Real story behind Turkey’s third quarter economic growth

According to the Turkish Statistical Institute (TÜİK) data on national income for the third quarter, durable consumer product expenditures increased 61 percent. There is no such period with such an increase in the past 10 years. The summary of Turkey’s third quarter growth is the gigantic credit growth, the boost in durable goods consumption and gold imports. As a result, we have a boost in foreign exchange rates, an inflation of 20 to 30 percent pace and loss of employment.

It must be unique to “Alla Turca” politicians that they brag about the speed of the vehicle while they are about to hit the wall. This is what has happened to Turkey in the third quarter. A while after the “driver” was fired, this outcome was announced: In the third quarter of 2020, Turkey’s gross domestic product (GDP) grew 6.7 percent.

It is quite obvious that politicians who love to race growth rates are not interested in what price has to be paid for this. But again, there will be statements boasting such a high growth rate we have within the G29 and OECD and how we are placed near the top. However, let us note that Turkey, as of the end of September, has lost almost 80 billion dollars of its reserves compared to the same month last year and its money has lost 30 percent of its value.

It is pretty clear that in the third quarter, economic growth around the world will be close to the rate of fall. All industry production data and the PMI data confirm this. Turkey is following this route also. The only difference is that our government, which was not able to manage the pandemic crisis well, and since it always reaches for the “hammer” as it sees every issue as a “nail,” thought it could solve this only by credit expansion. Then whatever was inevitable has happened. While the interest rates were kept low, loans increased by 30 percent during the pandemic period (March-September). Public banks accounted for 60 percent of the increase in loans. Consumer credits made up one third of the gigantic 530 billion Turkish Liras of credit growth in this period.
As a matter of fact, there was a boost in consumption expenditures in housing, automobile and white goods.

According to the Turkish Statistical Institute (TÜİK) data on national income for the third quarter, durable consumer product expenditures increased 61 percent. There is no such period with such an increase in the past 10 years. This brought 9.2 percent growth in resident household consumption expenditures.

The 41 percent growth in financial services and insurance components in TÜİK production-based national income calculations is also an unprecedented growth in any quarter in the past 10 years. This is the result of the giant credit growth. So much so that finance and insurance activities, which have 3.1 percent share in GDP, had a contribution to the total increase in GDP which was equal to the contribution of industrial production. The latter’s share in GDP is 21 percent. In other words, the former has contributed 1.5 points of the 6.7 percent growth.

The growth in investment expenditures has been 22.5 percent which is the best performance in the past two years. Investments had long been declining. They have contributed 5 points to the GDP growth.
The boost in housing sales has activated constructions. While constructions account for half of investment expenditures, this sector has a notable growth of 14 percent.


Poorer middle class

Another prominent factor is the 57 percent growth in “other assets” that make up 57 percent of investment expenditures. In this item, there is gold, which is not used in production or consumption but is a store of value. Turkey broke a record in gold imports this year. In the first nine months last year, 7.4 billion dollars of gold was imported; however, in the first nine months of 2020, 18.5 billion dollars of gold was imported. In the third quarter when the GDP grew 6.7 percent, when investments grew 22.5 percent, “other assets,” which is containing the gold stock, grew 57 percent. In the third quarter, gold imports were 9.4 billion dollars. Increases in these items have contributed to the high figure in growth. The contribution from these seems to be close to 1 point. 

The summary of Turkey’s third quarter growth is the gigantic credit growth, the boost in durable goods consumption and gold imports.
Following the growth data, inflation data was released next. The outcome is alarming. The average increase in production costs for the last three months has reached 3.6 percent. This roughly means a trend of 40 percent annualized increase. Annual increase, on the other hand, has reached 23 percent. Intermediate goods production costs have increased 4.22 percent average monthly in the past three months. This figure is 30 percent in the past 12 months.

It was inevitable that this increase would be reflected on consumer prices and this is what is happening. The Consumer Price Index (CPI) growth was 14 percent while the core inflation was increasing with an 18 percent pace.

As a result, we have a boost in foreign exchange rates and an inflation of 20 to 30 percent pace, loss of employment, people withdrawn from the workforce, citizens who are on unpaid leave with an allowance of 39 Turkish Lira a day.

This environment of high growth has enabled those - who have the capacity - to spend, to invest in gold and to renew their cars but this high growth environment has cost a lot to the middle class and the poor.

Gaining time

The period of one month starting on November 7 when the Central Bank Governor and the Minister of Treasury and Finance were removed, as I predicted, was used as a “break.”

During this time, those particularly wrong policies of the past were reversed. The “active ratio” will be lifted at the end of December. This application forced banks to risky loans for the sake of credit growth. The Central Bank also lifted the minimum reserve practice based on credit growth.    

Even though the Central Bank (CB) raised interest rates and simplified the operational framework of monetary policy, it did not give a signal for the future. In fact, the November inflation rate released at the beginning of December became equal to the elevated policy rate. It remained behind the acceleration of core inflation. It was quite obvious that the CB was making a raise within an “allowed framework.” It was again behind the inflation.

While the exchange rate remained at the same level it fell to when Finance Minister Berat Albayrak was removed, during the past three weeks since then, residents have opted for foreign currency and gold. In those three weeks starting Nov. 6, resident individuals and companies bought foreign currency and gold worth 4.7 billion dollars; while foreign investors brought in foreign currency to buy 1.8 billion dollars of bonds and stocks.

Residents continue to move away from the Turkish Lira despite the hikes in interest rates. This tells us that the issue regarding economic units is not only “nominal rate/real rate” concerns; it is actually beyond that.   

Companies in difficulty

The place this excess credit expansion and the passion for negative real interest rates has taken us is here: While inflation will be booming, hike in interest rates will be inevitable. Raised interest rates will put those entrepreneurs in very difficult situations, who took credits to support their working capital under pandemic conditions. The economic boom will be followed by a recession that will last a couple of quarters, or maybe more.    

The management of the pandemic crisis is somehow drifting from the attitude of “if you do not know the correct number of cases, then you will not worry,” and the efforts to put a blanket over problems, to stricter cover up measures. It will eventually bring a new contraction period for economic activities.   

While it was crystal clear that under pandemic conditions, the balance of payments will be disrupted due to both tourism and capital movement, the lack of an economic policy boosted durable goods imports, gold importation, exchange rates and inflation, making us the only country in the world that had to increase interest rates.

In a process that we launched with slogans of “We will soon be on the rise,” what is left for us today is exchange rate, inflation, interest rate and increasing unemployment.

For a long time, seeing this management crisis, citizens and companies were taking their own measures. They were trying to take care of themselves. In this context, the answer to the question, “Why are residents still buying foreign currency and gold?” is very clear.   
The issue is the governance crisis, the one that is based on one mind only.

September 10, 2021 Central Bank's Beştepe problem