Credit and foreign financing
Loan credit has soared to high levels since the end of last year. Public banks led the way, then private banks tried to keep pace with public banks. This fast increase peaked in the middle of May, after which the credit expansion rate started to continuously decline. When we examine the 13-week moving average of the annual increase of foreign exchange rate adjusted credits, since the May-peak the credit expansion rate has been declining. The inflation adjusted credit expansion rate of private banks in mid-October even declined to ‘zero.’
Credit expansion is supposed to influence consumption and investments positively – in case there is no negative trend in other decisive factors for consumption and investments. For instance, if elements such as “to be able to foresee the future” and “game rules changing frequently” are positive, credit expansions influence investments positively. I’m not finished yet, a period where credit supply in on the rise should not coincide with a period where the potential of the economy is already boosting. If it coincides with such a period, it fuels inflation and increases the current account deficit in countries like ours. Increasing the growth rate would not be permanent.
In short, if there is an investment-convenient environment and the economy doesn’t grow above its potential, it’s normal to take credit expansion as a positive improvement in terms of macroeconomics. “Under normal circumstances,” for sure. What we mean by “normal circumstances” here is banks increasing the credit supply under “market conditions.” It doesn’t necessarily mean that credit expansion as a result of the Credit Guarantee Fund doesn’t fit “market conditions,” but that it may fit on some occasions and sometimes not. I would like to draw attention to another point. It’s not a skill to state that banks should collect funds to be able to issue credit. I mean collecting deposits, selling bonds and borrowing from abroad by collecting funds. Turkey has two fundamental problems in this regard. Firstly, the volume that deposit banks collect is far below the credit volume. The credit-deposit rate in terms of lira is 150%. Secondly, banks have not recently been so comfortable in finding foreign borrowing.
Both the current situation in foreign borrowing opportunities and the credit-deposit rate clearly shows why private banks have stepped on the credit brakes for the last couple of months. In other words, the growth seen in the first three quarters of 2017 is not permanent. Efforts towards making it permanent are useless under current circumstances and only serve to shake economic balances further.