Turkey credit boom is bigger than ever, threatening lira, IIF economist says

Turkey is experiencing a huge credit boom that makes it an outlier in emerging markets and threatens the value of the lira, said Robin Brooks, the chief economist for the Institute of International Finance (IIF).

The Turkish economy will outgrow other emerging markets due to the lending surge, but that will come at the cost of a weaker lira and a widening current account deficit, Brooks, a former chief currency strategist at Goldman Sachs, said in comments on Twitter on Sunday.

“Turkey's credit boom is bigger than ever and an outlier relative to the rest of emerging markets,” he said. “It's the latter that weighs on the lira, as current account deficits everywhere are shrinking, while the credit push to boost domestic demand means Turkey's deficit is widening.”

Investors have been selling Turkish stocks and bonds in record amounts this year and many savers are buying dollars for lira amid concerns for financial and economic stability. A boom in credit and economic stimulus by the government helped provoke a currency crisis in the summer of 2018.

The lira slid to a record low of 7.269 per dollar in early May but has since recovered to trade at 6.85 against the U.S. currency, helped by a currency swap deal with Qatar and support from state-run banks.

Turkey’s central bank has slashed interest rates to 8.25 percent from 24 percent over the past year, introduced regulations to encourage banks to lend more and spent tens of billions of dollars of its foreign currency reserves to help the government achieve its economic growth goals, keep inflation in check and defend the lira.

The economy posted a current account deficit for the sixth straight month in May as imports, driven by consumer demand, exceeded exports.

Turkey’s economic stimulus, ratcheted up during the COVID-19 pandemic with the help of cheap lending from state-run banks, has increased demand for imported goods. Meanwhile, the coronavirus outbreak is limiting sales of Turkish goods and services abroad.

Portfolio investment registered a $2.54 billion outflow in May, extending a trend this year that has seen foreign investment in Turkey’s stock market drop below 50 percent for the first time in more than a decade and a half. Tourism revenue, another key source of hard currency for Turkey, has slumped to almost zero during the COVID-19 outbreak.

Meanwhile, inflation in the country is accelerating. It stood at 12.6 percent in June compared with 11.4 percent the previous month and 8.6 percent in October. Expectations for future inflation are also deteriorating, according to a central bank survey published last week.