May 16 2018

Turkish credit crunch concern stops bank raising rates – investor

The possibility of a credit crunch in Turkey is limiting the central bank’s ability to raise interest rates and halt a decline in the lira, said Alberto Gallo, a portfolio manager at Algebris Investments.

“If the central bank starts hiking rates to defend the currency there is a risk that you have a domestic credit crunch because of all the leverage that has been accumulated,” Gallo, who runs a bond and credit fund, said in an interview with Bloomberg Television, adding that non-performing loans have been growing as lending surged.

Turkish bank loans have been expanding at almost 20 percent annually, reaching an all-time high in March, amid government stimulus measures for the economy, which have included more than $50 billion in loan guarantees. At the same time, the lira has slumped to record lows against the dollar, hurting spending power and making it harder for companies and consumers to repay foreign currency debt. Turkish corporates have more than $220 billion in foreign borrowing that they must service.

Gallo said the willingness of the central bank to raise rates is also lacking because Turkish President Recep Tayyip Erdogan wants to boost short-term growth to get re-elected, which means keeping interest rates low and pushing the nation’s banks to lend more to consumers and households.

“So, when you have a very short-term focused mindset in an environment of a stronger dollar and high interest rates in the domestic market it (the lira) is going to get weaker,” Gallo said, adding that he was still short Turkish lira.

While the lira and local debt has been selling off, the investment manager said he was concerned about the price of foreign currency debt of banks and corporates, which was still trading at low yields despite the economic instability in the country.

“If you look at hard currency debt, that’s still trading in the range of 200 basis points, 250 basis points, which is among the tightest in the emerging market universe and in Europe,” he said. “Turkey was very often regarded as a country that would join the EU, that would be going towards investment grade, developed status markets, and it’s not.

“Banks and corporates have a lot of hard currency debt which they may not be able to pay.”

The lira slumped to a fresh record low of 4.49 per dollar on Wednesday. The currency is also weakening amid a general sell-off in emerging markets, which is targeting countries with high inflation and current account deficits such as Turkey in particular. Turkey's inflation rate stood at 10.9 percent in April, more than three times the average in emerging markets. The current account deficit exceeds 6 percent of gross domestic product because of a recent surge in imports.