Turkey’s credit card issue could become explosive

Debt in Turkey is becoming a social crisis.

al-monitor The banking watchdog BDDK in Turkey unveiled plans to limit credit card payment by installments in various sectors. Photo by REUTERS/Jim Bourg.

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finance, turkish economy, turkey central bank, financial crisis, deficit, credit ratings

Dec 3, 2013

ISTANBUL — When police arrested a man near the office of Turkish Prime Minister Recep Tayyip Erdogan in central Ankara last month, officers first thought they had caught a suicide bomber. It quickly turned out that the man, Tugrul Bayir, did not have a bomb with him, but his action was potentially explosive nonetheless. Bayir told police he wanted to stage a spectacular protest because of his credit card debt, which amounted to about $17,000. Like Bayir, millions of Turks are in the red, and many are sinking ever-deeper into debt.

The total debt on Turkey’s 57 million credit cards stands at around $45 billion, and the volume of nonperforming consumer loans is at $14 billion, a 20% increase since the end of last year. According to the Dunya daily, around 1.7 million credit card holders were unable to pay their debt in the first nine months this year, compared with 277,000 in the whole of 2009.

Authorities are reacting by tightening rules for credit card use and consumer loans. But critics say more than 2 million Turks have already defaulted.

In a sign of the government’s concern about the problem, Erdogan used a speech in Fethiye in southwestern Turkey last weekend to warn Turks of high interest rates on credit card debt. “My citizens should be careful when they get a credit card,” Erdogan said, adding that credit card holders should not spend more than they earn. The prime minister said debtors risk losing everything they own if they default. “They will take away everything you own,” he said.

During the last 10 years, Turkey has enjoyed a spectacular economic boom that has more than tripled gross domestic product (GDP) from $270 billion in 2002 to $820 billion last year and transformed the country. The unprecedented upswing has put additional money into the pockets of millions of ordinary citizens, many of whom have gone on a spending spree, buying everything from cars and electronics to refrigerators and apartments to an extent never before seen in Turkey.

Together with imports of energy and components and machines for Turkey’s industry, private consumption has been one of the factors that have pushed the country’s current account deficit to roughly 7% of GDP.

So far, private consumers have had no shortage of means to finance the rush, even if they set their sights on goods priced far above their immediate resources. With banks offering instant loans from automatic teller machines and with credit cards and payment by multiple installments readily available, many consumers have been tempted to spend more than they earn, while savings are low. Some experts say poorer Turks are using credit cards as a way to cover day-to-day expenses.

Ankara is putting on the brakes. Finance Minister Mehmet Simsek has said the growth of consumer credit was unsustainable. The banking watchdog BDDK last month unveiled plans to limit payment by installments to six to 12 months in various sectors and scrap the practice altogether for grocery stores and gas stations. Down payments for car purchases will be a minimum of 30% of the vehicle’s value. That way, authorities would rein in credit card spending and encourage consumers to save more.

The steps planned by the BDDK are expected to result in a drop in private consumption, but a short-term spike is also possible. News reports suggest that companies are likely to step up pay-by-installment campaigns for cars, white goods and furniture before the BDDK measures come into effect around the new year. Those campaigns could convince consumer to make a big purchase like a new car before the new restrictions on down payments and installments kick in.

As both the government and the opposition warm up for an election cycle that includes local elections coming up next March, presidential elections next summer and parliamentary elections in 2014, the credit card and private debt issue could become a political topic in Ankara, especially if more credit card holders default on their debt.

The opposition, seeing a chance to corner the government, has already begun to point out problems with credit cards and consumer loans. The Republican People’s Party (CHP), the biggest opposition group in parliament, recently tabled a bill that would make it easier for credit card holders to postpone the repayment of their debt. “Credit card debts have become a social problem,” CHP deputy Hasan Onen said.

Faik Oztrak, another CHP deputy, accused the government of having built its political success of recent years on a growing mountain of debt. “The government has won elections not by increasing income, but by increasing debt,” he said. Alim Isik, a lawmaker from the right-wing Nationalist Movement Party (MHP), said late last month that credit card debt was behind 200 suicides in Turkey last year.

Emre Deliveli, an economist and columnist for the Hurriyet Daily News, said the proposed BDDK measures could bring down the current account deficit around half a percentage point from its current 7%.

But the continued dependence of the Turkish economy on foreign investment could become an even bigger headache for the government, Deliveli said. “The biggest uncertainty is still the global environment,” he said in a telephone interview this week. Turkey, like other emerging economies, was “at the mercy of foreign markets.” He was referring to the expected end of the US Federal Reserve’s stimulus program, which is expected to result in a drop of foreign investment in emerging markets such as Turkey. 

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