When Donald Trump won the US presidency, investors immediately expressed their views of what the impact might be on Turkey: the lira plunged, losing 7 per cent of its value against the dollar in the space of 10 days.
What spooked investors most was not the threat of protectionism that has roiled other emerging markets, but the effect an expected rise in US interest rates, under a Trump presidency, will have on a country that is so heavily dependent on foreign finance.
At the heart of the problem is corporate debt. Over the past decade, Turkish companies have run up foreign currency debt at a pace second only to that of their peers in China.
According to Turkey’s central bank, Turkish companies had foreign currency liabilities of about $210bn at the end of September, the latest month for which data are available. “The problem is, it keeps getting worse,” says Atilla Yesilada of Istanbul Analytics, a consultancy. “They are stuck on a treadmill.”
The “rollover ratio” for Turkey’s corporate sector was more than 160 per cent in the first nine months of this year, according to central bank data. In other words, for every $100 due, companies borrowed those $100 again and added another $60. “They don’t have a choice. If they don’t keep borrowing they will go into bankruptcy,” says Mr Yesilada.
It is easy to see how tightening global credit conditions could quickly become catastrophic for companies in that position. But two factors suggest that a crisis can be avoided, at least for a while.
One is that the net foreign exchange liabilities recorded by the central bank may be overstated. Ozgur Altug, chief economist at BGC Partners in Istanbul, estimates that Turkish companies have about $150bn salted away overseas in undeclared deposits and have been bringing some of this back into the country. Such transfers would show up as borrowing from overseas — perhaps accounting for about 20 per cent of the new debt, Mr Altug suggests.
The other mitigating factor is that the share of foreign debts maturing in 12 months or less is close to zero — at just $5m in September, according to the central bank. Many banks, though, are known to date loans at just a few days over a year to avoid the short-term label, so this may be largely a false assurance. However the debt is measured, says Mr Altug, this “doesn’t mean [currency weakness] won’t hit their income statements. There will definitely be an impact.”
The difficulty for investors is to gauge the damage likely to be caused by currency weakness and falling corporate earnings and when, or indeed if, it will become critical.
The challenge for Turkish companies is how to generate enough foreign currency to meet their repayments. There are three ways of doing that: as exporters, as members of the tourism industry, or as participants in the domestic economy who can make enough lira to buy the foreign exchange they need.
All three sources of income are under stress. Exports, which were growing at 10 to 15 per cent a year for most of this century, have collapsed over the past two years. Exporters also face an additional currency mismatch: about 60 per cent of their foreign debts are denominated in dollars, while the dollar share of export receipts is only 40 per cent, according to Inan Demir of Nomura.
“In the Trumpflation world, Turkey will be in the unenviable position of generating export revenues in other currencies and trying to service dollar-denominated debt,” he says.
Revenues from tourism have also collapsed. As Moody’s Investors Service noted when it downgraded the country to junk in September, income from tourism fell by nearly 30 per cent in the first half of this year from a year earlier, largely as a result of terrorist attacks and of sanctions imposed by Russia last year after Turkey shot down a Russian military jet.
Moody’s noted: “While the removal of Russian sanctions is likely to provide some support to the [tourism] sector, full normalisation will be delayed as long as political and security risks remain elevated.”
As for those indebted companies relying on the domestic market, growth is not running quickly enough. The economy will grow by about 3 per cent this year, far short of the rates Turkey has achieved this century and of the growth needed to meet foreign obligations.
Some analysts warn that the money borrowed overseas by Turkish companies has not been put to the best use. Had enough of it gone into investment to boost productivity, things would be different. But too much, critics say, has gone into Turkey’s money markets, where interest rates are much higher than the rates borrowers pay on overseas markets.
Michael Harris, an analyst at Renaissance Capital, says most companies should be able to adjust to rising financing costs by raising prices or cutting costs, for instance, in headcount.
But there are limits: “If the lira keeps weakening, the recessionary cost cuts will intensify, giving more reason to worry,” he says.
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.