Turkey's Plan to Spur Lending Is Paying Off Ahead of Referendum

  • Loan-growth accelerates as government incentives start working
  • Authorities seen continuing with measures to spur economy
Photographer: Kostas Tsironis/Bloomberg

Turkey’s efforts to spur lending are working. The timing couldn’t be better for President Recep Tayyip Erdogan and the government’s efforts to reignite economic growth before a referendum this weekend that could give him sweeping new powers.

Annual loan growth quickened to 21.2 percent at the end of March, matching levels achieved in January that marked the fastest pace in 14 months, according to the banking regulator, known as the BDDK. The acceleration comes after the government introduced incentives including state-guaranteed loans, tax cuts and looser banking provisions to help revive the nation’s economy after a failed coup attempt in July.

Lenders are using programs backed by the government to boost credit extended to companies to help businesses stay afloat as an economic slowdown risks spurring bad debts. Turks will head to the polls on Sunday to decide whether to abolish the prime minister’s job and greatly expand the powers of Erdogan, whose administration has been grappling with a stubbornly high inflation and unemployment and high levels of corporate debt.

“We expect policy makers to continue to support economic activity,” Morgan Stanley economist, Ercan Erguzel, said in a report. 

Authorities will continue to rely “more and more” on unorthodox monetary policy and fiscal measures, he said. This would include measures like the Credit Guarantee Fund, known by its Turkish initials KGF, a government initiative where it acts as a guarantor in the credit applications of non-financial companies.

Above Threshold

So far, it’s paying off. The momentum in loan growth, fueled by the KGF, is now higher than the central bank’s previous threshold of 15 percent, and significantly higher than before the coup attempt when it stood at about 12 percent.

Banks have extended 108 billion liras ($29.1 billion) of loans to 155,000 businesses under the program since November, Ankara-based KGF said in an emailed response to questions. The government previously said that KGF will be able to back as much as 250 billion liras of loans.

State banks are playing a bigger role than privately owned lenders in spurring the lending boom after Erdogan, who is well known for his opposition to high interest rates, urged them to cut interest rates on mortgage loans and extend more credit at cheaper prices. Moody’s Investors Service predicts the economy will probably expand 2.6 percent this year, compared with 2.9 percent in 2016 and 6.1 percent in 2015.

“This divergence is most apparent in consumer loans, where public bank lending is growing at more than 20 percent in annual terms versus 6 percent growth in the private-sector banks, ” HSBC Holdings Plc economist, Melis Metiner, said in an e-mailed report.

Upward Pressure

Questions remain on whether the growth in lending can be sustained. The loan-to-deposit ratio of banks climbed to a record 124.8 percent at the end of February, according to the banking regulator data, which means banks either need to attract more deposits or borrow externally to find fresh funding. Banks are seeking a change in the way their liquidity-coverage ratios are calculated to free up more cash.

“Record high loan-to-deposit ratios and double digit inflation have already started to put upward pressure on deposit interest rates amid an acceleration in lira denominated loans,” said Cagdas Dogan, a banking analyst at BGC Partners Inc. in Istanbul. “Banks will continue to utilize foreign borrowings but their contribution could be limited as an incremental funding option.”

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE