Turkish debt too dependent on foreign currency -- IIF

Turkey’s total debt is too dependent on foreign currency, according to the "Global Debt Monitor Report" of the International Finance Institute (IIF), published on May 13.

“Among the developing countries, dependence on foreign currency increased the most in Turkey and Chile,” the report warns. “The ratio of total debt to national income, which was 144.3 per cent in the first quarter of 2020 in Turkey, was 163.4% in the first quarter of 2021. When calculated according to the national income of 2020, which was announced as $717 billion dollars by TURKSTAT, Turkey's total debt reached $1.17 trillion. Foreign currency denominated debt constituted 87.2 percent of this debt.”

Servicing this debt may become a challenge for the Turkish government, the report continues.

“While global financing conditions remain strongly supportive, pandemic-related spending increases and revenue losses have made debt service a greater burden for many EMs including Philippines, South Africa, India, Indonesia, and Turkey. Heightened political and social tensions as the pandemic wears on could limit governments’ willingness to deliver structural tax reforms, leaving many sovereigns more reliant on domestic and international debt markets.”

Turkey, however, has limited access to international debt markets, according to a European Commission report released on April 22.

Failure to reduce reliance on carbon-intensive activities could add to upward pressure on EM government borrowing costs by reducing investor appetite for EM assets. For example, a 10 percent increase in climate vulnerability is estimated to increase EM sovereign spreads by 100 basis points on average.

The sovereign spread represents the difference between bond yields issued on international markets by the country in question versus those offered by governments with AAA ratings.

Turkey is particularly at risk in this scenario, according to the report.