Business World

Saturday 19 October 2019

Turkey Inc reeling as crisis prompts bailout speculation

Turkey's President Recep Tayyip Erdogan
Turkey's President Recep Tayyip Erdogan

Constantine Courcoulas, Onur Ant and Tugce Ozsoy

Desperate measures are in the air in Turkey: Trading rooms are awash with talk of a bailout by the International Monetary Fund and potential capital controls. But there's a vacuum at the core of economic policymaking.

The central bank and government have remained largely silent as the currency plummeted to record lows and the US imposed sanctions and threatened more. The lira rebounded after falling by the most in a decade on Monday, getting a lift from news that Turkish officials were headed to Washington for talks. The yield on 10-year bonds surged above 20pc to an all-time high.

Capital controls are now "more than a tail-risk scenario now as the authorities show no signs of reverting to more orthodox policies", said Shamaila Khan, AllianceBernstein's director of emerging-market debt in New York. What the lira really needs is "independence of the central bank, tighter fiscal policies and an IMF programme", she said.

Late on Tuesday, the IMF put out a statement saying it has "received no indication from the Turkish authorities that they are contemplating a request for financial assistance".

Meanwhile, US State Department spokeswoman Heather Nauert said that Secretary of State Mike Pompeo's call with Turkish Foreign Minister Mevlut Cavusoglu yesterday was, generally speaking, a "good sign".

Yet the radio silence from Ankara is deafening. President Recep Tayyip Erdogan, who won almost absolute power in June elections, is a staunch critic of higher interest rates and investors worry that he may be standing in the way of the central bank.

"It is very difficult to foresee an about-face by the authorities," said Per Hammarlund, chief emerging-market strategist at SEB in Stockholm. "The moment when Turkey will be forced to go to the IMF for support is drawing closer."

The lira is buckling under the weight of one of the widest current-account deficits in emerging markets and inflation is spiralling ever higher. As of July it was running at more than three times the central bank's target, driving the real policy rate to below 2pc, the lowest since December.

Ten-year yields fell 19 basis points after earlier surging as much 42 basis points to a record 20.09pc; the benchmark stock index was up more than 2pc.

Although investors are pushing for a significant rate increase from the central bank, there is growing consensus it is going to take more than monetary policy to reverse the tide.

"It's going to be a shock of one type or another: either a policy shock or a macro shock or some combination of the two," said Christopher Granville, managing director for EMEA and global political research at TS Lombard in London. "But the way to sugar that pill," he said, would be a "political accommodation with the West. That would make the pain much less."

Turkey's deputy foreign minister Sedat Onal was leading a delegation with officials from the finance, justice and foreign ministries to the US, the foreign ministry in Ankara said in a statement, fuelling speculation that a deal to patch up relations - strained by Turkey's detention of an American pastor - may be in the works.

The US remains a solid friend and ally of Turkey, the US embassy in Turkey said in a Twitter post, as it denied news in Turkish media that a US official predicted the lira would weaken to 7 per dollar.

On Monday, the central bank boosted banks' access to dollar liquidity by $2.2bn, an effort to take some pressure off the lira. The currency trimmed its losses briefly, only to plunge to successive record lows through the night as investors saw the move as evidence that the bank's hands were tied.

The lira's meltdown is not only hurting consumers' sentiment and wallets, but it's pushing corporate balance sheets closer to the abyss. Companies that borrowed heavily in foreign currencies now face a growing burden due to the tanking lira. Turkey Inc is weighed down by $337bn of foreign-exchange liabilities, with a shortfall of $217.3bn net against assets, according to central bank data. Bank borrowing costs are also rising ahead of more than $100bn in debt payments coming due over the course of a year.

"It will remain like this until the central bank commits unconditionally to hike rates and keep them high until inflation has turned," Henrik Gullberg, a strategist at Nomura International, said by email. "The market needs that sort of hard commitment."

Investors are watching closely to see whether Turkish banks will maintain access to the foreign funding they need to keep economic activity humming.

Turkish lenders have a good record of foreign borrowing even at the height of a financial crisis and are strong enough to weather a slowdown, according to bank executives. But the nature of the current crisis raises the possibility of a new set of external shocks, most notably from the US, which is retaliating with economic attacks against Turkey's imprisonment of American citizens.

Even if foreign banks continue lending to their Turkish counterparts, "costs will rise and access to markets will be hampered, with many investors not willing to increase their exposure to Turkey," said Trieu Pham, an emerging market credit strategist at ING Bank NV in London. "If sanctions were applied on banks, that would be the worst-case scenario given the high external financing needs, but that's not a likely scenario for now."

Last week, the US started the pressure by sanctioning two ministers, and on Friday it announced a review of duty free trade for about $1.7bn in Turkish exports. The Turkish government has been trying to negotiate relief for a two-track investigation into state-run bank Turkiye Halk Bankasi, but Secretary of State Mike Pompeo has already warned Turkey that "the clock had run out" on its deadline to set the prisoners free.

The heads of Turkey's two largest banks say they're still able to borrow.

"There is no issue at all regarding the syndication," Akbank TAS Chief Executive Officer Hakan Binbasgil said on July 25 during a teleconference after the bank's first-half earnings. Akbank borrowed a total of $1.15bn in syndicated loans in August 2017, $945m of which will mature in September, according to a public filing.

Turkiye Garanti Bankasi CEO Ali Fuat Erbil said strong relationships allow banks to roll over loans even against a turbulent economic backdrop. "In the toughest days I remember during 2008 and 2009, our rollover ratio was around 88pc, not below 80pc," Mr Erbil said in an earnings teleconference on July 26.

Fitch downgraded Turkey and then 24 Turkish banks further into junk in July, saying tougher financing conditions and a weaker economy will likely hit the performance of the banking sector.

Even a 100pc rollover ratio doesn't meet Turkey's needs at a time of weak capital inflows, according to Inan Demir, an economist at Nomura. "Investors are watching restructuring demands and their impacts on banks' balance sheets and creditworthiness very closely," he said. "I don't know when these will have a negative impact on foreign borrowings, but we can't say that they will have no impact on foreign lenders' appetite." (Bloomberg)

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