Bad loans of three energy projects in Turkey harbinger of difficult days ahead

The Turkish banking regulator’s request that banks write off loans for three energy projects last week has raised alarms over both the country’s energy sector and its banks.

Turkey’s banking regulator demanded credits extended to at least three gas-fired power plants to be classified as non-performing loans, Bloomberg reported, citing people with knowledge of the matter.

It said the three projects included ACWA’s $1-billion plant in Kırıkkale, Gama Enerji’s $900-million project near Ankara and a $1-billion facility run by Ansaldo Energia SpA and its partners in Gebze. The loans on these projects originally amounted to almost $1.9 billion, but are estimated to have reached $2.5 billion with interest. 

Turkey’s largest private lenders Garanti Bankası, İş Bankası, Akbank, Denizbank and Yapı Kredi Bankası, and the European Bank for Reconstruction and Development are among creditors that provided loans to the three projects, Bloomberg said. 

This will be the second biggest example of non-performing loans in the energy sector after Turkish banks took over the Osmangazi Electricity Distribution Grid in Ankara, owned by Yıldızlar Holding, due to unpaid loans in 2013. 

The total amount of non-performing loans of the latest three projects is significantly higher than Yıldızlar Holding’s $1 billion debt, which was mainly borrowed from state-run Halkbank and Vakıfbank. The banks categorised the Yıldızlar loans as frozen in their June balance sheets and so absorbed the losses. 

The newly announced bad loans in the three energy projects however indicate wider problems in Turkey’s energy and banking sectors. 

First of all the loans were not only provided by public lenders, but by a wider list of creditors. Almost all of the creditors are private banks that have restricted capital resources. This is a problem international rating agencies have pointed to for a while and presented as the reason for giving Turkish banks lower ratings than the country overall.

With the addition of $2.5-billion worth of new non-performing loans, the share of bad debt in the total of Turkish loans will increase from 5.25 percent to 5.9 percent.

Turkey's Banking Regulation and Supervision Agency (BDDK) said in early 2019 that markets had exaggerated the problems with bad loans and that even in the worst-case scenario they would not exceed 6 percent of the total. That level has now almost been reached.

This is likely to be only the beginning of a difficult period for the Turkish banking sector. The companies involved in the three energy projects had been struggling to repay their debts for some time, but the loans were previously categorised as being at risk, rather than non-performing.

The semi-annual balance sheets of Turkey’s 10 largest banks show that some $50 billion of loans are in a similar situation, a large grey area in the total $400 billion of loans. Between $12 billion and $13 billion of those loans are subject to restructuring, while there is uncertainty about what will happen to the remaining amount that is at risk. The latest BDDK decision could signal some of these loans can no longer be accommodated. 

The latest non-performing loans also point to problems in Turkey’s energy sector due to a mismatch between supply and demand. It is no coincidence that the three projects facing problems are natural gas power plants. 

Turkey’s electricity production capacity has reached a level twice that of domestic demand due to reckless investments. Meanwhile, as a result of the economic downturn, demand for electricity is declining.

According to the Energy Ministry, electricity consumption has dropped by 2 percent since the start of the year. Even in August, when tourism was at its peak, total monthly electricity consumption was 0.81 percent lower than during the same month last year. But companies that invested in the energy sector did so on the basis of a 5-percent annual increase in electricity consumption. 

The existing supply allows the Energy Market Regulatory Authority to set electricity prices lower than market rates. Given the slide of the Turkish lira, energy companies are struggling to pay back their mainly foreign-currency denominated loans as electricity prices are lower than the unit costs of natural gas power plants. Since the market price of natural gas material is increasing, some energy companies are on the verge of total collapse. 

Additional figures also prove that point. Turkey has 275 natural gas power plants that can supply 57 percent of the total domestic electricity consumption. Those power plants met almost 50 percent of demand only a few years ago. But, according to the Energy Ministry, their share has fallen by 14 percent as of last month. The shrinking market share signals further problems down the road. 

Some $50 billion of the total $70 billion worth of loans that banks have provided to the energy sector in the last decade are still not due. Of that, some $16 billion has been lent to natural gas power plants.  

It was assumed until recently that 50 percent of the credits supplied to thermal power plants, amounting to nearly $8 billion, was under risk. Now estimates show this amount could be as much as $20 billion. 

The latest developments show that international investors are not providing companies in the Turkish energy sector money to pay back their loans. Turkish banks hold nearly all the debt. A similar situation was observed when last year Turkish and international banks took control of Turk Telekom, Turkey’s biggest telecoms company, due to billions of dollars in unpaid debt. As a result, while the Oger Telecom of Saudi Arabia left the country, creditors suddenly found themselves the biggest operator in Turkey’s communications sector. The banks could also become big players in other sectors too. 

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.