Credit Guarantee Fund: Will It Juice Economy?

Turkish government introduced a new facility so-called ‘Credit Guarantee Fund’ a couple of months ago to boost the economic activity by spurring lending to small and medium size enterprises where majority of the country’s workforce is employed. As is Clear from its name, this is typically a system of state-guaranteed lending in which the government provides TRY25 billion in cash with the aim of creating a lending base of TRY250 billion with a leverage of 1:10. The guarantee will be offered to the banks if they keep the NPL ratio below 7%, but also note that provisioning standards was loosened by the banking regulator recently.

As we look at the y/y changes in installment commercial loans, we observe government’s push functioning as a strong incentive to increase the volume across the board. This also marked the strongest short-term momentum ever in the data set provided by the banking regulator. As of mid-April, the total amount of loans utilized by the corporates reached at TRY140 billion.

Meanwhile NPL ratios for the SME segment has been slowly but steadily rising since 2015 and current stand at 5.2%. There have been speculations around Turkey’s banking regulator’s loosening in provisioning policy led some preternatural improvements in the asset quality front. Whether it is true or not, one need to admit that we are not in a malign cycle regarding the credit metric as evidenced by the soar in bad loans.

Will these funds give way to new investments which would minimize the erosive impact of slowing growth and turn it into a faster one in the upcoming period? According to a Turkey’s daily Haberturk (see the article here in Turkish), some of the cash placed in companies is wasted on buying property and luxury cars. As evidenced by the data, corporates use the funds to close the revolving/overdraft accounts and to deposit the proceeds back to the banks. Government’s efforts, on the other hand, seemed to create an uptick in investment expenditures according to the sub-index of real sector confidence index but more improvement is needed to make a certain assessment of strength of the investments.

Turning back to the question asked at the headline of the article, in our view, there appears to be two important concerns; i-the moral hazard created with state guarantees that kind of would lead a ‘sub-prime SME lending crisis’, ii-more debt for already indebted corporates in period when deleveraging has to be an overriding theme for developing economies. That being said, this could lead some faster economic activity and earnings boost for banks in the short term, but there will a lot more talk of uncertainties in the medium-term.

The Impact of Credit on Turkey’s Growth

Credit impulse is an economic measure first introduced by Deustche Bank economist Michael Biggs. It is simply the change in new credit issued as a percentage of GDP. The conventional method measure used when associating developments in credit with developments in domestic demand is credit growth which actually is the growth in the stock of credit. But one should consider that domestic demand depends on the amount borrowed in a particular period, or the flow of credit. If this is correct, then growth in domestic demand is a function of growth in new credit issued, not growth in credit. Therefore the impact of credit on demand would also depend on the amount of credit extended relative to the size of the economy. As a consequence, the generated measure named as “credit impulse” at this stage emerges as a very helpful tool to overcome this issue.

Based on the methodology explained here, this is how Turkey’s credit impulse looks like.

Turkey Credit Impulse

I also recently posted that we would probably see a cyclical increase of consumption in the third quarter of this year. As expected this will lead a remarkable rise in GDP. Additionally, high GDP growth in the third quarter scenario was also backed by the August’s official industrial production data which reveals 5.2% rise in production activity on yearly basis as well as is visualized as follows.

Turkey Industrial Production