Country Report Turkey April 2011

Economic policy: Banking authority supports efforts to control credit growth

The banking watchdog, the Banking Regulation and Supervision Agency (BRSA), has been supporting the Central Bank of Turkey's efforts since November 2010 to curb the growth of bank credit and hence domestic demand as part of a strategy to control Turkey's current-account deficit, which reached an estimated 6.7% of GDP in 2010. Financed mainly through volatile short-term capital inflows, the large deficit poses risks to macroeconomic and financial sector stability in the event of a reversal of capital flows if global investor sentiment deteriorates sharply. In January 2011 the BRSA established ceilings for loan-to-value ratios on residential and commercial property loans in response to rapid mortgage lending growth and as of March 1st it reversed the temporary easing of loan-loss provisioning rules adopted in January 2009, during the global financial crisis. The regulator has also sought to use its authority to pressure the banks to limit the pace of credit growth to not more than 25% annually-a pace regarded by the Central Bank to be compatible with a sustainable current-account deficit. On March 10th, the BRSA president, Tevfik Bilgin, predicted that bank credit growth in 2011 would work out at 20-25%, and that he did not think there would be a need to "twist the ears" of individual banks. However, he also suggested that the regulator would monitor not only the overall growth in bank credit volume, but also its distribution, implying that growth in export credits, for example, would be regarded more favourably than growth in credits for vehicle purchases by consumers, given their divergent impacts on the current-account deficit.

The Central Bank's monetary policy since November 2010 has twice raised reserve requirements for banks (March 2011, Economic policy). According to Central Bank data, domestic loans of deposit money banks (excluding Sharia-compliant "participation banks") stood at TL439.2bn (US$273.5bn) on February 25th 2011-4.4% higher than on December 31st 2010 and 43.4% higher than a year earlier. Within this total, consumer credit amounted to TL175.5bn, showing an increase of 3.4% over the eight-week period and 35.2% year on year. These percentages may underestimate the pace of credit growth as the volume of credit was seasonally high on December 31st. However, some of the growth of credit in January and February 2011 may be attributable to the recent weakness of the lira, since about one-fifth of domestic loans are denominated in foreign currency. In 2010 as a whole, domestic loans of deposit money banks rose by 44% year on year and consumer credit by 33%.

The deputy prime minister responsible for economic affairs, Ali Babacan, has expressed government approval for the Central Bank's strategy. On March 2nd he was quoted to the effect that while credit growth at most banks had been "quite appropriate" in the first two months of 2011, three or four banks were raising the average. He said that he hoped that the authorities would not be obliged to take "police measures" to stop this. Although the government has generally kept fiscal policy tight during the economic recovery, there is some room for further tightening, which would be supportive of the Central Bank's strategy. However, with an election just three months away, the government will be keen to maintain some room for manoeuvre.

Central government budget
(TLbn unless otherwise stated)
 2009  2010  201120102011 
 Outturn% of GDP% changeTargetaOutturn% changeTargetJan-FebJan-Feb% change
Total revenue215.522.62.8252.8254.017.9279.039.548.121.4
 Tax revenue172.418.12.6210.2210.522.1232.233.440.922.2
 Other revenue43.
Total expenditure268.228.218.1297.0293.69.5312.644.946.02.5
 Non-interest expenditure215.022.421.9247.5245.314.1265.134.336.15.3
 Interest expenditure53.
Budget balance-52.8-5.5-44.2-39.6-33.5-5.42.0
Primary balance0.
a Revised in October 2010.
Source: Ministry of Finance, General Directorate of Public Accounts.

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