Growth: short term gain and long term pain

We were so happy last week about being the fastest growing economy among the G-20 but at the same time, witnessed the USD/TRY rate surpass the 4.00 barrier. It’s kind of confusing to have such a rise in the foreign exchange rate in a“strong”, growing economy.

That can be explained by looking at the details of this high growth.

The growth rate of 7.42 percent in 2017 was achieved by increasing vulnerabilities and through unsustainable policies. If we look at it through these lenses, we come to the following conclusions: The most decisive factors contributing to this growth rate was extending credit volumes sharply through the Credit Guarantee Fund (CGF) and excessive incentives for employment and investments.

These incentives are not sustainable. It’s not possible for the CGF to provide such a credit expansion in a sustainable way. It’s not easy to continue the employment and investment incentives at the same scale either. Besides, figures reveal that the results were minor when compared to the scale of incentives both in employment and investments.

More importantly, going forward, fast credit expansion through the CGF, combined with policy easing regarding bad loans, increased the balance sheet risks on both companies and banks. Despite this credit expansion, employment and investment did not expand as needed – except in the construction sector. This raised the vulnerability of the whole economy.

Two major factors supporting growth was hot money and foreign funding through borrowing. An overwhelming proportion of foreign resources were short dated. That raised already high levels of vulnerability. And that will keep the economic trend continuously under pressure of debt payments and finding fresh funds.

Growth was mainly supported by domestic demand and the corresponding increased borrowing. A 12.04 percent increase in exports also supported growth but the growth rate of imports increased from 3.75 percent to 10.31 percent in the same period.

Domestic demand-based growth raised the share of the current account deficit in comparison with GDP up to a very high and dangerous level of 5.54.

Despite all the incentives, machine and equipment investments grew only by 0.69 percent. On the other hand, stocks are still on the decline, although at a more modest rate when compared to 2016. This indicates that the business world is not very confident about the future.

We saw after 2011 how growth policy supported by domestic demand and pumped by domestic and foreign borrowing may create instabilities. And that was a period where global sources were excessive and cheap. Now it is the reverse. And Turkey has much higher domestic and foreign policy risks.

Therefore, it is not possible to sustain the growth rate of 2017, and attempting to do so will lead to problems in the coming years.