Non-Financial Sector Debt: Impending Risks

Previously we noted that Turkey debt will draw attention as global monetary conditions were set to be less friendly to developing economies than it had been in the past. Following the Trump win, we have seen a bond rout in the United States, resulting in higher yields that simultaneously putting emerging market assets to the fire.

We think it is time to place some emphasis on Turkish corporates debt as pundits tend to conceive about increasing financing costs of those businesses which would ultimately cause a protracted earnings recession.


Turkish non-financial companies’ open FX position rose to $212.8 billion (+1.2% m/m, +17% y/y) in September according to the data released by Turkish central bank. This has been intensely pointed by the critics that each TRY0.01 deprecation against the US dollar would accretive to financing expenses TRY2.1 billion, give or take. Our prospect is for increased inflationary pressure.


FX-denominated liabilities of Turkish non-financials have been steadily rising since late 2010 when the central banks of developed economies introduced ZIRP world. Eased global monetary policy conditions paved the way for Turkish corporates since domestic savings are enough to finance Turkey’s economic growth. By this one could assert that one of the pillars of Turkey’s economic success has been the private debt. Assets, on the other hand, have also risen, been more volatile, but more importantly on the decline over the past several months, which might be explaining the weakness in Turkish lira. Note that FX assets were $98.6 billion in September (-5.1% y/y) and liabilities climbed to $311.4 billion (+9% y/y).


The crucial point of this article is offer here. As visualized in the chart above, companies’ investments abroad are on the rise while their FX deposits as well as export receivables are declining. We find Turkish corporates growing their investments abroad noteworthy. On a separate note, deposits, export receivables, and DIAs were $67.1 billion, $10.6 billion and $20.7 billion, and of total assets, representing 68%, 10.8% and 21%, respectively.


Finally, on the liabilities side, it’s loans, the loans, nothing but the loans. Accounting for 90% of total liabilities, Turkey’s real sector has a payable book of $280 billion to the banks, while import payables have been clearly declining mostly due to slowing domestic demand for imported goods. FX loans growth around 9% is also alarming given the volatility in exchange rates.

Nevertheless, the data suggests that there is no sign of a maturity mismatch as 79% (25%) of assets (liabilities) is set to mature in one-year period, which means Turkey’s corporates only have a short-term net FX open position of $1.3 billion. However, it has noted by many economists that a significant part of the long-term liabilities is typical one-year-plus-several-days debt which papers over the cracks.

The Real Effects of External Debt on Turkey

One basic problem of Turkish economy is that the large current account deficit which is expected to equal to 4.5% of total Gross Domestic Product at the end of this year. When this is the case, the short term capital inflows and foreign direct investments (FDI) in the country becomes crucially important (Recently we published a post about the outlook of FDI in Turkey). That said, short terms capital flows into the country has come into prominence as the volatility in foreign exchange markets rises dramatically pushing Turkish lira to fresh lows, coupled with political pressure on Turkish central bank to lower the interest rates at a time when inflation remains above the official target.

Picking up on short term flows, foreign debt has been a more stable means of finance in the short term provided that domestic savings are remarkably low. This is explaining the Turkey’s heavy dependence on foreign capital inflows into its $800 billion economy. Additionally, foreign exchange reserves of Turkish central bank is known amount to $108.6 which is a figure not enough to fill the gap of short term external debt stocks that was above $130 billion at yearend.

Amid political turbulence and with the largest short term external debt stock ever recorded by its peer group, Turkish lira was expectedly poised to tumble much further. This is a short summary of what happened in foreign exchange markets. Considering the fact that Turkey like any other emerging country will be less able to receive the funds it needs to maintain its economic activities as the United States Federal Reserve pushes the risk aversion button for all markets across the globe with a rate hike, lira will add new fresh lows. But, in this post I mainly touch upon the impact of the short term external debt on economic growth.

According to the data released Turkish central bank, at year-end 2014 the total short term external debt stock of Turkey is $133 billion of which $96 billion comes from Turkish banks’ borrowings, and $36 billion from non-financial private companies. This means a 4% rise in total debt on yearly basis. The rise at year-end 2013 was 35% showing Turkish companies facing difficulties while borrowing from foreign institutions. In order to be clearer, we prepared the chart below that visualizes the annual changes in short term foreign debt stock.

Turkey - Economic Growth and Short Term External Debt

Turkish economy averagely grew 4% between 2006 and 2013, which we accept as a threshold for analyzing Turkish economic growth. As you may guess, red areas in the chart expresses the lower than average growth periods. Specifically in post-global financial crisis period Turkey clearly seems to be growing below its potential unless it posts an annual rise of 20% in short term external debt. This, of course, does not mean that Turkey’s economic growth is completely reliant on borrowing more from foreigners. But somehow two variables correlate perfectly.