Public banks have strongly supported private consumption by rescheduling households’ credit card and other debt, extending additional consumer loans, and offering subsidised housing and car credits. Consumer loans grew more rapidly than commercial credits, reaching the very high annualised rate of 25% in early October. At the same time, the exchange rate, which had depreciated by 33% against the US dollar after the August 2018 shock, and the country risk premium, which had risen severely, regained some ground. The lira exchange rate and the country risk premium nevertheless remain exposed to bouts of volatility arising from political and geopolitical uncertainties, which have risen recently. Against this backdrop, the high degree of dollarisation of domestic savings and credits further increases volatility risks for the Turkish Lira.
A new economic programme introduced in September intends to lift GDP growth sharply in 2020 and 2021. As private consumption is hindered by high unemployment and low household confidence, and as private banks (which face higher loan delinquencies and are undergoing large-scale loan restructurings) remain prudent, public banks and other government financial institutions are being solicited on an ever‑larger scale. Public banks are also reported to be undertaking foreign exchange operations to help stabilise the exchange rate, within the scope provided by regulations. Together with additional subsidies and incentives to selected businesses and projects, capital formation is being stimulated largely through policy leverage. This shift may raise important risks for the quality and sustainability of capital formation in the business sector, including in activities exposed to large capital misallocation risks such as energy and real estate development. This may compound the observed past decline in productivity growth and the potential growth rate, with short-term stimulus gains risk being more than offset by durable losses in trend growth. The expansion of government-controlled and subsidised funding is also not included in formal fiscal reports or in official fiscal plans, nor are most other off-budget liabilities such as expanding government guarantees to public-private partnerships. Even though detailed data are lacking, it is clear that public contingent liabilities have increased massively over the past year.
Monetary policy has benefitted from the very benign global monetary conditions by sharply cutting the policy interest rate from 24% in July to 14% in October. At 8.6% in October, the annual inflation rate remains, however, well above the 5% target and is subject to upward risks in the period ahead as a result of sharp administrative price increases. A tight monetary stance should be maintained to ensure the continuation of the disinflation process. Ensuring the independence of the central bank is key for future credibility.
