Household Debt in Turkey: The Critical Threshold for the Next Crisis

Turkey by and large avoided the financial meltdown thanks to its low level of household debt ratio and relatively sound public finance structure. The stylized fact is that the consumption loss as a percentage of GDP has been greater for the countries with higher growth rates of household debt-to-income ratios prior to the global crisis. Although Turkey also witnessed a surge in household debt levels (for example in 2010 among 34 OECD members, Greece and Turkey saw household liabilities increase at fastest pace as 12.1 percent and 10.8 percent respectively), the starting point was so low that the general effect could not be as destructive. We study two main factors that will make this dynamic more fragile and hence lay ground for an imminent financial crisis in the future: (1) Due to formalization of land and real estate markets, home ownership rates decline for the median group of households which constitute the backbone of the labor force, and (2) The share of consumer credit in household budgets increase steadily for the lower three quintiles of the households. Both factors will induce dramatic rises in household debt-to-income ratios and will create systemic financial risks . We follow Hein (2011) and employ a simple Kaleckian closed economy model. By using the model we get comparative statics equation for growth in terms of household debt as a ratio of total disposable income and various parameters/variables including the home ownership rate, interest rate, debt burden. Then we simulate the model in Mathematics to figure out the critical regions in which growth would decline and hence trigger a crisis. Decreasing home ownership rates, decreasing nominal income growth and increasing debt-sensitivity of investment will increase the fragility (by expanding the regions in which growth declines) and hence raise the likelihood of a crisis in Turkey.