Analysis of Turkey's third quarter growth and expectations

Published 13.12.2017 02:03

Despite the external turbulence, the Turkish economy grew by 11.1 percent in the third quarter of 2017, becoming the fastest-growing country in the world in this period. Considering the dynamics that contributed to this growth, we see it is not pertinent to cyclical variables.The value-added created by the industrial sector was 14.8 percent in this period, while the service sector, which brings together the trade, transport and food sectors under the same roof, provided 20.7 percent of value-added to the growth. Also, the contribution by the manufacturing industry was 15.2 percent. Exports, with the exception of gold, soared by 17.3 percent, while total real exports rose by 14 percent. And real imports, with the exception of gold again, increased by 13.6 percent. We see that Turkey has come to be advantageous in terms of decreasing import dependency and finding different foreign markets and competing in basic industrial sectors. We also observe that, besides the export of commodities, the export of capital started coming to the fore and investments started to move from outside to inside as well as from inside to outside.

This picture is accompanied by a credit expansion of the banking system and a reduction in the rate of nonperforming loans against this credit expansion. I would not like to strangle you with figures, and you can look at the data of the Banking Regulation and Supervision Agency (BDDK). The Credit Guarantee Fund (CGF) had great contribution in this process both in quantity and in quality (in the sense of the move of moral and related investments).

The CGF contributed to the credit expansion amounting to TL 250 billion ($65 billion) and nearly TL 50 billion of it will have returned by the beginning of the first quarter of 2018. Only seven per 1,000 of these credits are poised to be nonperforming. What is noteworthy here is that while credits are expanding in the banking system, the rate of nonperforming loans is rapidly falling. For instance, the turnover rate for the CGF was TL 18 billion, while the rate of nonperforming loans was seven per 1,000. And when the turnover rose to TL 50 billion, this rate was still seven per 1,000. These credit rates show that industrial and exporting enterprises that shoulder growth is changing for the better in the last quarter of the year. These enterprises, which use a large portion of the CGF loans, are returning cash back to the banking system without delay. This is the most important indicator showing that we have started overcoming the hot money flow problem in the first and second quarters of the year and that growth will continue in a healthier way by creating jobs and investments. Also, it has helped increase deposits in the banking system.

We will see the laxation of rigidity in unemployment in the fourth quarter of 2017 and the fall of inflation in line with the Central Bank of the Republic of Turkey (CRBT) forecasts and targets in the first quarter of 2018. Indeed, industry and export dynamics have achieved stable growth, regardless of exchange rate increases. We think that the CBRT will continue to make a positive contribution to this process. The reforms and regulations, which will strengthen the fiscal policy to come into force in the first quarter of 2018, will also support pro-production growth and remove bubbles in the producer price index. We expect that the Treasury, which has been highly cautious in 2017 and made unnecessary preliminary borrowing, will feel free in 2017, and that it will have a marginal impact on increasing interest rates in capital markets through borrowing.

On the other hand, I think that our independent regulatory and supervisory agencies will use their regulatory power more effectively. For instance, the BDDK has very strong regulatory instruments in place to ensure that banks have the right credit placement and smoothly maintain credit expansion. As of 2018, the BDDK will switch to TPRS-9, which is a top-level regulation application. This new system allows for the management and implementation of a larger credit placement for banks. At the moment, some banks, especially big ones, are making unnecessarily high provisions. With this new system, unnecessarily cautious banks will not need this cautious attitude and the system will be more relaxed. On the other hand, new fund inflows other than deposits can be made possible by supplying the banking receivables strengthened by the CGF to capital markets. In this sense, we can say that our banking system will support growth in a more healthy and intensive way in 2018 as well. We already have a CGF volume of TL 100 billion, including unused TL 50 billion and returns. This credit facility is a dynamic that prevents production inflation without bringing a burden to the Treasury (return rates show this). In fact, the basic problem for Turkish industrialists is timely access to financing, besides high financing and investment costs. A right credit expansion to this end will also help the CRBT's inflation target.

Turkey will pursue this inclusive growth path with strong market-friendly reforms. We will see a decline both in inflation and unemployment as of early 2018.

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