End of credit-driven growth everywhere
► Turkey is considered fragile, almost always since 2013. Now, there is a bunch of economies that are fragile because they all relied almost exclusively on debt, i.e. credit. Those countries which lack capital – and more often than not, technology - to achieve high growth rates, and which can’t attract genuine FDIs are dependent on portfolio flows and FX-denominated debt.
► This is, or rather was, a model, so to speak. I say model because such debtdependency can’t pass for a growth strategy. A strategy is by definition a long-term plan, but credit-driven growth isn’t sustainable. Since capital (equity) was (is) the binding constraint in the production function, it has been replaced by debt. ► Now, the Real, the Rouble, the Lira, the Indonesian Rupee are all fragile currencies. Whatever room the Fed’s new policy of holding creates, nothing will be the same as before. Still, there is a chance. There may be a window of opportunity in the very short term if only everything is done right.
► Clearly, the business cycle automatic recovery process that I have mentioned time and again since October 2018 is at work now. Confidence indices confirm that to some extent. Yet, I don’t know how strong that effect will be because the lira remains volatile. We are dependent on the ups and downs of the currency and oil markets, while the TRY interest rates are more and more bound from below. Policy mistakes render the lower bound on interest rates sticky, and it gets higher. ► The credit impulse is so high here that at whatever cost the government tries hard to keep loan growth going. The Credit Guarantee Fund was such a device; it replaced outright budget deficit by a delaying mechanism, back in 2017. It worked for as long as it could. Buying time didn’t help anybody anywhere though because nothing has been done in the meantime.
► Public banks may have spent every dime they could ahead of elections. Still, there is a slight recovery and credit growth turned to positive. This is a very volatile and tricky variable though. Unless loan growth, both public and private banks, stays afloat nothing is possible because capital is scarce in this economy.