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Turkey’s credit shock deepening!

If the economy does not recover in autumn, a sudden increase in bad loans of the banking system and many inefficient private sector companies going bust is the most likely scenario.

Turkey’s credit shock deepening!

Credits are a very important indicator to measure the health of the private sector and the general course of the economy. We follow the progress of the loans in the 13-week moving average annual rate preferred by the Central Bank of Turkey. This rate fell to 15 percent as of June 22; a level that would not support growth. While the public banks keep lending, the private banks had completely left the race. Consumer loans froze. It will be very difficult for the private sector to repay debt obligations.

 

The loan volume which has been increasing rapidly at 13.1 percent since the beginning of the year, is actually declining visibly in the last few months. The acceleration measured by the 13-week moving average declined to 15 percent a year, while the 8-week average expansion rate is down to 0.7 percent, but the pace of growth almost is still at 0.3 percent for the last four weeks’ observations.

Assuming 11 percent end of year inflation, the Turkey’s economy to grow by 4 percent, loan growth rate needs to be at least 15 percent; or by 20 percent if we consider financial deepening. Thus, the data shows that at the end of June, the credit growth has slowed down to a level not enough to support economic activity. 

Private banks pull out from the race

As can be seen from the below chart, the 13-week moving average credit volume of private banks decreased by 7% percent. In other words, private banks have fled the loan competition. Business contacts tell us that SME loan rates are now as high as 25 percent and banks are very selective about lending collateral. A bank manager who e-mailed us used the phrase “the law department is working day and night; there are a lot of restructuring requests”. While the credit acceleration of public banks slowed down in recent weeks, asset quality of these banks is being questioned.  We are hearing anecdotes that public banks are collecting deposits at high interest rates from the market and lending to the mortgage at a loss.

Note: Loan Growth Rate- Red line: Total banking sector loans; Blue line: Public Banks loan growth; Green line: Private sector loan growth

Consumer loan growth has stopped 

Since the beginning of the year, total loans have increased by around 13 percent, while growth in consumer loans have remained below 5 percent. According to TURKSTAT figures, we can say that households that have contributed to first quarter’s 7.4 percent GDP growth by 10 points have refrained from purchasing goods through installments. Rising inflation and the pause in the TURKSTAT Consumer Confidence Index indicate that private consumption expenditures will not improve in the short term. 

Bankruptcies may begin in the private sector

During investor visits, the bankers insist that they have not had any problems with the restructuring of the loans, but this explanation is not convincing. If a company cannot repay its credit at “17 percent interest rate- 7 percent GDP growth rate”, how will it pay if the interest rate on the loan goes up to 21 percent and growth slows to 4 percent without any problems?

Companies with weak financial structure or slower gross revenue growth due to a slowdown in the economy are facing the danger of bankruptcy. The private banks that read this landscape correctly are currently in the process of freezing new loans; will as a second step engage to efforts to rescue bad loans and raise capital. The public sector liquidity might also soon dry up.

It is inevitable that interest rates will rise even further in the summer months. While inflation and exchange rate volatility push up deposit rates, private banks fail to provide external funds with 3-5 year maturities as the borrowing costs have increased by 300-400 bps since the beginning of the year. In addition, the Treasury’s internal debt rollover ratio may spike back to 120 percent or even higher levels pressuring interest rates further up in the coming months.

If the economy does not recover in autumn, a sudden increase in bad loans of the banking system  and many inefficient private sector companies going bust is the most likely scenario.

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