Turkey’s problematic loans may double, Standard & Poor’s says

Problematic loans at Turkish banks may jump next year because of a slide in the value of the lira and a sharp economic downturn, S&P Global Ratings said in a report.

The loans could grow to 20 percent of total lending in 2021 from about 10 percent in October 2019, S&P Global said in a report on Tuesday. The figure estimate included both restructured loans and non-performing loans, which may surge to between 11 percent and 12 percent of all lending from 4.6 percent at the end of May, it said.

The preponderance of foreign currency loans approved by Turkish banks was worsening the quality of lending, S&P said. Debt denominated in foreign exchange made up almost 37 percent of total debt, it said.

“Risks are further exacerbated by some specific characteristics ... namely, the accelerated lending through the Credit Guarantee Fund (CGF), and more recently via state banks, as well as the high proportion of foreign currency lending,” S&P said.

Turkey’s government has increased guarantees on loans via the CGF in order to encourage banks to lend more to consumers and businesses. That has led to a spike in borrowing this year even as the economy contracted sharply due to the global COVID-19 pandemic.

Concerns among investors about government policy and the state of the economy saw the lira slide to a record low of 7.269 per dollar in early May.

S&P also said that checks and balances in the Turkish financial system were weak. There were questions about the quality of both regulation and the perceived independence of the central bank, it said.

Turkish President Recep Tayyip Erdoğan sacked and replaced the central bank’s governor in July 2019. Monetary policymakers then embarked on a series of rate cuts that brought down benchmark borrowing costs for banks to 8.25 percent from 24 percent.

State-run banks have been leading the splurge in lending, encouraged by the government. The three largest state banks are controlled by the Turkey Wealth Fund, which is chaired by Erdoğan.