In Turkish President Recep Tayyip Erdogan’s hunt for domestic enemies, even the invisible hand of the marketplace is getting cuffed.
With elections just over two years away and his approval ratings dipping below 50 percent, Erdogan isn’t leaving his political fate to the vagaries of the free market. Instead, he’s risking his country’s future stability by flooding the economy with credit to engineer short-term growth, analysts say.
“Turkish economic policy is all about politics—and politics is all about Erdogan and his AKP party winning decisively in 2019,” said Nigel Rendell of Medley Global Advisors in London. “Nothing else matters.”
Since last year’s foiled coup, which triggered emergency rule, Turkey has expanded state guarantees to rush about $50 billion of lira loans to almost 300,000 businesses with little transparency over how the money is spent. The government has also pooled about $200 billion of assets into a wealth fund. That’s so it can borrow against its stakes in companies like Turkish Airlines and Turk Telekom to build popular big-ticket infrastructure that will further swell a budget deficit that’s already projected to be the highest since 2010.
Officials have even proposed letting banks securitize their total loan book of $515 billion to finance more lira lending, though they’ve already dispersed 50 percent more than all deposits in the national currency, the most of any major economy. While a 22 percent surge in credit since the failed putsch is helping fuel 5 percent headline growth, which Erdogan has trumpeted as a vindication of his policies, it’s also threatening to prolong double-digit inflation.
The immediate downside of the credit boom has been an increase in the price of money. To attract savings from a population that’s more reluctant than most to park cash, lenders have raised deposit rates to as high as 15 percent, which means they have to charge even more for lending to be profitable.
Melis Metiner of HSBC Holdings Plc says Erdogan and his allies are trying to bypass the structural, “supply-side constraints” of the economy, including low savings rates, poor education results and skill shortages—all while shielding inefficient industries with some of the most protectionist policies in emerging markets. This neglect, together with the debt buildup, risks making Turkey even more vulnerable to external shocks after the elections, she said.
“The government’s priority appears to be to keep domestic activity as strong as possible for as long as possible by leveraging the public- and banking-sector balance sheets,” the London-based economist said in a research note.
Finance Minister Naci Agbal said in an interview in March that most of the government’s recent measures related to taxes and credit are one-time in nature and their impact on the budget will disappear by 2020.
“As long as the budget gap is at manageable and controllable levels, a certain amount of increase will not hurt the perception of fiscal discipline,” he said.
The Credit Guarantee Fund, which the government created in 1991 but drastically expanded last November, lets commercial banks share some of their lending risks with the treasury, which covers 7 percent of any losses—enough for lenders to approve many clients with borderline creditworthiness.
Metiner and other economists have criticized the fund for creating a “debt spiral,” adding another element of fragility to the economy. They argue that while it allows companies to restructure debt and receive fresh loans with maturities of up to 10 years, it does nothing to improve credit quality and encourages excessive borrowing that can require even more loans to service.
Business owners like Alper Akmaner, who makes and distributes the Cire Aseptine brand of Swiss beauty products, say they would’ve had difficulties surviving, let alone expanding, without the guarantee program.
The Anthemis Cosmetics chairman, like legions of other entrepreneurs, imports raw materials for dollars and was thus ravaged by the lira’s 21 percent plunge last year. Turkey is particularly sensitive to U.S. currency swings because its current account deficit is set to be the biggest relative to output of the 20 largest economies this year and its imports are priced mostly in greenbacks.
“When I started my company, banks avoided me,” Akmaner said in an interview in Istanbul, where he employs 14 people. “Now they’re calling me.”
Akmaner, who borrowed 750,000 liras ($213,000) from two different banks under the mechanism, said the “huge cash injection” has provided “undeniable relief” for thousands of firms. It should be extended to achieve sustainable results, “otherwise, in terms of growth, it’ll be a one-off and then we’ll be back where we started,” he said.
Deputy Prime Minister Nurettin Canikli said so far the fund has backed about 180 billion liras of credit out of a maximum of 250 billion liras, after which the program will be wound down. That’s the main reason officials are considering allowing banks to bundle their loans and market them to investors, said Trieu Pham, a credit analyst at MUFG Securities in London.
“That could reduce the upward pressure on deposit rates and free up some breathing room for further loan growth,” Pham said.
For Erdogan, who’s presided over the firing and jailing of civil servants by the tens of thousands since a rogue army faction tried to topple him, prolonging the credit spree is a double-edge sword. He’s seeking a popular mandate for greater powers after pushing through a disputed referendum in April on moving from a parliamentary system to an executive presidency. Elections for both offices are scheduled for November 2019, but he can call either one early, a decision that may depend on the health of the economy.
“The risk is to face an over-leveraged economy right after elections,” said Inan Demir, Nomura International Plc’s London-based economist. “An external financing shock could lead to accelerating inflation, higher unemployment and stagnant activity right after the transition to the executive presidency.”
Even supporters of the debt and restructuring frenzy who’ve benefited from the government’s largesse are worried it may have gone too far.
“This isn’t sustainable,” said Mehmet Erdogan, chairman of Sezon Pirinc, an agriculture producer based in Istanbul that filed for bankruptcy protection two years ago. “We can’t get anywhere by borrowing and restructuring,” said Erdogan, who isn’t related to the president.
Maybe not, but don’t expect the Turkish leader to stop trying, according to Atilla Yesilada, an adviser to GlobalSource Partners, a consultancy in Istanbul.
“Voters are extremely uncomfortable with the purges and clampdowns,” Yesilada said. “Erdogan can only hold the system together by pumping in enough money to keep growth high, so he’s not going to hit the brakes.”
—With assistance from Constantine Courcoulas.