Kozanoğlu: If they continue to raise interest rates, both demand will slow down and the non-performing loan ratio will jump

The Turkish economy grew by 5.9 percent year-on-year in the third quarter of the year.

Household consumption also increased by 11.2 percent in the July-September period.

Stating that as a result, private consumption contributed 7.7 percent to growth, Altınbaş University Faculty of Business Administration lecturer and economist Prof. Dr. Hayri Kozanoğlu expressed that there are 2 important sources for this.

"CONSUMPTION WILL SLOW DOWN SIGNIFICANTLY"

Kozanoğlu said, "The first is the vitality brought to demand by the July wage increases. The other is that even though the Central Bank started interest rate hikes after the May 28 elections, consuming through borrowing remains attractive when compared to felt inflation. However, this trend will slow down significantly in 2024."

According to Prof. Dr. Hayri Kozanoğlu, there are two more sources of vibrant demand in Turkey that are not discussed much.

The most important one, as seen in other parts of the world, is that the upper-middle income group, in particular, is converting their increased savings into demand because they did not spend during the pandemic. The second is that the "wealth effect," primarily driven by gains in housing, automobiles, and the stock market, is fueling expenditures.

Stating that people feel wealthier due to the rise in asset prices and make their purchases more boldly, Prof. Dr. Kozanoğlu assessed, "This effect most recently manifested itself with the Turkish Lira losing around 30 percent of its value in a short time after the elections. In addition to the 91 billion dollars individuals have in banks, they also have foreign currency under their pillows. Their TL equivalents increased in a short time. It allowed them to look at the world through rose-colored glasses."

POINTED TO IT AS THE MOST IMPORTANT PROBLEM

Prof. Dr. Kozanoğlu pointed out that investments also increased by 14.7 percent during this period, stating that this provided a 3.4 percent positive contribution to growth.

He also noted that the 8.1 percent growth in construction gained momentum due to activities in the earthquake zone.

Prof. Dr. Kozanoğlu noted that the most important problem is in the agricultural sector, with only 0.3 percent annual growth.

Kozanoğlu expressed the view, "The increase in agricultural production, which has remained below population growth for a long time, stems from the supply shortage of high vegetable and fruit prices." Stating that the change in stocks is pulling growth down and that the production capacity's inability to keep up with demand is a sign of this, Kozanoğlu said, "This situation is already seen as an output gap in Central Bank reports. The same reports show that this gap will turn into an output deficit in 2024."

IMPORT RATES NEGATIVELY AFFECTED GROWTH

Noting that import and export rates in the third quarter of 2023 negatively affected growth by 2.6 points, Kozanoğlu said, "It was announced that exports increased by 7.4 percent and imports by 0.6 percent in October. However, the decline in energy and raw material prices and the restrictions imposed on gold imports were decisive in this positive outlook. Because excluding energy products and gold, imports increased by 18.8 percent in October. Indeed, while consumer goods imports jumped by 78 percent in October and 62.6 percent in the first 10 months of the year, intermediate goods imports fell by 13.5 percent in October and 9.1 percent in the first 10 months of the year. In particular, the rise of automotive and spare parts imports to 26.2 billion dollars between January and October affected these statistics."

POOR FAMILIES ALLOCATE THEIR INCOME TO BASIC NEEDS

Kozanoğlu stated that headline inflation figures do not fully explain the dilemma experienced by low-income segments.

Stating that while consumer inflation was 61.98 percent in November, unprocessed food prices increased by 81 percent annually, rents by 106 percent, and transportation by 95 percent, Kozanoğlu said that poor families allocate more than 70 percent of their income to food, housing, and transportation. Kozanoğlu said, "Therefore, the inflation they are exposed to is well above the average."

INTEREST RATE HIKES WILL AFFECT NON-PERFORMING LOANS

Reminding that demand is kept alive by individual credit card (CC) expenditures, Kozanoğlu pointed out that the individual CC balance rose to 1040 billion liras as of November 24.

Stating that the maturity difference, which is 3.69 percent monthly, has been fixed until the end of the year and that low-income citizens in particular meet their mandatory needs by borrowing with credit cards whose annual compound interest is approaching 60 percent, he said, "If credit card interest rates continue to rise in 2024, both demand will slow down and the non-performing loan ratio will jump. This is a significant social issue. Consequently, widespread reactions will emerge."

Kozanoğlu concluded his words as follows:

"In an environment where labor payments remained as low as 32.2 percent of the total in the third quarter of the year, the vitality of demand can be attributed to two reasons. The first is that the labor segment continues its expenditures by borrowing, especially thanks to favorable financial conditions before the May 28 election. The second is that those who appropriate the net operating surplus consisting of profit, rent, etc., which was 47 percent in the third quarter of 2023, also create demand in the services sector as consumers. The rise of consumer goods imports to 38.9 billion dollars in the first ten months of 2023 can be considered proof of this phenomenon."

News Source: 12punto