Interest rates… Sometimes remedy, sometimes poison

fact that the CBRT decided to rate hikes in April was a dramatically late decision, thus a hike by 500bps is nothing but an extreme move.

Inflation rise in Turkey is definitely not similar to the US inflation rise; because, in Turkey, it is the cost that is making prices climb up, not the demand. Therefore, if the CBRT hiked rates last year, we would now be seeing better scenery of both inflation and exchange rates. But Turkey really liked hitting new records for growth. It was in full swing. CBRT had no other choice but to adapt itself to the flow.

However, since the beginning of 2008, budget balance, current account balance, inflation and consequently exchange rates have been gradually deteriorating. This was mainly caused by companies’ huge debt stock. Although companies looked like they were having nice profit on paper, I decided to make a deep analysis of February and March and it led me to some very surprising results.

“What would happen if interest rates went up higher?”

Total debt stock of holdings and group companies was above their consolidated income. And I think it still is. Besides, this was the big mystery behind the large groups’ request for “restructuring”. Decrease in revenue, cumulative losses of some group companies and extensive borrowing have resulted in their undoing. Nevertheless, the banks have rejected some of their request.

The key problem of banking sector is the foreign currency credits offered to certain sectors as well as huge amounts of loans granted to specific groups. So, I think some banks need to test their own stress level. They might as well adopt a brand new approach towards those loans called “Tier 2”, which are subject to debt collection yet not classified as “non-performing loans”. Accordingly, it would only be matter of time that loans subject to debt collection turn into non-performing loans in this new situation that we might call “IFRS 9 impact”. It is just not that easy to perform manoeuvres in an environment where interest rates keep constantly rising.

If Central Bank hiked rates one more time, even by 100 basis points just to satisfy the rentiers’ appetite, everyone, from banking sector to business owners, would have to struggle with major market difficulties. What I mean is there’s no need to put Turkish economy in jeopardy just to help those performing buy-sell trades in stock market or just to bring joy to those earning interest by keeping their TRY-denominated funds on deposit. Interest rates decisions should not be taken based on 20th century paradigms in order to avoid any maturity or market functioning-related and problem.

I surely do not wish to offend some of my columnist friends but I have to say that economy is not something you can fully comprehend if you do not step out of your comfort zones. Depending on dosing times, interest rates are either a remedy or a poison. In short, I am extending my sincere congratulations to the CBRT for making the right decision.