Orhan Turan, head of the Turkish Industry and Business Association (TÜSİAD), said the government still has time to avert an economic crisis in the country, but the trend is very dangerous. His polite warning to the government to change tack in economic policy comes on the heels of the other influential business lobby TOBB’s leader Rifat Hisarciklioglu urging Central Bank to instruct banks to cut loan rates.
The economic cost of the government’s low interest rate policies, in the form of the highest inflation in 24 years and a weaker lira, are becoming heavier, Turan said in an interview with the Sözcü newspaper published on Monday.
“Time is running out,” Turan said. “These policies obviously did not yield results. What is the plan B of the economic management?”
Inflation in Turkey has surged after the government ordered the central bank to cut interest rates late last year and state-run banks lent to the economy at below market rates to engineer economic growth. The policy has led to a sell-off in the Turkish lira, which hit successive record lows late last year, forcing the government to introduce special lira bank deposits linked to the dollar.
Turkey is not fighting inflation, which hit 79.6 percent last month, with the right methods and the country is far from achieving its targets, whether that be for the current account, the exchange rate, or credit default swaps (CDS), Turan said.
“We are losing time. Every moment lost has an economic cost,” he said.
The Turkish lira, which has lost more than a quarter of its value against the dollar this year after dropping 44 percent in 2021, is about to face a testing time with syndicated loans and Eurobonds falling due, and the maturing in August of the FX-linked lira deposits, Turan said. It will be important to seek to what degree Turkish businesses stick to investing in the deposits or switch into foreign currency, he said.
Turkey is now implementing macro-prudential economic measures to encourage Turks to invest and borrow in the lira and to increase interest rates on some loans. Turan said that TÜSİAD believed that the measures were not designed for monetary tightening purposes but rather to prevent a flight of capital from the lira into foreign currency.
“The inevitable result is that financial conditions tighten and access to credit becomes even more difficult,” he said. “At the end of the day, we are faced with high inflation, high loan interest rates and a depreciating lira.”
Turkish Economy Won’t Survive The Winter
Neither inflation nor borrowing costs would have been this high today had Turkey followed the correct policies, Turan said. Banks price their loans by calculating and predicting costs and each increase in costs means higher interest rates, whether that cost is inflation or constant changes in regulations, he said.
“Access to credit becomes expensive and the investment environment weakens,” Turan said.
TOBB chair Hisarciklioglu pleaded with the Central Bank twice to take measures to lower loan rates, which are not hovering at 45% for sub-prime borrowers, in a setting where Central Bank policy rate is 14% and the average savings deposit rate 17.9%.
Turkish businesses have been quiet and very deferential to Erdogan’s increasingly inane economic policies largely in fear of persecution. Indeed, as Hisarciklioglu crusaded against tight financial conditions, his flagship company Nuh Makarna (Pasta) was immediately probed by the Anti-Competition Board for price gauging.
While business may still be cowed by this rude method of intimidation, AKP is losing its main pillar of support, namely small and medium businesses. It is fascinating to watch Erdogan’s strategists choosing to kill the messengers, instead of sorting out the bad news.
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