Static rates of interest

Non-decreas ng nterest rates

Analyzing the multitude of factors behind Turkey’s still high interest rates

1

What are the main factors leading to the current level of interest rates?

The first reason for high interest rates is high inflation. Factors such as the budget deficit, the Treasury’s borrowing requirement, the high current account deficit (CAD) and external debt, the burden of foreign resources required, the risk that exchange rates will exceed economic balances, credit volume exceeding deposits and risks in domestic and foreign politics are all affecting rising interest rates.

2

How is the situation regarding inflation?

In September, consumer inflation climbed to 11.20%, while domestic producer inflation was 16.28%. This is not an acceptable level in the modern world. Turkey’s inflation is also very high compared with similar countries. It is not possible to lower interest rates if inflation is so high and the future is uncertain. If you try to forcibly lower interest rates in these conditions, savers will increase inflation and interest rates by shifting to foreign exchange and consumption.

3

How does the budget deficit affect interest rates?

With election expenditure made before April’s constitutional referendum, the budget deficit almost exploded. In the first eight months of last year, the budget that gave a surplus of TRY 4.87 billion, gave a deficit of TRY 25.18 billion in the same period of this year. The eight-month primary surplus fell sharply by 68% to TRY 12.99 billion, from TRY 40.31 billion. The rapid increase in the budget deficit raises the Treasury’s need for borrowing. More borrowing by the Treasury naturally raises interest rates.

4

To what extent are Turkey’s external source needs met? 5

How much is the Treasury borrowing while financing the budget deficit?

The amount of foreign resources coming to Turkey is seriously decreasing while Turkey is in need of high external source. At the same time, the maturity date of the source is also shortening. While this makes the problem more difficult to manage, it increases the risks and causes them to stay alive.

The Treasury has borrowed much more recently than needed to finance the budget deficit. In the first eight months of the year, the Treasury’s cash deficit rose to TRY 24.69 billion due to the increased budget deficit. The Treasury needed to borrow TRY 24.69 billion to finance this deficit, but instead borrowed TRY 55.64 billion in eight months.

6

How does the CAD and foreign debt affect the rates?

Turkey’s external balances are extremely fragile. In the first eight months of the year, the CAD increased by 18.95%, from $4.34 billion to $27.23 billion. It is compulsory for Turkey to entice foreign resources to finance its CAD and foreign debt payments in the short term. Otherwise, serious problems may occur in the economy, including sudden stoppage. As of July, the sum of the foreign debt that Turkey has to pay in the next 12 months is $170.46 billion. If we add the possible current deficit, the amount of resources that Turkey needs to find in 12 months to keep its economy up tops $200 billion.

7

How does the relationship between interest and exchange rates result?

Owing to the fragilities and risks, both domestic economic actors and foreign funders always move in an uptight and vigilant fashion. With the slightest negative development, exchange rates immediately increase. Even small exchange rate increases are causing large damage to the balances of companies with open positions. With currencies on red alert, this forces interest rates to remain constantly high.

8

How is the balance between the loan and deposit volumes of the banks?

Under normal conditions, the deposit volume in banks should be higher than the volume of loans. Approaching and exceeding the credit volume to deposit volume leads to interest racing and an increase in interest to be able to collect deposits. However, as of the end of September, the credit volume in Turkey is 22.36% higher than the deposit volume. This disorder is another factor driving up interest rates.

9

Are political factors also affecting interest rates?

Political power is a pressure element on the Central Bank of Turkey to keep interest rates low. The central bank is therefore hesitant to follow a tight monetary policy. For this reason, it has to follow a complicated monetary policy. Because of the conflicting domestic political process, a decline in democracy and law, a war-type situation in Iraq and Syria in foreign policy and problematic relations with the US and the EU, Turkey’s risks and uncertainties are increasing and causing hikes in the risk premium increase, namely interest rates.

10

How do the global markets influence the rates?

The Fed also draws money from the market and begins balance sheet reduction operations. Signs from the European Central Bank indicate that the expansionary monetary policy has come to an end. This will lead to global funds shifting from emerging markets to developed countries, especially the US. As a result, resource constraints will increase in emerging markets and interest rates will generally rise in these countries.

Apart from global markets and political factors, what are the many reasons behind Turkey’s persistently high interest rates?