May 21 2019

Turkey's staggering credit growth very destabilising – IIF chief economist

Turkey’s efforts to boost lending to consumers and businesses reached "staggering" proportions ahead of municipal elections on March 31, said Robin Brooks, chief economist at the Institute of International Finance in Washington D.C.

New lending in March totalled 60 billion liras (almost $10 billion), or 1.5 percent of Turkey’s gross domestic product, said Brooks, who previously worked at the International Monetary Fund and for investment bank Goldman Sachs as its chief currency strategist.

The March lending was “a truly massive credit impulse in just one month”, Brooks said in comments on Twitter on Tuesday. “Very de-stablising to the economy, the balance of payments and the lira!”

Turkey’s government has used state-run banks to spur lending to the economy, which slumped into a recession in the second half of last year. Investor concerns about economic policy and nervous Turks have sold the lira this year, bringing declines of about 13 percent against the dollar. The currency lost almost one third of its value in 2018 due to an overheating economy and a political crisis with the United States.

Brooks said the IIF's technical models showed that the lira was undervalued by 8 percent and should be trading at 5.5 per dollar. The currency fell 0.8 percent to 6.06 per dollar at 4:40 p.m. local time in Istanbul.

"But if another credit expansion happens in coming weeks, we'll have to downgrade our lira fair value," he said. "That's because another credit push degrades BoP adjustment and destabilises the lira."

Some economists say that while such technical assessments of a currency's price are valuable, they don't sufficiently take into account geopolitical developments and domestic political issues that might impact consumer and investor sentiment.