After the flare-up in Turkey which saw its currency drop 25% in a week, major tensions with the US, and even talk of its entire economy collapsing, things appear to have quietened down over the past few days, as the country settles in to try and solve its problems.

Just because things have calmed down, however, doesn’t mean Turkey is out of the woods yet, and a recent note from HSBC shows just why.

Writing to clients this week, HSBC’s Melis Metiner, an economist for central and eastern Europe, the Middle East, and Africa, said that there are still several signs that things could get worse before they get better in the stricken nation.

The big issue, Metiner says, is the fact that growth in people and businesses being given credit is so low.

“A look at recently released data shows that a more challenging external backdrop and TRY [the Turkish lira] weakness and volatility have dragged credit growth lower,” Metiner wrote.

“Consumer loan growth has slowed from around 20% in the middle of last year to 14% in annualized terms,” she continued.

“The slowdown in commercial loan growth has been much more marked, with the annualised pace falling below zero in mid-August, the slowest pace since 2009.”

“Total loan growth, as a result, has slowed to around 4% in annualised terms, the slowest pace seen since 2015.”

The chart below illustrates that sharp slowdown (in this case in domestic credit):

While too much credit can be a negative for an economy, as borrowers overstretch themselves leading to possible defaults, credit helps to allow households to spend, and companies to invest in their businesses. If credit slows too sharply, the subsequent lack of investment can lead to slowing economic growth.

Metiner believes this could manifest itself in Turkey, saying that slowing growth in credit “is set to weigh on Turkey’s growth, especially private investment.”

The natural response to such a slowdown, Metiner notes, would be for the Turkish central bank to raise interest rates in order to fuel spending. “We believe further policy tightening and a prolonged period of tight policy are both warranted.”

She also notes, however, the reticence of the Erdogan administration to allow such moves. Erdogan himself is staunchly opposed to high interest rates, and once publicly described them as “evil.”

Source : www.businessinsider.com