Turkey’s private sector long-term foreign loans stock contracted by a further 1.1% m/m to stand at $223bn as of end-May, the central bank said on July 16.

The loan stock reached $227bn in March before moderately contracting over the following two months.

Turkey is heavily dependent on external loans to finance its large and surging current account deficit, which at 6.5% of GDP is one of the widest in the world. Debt-financed consumption is regarded as one of the main drivers of the remarkable economic growth experienced by the country in much of the past decade. However, when it comes to the economic horizon, a more challenging environment for the country’s private firms is placing sustained pressure on the outlook. Turkey’s corporate sector may experience increasing difficulties in meeting liabilities.

Data from the central bank also showed that the private sector's short-term loans declined by 3% m/m to $19.7bn as of end-May.

The net short FX position of the non-financial firms slightly declined by 0.66% y/y to $221bn at end-April, central bank data showed on July 3.

Private sector long-term foreign debt moved up 9% y/y to stand at $222bn as of end-2017 from $202bn at end-2016 while the short-term debt rose by 28% y/y to $18bn as of end-2017 from $14bn a year ago.

Turkey’s gross external debt stock rose by 3% q/q and 12% y/y to reach $467bn by the end of March, the Treasury said on June 29. The private sector's share in the country’s total gross external debt stood at 70% or $325bn at the end of March 2018.

Turkey’s gross external debt stock corresponded to 52.9% of GDP as of the end of March 2018, lower than the 53.4% recorded at the end of 2017, which was the highest level posted since Q1 2003. 

Turkey's net external debt stock increased by 4% q/q and 13% y/y to $303bn as of the end of March 2018. 

Signs of major conglomerates struggling to pay their hard currency-denominated debts have set off alarm bells. Of the total $95bn invested into Turkey's energy industry since 2003, about $51bn is debt that still needs to be repaid, Zumrut Imamoglu, the chief economist of Turkish industry and business association Tusiad, told Bloomberg on July 11.

Turkey’s foreign-currency corporate debt amid the country’s debt-fuelled and consumption-driven boom is equal to about 40% of economic output and its cost is climbing every day, putting the nation’s companies in a tight spot, Bloomberg reported on March 29.

Turkey’s corporate foreign-currency debt pile has more than doubled since 2009, with about 80% held by domestic banks. In the same period, the dollar and euro rates have more than doubled against the TRY.

With an eye on addressing the risk generated by Turkey’s corporate debt and defending the lira, the government decided to restrict hard-currency borrowing for some of the smallest companies from May. Under the plan, larger borrowers were to be told to hedge against their exposure.

Fitch Ratings on July 13 cut Turkey deeper into junk, downgrading its Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB', two notches below investment grade, from 'BB+', with a negative outlook.

Downside risks to macroeconomic stability have intensified owing to the widening in the current account deficit (CAD), the more challenging global external financing environment, the jump in Turkey’s double-digit inflation and the impact of the plunge in the value of the Turkish lira (TRY)on the private sector, which has significant foreign currency-denominated debt, the rating company said in a statement.

For 2018, Fitch estimates the external financing requirement at $229bn, comprising of a CAD of $54bn, medium and long-term amortisation of $57bn and short-term debt of $118bn.