Credit volume and growth rate

Dunya Executive - - COMMENTARY - Tugrul BELLI Columnist

There has been a sharp tightening in real credit volume over the last weeks. This credit crunch may be because banks are having difficulties finding foreign exchange funds, credit customers’ demand for foreign exchange credits have narrowed and some macro prudential measures have been taken. But lira-denominated credits have declined mainly due to interest rate hikes. At current interest rate levels, either borrowers avoid using credits or banks consider consumers asking for credit at such high rates risky and avoid providing loans to them. In short, unlike foreign exchange credits, the decline in lira credits are not liquidity relevant because when needed, the Central Bank can provide the required funds for banks at today’s interest rates “temporarily”. I call it “temporarily” because under normal conditions, credit returns to the banking system as deposits. Banks may not give credit when they reach critical levels on some ratios like capital adequacy or liquidity. But for now – at least according to published data – that is not the case.

On the other hand, economic activity itself decreases the demand for total credit needs. Consumers facing high interest rates with bigger concerns about their future cut down their (consumer, mortgage or auto) loan usage and veer into savings. That directly decreases corporate revenues. Companies, on the other hand, decrease their stock levels, extend their commercial credit maturities and try to cut their capital needs. (But creditors extending their maturities at the same time creates an adverse effect).

We can’t jump to rough conclusions about how it will affect economic growth simply by looking at the apparent contraction in credit volumes in recent weeks and the GDP series. For instance, in 2009, where GDP contracted by 4.9 percent, the total lira credit volume increase declined to 8.7 percent. Considering CPI was 6.5 percent at that time, lira credits seemed to experience a real increase despite everything. But even though the lira credit increase was 13.3 percent in the third quarter, inflation was around 25 percent. In other words, there was a high level of real decline in credit volumes. If this continues, it won’t be a surprise to see a serious contraction in GDP.

According to released estimates, the Turkish economy is entering a stagnation period in third quarter and a contraction in the last quarter. On the other hand, the lira and foreign deposits have achieved a certain stability since the Central Bank’s rate hikes.

With this, there is no valid basis to further increase interest rates on the lira.

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