Nesrin Nas
Dec 17 2017

Exaggerated growth

The growth rate in the third-quarter did not surprise. Although Deputy Prime Minister Mehmet Şimşek tried to create a positive atmosphere by saying the expectation was for 8.5 per cent growth in the third quarter, those who know economics a little bit were expecting that the rate would reach double-digits.

What we need to focus on is whether growth in Turkey is sustainable. Just as a marathon can not be run at a 100-meter race tempo, economies can not grow for long far above their natural growth rate. An economy stimulated by encouraging consumption and widening the public deficit with tax and credit incentives exhausts itself in the end. Producer price inflation, which has been accelerating and now at 17 per cent, is the most important sign of this blockage. The growing budget deficit and current account deficit are other indicators.

The business world did not welcome this growth rate with great enthusiasm. The stock markets also remained unresponsive.

The reasons for the business world’s apathy lie in the details.

TurkStat (the Turkish Statistical Institute) does not display full details of the series disclosed. Therefore, the national income series can not be compared with other economic data. In addition, TurkStat discloses growth in the sectors all together. So, to reach the truth, it is necessary to scan and crosscheck all economic data in the smallest detail.

Let’s come to the statement of TurkStat:

The GDP, with chain linked volume index (2009 = 100), has increased by 11.1 per cent in the third quarter of 2017 compared to the same quarter of the previous year.

The estimate for the GDP by production approach increased by 24.2 per cent at current prices in the third quarter of 2017 and became 827 billion 230 million TL.

In the third quarter of 2017, compared to the same quarter of the previous year, with chain linked volume index, total value added of the agricultural sector increased by 2.8 per cent; industrial sector by 14.8 per cent; construction sector by 18.7 per cent and the services sector consisting of the sum of trade, transport, accommodation and food service activities by 20.7 per cent.

The calendar-adjusted GDP with chain linked volume index, increased in the third quarter of 2017 by 9.6 per cent compared to the same quarter of the previous year; seasonally and calendar-adjusted GDP with chain linked volume index increased by 1.2 per cent compared to the previous quarter. According to the seasonally and calendar-adjusted data, the agricultural sector contracted by 0.2 per cent and the manufacturing industry by 1.3 per cent compared to the second quarter. Meanwhile, dollar-based per capita GDP in the first nine months continued to fall.

The government has long been showing just one side of the coin, and seeking to obscure the other.

Whilst the deterioration in all basic indicators, from inflation to unemployment, and from the exchange rate to the current account deficit, is accelerating we do not know who will take double-digit growth seriously. Both economists and stock market investors, who always chase short-term expectations, know very well that the government does not have much chance to continue with the tax incentives and social security support payments that have provided this growth, or renew the Credit Guarantee Fund (KGF). The numbers are obvious. According to the BRSA (Banking Regulation and Supervision Agency - BDDK), credits increased by 24 per cent in the third quarter of 2017 compared to the third quarter of 2016.

There is also a base (year) effect:

Turkey grew in the last quarter of 2002 by 11.2 per cent due to the base (year) effect; by 11.6 per cent in the second quarter of 2004 due to the base effect; and by 8.7 per cent in the third quarter of 2010, again due to the base effect.

And the other two important aspects of this growth are public expenditure and the Credit Guarantee Fund (KGF).

Public spending increases began before the referendum of April 2017 and continued thereafter. The budget deficit was 29.5 billion lira in the whole of 2016. Due to temporary tax breaks and deferred collection of social security premiums as well as rising public expenditure, the gap increased to 35 billion lira in the first ten months of 2017.

As for the credits from the KGF:

Most of these loans do not seem to have been repaid. So, it is inevitable that creditors will fall on the banks and the banks will fall on the taxpayers.

Moreover, we do not know the real amount of NPL (non-performing loans) in the banking system.

According to BRSA data, as of September 2017, NPLs were only 63 billion lira. The ratio of NPLs to the total amount of outstanding loans is 3.05 per cent. It would seem that there is no problem. However, loans granted to institutions such as Turk Telekom and Turkcell, which have turned sour, are not included in these NPLs in the balance sheets of the banks. Therefore, no provision has been reserved for this bad debt. When studying the footnotes of banks’ balance sheets, it suggests that risky loans are several times greater than those disclosed officially.

We will see the real picture when Article 9 of the International Financial Reporting Standards (IFRS) is implemented at the start of next year. This will in theory require banks to report all loans that are more than three months in arrears as bad loans. As far as we can ascertain from the footnotes of banks’ balance sheets, the BRSA seems to allow some loans to be “floated”, or not defined as non-performing, by using the authority it has under the Regulation on Classification of Loans.

The Treasury’s options are also narrowing. If the U.S. issues additional bonds to reduce its gigantic budget deficit, no one will interest themselves in the debt securities of a country that has become a permanent member of the most fragile five emerging markets. Therefore, the only option left for the government to raise capital is via Turkiye Wealth Fund (TVF) - an institution that controls Halkbank, a lender that probably violated OFAC (The Office of Foreign Assets Control of the US Department of the Treasury) rules in its dealings with Iran.