Just check the loan-to-deposit ratio
I believe that Turkey belongs to the West, because despite everything, it shares certain values we usually refer to as democracy, the rule of law, liberty, you name it. But if that is too abstract for you, and you want a more concrete link, look no further than the balance sheets of Turkish banks. Our country’s recent reliance on domestic demand to boost growth has only made that link stronger.
Really though? Lower interest rate, higher credit expansion? It doesn’t sound very good, you might say. But it is a strong link to the West as long as that policy is sustainable. Accelerating credit expansion only strengthens that link by making Turkey more vulnerable. Let me elaborate.
The loan-to-deposit ratio in Turkey’s banking system was around 0.50 in 2004, which meant that banks were on average relying on their own deposits to make loans. That number has now reached 1.13, meaning banks are borrowing additional money to make loans. But banks cannot simply loan out their entire deposit base. They need to place a certain percentage of deposits in the Central Bank as a precaution. This “required reserve ratio” was 5 percent in 2004 and to control the rapid credit expansion of the Turkish banking sector after 2012, was raised to around 10 percent. Ali Babacan was around then. The economics team was more sensible. Together with required reserves, the loan-to-deposit ratio was 0.55 in 2004. It is now at 1.25.
What does the latter entail? First, there has been rapid credit expansion in Turkey during the last decade.
While the share of bank government debt instrument (GDI) portfolios has halved, the share of bank loan portfolios has doubled up. Second, the rapid credit expansion was not financed by rapid deposit creation in the Turkish banking system, which would have been the most stable way of funding loan portfolios. So the doubling loan-to-deposit rate has made bank balance sheets more risky. Third, with bank capitals staying constant, the doubling of the loan-to-deposit ratio from 0.55 to 1.25 means banks are now heavily relying on foreign bank loans to fund rapid credit expansion in Turkey. That makes the Turkish economy only more vulnerable to reversals. Turkey’s demand for foreign savings has only increased as a result of recent growth-pumping policies. So debt is our link to the West. The dollar market is still the deepest when it comes to foreign savings.
Rapid credit expansion was the factor fuelling domestic demand in the Turkish economy. That is how Turkey’s growth was at 3-3.5 percent, mind you. Sustainable? No. Growth induced by rapid bank credit expansion makes Turkey more vulnerable to growth reversals, especially now with the Fed decision imminent anyway.
More unconventional monetary policy exercises? Plans to increase the pace of credit expansion? Preparations for easing prudentials, like lowering the required reserve ratio? These are all calls for a rapid contraction in the Turkish economy, if you ask me. That’s what the 1.25 loan-to-deposit ratio is all about.
Macro management is now a performance on thin ice. Pity that as the ice is thinning, we had to switch to a team of weaker performers.
The good news for those wishing for a strong bond between Turkey and the West is that there is one: Debt. Cutting that tie to the West would risk the 2019 presidential elections, which no self-interested actor would be willing to do.
Remember, just check the loan-to-deposit ratio, and that should allay your fears of “losing Turkey.”