http://www.atimes.com/atimes/Middle_East/MID-01-230413.html
Turkey’s economy came to a dead stop during the first quarter, but the country’s credit bubble continues to grow.
Under the headline “Ankara’s Economic Miracle Collapses”, I argued a year ago in the Middle East Quarterly that Turkey’s economic prowess had more hype than substance. The government of Prime Minister Recep Tayyip Erdogan had financed a consumer bubble with a huge trade deficit financed by short-term interbank loans. The consumer boom is gone, but the credit bubble continues, with bank lending still expanding by 30% a year despite the stalled economy.
Turkey’s current account deficit remains in the red-alert region of nearly 10% of GDP, and it continues to finance the deficit with short-term interbank borrowings. Bubbles like this eventually blow up.
Turkey cannot blame global economic conditions, because emerging market economies are growing at 5.5% this year in the International Monetary Fund’s estimate while Turkey is not growing at all. Turkey’s government debt remains quite low at just 36% of GDP, but private-sector debt – especially short-term foreign debt – has tripled in the past four years.
Most of the US$80 billion in short-term money that Turkey has borrowed since 2010 probably came from the Gulf states, which have a strategic interest in preserving a Sunni power with an army larger than Iran’s. This largesse cannot continue indefinitely, though. Turkey’s central bank promised to reduce its foreign deficit by reducing growth. Now the growth is gone, but not the deficit. The galloping increase in bank debt indicates that Turkish banks are lending their customers just enough to pay the interest on past loans.
This puts Erdogan’s political future in question. His Justice and Development Party (AKP) won the past two national elections on the strength of its economic record. Many Turks are caught in a consumer debt spiral, borrowing to pay a 32% interest rate on credit card obligations. Consumer spending has already started to fall. A few months more of this and Erdogan’s mandate will start to crumble.
The numbers tell the story.