We’re approaching the end of the road
It is becoming increasingly clear that the cost of politics to the economy is growing and that the second quarter of this year will result in a contraction, as in the previous two quarters. Decreasing growth expectations, which have become almost entirely dependent on the increase in loans due to diminished investor and consumer confidence, seems inevitable as the burden of support to the real sector remains solely for public banks due to the decrease in new loans of private banks and the decline in credit volume in foreign banks. To which extent the loans will turn into investment and production is another question mark.
The “special issue bond” operation, which will be carried out to strengthen the capital of public banks, indicates that this resource is also reaching its limits. In addition, a concern that is particularly alarming in international financial institutions is that efforts to provide liquidity to the market
while reducing credit appetite will eventually require the support of the Central Bank, which may lead to higher inflation and further depreciation of the TRY. The rising cost and shrinking financing conditions in the world does not seem conducive to the need for funds in Turkey. For these reasons, it is imperative to implement at least a new medium-term program and policy set, which aims to control the growing budget deficit and prioritize confidence both within the country and abroad just after the Istanbul election.
Downsizing and cash/debt crisis
Indeed, considering that the budget deficit increased more than twice as much compared to the same period of last year, while the primary surplus turned into a deficit, it is clear that the public sector does not have any further relaxation margin. Therefore, it is not possible for the public sector - which has been the only contributor in terms of domestic factors to the national income in the last two quarters other than the contribution of foreign trade due to the contraction in imports - to maintain this role for long periods.
The 2 to 13 percent contraction in the construction, industry and services sectors, as well as private consumption, was able to keep the contraction in the economy at 2.8 percent. The decrease in employment by approximately 800,000 compared to last year is the result of this contraction. The fact that investment expenditures, which is the most significant indicator for future growth potential, is the area where the highest shrinkage was experienced, at 13 percent, makes it even more worrying. Consequently, the 2.5 percent contraction forecast by the IMF for the Turkish economy for 2019 may not be pessimistic.
The fact that Turkey has the highest CDS premium (an indicator for foreign debt payment ability) among developing countries means that the country’s outlook in terms of financing is getting worse. The fact that the ratio of financial expenses of the top 500 industrialists in operating profit has increased to 90 percent in 2018 from 50 percent in 2017 shows that the situation is getting even worse. As it is harder to repay foreign currency borrowing made when liquidity was abundant and cheap globally with the added value of production made in today’s conditions, companies have to borrow on much more costly terms and this destroys the financial structure of companies. An interesting data showing the distressed situation of the real sector from another perspective is that the rate of leakage found in tax examinations does not exceed 10 percent in income and corporate taxes based on profitability, while it is 40 percent in VAT based on cash flow and 600 percent in special consumption tax. Cash deficit and debt service is the most important problem companies.