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Turkey Relaxes Cap on Bank Lending, Says Economic Risks on Recession Side

Turkish Deputy Prime Minister Ali Babacan said the government won’t apply loan-growth limits to individual banks as economic growth slows.

“Some banks may exceed the 25 percent but we don’t look at it bank-by-bank,” Babacan said. “What matters is the average.” Babacan had said on June 7 that banks breaching the loan-growth target may be penalized.

Turkey’s central bank has been increased reserve requirements for lenders since December, pushing their shares down, as it sought to slow a credit boom that fueled demand for imports and helped push the current account deficit to a record. A surprise interest rates cut last month showed that policy makers are now more concerned with the risk of a recession imported from Europe, Turkey’s main export market.

Growth will slow further in the second half and “risks are now on the recession side,” with the likelihood of that outcome depending on “the effectiveness of measures taken in the U.S. and Europe,” Babacan said. Turkey doesn’t foresee risks from inflation as the country is producing less than its capacity, he said. Output rose 1.3 percent in the second quarter, down from 1.7 percent in the January-March period.

Recession Risk

Industry Minister Nihat Ergun said Sept. 7 that the country will not fall into recession, dismissing assessments from Bank of America Corp. and Goldman Sachs Group Inc. that the economy is in danger of contracting.

The government may back-date investment incentives planned for later this year to June or July to ensure companies don’t delay spending that will shore up the economy, Babacan said.

The current account deficit, which reached about 9.5 percent of output in the 12 months through July, will narrow as growth slows, he said. The government will announce its latest economic forecasts by early October, he said.

European nations should use the current crisis as an “opportunity to reform” their economies, Babacan said. The debt crisis engulfing Greece may spread to European banks unless measures are taken quickly to deal with the problem, he said.

To contact the reporter on this story: Ercan Ersoy in Istanbul at eersoy@bloomberg.net

To contact the editor responsible for this story: Mark Bentley at mbentley3@bloomberg.net

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