What if the ratio of bank deposits to national income remained at the 1980s values?

Let be rewind the story first: in 1970-79 period, the ratio of total deposits at banks to national income was in average 14.5 percent. The ratio increased to 18.7 percent in 1980-89 period and to 23.2 percent in 1990-99 period. The ratios for 2007 and 2009 were 43.3 percent and 55.8 percent, respectively.

Now think about the couple of years ahead, that is, the short term. What do you think is the biggest economic challenge for Turkey? The answer is quite simple: the current account deficit is too high and this deficit is almost entirely financed via short term capital inflows. 

Savings are insufficient
The main challenge does not change considerably for the medium term, either: Turkey's potential is insufficient to close the income gap with developed countries. With "potential" I refer to the average growth rate in the last five decades, three decades or the last decade. It does not matter which one we focus on. The average growth rate is around 4.5 percent for each period. In years in which the growth rate exceeded this potential, current account deficit reached record high levels for we need the savings of other countries in order to perform better than the potential. Turkey's savings are insufficient to improve the potential growth rate.

In short, we witness a current account deficit problem both in the short term and the long term. When you dig into this issue, you come across the insufficient domestic savings problem as one of the fundamental causes of the current account deficit threat.

Let me revisit the figures in the first paragraph. I think all of you have noted that the ratio of total deposits at banks to the national income was too low in the period before the 1980s. The fact that the ratio increased in time is also apparent. Let's note one thing: before the 1980, there were no other stores of value other than saving deposits (excluding gold). But now we have various financial tools to invest savings in, other than deposits. But even this simple comparison reveals that banks own substantial amounts of funds to lend compared to the 1980s. 

Attention to the period before the 1980s
Here are the questions to ask: what if the ratio of bank deposits to national income remained at the 1980s values? Could Turkey attain the current growth rates anyway? Or, if it did, would the current account deficit surpass the current record-high levels?

But, what do all these have to do with the topic of the commentary? The answer is hidden in one key feature of the period before 1980: Then, the deposit and interest rates were set by the state. For instance, in 1974-1977 period, interest on annual deposits was 9 percent and on six-month deposits was 6 percent. The rate on annual deposits increased to 12 percent in 1978 and to 20 percent in 1979. Annual inflation rate for these years were: 20.6 percent in 1974-1977, 49.6 in 1978 and 56.5 in 1979. In brief, the interest rates were quite low compared to the inflation rates. That is, real interest rates were below zero.

So, the questions to ask go as follows: Was there a correlation between the level of deposits being low and the real interest rates being below zero percent? Would the picture change if real interest rates were at rather than below zero percent? The answer to the first one is, "Of course, they are closely correlated". But the answer to the second one is no. So, the zero percent interest rate debates must be read also with this perspective.

This commentary was published in Radikal daily on 30.06.2011