Banking regulator steps in: Too little, too late

The banking regulator announced tighter rules on credit cards and consumer loans this week.

According to the draft communiqués that were released on Nov. 26, the maximum installment duration in general credit card transactions will be nine months. Installment duration in consumer electronics and jewelry will be limited to six months, whereas consumers will be able to pay for white goods and furniture in twelve monthly installments.

In addition, consumers will have to put down a minimum of 30 percent in purchases of vehicles costing less than 50,000 Turkish Liras. For vehicles more than this amount, a minimum 50 percent down payment will be required. Last but not the least, the durations of general purpose consumer loans and auto loans have been lowered to 36 and 48 months, from 60 months.

The government’s top economic officials are hoping the measures will address several interrelated economic issues. For one thing, the Turkish economy is too dependent on consumption. It would be a welcome development if some of the curbed consumption finds its way to investment. Moreover, savings are likely to go up. 

This simple reasoning tells you Turkey’s savings investment gap, which is equal to the current account deficit by national accounting identities, will probably improve, but less than the decrease in consumption. While it does not figure in the equation, consumption effects both investment and savings.

But the communiqués are also encouraging a shift from imports to domestic goods. The sectors with the shortest installment duration are those with a large share of imports. Similarly, you would have to put lots of options on even the most luxurious domestically-produced cars to make them more expensive than 50,000 liras.

Will these measures work? Some definitely will, others less so. Auto demand is likely to fall quite a bit, as down payments are currently in the 20-25 percent range. Some will undoubtedly work their way around the loan regulations. But, more importantly, they are a little too little and too late.

For one thing, Turkey’s current account deficit is more than the result of booming consumption. As President Abdullah Gül, among others, has noted, 80 percent of the inputs that go into Turkey’s exports are imported. So are the machines that are used to produce and export.

Besides, even if they won’t miraculously bring down the deficit overnight, the measures are sure to hurt growth, as Finance Minister Mehmet “Nominal” Şimşek recently noted. But Turkey has been growing below its potential for the past two years and is likely to do so again next year. 

Economists were already cautioning in 2010 and 2011 that credit growth was flashing red signs, when Turkey grew 9.2 and 8.8 percent respectively. The government and the Central Bank dismissed the warnings, arguing that the economy was not overheating. That’s exactly when credit card installments shot up. 

In essence, the banking regulator is three years late. Better late than never, I guess.