Foreign debt of 1 trillion liras underscores Turkish corporate woes

Turkey’s firms now owe one trillion liras in long-term foreign currency loans after the lira slumped to fresh record lows against the dollar this week.

The cost of the debt for Turkish firms is surging alarmingly as the lira slides at break-neck speed.

Companies’ foreign borrowing totaled $226.8 billion in March, or about 30 percent of GDP, the central bank said on Thursday, an increase of $5.5 billion compared with three months earlier. The loans equated to a 10-figure sum in liras for the first time.

Turkish corporates had owed about $190 billion in 2016, prompting ratings companies and analysts to issue stern warnings about their exposure to foreign currency risk.

But the lira traded at about 3 per dollar two years ago, meaning the loans cost a “mere” 570 billion liras in local currency terms. Turkish corporates had owed about 7 billion liras in 2002, when the current government came to power.

Much of the blame for some 400 billion liras extra that Turkish companies must now repay lies with President Recep Tayyip Erdoğan. His theory that higher interest rates cause inflation is the polar opposite of conventional economic thinking, meaning the central bank has had its hands tied when looking to raise rates to stem declines in the lira and rein in inflation. Inflation in Turkey is 10.9 percent, more than three times the emerging-market average. The central bank’s main interest rate stands at 13.5 percent.

These questionable policies have also extended to the government's approach to the economy as a whole – Erdoğan has sought to stimulate economic growth through loan incentives, cash giveaways to pensioners and tens of billions of dollars in investment incentives for his business allies, which include tax breaks and delays in social security payments. The policies have prompted investors, ratings agencies and the International Monetary Fund to warn that the economy is overheating.

In light of the lira’s troubles, it is not surprising then that companies such as Yiıdız Holding, the maker of Godiva chocolates, and Turkish billionaire Ferit Şahenk, once heralded as the most successful of Turkey’s young entrepreneurs, are now seeking the help of banks to restructure the billions of dollars in foreign debts that they owe.

Ferit Şahenk
Turkish billionaire Ferit Şahenk, chairman of Doğuş Group

The problematic loans at Turkey’s largest companies appear to be just the tip of the iceberg. No official data is available for the economy as a whole. But the nation’s banks are reporting a surge in restructured lending.

Loans under close scrutiny at Akbank, Turkey’’s second-largest listed bank, almost tripled to 22.3 billion liras at the end of March when compared to six months earlier. The loans, which the bank defines as at risk of non-repayment, comprise almost 10 percent of total loans, according to the bank’s financial results. A similar picture can be seen across the country’s finance industry.

Making the picture even more bleak, total loans in Turkey’s banking industry now exceed deposits by about 20 percent.

Still, that didn’t stop Erdoğan last week ordering Turkey’s state-run banks to take losses on mortgage lending. Last week, Ziraat and Halkbank reduced their mortgage rates to 0.98 percent monthly – 1 percent is a key psychological level in Turkey. In contrast, Isbank, the country’s largest listed bank, charges about 1.3 percent monthly on mortgages. Interest rates banks offer customers on deposits exceed 13 percent.

On Thursday, Fitch warned that Turkey is among a fragile three of nations that also includes Argentina and Ukraine. The countries have two things in common – exposure to foreign debt and high inflation.

Argentina is seeking IMF loans to shore up its economy. It raised interest rates by a total of 12.75 percentage points to 40 percent over the past two weeks to steady the peso. Ukraine already has a $17.5 billion programme with the fund. Its currency has gained this year…

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