Limitations on credit cards may lead to lower growth: Turkish finance minister

ANKARA/ISTANBUL

Finance Minister Mehmet Şimşek said Turkey should prepare itself for a period of more modest growth, during the Second Turkey Public-Private Cooperation Conference in Ankara. AA photo

The tighter regulations on credit card payments and private consumer loans as macro-prudential measures may have a limited effect on growth in the short-term, but Turkey should prepare itself for a period of more modest growth until its current account deficit is lowered permanently, Finance Minister Mehmet Şimşek has said. However, representatives from a number of sectors foresee a further drop in domestic consumption if the draft comes into force.

Şimşek’s comments followed the announcement a day earlier of further steps to reduce the country’s crippling current account deficit, now more than 7 percent of the GDP, and the resulting dependence on inflows of speculative cash to fund it.

Turkey’s banking watchdog said late Nov. 26 that it would seek to curb consumers’ use of credit cards to pay for goods by monthly installments in the hope of stemming the flood of money spent on imported goods.

According to the Banking Regulation and Supervision Agency’s (BDDK) draft legislation, payment in installments will be limited to six months for purchases in electronics, jewelry and car rental, while it will be limited to a maximum of 12 months for purchases of domestic appliances and furniture. No payment in installments will be possible for grocery store or gasoline purchases. Car loans will be limited to 70 percent of the total amount for vehicles that cost less than 50,000 Turkish Liras. The draft also foresees the restriction of consumer credit to a 36-month loan and of car credits to 48-months.

“Turkey should continue on its path with moderate growth rates until the current account deficit is lowered permanently,” Şimşek said during the Second Turkey Public-Private Cooperation Conference. “We are now intervening more when we are making regulations, but with macro-prudential measures, which don’t limit competition.”

Turkey has seen explosive consumption-led growth over the past decade, with per capita wealth almost tripling in nominal terms, but its low savings rate and huge energy deficit have made it heavily dependent on volatile foreign capital flows.

Limits may cause rise in informal economy

Restrictions on the use of credit cards was one of the measures in the government’s medium-term economic plan to control the current account deficit, Mehmet Nane, CEO of Sabancı Holding’s CarrefourSA, said in a telephone interview with the Hürriyet Daily News yesterday.

Nane said that as the installment period will be reduced if the draft comes into force, it might influence consumers to pay with vouchers in furniture, electronics and automotive sectors and could lead to an "informal economy." In order to prevent this, the Finance Ministry should have talks with other ministries, representatives from all sectors, and NGOs, he added.

“While the current account deficit is controlled, domestic consumption and economic growth should also be assured,” Nane said.

The Automotive Distributors’ Association (ODD) General Secretary Hayri Ece told Anadolu Agency that the BDDK’s draft aimed to reduce consumption in all sectors. He said the regulations would lead to a drop in domestic consumption that would affect adversely automotive products in the long-term. Also, the Automotive Industry Association (OSD) General Secretary said the draft, which reduced the car credit period to 48 loans, would seriously affect particularly passenger cars.

Teknosa, the electronics chain owned by Sabancı Holding, said the restrictions on installment periods would negatively affect consumers’ demands in the short-term, but demands would continue in the electronics sector, in its written statement in the Public Disclosure Platform (KAP) yesterday.

The new restrictions on credit card installments, along with the latest regulations regarding minimum payment amounts and limits, would slow the growth of credit cards, but would also lead to sustainable growth, Odeabank Strategy Director Ali Kırali told Anadolu Agency. Some 47 percent of total installments in the first nine months of this year were made by installments of nine months and above, he said, noting the decrease in installment numbers would reduce both domestic consumption and the current account deficit. Though the annual growth rate of consumer loans reached 28 percent, a fall is predicted, he said.

Jewelers want lower installment number

However, Allattin Kameroğlu, head of the Istanbul Chamber of Jewelers (İKO) said in an interview with Anadolu Agency that while the draft limited the installment number to six for their sector, three would be better. Kameroğlu said that due to the volatility in gold prices, jewelers usually wanted to sell their products with an immediate cash payment or credit card payment, and it was also less risky for consumers to buy more expensive products through installments. He also added that jewelers generally do not prefer credit cards.

Meanwhile, the government recently announced its intention to regulate bank issued loans for consumption and reduce interest rates.

“If loans are issued to increase exports, production and investment, and, not to mention, to support small and medium size enterprises, we will say ‘yes.’ However, we will say ‘no’ to loans that are issued for the sole purpose of increasing consumption, as the exhaustion of such a measure will only cause harm to our economy,” Deputy Prime Minister Ali Babacan said on Nov. 14, stressing that the Turkish economy should improve saving habits, which would enable improving investments.

Last month, the BDDK announced new regulations that will bring about a series of stricter rules on credit card limits and minimum payment amounts. The card limit for people applying for a credit card will not be permitted to exceed twice the amount of their monthly income in the first year of ownership; then, the limit will increase up to a maximum of four-fold of the income in the following years, according to the new rules. Minimum payments on credit card debts will also increase. In this vein, persons whose credit card limits are up to 15,000 liras will pay 30 percent of their debt as a minimum payment rather than the 25 percent, as of January 2014. And card-holders whose limit is between 15,000 and 20,000 liras will pay 35 percent of their debt rather than 30 percent. No changes were made for cards which have over a 20,000-lira limit. The holders of such cards will continue to pay 40 percent of their debts as minimum payment.

According to an IPSOS report, Turkish people were unable to save money as a result of high debts due to loans and payment installments.

Compiled from Anadolu Agency and Reuters stories by Hürriyet Daily News staff.