Struggling western central bankers should spare a thought for their Turkish counterparts. There, unorthodox policies are both stoking inflation and crimping bank lending. To boost the latter ahead of May’s election, three state-owned banks underwent a $5.8bn recapitalisation on Friday.
Real interest rates remain deeply negative at the insistence of leader Recep Tayyip Erdoğan. Since 2018, the country’s unorthodox approach to fighting inflation has instead focused on shrinking bloated foreign debts. Turkey has shrunk its current account deficit and pursued a forced “Lira-isation” to reduce dollar dependence. Its rationale is that the latter makes domestic prices more vulnerable to external shocks.
To an extent, this policy has worked: banks have managed to shrink their foreign exposures. But it has also left the lira dangerously overvalued.
Bank deleveraging abroad has also shrunk lending at home, by 15 to 20 per cent of GDP, thinks Capital Economics. A loan to deposit ratio of 0.9 is at a decade low. But banks are in a stronger position today than for many years. Lending rates have decoupled sharply from the central bank rate of 8.5 per cent. Net interest income at Halkbank and Vakifbank, two of the state lenders recapitalised, soared by more than $2bn respectively last year. In lira terms, net profits rose at least fivefold.
Further falls in the currency should be manageable. But tighter external financing poses a risk. Banks must meet some $80bn of foreign debt and interest payments this year. Their foreign exchange buffers could help meet these but lending would be further constrained.
An opposition win at May’s election is a chance to return to economic orthodoxy. That would mean higher rates to fight inflation. But it would also require the policies that are keeping the lira artificially high to be unwound. A banking crisis may be unlikely but further economic pain appears unavoidable.
Source: Economy - ft.com
