Central Bank head warns private sector to refrain from excessive borrowing

Turkey’s central bank governor Erdem Basci has cautioned the private sector during a recent appearance on a TV show that they should avoid excessive borrowing and continue saving to strengthen their businesses.

Noting the significance of the upgrade of Turkey’s investment rating by Fitch’s from BB+ to BBB-, which fueled hopes for a rise in capital flow and decline in interest rates, Basci warned businesses not to get carried away over the development. He said, “The foreign direct investment [FDI] flow to Turkey is inevitable; however, we need to resist the appeal of the flow in order to strengthen the foundations of businesses.” He continued, “If we act cautiously at the time of low interest rates, we can greatly benefit from the global economic conditions.”

Basci explained that the private sector in the country has “excessive appetite to borrow” and stated: “We need to step on the brakes in order to make sure that majority of investments are made through national savings for the economy to be more resistant and sustainable. Investors are searching for safe harbor to make long-term investments, and as long as Turkey keeps up with the hard work much more FDI will find its way here.”Stressing that interest rates on commercial loans will be reduced to single digits in the first quarter of next year, Basci said it would lead to expansion in the difference between interest rates on commercial loans and on short-term deposit accounts, where the central bank is working to close the gap.

Basci further noted that the majority of the structure of the reserve option mechanism has been completed, and emphasized that the Turkish lira is one of the most stable currencies among the countries that are in the same category as Turkey. He explained that current global economic conditions pressure short-term financing, which is the type of financing least demanded in the markets, and that “long-term investments should be encouraged.”In addition, Basci mentioned that the main target of the central bank is to lower inflation to 5 percent.Expressing his opinion that the split of the European Union is a distant possibility, Basci stated: “The main problem in Europe is uncertainty in its economic policy and lower reliability of the financial institutions. The financial system is not working because there is no trust in it.”

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