

“Everyone abroad asks ‘if these growth levels drop, how will the banks and private sector pay their foreign debts?’ That’s why we compare the results that will come about in the event there is no growth with the outcome of relaxing tight policies, and we prefer the outcome on the latter.”

Another banker who pointed to the negative outcomes of relaxing tight policies like the current account deficit and inflation said, “This is definitely much less detrimental when compared to the outcomes in the eventual drop of growth level from 4 percent to 1.5 percent.”

Yet bankers are of the same opinion that the government should not go overboard on these measures. 

“A cautious relaxing of tight monetary policy won’t create many problems. But if we have it both on monetary and fiscal policies, then it might turn out bad,” said a banker.

The latest data made public on industrial production on unemployment figures show there was a problem in growth in the second quarter and that this trend has continued into the third quarter.

Are there then ministers and civil servants ringing the alarm bell in the event the measures go overboard? I am not sure.