Throughout the referendum campaign, President Erdogan and the Justice and Development Party (AKP) promised to move the economy back to the top of their agenda. This was easier said than done, as the field dynamics changed drastically from 2002. During the AKP’s first twelve years of governing, Turkey was a strong EU candidate, with better diplomatic relations with the West, and a rising star in the Middle East.

From a political economy perspective, Turkey has fought multiple economic shocks throughout 2016: a failed military coup, battling terrorism, and added to the Council of Europe’s watch list for compromising human rights and rule of law. Current political and geopolitical risks continue to affect Turkey’s domestic economy and economic confidence: increased role in Syria, the domestic and international effects of Kurdish prominence, and transitional effects of the constitutional change to the presidential system. The AKP government started to implement various unorthodox stimulus policies and incentives to generate new sources for funding and stimulate the economy and there are three main channels that this stimulus system relies on. Economic and financial developments suggest that Turkey needs structural reforms, well-balanced fiscal strategies, a competitive monetary policy, and a stronger banking sector to rebalance the global investment appetite.

Turkey’s Economic Coordination Council implemented one of the major stimulus policies in December 2016 to increase access to loans and export financing through the formation of a Credit Guarantee Fund (KGF) extending loans to the real sector under the government’s guarantee. KGF was designed mainly to act as a guarantor in credit applications of non-financial companies, to extend their loans with payback terms starting in six months, nine months, and over one year in some cases. Given the recent deterioration in Turkey’s GDP, and the plunge in the Turkish lira, and increase in inflationary trends, this was a targeted measure to boost growth by spurring lending.

In March 2017, it was announced that the limit of the fund was increased to 250 billion liras ($71 billion dollars), which will act as a “bail-volume-ceiling”, upon a default event. As of April 30th, 160 billion liras ($45 billion) of loans were already extended by banks to 225,000 businesses, with an average interest rate of fourteen percent. This is quite fast paced considering it is the first four months of the fund. With banks issuing loans this fast, we can expect the fund to hit its limit as early as June 2017. The problem is, the AKP government has not shared any statistics or ratios on where the non-performing loans currently stand. And, there is no easy way to calculate this ratio before the payments start coming in which is in six months, nine months, or a year.

Government officials explained that Turkey’s Treasury will guarantee an NPL ratio or a bad loan ratio of up to seven percent for each bank. However, as the government keeps encouraging the banks to lend, without producing the current standing of the NPL ratio of the program, this produces uncertainties, and increases the risk premium of Turkey’s banking sector. What is also unclear is what action the government will take, if the NPL ratios hit higher than the planned seven percent level once payments start coming in. This program serves as a potential strong instrument in postponing the effects of an economic crisis in the real sector given the high levels of dollar-denominated debt. Even in a good scenario, 250-billion-dollar worth of a credit line has the tendency to take its toll on Turkey’s budgetary discipline in 2017 and beyond, making liquidity risk management and fiscal discipline more challenging for the country.

According to Chief Economic Advisor to the President, Cemil Ertem, the KGF Fund is expected to contribute as much as 1.5% to Turkey’s GDP. However, the question is how many points will it take away from Turkey’s budget deficit as a percentage of GDP, if the high TL loan risk-premium exceeds expectations. According to Hologram Network’s calculations, assuming Turkey carries a similar amount of budget deficit from last year (with approximately 29.3 billion TL of budget deficit), and a conservative estimate of 20 billion TL deficit as a result of the Credit Guarantee Fund, this will bring Turkey’s 2017’s deficit to 49.3 billion TL, close to two percent levels of GDP. Turkey’s budget deficit was around 5.2% in 2009, and decreased to 1.1% levels on average from 2011 through 2016 with fiscal discipline measures.

The Turkey Wealth Fund (TVF) initiative is the second major economic stimulus and formed in August 2016 to finance the government’s large-scale infrastructure investments, or “mega projects” as the AKP calls them, such as bridges or canal projects in Istanbul, and other big cities. Usually countries with budget surpluses establish these funds to diversify their national investments globally. However, in February 2017, the AKP government authorized the transfer of public assets worth billions of dollars under the fund’s control, structured through the legislative decrees under the “State of Emergency” declared after the failed military coup in July.

Treasury Undersecretary Osman Celik recently announced that the fund’s value has reached $160 billion, with thirty-five billion in equity. This is the second major component of the AKP government’s efforts to raise funding, by aiming to raise collateral through foreign means. From an economics perspective, it is another unorthodox measure, as the checks-and-balances of TVF are not clearly established and it is exempt from public audit and supervision. Government officials argue that the fund will be monitored by independent auditors, and will contribute greatly to calming markets and repelling attacks in times of extreme market fluctuations. However, the management and supervision of the fund needs improvement and is yet to be tested.

The third major stimulus channel, established to bail out and extend credit to small and medium sized enterprises (SMEs), is the KOSGEB (Small and Medium Industry Development Organization). As of April 30th, 5.9 billion liras of loans ($1.6 billion) were extended to 238,595 small and medium sized businesses with zero interest rate and no payback terms for twelve months. Maturity dates are within thirty-six months. Secondly, through TESKOMB (Union of Credit and Guarantee Cooperatives for Tradesmen and Craftsmen of Turkey), an umbrella organization bringing together all the cooperatives established throughout Turkey, twenty-two billion liras of loans ($6.2 billion) were issued to 1.1 million craftsmen. The total bail out amount is expected to hit thirty billion liras ($8.5 billion) by the end of 2017, with very competitive interest rates around five percent levels.

Through these three major stimulus channels, the AKP government has found means to stimulate Turkey’s economy by an additional $240 billion dollars. The total amount of loans extended by Turkey’s banking sector already stand at 1.83 trillion liras ($522 billion), with a high credit growth ratio of twenty-one percent, and an already high loan-to-deposit ratio standing at 149 percent. In order to cope with the effects of worsening ratios, government officials recently announced plans to allow the securitization of these loans up to five hundred billion dollars, meaning Turkey’s commercial banks will be able to package and sell these loans as asset backed securities. And the buyers can include Turkey’s Wealth Fund or Turkey’s Central Bank (CBRT). 

As long as all of these measures are monitored closely with transparent tracking statistics and supported by more structural reforms, a competitive monetary policy agenda, and a growth plan based on “productivity” not just a “grow by loan” strategy, they might produce the boost that Turkey’s economy needs. However, for any fiscal and financial stimulus plan to work efficiently, there needs to be a stable political environment. If not, all these measures will only provide stimulus in the short run, and may cause more structural economic challenges, debt and capital inadequacy mismatches, in the longer run.

Merve Hande Akmehmet is an economist with a focus on Turkey, the Middle East, and emerging markets. Hande is the President of Hologram Network, a political economy consulting company in Washington, D.C. 

Image: Photo: A board showing the currency exchange rates of the U.S. dollar and the Euro against Turkish lira is on display at a currency exchange office in Istanbul, Turkey, January 11, 2017. REUTERS/Murad Sezer