Growth and employment to challenge

Dunya Executive - - COMMENTARY - Fatih OZATAY

Will there be more or less borrowing opportunities in the next few years, compared with 20152016? How will credit-extension behavior of the banks unfold? What are the possible effects of these developments on growth and unemployment?

Those were the three questions I asked in my previous column. And the reasons for them are tied to three characteristics of the increases in the volume of credit and deposits between January 2007 and February 2017.

Over the past 10 years, the increasing rate of borrowing was below that of deposits only once, in 2009, during a period when the effects of the global financial crisis were most keenly felt. Banks geared down, credit demand soured, and banks were unable to find funds from abroad. During this period, deposits were not a binding constraint yet, because the credit-deposit ratio was at 75 percent.

Back when foreign funds (i.e., foreign debt) were flowing into the Turkish economy in 2007 and again in between 2010 and 2013 the rate of loan increase was much higher than that of deposits. The credit-deposit rate soared, reaching 107 percent in the last quarter of 2013.

Since 2015, when foreign funds were below foreign financing needs due to Turkey’s current account deficit, deposit and credit volumes rose by the same rate, stabilising at 114 percent. The slowdown in foreign fund inflows and the expectation that it would persist, on the other hand credit-deposit rate at 114 percent, extension abilities of the banks were constraint.

The answer to the first question -Will there be more or less borrowing opportunities for the next few years?- is less. The U.S. economy is at full employment and inflation has reached the target level set by the U.S. Federal Reserve, which is expected to raise the policy interest rate at least three times this year. In addition, “the range” is still in discussion, but President Donald Trump’s proposed fiscal policies may also cause interest rates to rise. Such developments mean less funds for economies like ours, creating an upside risk for exchange rates and the interest rate.

To answer the second ques- tion - How will credit-extension behavior of the banks unfold? – a brief mention of the developments from 2009 onward would be helpful. Foreign fund inflows severely decreased, but this time it will not be that severe. This prediction only counts with one condition: that developments in Europe and Syria will not resume to negatively impact Turkey and the Central Bank will pursue a decent interest rate policy. Without these, foreign fund inflows will be effected badly.

That makes the third question - What are the possible effects of these developments on growth and unemployment – easier to answer. It is more likely that Turkey will be worse off for a couple years in comparison with 20152016, when unemployment and growth were not good at all.

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