Turkey’s jittery financial markets—on the lookout for any signs of turbulence from the coronavirus (COVID-19) crisis placing unbearable additional strain on the country’s already exposed economy—on April 14 were digesting news of another Turkish bank somehow managing to roll over its debt, albeit at a lower renewal rate, and saw some early ‘red alert’ smoke rising from the real sector after Standard & Poor’s downgraded a TV and household appliances maker after it postponed meeting a financial obligation.

Government-run Ziraat Bank, the largest lender in Turkey by assets, said it obtained a $1.1bn syndicated loan in two tranches of $415mn at a cost of Libor+2.25% and €597mn at Euribor+2%, according to a stock exchange filing.

The costs were identical to those of the benchmark set by Akbank earlier in April, while the rollover rate stood at 77%.

The costs compare lower to costs arranged in March 2019 (Libor+2.50% and Euribor+2.40%) while it is only the euro costs that are slightly lower held up against an October 2019 loan (Libor+2.25% and Euribor+2.10%).

Akbank, meanwhile, said in a separate stock exchange filing that its total loan amount rose to $605mn at the end of the “accordion” feature from the previous $560mn. That brought its rollover rate to 86% from 80%.

Eximbank needs to renew a $100mn loan in April, while Ziraat Katilim ($250mn) and Vakifbank ($1.1bn) will also be in the market for renewals.

In May, Yapi Kredi Bank ($1bn), Garanti BBVA ($784mn) and Isbank ($1.03bn) will join the queue.

“Problems on the liabilities side of banks’ balance sheets are most likely to occur in Turkey, where large short-term external debts will be increasingly difficult to roll over,” Edward Glossop of Capital Economics cautioned on April 9 in a note entitled “EM banks: where do the risks lie?”.

Those EMs with more indebted private sectors that also have a large share of private sector debts in forex were more exposed, he added.

Turkey is among the top three exposed based on all risk indicators, plus it is among the EM economies hardest hit by the COVID-19 health and economic emergency due to shutdowns afflicting its large tourism and services sectors. A further rise in non-performing loans (NPLs) looks a certainty to most analysts.

“In Turkey’s case, risks are altogether greater. Banks have financed lending through large short-term external debts. And banks look weaker than they were going into the currency crisis in 2018. In a best-case scenario, a severe credit crunch will follow. And in a worst-case scenario, a wave of bank defaults is likely to ensue,” Glossop added.

‘Selective Default’ on Vestel Elektronik

The downgrade from Standard & Poor’s was applied to TV and household appliances maker Vestel Elektronik. It took the company to ‘Selective Default’ (SD) from ‘CCC+’ with the rating agency responding to Vestel Elektronik postponing a portion of its financial obligation due in June 2020 for three to six months.

Despite the lending counterparties agreeing to the postponement, S&P considered the exchange to be distressed.

In S&P’s view Vestel Elektronik's tight liquidity and weak credit metrics, with its forecast liquidity sources over uses of less than 0.4x (over the next 12 months as of January 1, 2020), and adjusted leverage above 10x in 2020, leaves the company with limited options in terms of refinancing.

In addition, S&P saw Vestel Elektronik's refinancing ability as further constrained by its relatively high share of foreign currency-denominated debt of around 40%, and expected demand and supply disruptions caused by the COVID-19 stress.

Although the Turkish government is representing Turkey’s current account deficit as under control—thanks to its habitual employment of a change in methodology—the pointedly ignored capital account continued to give off bad signals in February prior to the “COVID-19 sudden stop” in March.

The capital account was at +$3bn in the month but that was only because of the Treasury’s $4bn eurobond sale and transfers of $3.2bn made by banks from offshore branches.

“Major outflows”

“Apart from those [items], the overall capital account actually witnessed major outflows,” Seker Invest said on April 14 in its daily bulletin.

Despite relatively limited redemptions in February, both the banking and corporate sectors attained low rollover ratios in new borrowing at 69% and 65%, leading to a total $0.7bn outflow (including short-term loans).

There was also a $0.5bn outflow via banks’ net eurobond issuance.

The banks have remained net debt payers in each month since May 2018. Since then, they have redeemed a net $31bn, including eurobonds.

Non-residents sold $0.7bn worth of equities and $1.7bn of T-bonds in February, while some $1.2bn in capital outflows took place through trade loans, formerly a financing item in previous months.

At the same time, net FDI inflows stood at a mere $0.3bn.

“There is clear evidence that Russia and Turkey are struggling to contain [COVID-19] outbreaks… The escalation of the coronavirus outbreak in Turkey has spooked investors and sparked rumours that Turkey may turn to the IMF for financial support… Meanwhile, external financing conditions remain tight—spreads on Turkish banks’ dollar bonds over US Treasuries are close to 1,000bp, their highest since 2018. We warned in an Update that banks are in a poor position to cope with a period of market stress,” Liam Peach of Capital Economics said on April 9 in a note.

“A few quick points are worth making. First, turning to the Fund would be a huge loss of face for President [Recep Tayyip] Erdogan and he would exhaust all other options first. Second, even if Mr. Erdogan buckles, previous IMF assessments of Turkey suggest that there would be a major push for a return to orthodox policymaking. Third, a financing package for Turkey would stretch the IMF’s funding capability. The upshot is that, while talks with the IMF may be opened, sealing a deal would be difficult,” he added.

“I do not see capital controls… So options are: A) SWAP lines with the Fed… but… it has wanted some assurance of [monetary and exchange rate] policy orthodoxy… Turkey… simply does not tick the boxes there. So the Fed would need to be dragged kicking and screaming and by some huge geopolitical ask from Erdogan to Trump, or rather ‘give’ from Erdogan to Trump. Read there S400 backdown [on bringing acquired Russian missile defence systems into operation], purchase of [US] Patriots [missile hardware],” Timothy Ash of Bluebay Asset Management said on April 9 in a note to investors.

“But in the end the US likely would prefer Turkey to turn to B) IMF lending,” he added.

“De facto no swaps”

In regard to capital controls, Erdogan just cut banks’ offshore swap limits to 1% of equity, so make that "de facto no swaps", while on April 14 he made it obligatory to inform the financial crimes office (MASAK) prior to transferring more than TRY1mn to a foreign country.

He has introduced many limitations on FX trade since March last year, but he's not managed to convince some of his allies that he's achieving capital controls.

Erdogan still has about $60bn of gross FX reserves at the central bank and around $20bn in additional FX liquidity at banks (about $5bn at home and about $16bn at foreign bank accounts), available to be swapped, and it seems that he is not in a hurry, although everyone is worried.

“Just in case anyone is in any doubt: I'm bearish Turkey,” Julian Rimmer of Investec said in an April 9 note to investors.

Major external financing obtained by Turkish borrowers
		Total	Renewal	Maturity	Tranche	Cost	Tranche	Cost
		(mn)	Rate	(days)	1	1	2	2
Apr-20	Ziraat	$1,100	77%	367	$415	Libor+%2.25	€597	Euribor+%2.00
Apr-20	Vakifbank	$325	130%	3-year	China	ICBC
Apr-20	Akbank	$605	86%	367	$256	Libor+2.25%	€316	Euribor+2.00%
Apr-20	Ulker	$455	121%	3-year	$110		€244	€75
Mar-20	Turkcell	€50	ING	5-year		Euribor+1.95%
Jan-20	Borusan EnBW	$74	China	EBRD
Jan-20	Getir	$38	Moritz	Crankstart