Turkey’s external financing squeeze

Reuters reports that Turkish GDP is expected to grow %4 in 2021. World Bank is even more optimistic. Its first 2021 report predicts that Turkey will grow 4.5% and 5%, respectively in 2021-22.  At first sight, these forecasts make inherent sense. Despite the ravages of the epidemic, Turkey will eke  out 0.5-1% GDP expansion in 2020, thus joining  the elite group of Developing Nations, where output did not shrink.

Yet, digging deeper into the bowels of the Turkish economy and knowing Turkstat’s penchant for error, I find these forecasts unduly optimistic and prone to downside revisions.  This is first of the four articles I will write about  impediments to economic growth in Turkey.  Let me list what these will cover:

  • Turkstat data is deeply flawed and overestimates growth
  • President Erdogan has successfully destroyed all the institutions which ensure the smooth working of a free market economy, such as the courts, independent regulatory authorities, etc.
  • Turkey had a chronic underemployment problem prior to Covid-19, which shall be exacerbated by the epidemic and the resulting technological change.
  • This article focuses of credit and financing.

Simply put, I make the point that GDP growth requires financing, which is simply not present or forthcoming.

Let’s start with domestic credit.  By the end of the year, YoY credit growth exceeded 30%, which brought in its wake a distressed loan problem, which may affect as much as 15% of the total loan stock.  Furthermore, by end-year, the 13-week moving average annualized credit growth rate, the best indicator of credit trends declined to 5%. With 14.6% official inflation, real credit to household and companies are actually shrinking as I write this article.


It is not going to get better.  Several large private banks issued their 2021 guidances, with an average loan growth projection of 15%.  Given that 2021 CPI is unlikely to decline below 15% before 3Q2021, if it does than, the guidances suggest banks don’t intend to enlarge their REAL loan stock.

This make sense. They need to start provisioning for large loan losses and the prospect of a regulatory regime change, whereby BRSA may require an honest-to-God stress test, or abolish the forbearance measures, which allowed bank to float deal loans as live.  Secondly, because of falling tax revenue caused by lockdown and unemployment, the budget is forecast to yield a deficit of 6.5% of GDP or so, which  means a much higher debt financing requirement.  To recall, in Turkey commercial banks are the leading lenders to the Treasury, with pension funds and other institutional investors having a NAV of less than 3-4% of GDP.

Moreover, Turkish banks can’t make long-term loans for capacity expansion and new factories, because the duration of deposits is around 3 months. This is why Turkey’s growth spurts have always been accompanied by larger foreign borrowing.

Put differently, banks and corporates borrowing abroad more than they redeem, is a sure leading indicator of a private sector fixed investment boom.

Unfortunately, the November balance of payments data reveals that banks don’t believe in an impending investment boom, while corporates don’t plan for it.

Is Bank Economic Research writes:  Foreign direct investment declined $6.125 bn to $4.166 YoY through November.  In this period, deposits of domestic banks at their foreign correspondents increased by 1.1 billion USD, while foreign banks’ deposits at domestic banks rose by 2.2 million USD. In November, the banking sector made a net loan repayment of 629 million USD for the loans from abroad. In this period, other sectors made a net loan repayment of 191 million USD. According to 12-month cumulative figures, the long-term debt rollover ratios became 80% in the banking sector and 65% in other sectors as of November.

Can this picture change—for the better?  Why should it?  The very reason that compelled banks and firms to reduce their FX short positions remain the same:  The epidemic, erratic decision-making by Erdogan and currency and interest rate volatility.

Growth will be herd to come by in Turkey in 2021.


Atilla Yesilada, Country Analyst for Global Source Partners


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.