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.