May 11 2018

After Argentina, watch out for Turkey’s banks – FT

Turkey’s banking industry could provide the most dramatic fireworks after Argentina’s capitulation in recent weeks helped keep the country out of the headlines, the Financial Times said citing economists.

The Turkish lira has slumped more than 10 percent against the dollar this year, making the country’s huge pile of foreign currency debt more difficult to repay.

The build up of Turkey’s private sector debt to 70 percent of gross domestic product from 33 percent in 2007 is similar to that of Greece before its financial crisis in 2009, according to Charles Robertson, chief economist at Renaissance Capital, the FT's Steve Johnson said. Private debt in Argentina is just 16 percent of GDP.

The plight of Turkish banks, whose stock prices have underperformed their emerging market peers by a wide margin, presents an obstacle to President Recep Tayyip Erdogan as he seeks to win a snap election in June and replace parliamentary democracy with a full presidential system of government.

Turkey’s financial debt to GDP ratio is also rising faster than 38 other developed and emerging market countries tracked by the Institute of International Finance, the FT said.

Meanwhile, Turkey is in a class of its own when it comes to fx-denominated debt, which totals 69.5 percent of GDP, ahead of second-placed Poland on 53.5 percent and Argentina on 51 percent, data showed.

Banks’ loan-to-deposit ratios stand at a record high of 120 percent as lenders rely on borrowing from abroad to fund loan growth.

Jason Tuvey, an economist at Capital Economics, said he “harbours fears” concerning the risks to Turkey’s banks, where lending standards may have slipped.