Mustafa SÖNMEZ Hürriyet Daily News May 25 2013

The Turkish government wants more economic growth, and growth in the domestic market seems to be the focus. However, there has been a huge increase in the level of consumer credit debt over the last decade.

There has been a huge increase in consumer credit debt to banks over the last decade. In 2003, 2.4 million people were in consumer credit debt to banks, but this number reached 13.2 million by the end of last year. 

With the effect of the global crisis, Turkey’s economy shrank by about 5 percent in 2009; but then showed a 9 percent rise of growth performance in 2010 and 2011. However, the current account deficit also increased in that period, reaching about 10 percent of the national income. Then, the targeted growth rate was decreased to 4 percent; but since the brakes were put on too much, the growth rate remained at about 2 percent. In the 2013-2015 period, three elections are to be held: local elections, presidential elections, and general elections. The ruling Justice and Development Party (AKP) wants to achieve at least 4 or 5 percent of growth by venturing all the costs. So, what will this growth be based on? Will it be on the domestic market, or foreign demand?

The Central Bank, which underwent a half point cut in interest rates last week, announced the basis for growth. While decreasing weekly repo interest called “politics interest” from 5 to 4.5 percent, the Central Bank justified it as follows: “While the domestic demand displays a healthy recovery, the export activities are on a slowdown with the effect of poor global demand.”

Growth in domestic demand

This diagnosis actually explains the route: A growth based on the domestic market will be on focus. Actually this is not a new thing. Domestic-focused growth is one of the characteristics of the Turkish economy. It is seen from the performance of the last decade that domestic demand is the main leverage of growth.

Within the last decade, which covers the 2003-2012 period, the average economic growth rate reached 5.1 percent, while domestic consumption comprised the basis of it with 3.5 percent. Net export, on the other hand, did not make any contribution to the growth (-0.5 percent), while investments contributed to it with 2.1 percent.

Unless exaggerated, both budget and public debt burden are convenient for going into increase. Especially when the third option is considered, it seems that this will be put into practice.

In 2012, families decreased their consumption by half point rather than increasing it. They delayed their spendings on durable consumer goods and housing.

The interest cuts are expected to encourage consumption again. Also, as the interests that were decreased to 4.5 percent in the face of the 5 percent inflation target are considered, saving and keeping money on deposit lose their meaning. So, will those having money in bank accounts spend them? Will the use of consumer credits and spending with credit cards increase with the interest cuts?

Household debt burden rises sharply

Within the last decade, there has been a great increase in the number of those with consumer credit debts to banks. In 2003, 2.4 million people had consumer credit debts to banks. By the end of 2012, however, this number has reached 13.2 million. According to the Central Bank and Banking Regulation and Supervision Agency, the debt stock of households for April 2013 was 285 billion liras. This number is estimated to be 48 percent of household income, thus it relied on the idea that households have a significant unutilized capacity to go into debt. The credit costs that could not be paid to banks on time are about to reach 10 billion liras and the number of people included on the black list reached 2.5 million. Some find it alarming, while others are simply not troubled by it.

It would be good to keep in mind that the households do not only have debts to banks; but also use informal debt channels. The amounts indebted to acquaintances and informal markets remain unknown. The results of the expectation surveys also do not show any sign of optimism among consumers. Meanwhile, Economy Minister Zafer Çağlayan announced that the leading indicators of the first three months were not very promising and the expected growth rate was low. We have to wait to see.

May/25/2013