Alarm bells over Turkey’s economic bind ‘akin to those of 1997 Asian debt crisis’

Alarm bells over Turkey’s economic bind ‘akin to those of 1997 Asian debt crisis’

Analysts say Turkey's President Erdogan has called early elections with one eye on a brewing economic crisis that, if all goes to plan, won't hit voters until some time after the ballots are counted. The president says Turkey's growth story will continue to surprise the critics. / Randam.

By bne IntelliNews April 20, 2018

Turkey’s economic predicament is starting to ring alarm bells akin to those seen in the Asian debt crisis of 1997, a London-based fund manager was on April 20 reported as saying.

As investors continued to fret that Turkey’s warp-speed economic expansion, running at a faster pace than growth in India and China, could end in an economic meltdown, Paul McNamara, a London-based fund manager who oversees about $11bn in emerging-market investments at GAM UK, 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," he added.

Turkish policy makers, urged on by the unorthodox stance of President Recep Tayyip Erdogan who has pushed for interest rate cuts despite pronounced market pressure for the opposite move, have pursued a growth-at-all costs agenda. With the markets wondering if the Turkish central bank might hit the brakes with some tightening at its upcoming April 25 monetary policy committee (MPC) meeting (the question has become more intriguing following the April 18 announcement that snap parliamentary and presidential elections are to take place on June 24), some investors are switching their focus to a side effect of the breakneck growth, namely deteriorating foreign debt balances.

Sucked in imports
Turkey’s credit-fuelled 7.4% GDP expansion in 2017 and continued fast growth this year has sucked in imports—the country’s annual current-account deficit surged to $53bn in February. There is a real question as to whether the central bank retains its monetary independence amid the political heat and rates are still too low to shrink the gap and pull down sticky double-digit inflation, the expectations for which are worsening.

With the Turkish lira (TRY) having fallen by around 8% this year against the dollar, some of Turkey’s biggest conglomerates are attempting to renegotiate debt that they are struggling to repay and there are fears that the problems of unhedged foreign-currency borrowers could eventuate in far greater difficulties with problem loans for Turkish banks.

Immediately after the announcement of the election—which based on last year’s constitutional referendum Yes will usher in a new era for Turkey with an executive president, no prime minister and a substantially weakened parliament, leading some commentators to foresee “one-man rule” and others to claim a re-elected Erdogan will become “a dictator in all but name”—the TRY staged something of a recovery. It strengthened to as much as 4.0074 to the dollar on the day of the announcement, compared to the low of 4.1272 seen on April 17 and the all-time low of 4.1944 recorded on April 11. On April 19, market responses to the election news generally started moving sideways, with the TRY ending the day at 4.250. However, on April 20, the TRY came under renewed pressure, weakening to 4.0694 by around 1900 local time.

Amid the steep devaluation, the Turkish corporate sector’s cost of foreign-currency debt, presently standing at around 40% of GDP, is moving up on a daily basis. 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.

Turkey’s net foreign-currency reserves were $26.7bn as of April 6, the lowest recorded since 2016, while its gross foreign-currency reserves, excluding gold, were $83.1bn.

#Turkey’s #debt

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