Loans Risk Fueling Debt Tinderbox Under Economy: Turkey Credit

The Turkish central bank’s pledge to keep interest rates low is fueling a credit boom, perpetuating a debt-driven economic-growth model that Deputy Prime Minister Ali Babacan says is undesirable.

Lending to households jumped 28 percent and rose 41 percent for businesses in the year to Sept. 13, the banking regulator in Ankara said yesterday. That compares with less than 4 percent for households and companies in Poland in the year to June 20, and 12 percent for companies and 33 percent for individuals in Russia for the year to Aug. 31, data compiled by Bloomberg show.

While Turkey was the fastest growing major economy in Europe at 4.4 percent in the second quarter, industry and exports need to be drivers rather than domestic consumption and government spending, Babacan said in a speech at the Istanbul Finance Summit Sept. 18. Central bank Governor Erdem Basci cut the average cost of funding for banks to 6.1 percent last week, or 1.1 percentage points below August inflation.

“The risk is consuming while production is weak -- getting more and more in debt,” Haydar Acun, managing director of Sardis Securities in Istanbul, said by e-mail yesterday. “One day -- boom -- you can have large-scale bankruptcies in a chain.”

Turkey has the fourth-lowest proportion of non-performing loans in Europe, after Finland, Austria and Luxembourg, at 2.76 percent of all borrowing, according to July data compiled by Bloomberg. Even so, total bad debt has jumped 24 percent to 27.5 billion liras ($13.8 billion) in the past year.

Warning Sign

The 30 percent increase in lending in the past year is double the central bank’s 15 percent target. The amount outstanding climbed to 986 billion liras from 805 billion liras at the end of 2012, according to the banking regulator. Gross domestic product was $786 billion at the end of last year.

Turkey’s lending as a proportion of GDP poses risks, according to William Jackson, an economist at Capital Economics in London.

“A rise in the credit-to-GDP ratio of 3 percentage points over a year is a warning sign,” Jackson said by e-mail yesterday, citing International Monetary Fund reports. “In Turkey, we estimate that credit-to-GDP rose by 4 percentage points simply between the first and second quarters of this year.”

While Turkish banks are capitalized enough to withstand a substantial deterioration in bad loans, “the Turkish credit numbers do look worrying,” Jackson said.

Stimulus Measures

Even as the central bank keeps a lid on domestic lending rates, banks are being charged more to borrow on international capital markets by investors, who are monitoring the Federal Reserve as it prepares to taper its stimulus measures. The yield on dollar bonds due September 2022 from Turkiye Garanti Bankasi AS, the country’s largest lender, rose to 6.4 percent yesterday from 5.1 percent a year ago, data compiled by Bloomberg show.

The yield on Turkey’s 10-year government notes rose six basis points, or 0.06 percentage points, to 8.98 percent yesterday, the third-highest in major emerging markets, behind India and Brazil. The cost to insure Turkish debt against non-payment using credit default swaps was 187 basis points, compared with 162 a year ago.

The central bank’s guidance for 15 percent loan expansion was based on an assumption of “balanced growth in which net exports contributed,” Seyfettin Gursel, an economist at Bahcesehir University in Istanbul, said by telephone yesterday. That didn’t happen as Europe remained in recession and Turkey failed to gain through competitiveness, he said.

Babacan’s focus is “at least giving a message to his government by reminding them of the need for structural reforms,” Gursel said.

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