Ankara’s economic measures risk scaring off foreign banks (Al Monitor, August 27, 2019)

Keeping the Turkish economy afloat is becoming increasingly difficult. To stop the downturn and stimulate a return to growth, Ankara has pushed the central bank to make a massive rate cut despite the still-unripe domestic and external conditions and sought to control hard-currency prices via public banks. As a result, the central bank and the treasury, used as the main conduits of those coercive policies, have suffered major losses of credibility and funds.

As part of the same approach, public banks were prodded to cheapen loans in early August, mainly in a bid to help destocking in the crisis-hit construction sector. Yet private banks, many of them of foreign ownership, were largely reluctant to follow suit, concerned over profitability and excessive risks. The government responded with measures that effectively reward banks that lend more, namely the three state-owned banks Ziraat, Halk and Vakif, while penalizing those reluctant on loan expansion. 

Under regulatory changes announced Aug. 19, the central bank drew a link between how much credit the banks extend and the amount of cash they must put aside as reserves and the interest it pays on those sums. Banks with higher loan growth rates were entitled to more favorable terms. 

The move, which amounts to punishing those cautious on lending, has fueled fears among foreign banks that play an important role in the Turkish banking system that more fiats could come down the road. Some of them are even reportedly pondering whether to continue operating in Turkey or pull out, wary that Ankara might sustain and expand measures that contribute to unfair competition.

All those developments are taking place to the backdrop of heightened tensions within the ruling Justice and Development Party (AKP) following its major defeats in the local elections earlier this year. The AKP’s former economy tsar, Ali Babacan, backed by ex-President Abdullah Gul, is in the process of creating a new party, threatening to split the AKP base. 

The AKP is well aware that the decline in its political fortunes stems largely from the economic crisis bruising Turkey since mid-2018, but despite the sweeping powers that President Recep Tayyip Erdogan acquired under the executive presidency regime introduced last year, his government has struggled to put the economy back on track.

Above all, Ankara has failed to inject confidence in economic actors, as evidenced by monthly consumer and sectoral confidence index surveys. 

Domestic demand has fallen, especially for durable goods such as cars, white appliances and furniture, amid shrinking real incomes, hit by inflation — which shot up to more than 20% last year before easing in recent months — and growing unemployment, which remains close to 13% after topping 14% earlier this year. The construction sector, the driving force of economic growth in the AKP’s heyday, is in deep turmoil, with building tycoons — many of them AKP cronies — pressing the government to help them revive sales. 

Under the impact of economic recession and bad loans plaguing banks, Turkey’s loan volume fell to 67% of gross domestic product (GDP) in mid-2019 from 75% of GDP in the same period last year. 

Under government pressure and after the controversial replacement of its governor, the central bank slashed its policy rate by a staggering 425 basis points in late July, even though a lasting improvement in inflation has yet to be seen. Then, it was the public banks’ task to follow up with cheaper loans to consumers, only months after they had their melting funds replenished at the expense of swelling public debt. But without active participation by local and foreign private banks, real progress is hard to achieve — hence, Ankara’s need to pressure those reluctant to lend.

Under the new regulations, the central bank lowered the reserve requirements for banks with higher loan growth rates, i.e., public banks, and increased the interest it pays on those sums. Those less enthusiastic on lending, i.e., private banks, are now faced with higher reserve requirement ratios and lower return rates. The measure is effectively prodding banks to increase lending, regardless of risk and profitability considerations, which, of course, has stroked apprehension among private lenders, both local and foreign.

The concerns of foreign-capital banks cannot be ignored as they hold major sway in Turkey’s financial system. Foreign investments in Turkey’s banking system, both in the form of acquisitions and new ventures, increased notably in the previous decade, with foreigners eager to grab a share in the financial sector of the growing Turkish economy.

According to the Banks Association of Turkey, foreign-capital entities hold the majority stakes in 21 out of 34 deposit banks operating in Turkey today. They own 27% of the total of 10,335 bank branches and employ 29% of all workers in the sector. Some of them — Citibank, Deutsche Bank, Rabobank, Chase and Societe Generale — have only one to three branches, but others operate extensive networks such as Garanti BBVA and QNB Finansbank, which have 930 and 530 branches respectively. 

Some other private banks involve foreign minority partners such as Yapi Kredi, in which Italy’s UniCredit holds a 40% stake. 

According to the Banks Association, foreign capital makes about 52% of all capital in the banking system, including other categories such as investment and Islamic banks. 

With foreigners holding such important clout in Turkey’s banking sector, it is not hard to assume that impositions such as the one on reserve requirements will backfire. And if Ankara attempts to pressure private domestic and foreign banks to go easy on bad loans and keep defaulters “floating,” as it has done to public banks, the prospect of foreigners reviewing their operations in Turkey could become very real.