HSBC on credit and borrowing in Turkey

Murad
Sezer/Reuters

• News out of Turkey about its stuttering economy has
  slowed over the past few days, but major issues
  remain.
• After the collapse of the lira, HSBC’s Melis Metiner is
  now warning of another thread to the country’s fragile
  economy.
• Credit growth in both the commercial and domestic
  sectors is slowing sharply, likely presaging a significant
  weakening in growth going forward.

After the flare-up in Turkey which saw its currency drop 25%
in a week, major tensions with the US, and even talk of its
entire economy collapsing, things appear to have quietened down
over the past few days, as the country settles in to try and
solve its problems.

Just because things have calmed down, however, doesn’t mean
Turkey is out of the woods yet, and a recent note from HSBC shows
just why.

Writing to clients this week, HSBC’s Melis Metiner, an economist
for central and eastern Europe, the Middle East, and
Africa, said that there are still several signs that things could
get worse before they get better in the stricken nation.

The big issue, Metiner says, is the fact that growth in
people and businesses being given credit is so low.

“A look at recently released data shows that a more
challenging external backdrop and TRY [the Turkish lira] weakness
and volatility have dragged credit growth lower,” Metiner
wrote.

“Consumer loan growth has slowed from around 20% in the
middle of last year to 14% in annualized terms,” she
continued.

“The slowdown in commercial loan growth has been much more
marked, with the annualised pace falling below zero in
mid-August, the slowest pace since 2009.”

“Total loan growth, as a result, has slowed to around 4% in
annualised terms, the slowest pace seen since 2015.”

The chart below illustrates that sharp slowdown (in this
case in domestic credit):

HSBC

While too much credit can be a negative for an economy, as
borrowers overstretch themselves leading to possible defaults,
credit helps to allow households to spend, and companies to
invest in their businesses. If credit slows too sharply, the
subsequent lack of investment can lead to slowing economic
growth.

Metiner believes this could manifest itself in Turkey,
saying that slowing growth in credit “is set to weigh on Turkey’s
growth, especially private investment.”

The natural response to such a slowdown, Metiner notes,
would be for the Turkish central bank to raise interest rates in
order to fuel spending. “We believe further policy tightening and
a prolonged period of tight policy are both warranted.”

She also notes, however, the reticence of the Erdogan
administration to allow such moves.
Erdogan himself is staunchly opposed to high interest rates,
and once publicly described them as “evil.”