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Mark Bentley
Aug 14 2018

Turkish credit wall looms large as Erdoğan battles Trump

A wall of foreign currency debt is facing Turkey’s embattled businesses and capital-starved banks as President Recep Tayyip Erdoğan persists with policies that are plunging the country into financial crisis.

Turkish corporations have $50 billion of long-term debt repayments coming due over the next 12 months, with particularly large payments due in the next two months. About $2.75 billion is to be repaid in August, followed by $4.8 billion in September and $7.1 billion in November. Another large tranche of $5.6 billion is due in December, according to central bank data.

The lira has slumped almost 45 percent against the dollar this year, including losses of over 25 percent in the past two weeks alone, as Erdoğan doubled down in a diplomatic battle with the United States and accused it of mounting an economic attack on the country in partnership with foreign banks. President Donald Trump doubled tariffs on Turkish steel and aluminium on Friday after sanctioning two Turkish ministers the previous week for their part in detaining pastor Andrew Brunson and 14 other Americans on terrorism charges. On Tuesday, Erdoğan responded, vowing a boycott on U.S. electronic goods. 

The lira’s freefall, also prompted by concerns that Turkey’s economy is overheating, is hitting Turkish companies’ ability to repay a total of $223 billion in long-term foreign currency loans, including $133.6 billion in dollars, and meet interest payments on the debt. That, in turn, is hitting the balance sheets and capital of the country’s banks, which are already eroding because of the lira’s decline.

Concern about the financial health of Turkish banks caused the biggest decline in their share prices since 2013 on Monday as Erdoğan accused the United States of back-stabbing its NATO ally. The ongoing tensions also pushed the lira to a record low of 7.23 per dollar in Asia trade. The currency has partly recovered, closing at 6.88 per dollar on Monday and making gains on Tuesday, after the central bank said it would meet the liquidity needs of banks by freeing up of the provisions they must hold in lira, dollars and gold.

Garanti Bank, once a favourite of foreign investors eager to do business in Turkey, slid about 12 percent on Monday and is now worth 24.6 billion liras ($3.8 billion). Its value has slumped by half since a 12-month peak in January. And those losses exclude the effect of the lira’s decline against the dollar. Trading in three large Turkish banks – Akbank, Yapi Kredi and Isbank – was halted at various points during Monday’s stock market session as their shares breached lower limits that triggered circuit breakers.

Ratings agencies, including Moody’s and Standard & Poor’s, and investment banks have warned that Turkish banks and other businesses face difficulties because of currency depreciation, slowing economic growth and ineffective monetary policy.

Goldman Sachs warned in a recent report that banks’ excess capital would be largely eroded should the lira weaken to 7.1 and remained at such levels; a price that now seems possible. Turkish banks, like peers around the world, are seeking to meet and exceed internationally recognised capital benchmarks to show they are solvent and financially strong.

Under the latest Basel III banking rules, banks are required to meet a minimum CET1 capital ratio of 8.5 percent in 2019, when the limits are fully phased in. This minimum ratio, which is calculated by dividing a bank’s core capital by risk-weighted assets, is designed to protect a financial institution against unexpected losses, such as those that occurred during the 2008 financial crisis. Regulators can require an additional 2.5 percentage points of capital in times of high credit growth.

The ratio for Turkish banks was 12.2 percent at the start of June, above these limits. But for every 10 percent decline in the lira, the ratio falls 0.5 percentage points on average, Goldman said. The 12 percent slide in the lira during July reduced the ratio by a further 60 basis points, or 0.6 percent.

Goldman pointed to Yapi Kredi as the weakest bank among those it covered in Turkey, saying its CET1 ratio stood at 10.7 percent. A chart it published showed that the capital of Yapi Kredi and Isbank would be largely eroded if the lira fell to 6.3 per dollar. The next weakest link was Akbank, which would see capital eroded should the lira decline to 6.9. As mentioned above, it was the shares of these three banks that broke circuit breakers on the Istanbul Stock Exchange on Monday.

Goldman Turkey

The bonds of Turkish banks also fell deeper into stressed territory on Monday, as the lira’s slump spooked investors.

Bloomberg reported that nine bonds issued by Turkish banks were trading below 80 cents on the dollar, compared with a month ago. Bonds of Yapi Kredi that mature in March 2026 were among the worst hit, losing almost 30 cents on the dollar in the past week, the news wire said.

Local banks in Turkey have been the main providers of foreign loans to Turkish corporates, lending tens of billions of dollars for energy projects, takeovers and mega construction projects touted by Erdoğan as proof of Turkey’s global economic and political rise.

Total outstanding foreign borrowing by Turkish companies was about $50 billion just prior to the financial crisis of 2008, but surged thereafter as CEOs took advantage of a flood of cheap money created by monetary easing by the U.S. Federal Reserve and European Central Bank. That cash has now become expensive.

Among Turkish businesses that have sought to restructure their foreign debt are Yildiz Holding, the owner of the Godiva chocolates brand and McVities biscuits, and Ferit Sahenk, a Turkish billionaire who was touted as the rising star of Turkey’s business world a decade ago.

Further losses for the lira, which will create more pressure on corporates and banks, are expected unless Erdoğan changes course and resolves the crisis with the United States and takes steps to right the economy.

Inflation, already at close to 16 percent, is now expected to surge in the coming months due to the lira’s freefall, making it more difficult for companies to sell their goods and services. It will also put more pressure on banks’ balance sheets as demand for loans falls and defaults rise amid a recent surge in interest rates. The cost of consumer and business loans is now around 25 percent per annum.

The stress Turkish banks are under showed up in balance sheets for the first quarter. Institutions including Akbank reported that about 10 percent of its total business loans were either under close watch or had been restructured. This comes in addition to the 3 percent of total loans that the financial institutions have reported as underperforming.

The outlook for Turkish banks and the companies they lend to is currently a bleak one.