Turks spurn debt, threatening Erdoğan’s economic dream – Bloomberg

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Turkish President Recep Tayyip Erdoğan has forced down interest rates on loans to help achieve an ambitious goal of turning economic contraction into 5 percent growth by next year.

But many Turks, uncertain about the future, are spurning the offer of cheap borrowing, threatening Erdoğan’s plans, Bloomberg said in an analysis on Wednesday. Instead, they are cutting back on investment and repaying debt.

“Pessimism is at an all-time high,” said Halit Direkçi, who owns a $10 million poultry business in western Turkey, Bloomberg reported. “I am investing less these days and rather focus on paying back all the loans I have withdrawn. I don’t want to make new investments through borrowing any more.”

Erdoğan sacked and replaced the governor of the central bank in early July after he refused to reduce interest rates. Since then, the bank has slashed them by 1,000 basis points, or 10 percentage points, to 14 percent, and the government has instructed state-run banks to reduce borrowing costs accordingly.

But Turkish firms and consumers are still hurting from a currency crisis last year that led to a surge in interest rates and unemployment. Despite a raft of tax cuts and financial incentives, shoppers are spending less than they were a year ago, meaning some local firms are struggling to sell their goods.

Turkey’s purchasing managers’ index, which measures manufacturing activity, turned negative in October as firms scaled back production due to a drop in demand at home and abroad. The index declined to 49 from 50 points in September, the Istanbul Chamber of Industry (ISO) and IHS Markit said last week. Any reading below 50 indicates a deterioration in the industry.

“The main issue is the lack of confidence in the economy,” said Zümrüt İmamoğlu, chief economist at TÜSİAD, Turkey’s largest business group, according to Bloomberg.

Revenue at shopping centres in Turkey rose by 3.5 percent in September from the same month a year earlier, the Council of Shopping Centres – Turkey and Akademetre Research said in a report published on Tuesday. Inflation in Turkey was reported at an annual 9.3 percent during the month, meaning spending in real terms fell, just as it has for the past year.

Loans in Turkish lira, when adjusted for inflation, hardly grew in the three months to September compared with the previous quarter, when they contracted by 3.2 percent, Bloomberg said. Fixed capital investment has contracted for four-straight quarters. At the same time, corporates are reducing their stock of foreign loans and increasing their holdings of foreign exchange.

Turkey’s central bank, now compliant with the government’s economic growth ambitions, has rewarded banks that grow their loan books by between 10 percent and 20 percent annually, while penalising those who do not.

But companies are cautious about borrowing even as interest rates fall.

“It will be challenging to kick start growth through the credit channel,” European Bank for Reconstruction & Development President Suma Chakrabarti said in an interview with Bloomberg. “Corporates and banks are very heavily leveraged compared to 10 years ago. So it’s not going to be easy to stimulate the economy though this mechanism.”

Ahval

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