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28 I Cover story bne June 2018
sector debt has jumped from 33% of GDP in 2007 to around 70% today,
a build-up comparable to that seen in Greece before its financial crisis
in 2009, according to investment bank Renaissance Capital. Indeed, in
2017 Turkey saw the most extensive increase in its financial sector debt-to- GDP ratio of 39 developed and emerging countries tracked by the Institute of International Finance (IIF).
Turkish banks’ foreign currency-denominated debt, mostly in dollars, stands at 22.5% of GDP, a ratio only behind those of Singapore, Hong Kong and South Korea among 21 major EMs in the IIF’s database. Turkey’s corporate debt is now roughly 70% of GDP, the IIF added. More than half of that is in foreign currency, thus, even though widespread defaults are not yet seen, whenever the lira gets weaker, the depreciation eats up profits or distorts balance sheets.
Hung Tran, executive director of the IIF, in mid-May estimated that Turkey needs to attract foreign capital equivalent to 25% of its GDP every year in order to cover both its large current account deficit and the amortisation of its existing debt. Turkish businesses sat on a record $336bn in foreign debt at end-January. When that is netted against their foreign-exchange assets, the shortfall remains at a record $222bn.
Turkey’s gross foreign debt as a share of the economy, meanwhile, is also rising. The ratio stood at 53.3% at end-2017. That’s the highest since 2002, the year after Turkey suffered a financial crisis that wrought havoc.
On May 1, S&P Global Ratings cut Turkey’s credit rating deeper into junk. It saw signs of corporate debt distress.
"There is a risk of a hard landing for Turkey’s overheating, credit-fuelled economy," S&P said in the statement. "This is reflected in the rising imbalances in Turkey’s economy, most notably in its widening debt-financed current account deficit and high inflation."
At the end of April, the Financial Times said that Turkish conglomerate Dogus Holding could turn out to be the “canary in the coal mine” for Turkey’s corporate debt problems. Shortly before that, Paul McNamara, a London- based fund manager who oversees about $11bn in emerging-market investments at GAM UK, said Turkey’s economic predicament is starting to ring alarm bells akin to those seen in the Asian debt crisis of 1997. He told Bloomberg: “Turkey is ticking all the boxes: large FX debt on corporates, current-account deficit, reserves shrinking. We think foreign investors are being complacent." While banks aren’t yet seeing problems rolling over their foreign loans, “if it happens, it will happen very fast and that’s very critical."
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The lira’s collapse this year is thought to have put many Turkish companies that borrowed in foreign currencies at risk of default and the wicked brew of domestic and international economic negatives have taken the feet from under the lira could wreak havoc.
The opposition smell blood
It’s election season and the opposition smell blood. Meral Aksener, the former interior minister and Iyi (Good) party leader whom many see as having the best hope of unseating Erdogan in the presidential contest, has seized on the lira market rout, describing the president as a “tired driver” who is at the wheel of a “bus heading over the cliff edge”. On May 23, prior to the rate hike, Hurriyet Daily News reported Aksener was calling on the government to “urgently re-estab- lish confidence” in the economy.
She reportedly criticised the govern- ment’s economic team for “not seeing the realities” and for not admitting to “its mistakes” of the last past 16 years. Rebut- ting government rhetoric that the money market and economy were in trouble due to conspiratorial foreign intervention, she said: “If we are under a financial
and economic attack as the government claims, the biggest mistake to make is to remain indifferent to this attack. This is to accept defeat from the beginning.”
Though Erdogan – who often points
to foreign market conspiracies being mounted against Turkey’s economy
– stayed silent on the collapse of the lira, Turkey’s government spokesman said on May 23 that a game was being played with the lira but it would not change the outcome of June’s election, state-run Anadolu Agency reported. “The people have seen the game and