Latest data show no progress resolving Turkish real sector’s foreign debt woe

Latest data show no progress resolving Turkish real sector’s foreign debt woe
By Akin Nazli in Belgrade March 25, 2020

Turkey’s external debt maturing in one year or less regardless of the original maturity, and excluding obligations to foreign branches and affiliates, was up by $3bn m/m, or 2%, to $153bn at end-January, according to latest data from the central bank.

Year on year, the figure was only down by $5bn, or 3%, to $150bn at end-2019. At end-November last year, it fell to $146bn, but there was then a 3% month on month increase in December.

The all-time high level of $164bn was seen at end-February 2018, prior to the Turkish lira (TRY) crash six months later in August.

The latest figures show the public sector on the hook for $32.1bn in foreign debt as of end-January (compared to $30.5bn at end-2019 and $31.7bn at end-2018). The figure includes $27.7bn owed by public banks ($26.1bn at end-2019). The debt must be paid by January 2021.

The private sector, meanwhile, has obligations, excluding obligations to foreign branches and affiliates, to pay $113bn (up from $111.3bn at end-2019).

Banks must repay $17.5bn (down from $20.7bn at end-2019) and the real sector has obligations to repay $73.5bn (up from $68.4bn).

The data suggest that there has been no improvement as regards the Turkish real sector’s external debt—seen as the country’s main woe following the currency crisis—in the so-called “rebalancing” period.

The external financing needs for 2020 remain high. The magnitude of the current account deficit to be added to this figure will depend on the outcome of the ongoing coronavirus (COVID-19) pandemic.

William Jackson of Capital Economics said in a March 24 note entitled “EM capital flows: bank flows are the big risk”: “The idea that EMs are facing a ‘sudden stop’ in capital flows has started to gain traction. This will create major problems if borrowers with maturing external debts can’t roll these over or face prohibitively high borrowing costs. If that happens, either central banks would need to sell foreign currency from their reserves to residents (which isn’t necessarily sustainable) or domestic demand will need to weaken to generate the current account surpluses needed to repay these debts”.

Jackson added: “Weekly figures published by the Turkish banking regulator show that foreign banks haven’t reduced their exposure to the country (up to 19th March). While only one economy, its well-known external vulnerabilities, of which the banks are a large part, suggest that a pullback in global bank flows would show up there first. Elsewhere, indicators of bank stress (e.g. interbank rates) aren’t flashing red (yet).”

He also noted: “However, if governments in the developed economies can’t shield their banks from the economic effects of the coronavirus, that could result in a much more abrupt pullback in bank flows from emerging markets. Were that to happen, the economic impact could be even more damaging than what we’ve seen so far.”

Edward Glossop, also of Capital Economics, wrote in a March 24 note entitled “Are we about to see a wave of sovereign defaults?”: “Excluding Venezuela, Argentina and Lebanon (where governments are already in the midst of sovereign defaults) 17 EM governments now have bond spreads exceeding 1,000bp—a threshold that has historically preceded defaults. This includes the likes of Ecuador, Zambia, Angola, Nigeria and Ghana.”

Turkey’s 5-year credit default swaps (CDS) remained at 500+ on March 25 after hitting 600bp, a record high, last week.