During his inauguration ceremony at the Beştepe Presidential Complex in Ankara on July 9th, Erdoğan announced the government’s new executive Cabinet, which will convenes today Friday July 13th, 2018.
Erdoğan had made it clear last week that the Cabinet will not include AK Party deputies in the Parliament, instead comprising technocrats and some former ministers. Erdogan will not be naming any Nationalist Movement Party (MHP) members as ministers, despite their alliance in parliament helping him retain majority control of the chamber. Erdogan’s AKP and the ultra-nationalist MHP set up an electoral alliance for the June 24th elections, with the MHP supporting Erdogan as their presidential candidate. They declared their alliance would continue in parliament since neither has the majority to legislate alone. The AKP now has 290 MPs, while the MHP has 49 seats in the 600 seat parliament.
President Erdpğan has so far appointed one vice-president Fuat Oktay, who is also on the executive boards of both Turkish Airlines and Türk Telekom. The former undersecretary of the office of the prime minister, Oktay is regarded as one of the architects of the bureaucratic and administrative transformation after the governmental system has been shifted into presidency through last year’s referendum.
Interior Minister - Suleyman Soylu
Suleyman Soylu has remained in his position as the interior minister, a post he has held since August 2016. Soylu is a rather outspoken minister. He oversaw the operations conducted by the security forces against the outlawed Kurdistan Workers' Party (PKK) in Turkey. He not only accused the pro-Kurdish opposition People's Democratic Party (HDP) and its members of having links to the PKK, the outlawed Kurdistan Workers’ Party, but also accused the main opposition party, the Republican People's Party (CHP), of “supporting terrorism”. On July 3rd, when Soylu took his oath in parliament, CHP MPs left the grand assembly hall in protest.
Minister of Treasury and Finance - Berat Albayrak
Former energy minister and Erdogan’s son-in-law, Berat Albayrak, has been promoted to a newly powerful economic post. He is now the minister of finance and treasury, a new ministry which merges all the bodies concerned with economic management and financial policy. Erdogan, together with son-in-law Berat Albayrak, now have a direct say in all decisions relating to the economy. The fact that his son-in-law now has control over the cash safe has been a target of fun. Before being appointed energy minister in 2015, when he was first elected to parliament, Albayrak was a businessman. Since taking office in the Cabinet, he has travelled with Erdogan on most of the president's official visits abroad. Markets did not respond well to the news of Albayrak's appointment, and on the evening of July 9th when the Turkish lira fell around 3.5% to TL 4.71 against the US dollar. As energy minister, Albayrak supported the founding of Turkey’s Wealth Fund, which reportedly has a budget of USD 200 billion, and as the new Treasury and Finance Minister, he will have responsibility over the fund, which has to date not achieved any significant results.
Minister of Trade - Ruhsar Pekcan
The new minister of trade, Ruhsar Pekcan, is one of only two female ministers in the Cabinet and is a successful businesswoman with experience also working at the Foreign Economic Relations Board (DEİK), where she was the deputy head of woman entrepreunership, served on Turkey’s business councils with Iraq, Libya, Jordan and Syria.
Minister of Energy and Natural Resources - Fatih Donmez
The new minister of energy Fatih Dönmez, is one of the few bureaucrats in the new cabinet. He was previously known for his influence on energy politics and his close ties with Albayrak as former Undersecretary of the Energy Ministry.
Minister of Defence - Hulusi Akar
A surprise in the new Cabinet is Hulusi Akar. Chief of General Staff since 2015, who has now been appointed as the new defence minister. Akar is a controversial figure who was kept hostage by coup plotters during the failed coup attempt in July 2016. There were claims that he had received reports on the coup attempt on the same day, but did not do enough to prevent it. Thousands of military personnel were dismissed or detained after the coup attempt and Akar’s secretary and aides were also arrested on accusations of supporting the coup. Akar became close to Erdoğan and always accompanied him on his trips abroad. Akar’s appointment as defence minister is the first time in modern Turkish history that a chief of staff has assumed this position. The army, which has conducted several coups and overthrown many democratically elected governments since 1960, used to distance itself from politics while at the same time remaining a very powerful influence on the country’s politics. The balance of power has reversed with the army now very much under the control of the ruling government.
Minister of Justice - Abdulhamit Gül
Abdulhamit Gul has remained in his position as Minister of Justice, a post he has held since July 2017, during which time, thousands of civil servants have been dismissed as part of the crackdown against followers of Fetullah Gulen, the cleric who was alleged to be responsible for the failed coup attempt in July 2016.
Foreign Minister – Mevlut Çavuşoğlu
Mevlut Çavuşoğlu has remained as Foreign Minister since 2014, He is considered as a figure of minor importance since foreign policy is mostly controlled by Erdogan and his foreign policy advisers.
Minister of Education – Professor Ziya Selçuk
Ziya Selçuk is one of the technocrats who Erdoğan has enlisted into the cabinet. This is an interesting choice because Selçuk has been critical of the AKP’s educational policies in the past, though he has worked as an advisor to AKP governments in the past. He is the founder of one of the most successful private schools in Turkey. There have been many complaints that educational standards have collapsed in recent years, and Selçuk does give some hope that this adverse trend will be reversed. .
Minister of Industry and Development - Mustafa Varank
One of President Erdoğan’s closest aides
Minister of Environment and Urban - Murat Kurum
Minister of Health - Fahrettin Koca
Minister of Transport and Infrastructure - Cahit Turan
Cahit Turan was the former head of the Directorate of Highways.
Minister of Culture and Tourism - Mehmet Ersoy
Labour, Social Services and Family Minister - Zehra Zümrüt Selçuk
Minister of Agriculture and Forestry - Bekir Pakdemirli
Youth and Sports Minister - Mehmet Muharrem Kasapoğlu
The four ministers who are continuing in the new administration will have to resign their seat in parliament. They are Berat Albayrak, Treasury and Finance Minister; Mevlut Çavuşoğlu, Foreign Minister; Abdulhamit Gül, Justice Minister; and Suleyman Soylu, Interior Minister.
The new Cabinet will be made up of the above 16 ministers, down from the previous 25 ministers, with many ministries being consolidated to ensure a faster and more strategic decision-making process in governance. It will nevertheless take some time for the new Cabinet to settle in as Turkey’s new administrative function because of the need for government departments to adapt to the new organisation and due to the relative inexperience of many ministers in their new roles.
The reduction in the number of ministries is in line with President Erdoğan’s micro-management tendencies and his natural dislike of delegating authority. The new cabinet are made up of people close to the president or those who will easily tow the line under the president’s authority. Many areas of government will appear where there is no immediate line of authority or where the president cannot cope with the workload. To plug the gaps, we will see President Erdoğan appointing new aides as the need arises. This may result in a very complicated hierarchy with aides competing for the President’s attention. The new government has been built to work around the President as the queen bee. Such an organisation will collapse automatically in the absence of President Erdoğan.
Though it will naturally take some time for many ministries before they can operate as efficient administrative entities, there is one important area where no time can be spared. That is the economy, which is supposedly on the brink of entering a deep recession. The economy is now in effect under the single direction of Berat Albayrak, the new Minister of the Treasury and Finance, with the close support of the president. The news of Albayrak’s appointment was not met positively by the markets, which had great respect for the previous Deputy Prime Minister responsible for the economy, Mehmet Şimşek. The markets are particularly worried how much President Erdoğan will interfere in the running of the economy and the independence of the Turkish Central Bank. Under the new presidential system, the president will appoint the new governor of the Turkish Central Bank , a position which will held be for four years, instead of the previous five. Erdoğan has already indicated that he will take a more active role in running the economy and in monetary policy in particular. His belief that interest rates should come down despite rising inflation and the fall in the value of the Turkish lira does not offer much confidence to the markets. When faced with the economic realities, it will be interesting to see whether he will allow a hike in interest rates.
The new government clearly has the advantage of coming in following its success in the presidential and parliamentary elections. The president and top executive, Recep Tayyip Erdoğan, has been elected for five years as president, and as such under the new system will be able to effectively run the country single-handedly. The president’s political party AK Party together with its coalition partner MHP have a majority in parliament. The new government will be free to act determinedly and decisively, Indeed, there are areas requiring difficult but important decisions, such as education. The most difficult decisions will be regarding the economy, such as interest rate hikes, increased taxes, reduced subsidiaries, price increases, the withdrawal of further support to bankrupt financial and non-financial corporations, and the implementation of structural reforms. The government now has five years to ride out the economic crisis and bring the economy back on track. The local elections to be held in March 2019 may however be an obstacle for the government in implementing harsh economic remedies.
The new government has the mandate and power to take tough decisions. Whether the new government is capable of implementing its policies and meeting its targets has yet to be seen. Much will depend on how well President Erdoğan will be able to cooperate and interact with the new ministries, and the new advisory boards and directorates. The pressure on one man will be immense. The main risk is clearly a decision-making vacuum. There is a danger that government will degenerate into a crowd of ministers, bureaucrats, advisors and aides, all jostling for position for the attention of the president.
Turkey will officially move its new “presidential government system” or “presidential executive system” once President Tayyip Erdoğan has taken his oath on July 9th, 2018, when he will be able to start to use his executive powers. He has been elected to serve as president for the next five years. The new presidential system was approved in a referendum on April 16th, 2017 and replaced the parliamentary system.
Erdoğan will also announce his new Cabinet on July 9th following the oath taking ceremony. The prime ministerial position, which has existed in the Turkish administrative system for more than a thousand years, from the Seljuk era, to the Ottoman times and the republic since 1923, is now abolished. From now on, the Cabinet will be formed by the president who will in effect be both the head of state and government, a system adopted in a number of other countries. Under the new system, the Cabinet will not be required to have a vote of confidence from the Parliament as the people directly chose the president as the head of the state. Previously, the Cabinet formed by the prime minister needed to have a vote of confidence from the members of the parliament.
The president will have executive powers to appoint top public officials including ministers directly, and he would also be able to assign one or several vice presidents.
The number of ministers in the Cabinet is expected to be decreased from 25 to 16. Presidential offices and agencies, newly established under the presidential system, will also be introduced. For example, the National Intelligence Agency (MİT) or the Office of the Chief of General Staff, both of which used to be an undersecretary, will now be categorised as agencies. The new agencies will also include the Presidency of Defence Industry, the National Security Council, the Presidency of Strategy and Budget, the Presidency of Religious Affairs, the State Inspection Council and the Presidency of Communications.
Four new offices are also being established to introduce a faster and more strategic decision-making process in governance. Offices on human resources, finance, investment and digital transformation will be established to supervise the state's human resources and institute the state's digital transformation to adapt to the digital age and fight cyber-terrorism. Nine separate councils will develop, supervise and coordinate relevant policy suggestions. The main priority will be a more effectively run government by delegating responsibility with authority.
Where Turkey’s new presidential government system differs is that the president will also be able to stay as party chair. Erdoğan will therefore have a presence in parliament as the chair of the ruling Justice and Development Party (AK Party). This is a controversial development since it muddles the executive and legislative powers of the government, as there is no longer a clear dividing line between the two. The president is expected to be impartial, but this will be very wishful thinking.
Erdoğan says the new system will strengthen the separation of powers because he will not be employing any ministers to his cabinet from members of parliament. If he does, the member of parliament concerned will have to resign from parliament.
The president’s capacity to appoint some high judges to the Constitutional Court and some through his parliamentary power has been considered as a factor which will further weaken the already faltering checks-and-balances system in Turkey. The president and parliament would together be able to choose four members of the Supreme Board of Judges and Prosecutors (HSYK), a key judicial council that appoints and removes personnel in the judiciary to be renamed the Board of Judges and Prosecutors (HSK). Parliament will choose seven members on its own.
Military courts, which have convicted officers and even sentenced former prime minister Adnan Menderes to death following the 1960 coup, will be closed. A state of emergency would be imposed in the event of an "uprising against the homeland" or "acts of violence which put the nation in... danger of being divided". The president will decide whether or not to impose a state of emergency and then present the motion to parliament. Initially, the emergency would last six months, as opposed to the current three, and then be extended by parliament after a presidential request for four months at a time.
There is however a clause in the new constitution that makes the president accountable in courts if accused or suspected of a crime. Parliament would have to approve such an investigation and would need a parliamentary majority for such a move. President Erdoğan’s AK Party failed to win a majority on its own In the parliamentary elections, held the same day as the presidential elections, but secured a total of 344 seats out of a total of 600 through its People's Alliance with the Nationalist Movement Party (MHP). As long as the AK Party maintains support from MHP, or in the latter’s absence, from another party in parliament, President Erdoğan is unlikely to face any obstacles to his executive power. It will be interesting to see how the game plays out in the event that the AK party is unable to secure a majority in parliament.
A new page is opening in Turkey’s history with the establishment of the second phase of the republic, where all the executive power is concentrated in the hands of one person - the president. This development indeed coincides with the spreading “strong man” tendencies in world politics. The Turkish president will have a maximum of two five-year terms, which means that Erdogan could stay in power for another two terms until 2028.
It was widely suggested that the reason Turkish President Recep Tayyip Erdoğan called a snap election for 24th June, 2018 was that an economic crisis was imminent. Indeed, all the indicators showed that all was not fundamentally well with the Turkish economy ; a 25% devaluation in the Turkish lira since the beginning of the year, a 12% inflation rate, 12-month rolling current account deficit of USD 57.1 billion, and an unemployment rate of over 10%. The Turkish government was very reluctant to tighten money control further just before a critical election, but the pressure on the Turkish lira was too great. Despite the opposition of President Erdoğan to increasing interest rates which he sees as the source of all evils, he had no choice but to yield, and the Turkish Central Bank more than doubled the interest rate to 17.75% by June 7th, 2018.
Following the failed coup attempt on July 15th, 2016, the Turkish economy contracted in the third quarter of 2016. The Turkish government stepped into revive the economy and boost growth by introducing sales tax cuts and the credit guarantee fund which pumped some USD 58.5 billion into the private sector. The government introduced a further incentive package on April 30th, which included bonuses to pensioners, with the coming elections in mind. The government’s decision to go for growth at all costs despite indicators which showed the need for a tighter monetary policy, has resulted in an overheated economy. The Turkish economy grew by 7.4% in 2017, but this reflected only a small increase in investment in the private sector and was largely consumption generated. On June 11th, 2018, it was announced that the economy had grown by 7.4% in the first quarter of 2018. Turkey’s train was clearly continuing to proceed at break-neck speed and to head for a horrific pile up. The Central Banks’ interest rate hike will help and indeed stopped the Turkish lira from sliding further, but the Turkish economy is at a point of no return, and financial analysts have predicted a hard fall and have even gone so far as to discuss when Turkey will need a bail out from the IMF.
Turkey’s presidential and parliamentary elections were held on June 24th, 2018 with President Recep Tayyip Erdoğan being elected as the new president under the new constitutional regime, and with his Justice and Decelopment Party (AKP) receiving 42.6% of the votes and achieving a parliamentary majority through its alliance with the Nationalist Movement Party (MHP). The victory of the incumbent president and the ruling AK party in the elections immediately brought some stability to the markets as the previous air of political uncertainty was eliminated, and the Turkish lira gained 2% against the US dollar.
There is now a deadly silence before the storm. Erdogan knows that his first order of business will be to concentrate on Turkey’s troubled economy. He will first have to restore market confidence, and accordingly, it is likely that he will soon lift the state of emergency, now that he has formally acquired the powers it has afforded him. The big question is whether Erdogan will cling to construction-driven growth and continue to battle the Central Bank over interest rates. If Mehmet Simsek, the market-friendly deputy prime minister, stays on in the new government cabinet, it might signal a softening on Erdogan’s part, but many argue he will not change tack before critical municipal elections that are scheduled to be held in March of 2019.
There is likely to be a short phoney period in the coming days ahead as the Turkish lira temporarily strengthens . The Turkish lira is then likely to work its way down again as the pressures of worsening economic indicators start to build up. The first test will be the annual inflation rate to be announced on July 3rd for the month of June. This is likely to rise significantly and will put pressure on the Turkish Central Bank to take further action. The Automotive Distributors Association (ODD) will be disclosing at the beginning of July its figures for the sales of cars and light commercial vehicles in Turkey in June 2018, These are likely to be poor as a deterioration in private consumption is prevalent.
The Turkish government will do everything within its power to play down the brewing economic storm. Business circles and economic analysts in the media are encouraged to be optimistic, and prophets of doom are not welcome. The combined foreign currency debt of Turkey’s government and non-financial companies companies is around 47% of GDP. Many private companies have been propped up through loans from the Credit Guarantee Fund (CGF) over the last year following the fall-out from the failed coup attempt in July 2016. Since the recent interest hikes by the Central Bank, banks are unlikley to be offering loans at interest rates under 25%. Many companies have outstanding foreign currency loans which have already been an increased burden on them following the 20% devaluation of the Turkish lira since the beginning of the year. Companies will first strive to cut costs as funding is no longer an option. . Such strategy and a rush of bankruptcies is likely to in turn have a serious adverse effect on Turkey’s unemployment figures. The Turkish banking sector is likely to be faced with a spate of bad loans and a contracting market, and will come under severe pressure itself. This in turn will create a vicious circle of higher interest rates and higher inflation, with the Turkish lira being punished somewhere in-between.
The only question that remains is how hard the Turkish economy’s fall into recession will be. The drive for growth at all costs over the last two years and the Turkish government’s need to implement policies to please the electorate in face of crucial presidential and parliamentary elections is likely to mean that the fall into recession will be hard. Sructural economic reforms and tighter monetary policies implemented following the recent spot elections will seen to be too little and too late.
The Trans Anatolian Natural Gas Pipeline (TANAP) project was officially launched on June 12th, 2018 in the central Turkish city of Eskisehir. TANAP was opened by Turkish President Recep Tayyip Erdogan, Azerbaijani President Ilham Aliyev, Ukrainian President Petro Poroshenko, Serbian President Aleksandar Vucic, and Mustafa Akinci, president of the Turkish Republic of Northern Cyprus.
Erdoğan called this project a historic step for the countries of the region, adding that "We are opening the Trans Anatolian Natural Gas Pipeline, the backbone of the southern gas corridor, which we call the Silk Road of energy." The speed with which this project is being completed (less than 3 years) indeed has a great deal to do with the close relations between Turkey and Azerbaijan. Good relations with Georgia has also helped. However, the factor which ensured that this project was given top priority by the Turkish government in particular was the latter’s need to secure its energy sources.
The feud between Turkey and Russia in 2015 following Turkey’s downing of a Russian jet fighter and resulting in Russia imposing a wide range of sanctions against Turkey was a wake up call for Turkey. The country suddenly realised that 70% of its energy supplies in the form of natural gas from Russia could be cut off over night. Russia did not go as far as this which is understandable because of the revenue generated from the Turkish market. However, the risk was there and not to be taken lightly. Relations with Russia have since been patched up with President Erdoğan apologising for the original incident which set off the crisis. However, Turkey and Russia have historically been on antagonistic sides, and Turkey has since set about spreading its energy risk.
Turkey was quick to realise that it needed to stockpile energy resources on its own territory. Projects to store more natural gas at Turkey’s Silivri facilities and under the Tuz Gölu salt lake, and on two floating natural gas units (FSRU) close to the Turkish shoreline have been developed. These projects will allow Turkey time to access alternative sources in the event of an unexpected cut in supplies from current sources.
The completion of the TANAP project will allow Turkey to reassert itself in its relations with Russia on a more equal par. Turkey however surrendered much to Russia in the meantime. Turkey has gone ahead with its first nuclear plant being constructed by Russian state firm Rosatom at Akkuyu, Mersin on Turkey’s Mediterranean coast, has agreed to the construction of the Turkish Stream gas pipeline along Turkey’s Black Sea coast, and has purchased Russia’s S400 missile defence system. Turkey has also worked very closely with Russia and Iran with regard the on-going civil war in Syria despite the fact that it is strongly opposed to the Syrian government of President Esad. The Turkish Stream project is of great strategic value to Russia because the latter now has a pipeline to Europe as an alternative to the current pipeline which passes through Ukraine. The sale of the S400 missile defence system to Turkey has caused much friction between Turkey and Nato and western allies, much to the pleasure of Russia. Russia has done very well out of its improved relations with Turkey over the last two years. The completion and further development of the TANAP project will allow Turkey to take a less appeasing approach to Russia should the need arise.
TANAP is a natural gas pipeline stretching from the Turkish-Georgian border to the Turkish-Greek border to supply natural gas to both Turkey and also European countries.. TANAP is the central and longest section (1,850 km) of the Southern Gas Corridor (SGC) (3,500 km) which was inaugurated on May 29th, 2018 in Baku, Azerbaijan. The main aim of the SGC is to connect the giant Shah Deniz gas field in Azerbaijan to Europe through the South Caucasus Pipeline (SCP), TANAP, and the Trans Adriatic Pipeline (TAP). The SCP runs from Azerbaijan to Turkey through Georgia and the TAP starts in Greece and runs to Italy through Albania and the Adriatic Sea. TAP, which is currently under construction, will have a length of 878 km.
TANAP will run from the Turkish border with Georgia, beginning in the Turkish village of Türkgözü in the Posof district of Ardahan, through 20 provinces including Kars, Erzurum, Erzincan, Bayburt, Gümüşhane, Giresun, Sivas, Yozgat, Kırşehir, Kırıkkale, Ankara, Eskişehir, Bilecik, Kütahya, Bursa, Balıkesir, Çanakkale, Tekirdağ and Edirne until it ends at the Greek border in the İpsala district of Edirne. From this point is where the TAP will connect to convey natural gas to European nations. Two off-take stations are located within Turkey for national natural gas transmission, one located in Eskişehir and the other in Thrace. With 19 kilometers running under the Sea of Marmara, the main pipeline within Turkey will reach a total of 1,850 km, along with off-take stations and above-ground installations.
TANAP, with a total investment of around USD 8 billion, will deliver 6 billion cubic meters (bcm) of Azeri gas to Turkey and 10 bcm to Europe annually. TANAP's capacity is expected to increase to 22 bcm based on demand, and further to 31 bcm with additional investments. The European part of the project is expected to be operational in 2020. At present, the State Oil Company of Azerbaijan Republic (SOCAR) holds a 51% share, Turkey's BOTAS a 30% share, BP a 12% share, and SOCAR Turkey with the remaining 7% share.
The Southern Gas Corridor (SGC) is also important for Europe which also needs an alternative source to Russian natural gas. This pipeline is likely to be further developed once fully completed to meet the likely future increased demand from Europe. With TANAP completed, Turkey has drawn a breath of relief. It is now the turn of Europe.
The failed coup attempt of July 15th 2016 had very serious implications for the Turkish economy which contracted in the third quarter of 2016. To reinvigorate the economy, the Turkish government introduced tax incentives and its Credit Guarantee Fund (CGF), through which it guaranteed bank loans to companies. Many considered the CGF loans as good money after bad, believing that many companies which were already in serious financial difficulties had received loans which only delayed their eventual demise. This view point received some credibility by the news that two big conglomerates have recently approached their banks to restructure their loans. Turkish food giant Yıldız Holding requested to restructure USD 6.5 billion of its USD 8.5 billion debt, and Doğuş Holding, with outstanding loans of TL 23.5 billion (USD 5.7 billion) as of the end of 2017, is also in talks with banks on restructuring its debt. On June 6th, 2018 international credit rating agency Moody’s placed ratings of eleven Turkish corporations on review for downgrade following its recent decision to place Turkey's Ba2 government bond rating under review for downgrade. Moody’s sees the credit quality of these corpoations as correlated to varying degrees to that of the Government of Turkey because of their high dependence on their Turkish operations for revenue and cash flow generation. These 11 Turkish corporations are among the largest commercial enterprises in Turkey.
In an interview with the Dünya economic newspaper, the Credit Guarantee Fund’s General Manager Ismet Gergerli provided details of the scope of the loans provided through CGF as of the end of May 2018. Gergeli claimed that CGF contributed over 2% to Turkey’s 2017 growth rate of 7.4%, brought about a 20% fall in interest rates, enabled companies to increase their workforces by 213,000 employees, and caused a 28% increase in premiums collected by the Social Security Institution (SGK). Gergeli stated that the total guarantee amount provided by CGF as of the end of May 2018 was TL 233.2 billion (USD 52.1 billion), and that the total loan amount issued through this guarantee was TL 261.9 billion (USD 58.5 billion). He added that the first credit line approved as per protocol signed with the Treasury Undersecretariat was TL 200 billion, with a further TL 55 billion approved through a second protocol signed in February 2018 and TL 35 billion approved through a third protocol signed on May 11th. Gergele said that the third line was funded through loan repayments from the first and second lines, and that with the signing of the third protocol of TL 35 billion, the second line was reduced to TL 50 billion, resulting in a total approved credit line of TL 285 billion. As of June 4th 2018, a total of TL 234.1 billion in guarantees had been provided, resulting in total credit issued of TL 262.8 billion to 483,000 commercial enterprises.
Of the CGF guaranteed loans extended, the average maturity of loans for operation loans was 32.3 months, whereas this was 62 months for investment loans. 91.4% of loans extended were Turkish lira denominated with the remaining 8.6% foreign currency based. Gergeli explained that the 20% decrease in loan interest was brought about by the fact that banks were relieved of reserve requirements and risk premiums, as a result of which in the case where banks were normally expecting interest rates of 10%, this rate would fall to 8-8.5% as a result of the Treasury guarantee through CGF. Gergeli added that the average interest rate applied to GGF guaranteed loans was 15%. He recounted that the CEO of a large corporation rang him direcetly to ask when the third credit line package would be ready. The CEO was asking on behalf of the companies which were his trade partners and which depend on the support of the CGF loans in order to stay in business. This anecdote may show the importance of the CGF in supporting the Turkish economy, but it does leave an indication that the CGF is providing a life-line to many Turkish companies which may not in other circumstances be viable business enterprises.
Gergeli’s comment that 2% of Turkey’s growth rate of 7.4% in 2017 was due to CGF guaranteed loans is another indication that Turkey’s high growth rate in 2017 was largely induced by government expenditure. Gergeli’s claim of an addition of 213,000 to the workforce created through CGF guaranteed loans leads one to hope that credit dispersed has indeed been put to good use and is not infact good money after bad money.
The Turkish government’s banking supervisory body, the Banking Regulation and Supervision Agency (BDDK), announced on June 7th that the percentage of loans provided through the CGF which have been classified as doubtful is 0.83% as of March 2018. This compares with the normal average of 4.7% for small enterprises and 2.9% for all loans. Since loans only began to be issued towards the end of 2016, the significance of the 0.83% return of loans as doubtful is limited considering the maturity of these loans. Of course, the rush to provide financial incentives to the private sector following the contracting or the economy in the third quarter of 2016 and boost growth would lead to a conclusion that there would be an increased risk of bad loans. The real status of loans provided under the CGF facility will only become clear as they reach their maturities.