Paper ID Number: 201
Paper prepared for the
EY International Congress on Economics II
"GROWTH, INEQUALITY AND POVERTY"
Ankara, November 5-6, 2015
Investment and Loan Growth: Few Questions on Recent
Turkish Experience
Sakarya B.1
1 Strategy Development Department, BRSA, Ankara, Turkey
[email protected]
Copyright © 2015 by Burçhan SAKARYA, All rights reserved. Readers may make verbatim copies of this document for
non-commercial purposes by any means, provided that this copyright notice appears on all such copies.
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
Investment and Loan Growth: Few Questions on Recent
Turkish Experience
Sakarya, B.
Abstract
Following the global financial crisis researchers in advanced economies dwelled on the question
of a state of weak investment in times of favourable liquidity conditions. During this period
emerging and developing economies were relatively strong on the growth side, some even turning
into macro prudential policies to control overheating. Turkey being one of the acclaimed
economies of prudential policy measures has also been experiencing a stalled investment
recently. This mere observation brings out few questions about the relation between investment
and loan growth in Turkey. Mainly looking from banking lending perspective, this study tries to
raise questions about investment demand and sectoral preferences.
Keywords: Investment, Credit, Growth .
JEL classification:. E22, E51, O40
1. INTRODUCTION
In a recent research by Özatay (2015) one characteristic of Turkish economy was pointed
out as loss of momentum in private investment growth since the Global Crisis of 2008. The
questions raised and proposed explanations in Özatay (2015) paper focuses on the fact that the
Turkish economy was one worst hit emerging economy in the post Global Crisis period. The
growth performance was weak, external vulnerabilities were heightened, and investment was
declining, compared to peer emerging economies of the G20. While these issues remain valid
and present for Turkish economy, a different set of policies are also being discussed, namely
macro prudential policies, addressing financial stability and accumulation of systemic risk on
credit (financial) cycle. This seems to be as a dilemma for policy makers that, while worrying
about under achievement on the basis of national accounting aggregates, they are concerned about
excessive credit growth –used as the most used financial cycle indicator-.
This paper aims to raise further questions about this aforementioned economic and financial
environment, in hope for expanding our (mainly the authors) understanding of linkages between
these variables.
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EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
2. WRITING THE PAPER
The literature about the determinants of investment is highly extensive. A recent research
by Barkbu et. al (2015) provides a more than adequate literature survey about the determinants
of investment. Chirinko (1993) also states that the “…formal models have been less successful
in empirical implementation and hence in providing insights into the determinants of investment
spending” pointing out the fact that empirical models (based on consistant theory) seems to be
the better way to understand the issue. Moreover, formal or not, economic theory suggests that
weak growth is one of the main factors behind the weak evolution of investment, through the
traditional accelerator model.
Recent research by IMF (such as Barbu et.al.(2015), BIS (Banerjee, Kearns and Lombardi
(2015)) and ECB (2014, and Balta (2014)) take on the investment issue on more of applied
perspective and try to tackle the issue from the weak growth causality. However, while these
research address the issue of weak investment which is mainly explained by the lower production
level and an increased economic and political uncertainty, which makes firms reluctant to invest,
especially for some emerging market economies, which are said to be decoupling, the lack of
access to external funding can have been a factor. Hence, in comes the issue of global liquidity
and availability of external funds to these economies. Given the policy response to global crisis
and contracted economic activity, all major central banks pumped global liquidity to new heights,
where external borrowing conditions remained significantly favourable up to this day.
2.1. Bank Lending and Investment
Corporate finance theory suggests that for a given firm an investment expenditure is
financed by own funds (auto-finance) and/or by external finance. From a broader perspective firm
data indicates a high utilization of (or need for) external finance for Turkish corporate sector. For
example according to Central Banks firm balance sheet survey, share of bank loans in firms’
liabilities has risen from 19% to around 26% as of 2014. Additionally ratio of debt to equity is
around 130% for ISO500 firms.
Figure 1. Corporate Liability Structure
Turkey(1)
G7
Short Term
Financial
Debt, 10
Long Term
Financial
Debt, 19
Other
Liabilities, 27
Emerging Econ.(*)
Short
Term
Financial
Debt, 13
Short Term
Financial Debt, 5
Ownfunds, 30
Commercial
Debt, 14
Long Term
Financial
Debt, 23
Other
Liabilities,
29
Ownfund…
Commercial
Debt, 8
Long Term
Financial
Debt, 18
Other
Liabiliti
es, 12
Ownfunds, 46
Commercial
Debt, 11
Soource: ISO
(1) Average of Non-Financial Quoted Firms (*) Russia, S. Africa, Brazil, Mexico, India, China, Indonesia, Korea
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EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
Moreover the use of financial sector is predominantly bank based. This can be easily seen
by looking at the structure of the Turkish financial system, where almost 70% of total financial
assets comprises of banks, and 87.5% of financial intermediation is by banks. The flip side of the
coin is the firms, and according to World Bank data, the percentage of number of firms using
banks for investment finance is close to 80%, supporting the former evidence.
Figure 2. Share of number of Firms using Banks for Investment Finance
90
78
80
70
60
50
40
30
20
10
0
Source: World Bank
Thus moving along with this fact, one can claim that, firms major source for investment
funding is loans, thus bank loans would play a direct role on economic activity in Turkey.
Figure 1. Finance-Investment-Production
Y=F(K,L)
ΔK=I
Own funds
Direct (external)
finance
Capital Markets
Source: Turhan, Sakarya, Gökgöz (2014)
Page 3 of 12
Indirect (external)
finance
Banking
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
This brings the question of aforementioned Özatay findings and reaction of economic
policy makers towards loan growth. Thus while concerning about an underperforming economy,
policy makers are also taking measures towards mitigating systemic risk by controlling loan
growth.
Table 1: Growth, Investment and Capital Inflows
2002-2007
6.8
7.1
19.1
23.1
5.7
2.02
0.84
Growth (Turkey)
Growth (Emerging Econ.)
Private ınvestment
Machinery
Net Capital Inflow/GDP
Net FDI /GDP
Req. Capital Flow for 1 point growth
Source: Özatay (2015)
2008-2014
3.4
5.3
3.4
4.8
6.7
1.31
1.97
2012-2015
3.1
4.9
-1.2
-3.1
7.6
0.97
2.45
This may still be validated by claiming the fact that the measures were taken towards
limiting retail loans, and additional measures were taken to incentivise corporate and SME
lending. While this is actually the case especially for the post 2014 period, the weak economic
performance with high loan growth observation is still valid. Thus an analysis of (private) fixed
investment expenditure and bank loans is needed.
2.2. Fixed Capital Formation
According to Ministry of Developments data, in 2000-2014 period, the share of total fixed
capital formation in GDP has declined from 22% to 20%’lere, share of private fixed capital
formation in GDP has declined from 18% to 16% özel sabit sermaye yatırımlarının payı ise
%18’ler düzeyinden %16’lara gerilemiştir. While the share of private investment in total slightly
rose during this period, this trend lost momentum by 2012 (confirming Özatay findings).
Moreover, looking at sectoral break down of private investment, share of industry
(manufacturing+mining+energy) diminished from 50%s to 45%.
Figure 4. Share of Fixed Investment in GDP and Sectoral Breakdown of Private Investment
Composition of Private Fixed Investment
100
25
(%)
(%)
90
80
20
70
50.2 49.2 50.1 50.9 51.7 53.0 49.1 50.9 51.9 53.7 53.5
56.2 53.8 52.4
65.9 60.2
60
15
50
40
10
30
Page 4 of 12
Agriculture
2015P
2013
2012
2011
2010
2009
2008
Industry
2014GT
Services
Source: Ministry of Development
2007
2006
2005
2004
2003
2015P
2013
2014E
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
2002
PFCF/GDP
2001
TFCF/GDP
0
2000
44.1 45.6 47.9 49.1 48.3 47.5 46.5 45.0 48.4 45.9 44.7 42.6 43.0
20 32.9 38.1 41.9
10
0 1.2 1.7 1.9 2.2 2.0 1.9 1.7 1.6 1.6 1.8 2.0 2.5 3.3 3.4 3.7 3.6
5
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
Figure 5. Share of Private Investment in Total Fixed Investment Expenditure
100.0
90.0
80.0
70.0
60.0 79.3 74.4 75.2
71.3 71.2
78.2
84.5 82.3 83.4 82.3 79.7
76.1 77.8 81.4 79.4 75.8 76.4 77.8
50.0
40.0
30.0
20.0
10.0
0.0
Public
Private
Source: Ministry of Development
One thing to keep in mind is that the share of private investment expenditure has always
been high in Turkey. Thus, an inference about use of financial loans to investment to economic
activity remains strong for a very extensive period. However share of private investment has
remained subdued since 2011. This is also reflected in the public-private breakdown of total
investment expenditure. The share of private investment has declined by 3 percentage points,
since 2011
2.3. Weak Investment Issue
The weak investment problem is a highly common question asked by economist all around
to find solutions to dismal growth. Growth is expected to be ignited by (re-gained)
competitiveness and production of high value added product, which is assumed to be achived by
innovation. Thus, innovation inducing investment areas such as high tech industry is a direct
target for policy makers all around. However, in many economies first there is an issue of overall
weak investment demand, and secondly a lack of investment demand towards “preferred”
industries.
In a recent study by Banerjee, Kearns and Lombardi (2015) two main explanations are
proposed for the overall weakness in business investment [despite low interest rates and widely
accessible capital market funding].
The first is connected to the mismatch between favourable financial conditions and
investment opportunities. Meaning that firms cannot access finance easily. When internal funds
are not sufficient, external funding cannot be accessed. This explanation needs to be dwelled as
in Turkish case, firms heavily rely on external funding as pointed out earlier, and considering
shallow financial depth/ inclusion, this might be a main driver.
Page 5 of 12
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
Figure 6. Bank Loan to GDP and Bank Loan to Total Assets
65.0
80.0
60.0
(%)
(%)
55.0
60.0
50.0
50.0
45.0
Loan/GDP
40.0
40.0
30.0
35.0
Source: BRSA
Nevertheless banking sector data lessens this argument for Turkey. Financial depth is
increasing, firms are utilizing external finance through banks, and banks are allocating more funds
to their loan portfolio [regardless of their responds to lending survey]. According to CBRT’s
lending survey to banks, lending standards to firms remain neutral, even though some tightened
periods can be detected. However for the post 2011 period the standards have improved compared
to global crisis period.
Figure 7. Lending Standards to Firms
20
0
-20
-40
-60
-80
Lending Standarts to Firms
03-2005
06-2005
09-2005
12-2005
03-2006
06-2006
09-2006
12-2006
03-2007
06-2007
09-2007
12-2007
03-2008
06-2008
09-2008
12-2008
03-2009
06-2009
09-2009
12-2009
03-2010
06-2010
09-2010
12-2010
03-2011
06-2011
09-2011
12-2011
03-2012
06-2012
09-2012
12-2012
03-2013
06-2013
09-2013
12-2013
03-2014
06-2014
09-2014
12-2014
03-2015
06-2015
-100
Source: CBRT
Another source of external finance which is quite significant for Turkish corporate sector
is foreign borrowing. There, we see a stalled situation. Since the global financial crisis, while
Turkish banks had no difficulty in increasing their foreign borrowing, Turkish firms seems to at
Page 6 of 12
2014
2012
2010
2008
2006
2004
Loan/Total Assets
2002
2014
2000
2012
20.0
2010
0.0
2008
25.0
2006
10.0
2004
30.0
2002
20.0
2000
70.0
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
least keep their ground on long term borrowing with a slight increase in short term borrowing.
The non financial private external debt stock rose from around 35 billion USD to 60 billion USD
by 2006 and from there to 110 billion USD by 2009. Keepind a steady level since then.
Figure 8. Private Sector Foreign Debt Stock (million USD)
140000
120000
100000
80000
60000
40000
20000
2015Q1
2014Q2
2013Q3
2012Q4
2012Q1
2011Q2
Total
2010Q3
2009Q4
2009Q1
2008Q2
Long
2007Q3
2006Q4
2005Q2
2004Q3
2003Q4
2003Q1
2002Q2
2001Q3
2000Q4
2000Q1
2006Q1
Short
0
Source: Treasury, CBRT
A second, explanation is that even if firms do have funds to invest or access to external
finance, the uncertainty about the future economic conditions, keeps the investment demand
weak. This explanation seem highly plausible for Turkish case that the investor confidence has
been deteriorating since mid2011, despite picking up after the global financial crisis. Hence there
is an issue of market sentiment of domestic economic agents.
Figure 9. Reel Sector Confidence Index and Investment Component
140
130
120
110
100
90
80
70
60
50
RSCI
RSCI_Inv
Source: CBRT
Page 7 of 12
May-15
Dec-14
Jul-14
Feb-14
Sep-13
Apr-13
Nov-12
Jun-12
Jan-12
Aug-11
Mar-11
Oct-10
Dec-09
May-10
Jul-09
Feb-09
Sep-08
Apr-08
Nov-07
Jun-07
Jan-07
40
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
2.4. Sectoral Preference Issue
The 10th Five Year Development Plan of Turkey has a main growth strategy behind it.
Publicly announced in 2014 for 2014-2018 period. The growth strategy is explained as “The main
strategy for high and stable growth is developing the private sector-led, open and competitive
production structure. Increasing productivity and accelerating industrialization process are
milestones of this strategy”. Thus the strategy relies on increased industrial production, hence
capacity. So there is a need for increased investment expenditure in industry and manufacturing.
Figure 9. Manufacturing Industry Value Added / GDP
28.0
26.0
24.0
22.0
20.0
18.0
16.0
14.0
12.0
10.0
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
(%)
Source: SIS
Evidently national accounts displays a sharp decline in manufacturing industries value
added share in GDP since year 2000. This can be attributed to impressive growth performance by
the services sector, but ultimately, as of 2010s this fact threatens Turkish growth perspective as
addressed in the development plan.
So, is the decline in weight of manufacturing and industrial value added matched with
investment and loan demand for these sectors? As noted in previous section, the overall private
investment expenditure is weak despite favourable or at least neutral conditions. Is there a further
deterioration in “desired” sectors? A similar question is asked by Busetti, Giordano and Zevi
(2015) for Italy. The main research findings are that the non-financial private services were the
main driver of the decline in the aggregate investment rate, the reallocation of value added away
from industry was a further drag on investment. Their survey findings, and aggregate model of
investment indicates that even during the recent double recession the most important driver of
capital accumulation was demand conditions. Finally, they claim “…uncertainty provided a
sizeable drag on investment growth not only during the global financial crisis but also in the last
two years”.
Similar to Italy’s situation, despite policy documents dictate, following the abrupt rşse in
retail loans by 2003, share of loans to industry declined by around 10-15% points. The share of
services sector with in total loans also displayed a similar fall, but that needs to be further
analyzed.
Page 8 of 12
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
Figure 10. Sectoral Breakdown of Total Loans
100.0
90.0
0.5
1.2
(%)
27.0 29.3 31.2 32.6 31.7 32.9 32.1 32.3 33.4 32.0 29.7
80.0
70.0
56.8 54.4
60.0
40.6 41.8
39.9 39.7 39.4 39.8 40.2 38.8 38.4 39.6 40.9
50.0
40.0
2004
2005
2006
Retail
3.5
3.5
Services
3.8
4.1
Industry
4.3
3.9
3.3
3.6
2014
3.6
2013
4.4
2012
5.1
2011
4.3
2010
8.2
2003
0.0
27.3 24.5 25.3 24.2 25.4 23.5 23.6 24.6 24.2 25.0 25.8
2002
10.0
2009
34.4 40.1
2008
20.0
2007
30.0
Agriculture
Source: BRSA
Looking at sub sectors with in industry and services, Turkish manufacturing industry and
its value added coupled with a weakening investment preference for this sector, according to the
banking data. Bank loans for manufacturing industry which around 30-35% in 2003 began to
decline significantly to almost 20% by 2009. And while the total services sectors share in total
loans diminished, construction sub-sector became a power house, increasing its share by almost
doubling previous levels. Moreover considering the mortgage segment of retail loans, that easily
be linked to construction and dwelling, the preference towards construction and housing in
expense of manufacturing can easily be seen.
Figure 11. Selected Sectoral Shares in Total Loans
45
40
Manufacturing
Construction
Housing
Construction+Housing
35
30
25
20
15
10
5
12-2002
06-2003
12-2003
06-2004
12-2004
06-2005
12-2005
06-2006
12-2006
06-2007
12-2007
06-2008
12-2008
06-2009
12-2009
06-2010
12-2010
06-2011
12-2011
06-2012
12-2012
06-2013
12-2013
06-2014
12-2014
06-2015
0
Source: BRSA
Page 9 of 12
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
Figure 11. Selected Sectoral Shares in Total Loans
600.0
(%)
500.0
Manufacturing
400.0
Dwelling
300.0
200.0
100.0
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.0
Source: SIS and own calculations
There is a single reason that might be an explanation of this explicit preference. That is
relative price developments. Since 2000 the relative prices shifted in favour of construction
(dwelling). Thus expected return to this sub sector is higher, luring investment propensity towards
here. This may have also adversely effected future investment expenditure due to irreversible land
transformation (such as leaving all clustering and other positive externalities behind and further
hindering expected returns for manufacturing)
3. CONCLUSIVE REMARKS
Share of manufacturing and investment in manufacturing industry have been declining for
some time. Moreover, since there is an overall loss of appetite for investment in the private sector.
However all major policy documents claim that Turkish economy may meet her target via a
growth strategy focusing on high value added high technology embedded industries. Hence there
is a significant need to reverse current trends and preferences. To do this the main drivers of the
current situation needs to be discussed. This study merely points out two main points. First is that
since 2003 there has been a shift in investor preference towards non-manufacturing industry, due
changes in expected returns in cross sectoral domain. Second is that since 2011 there is an
aggregate loss of appetite of investment in the private sector. As the external financing needs of
the corporate sector heavily relies on bank lending and foreign borrowing, the worsening global
conditions will eventually hit both of these external finance sources, since banks also rely on
international capital flows as well. Hence in designing development policies all the possible
drives of lack of investment and sectoral incentives must be evaluated rationally.
Page 10 of 12
EY International Congress on Economics II
"Growth, Inequality and Poverty”
November 5-6, 2015, Ankara/Turkey
ACKNOWLEDGMENT
I would like to extend my thanks to Dr. Aziz TURHAN for his invaluable contributions and
discussions.
REFERENCES
Balta, N. (2015) “Investment dynamics in the euro area since the crisis” Quarterly Report on the
Euro Area, Volume 14, No 1, 35-43
Banerjee, Ryan and Kearns, Jonathan and Lombardi, Marco J., (Why) is Investment Weak?
(March 2015). BIS Quarterly Review March 2015. Available at SSRN:
http://ssrn.com/abstract=2580278
Barkbu, B., Berkmen, P., .Lukyantsau, P., Saksonovs, S., Schoelermann, H. (2015) Investment in
the Euro Area: Why Has it Been Weak? (February 2015). IMF Working Paper No. 15/32.
Available at SSRN: http://ssrn.com/abstract=2584383
BRSA, Monthly Interactive Bulletin, www.bddk.org.tr
CBRT, Electronic Data Delivery System, http://evds.tcmb.gov.tr/index_en.html
Chirinko, R. (1993), “Business fixed investment spending: modelling strategies, empirical results,
and policy implications”, Journal of Economic Literature, Vol.31, No.4, pp.1875–1911
ECB (2014) “Drivers and implications of the weakness of investment in the EU”, EU Economic
Forecasts
2014
Autumn
Box
1
http://ec.europa.eu/economy_finance/eu/forecasts/2014_autumn/box1_en.pdf
ISO, İstanbul Sanayi Odası (2015) Alternatif Finansman Yöntemleri Semieri Özet Kitabı, 20 Jan
2015, http://www.iso.org.tr/sites/1/upload/files/alternatif-finansman-yontemleri-3949.pdf
Özatay, F. (2015). 2000’li Yıllarda Türkiye Ekonomisi. İktisat, İşletme ve Finans 30(350) 2015,
09-24
Turhan A, Sakarya B, Gokgoz, İ.H. (2014) GSYH, Yatırım ve Kredi Analizi, unpublished mimeo
BRSA
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