On Monday CBRT released Short-term External Debt Statistics for the month of November and Last Friday CBRT released data regarding Outstanding Loans Received from Abroad by Private Sector for the month of November.

Facts:

Turkey’s gross external financing requirement stands at about USD 200bn for the year 2017. Long-term external loans of private sector amount to USD 205.7bn as of November – USD 69.5bn maturing in a year’s of time. Short-term external liabilities stand at USD 16.4bn. “In balance sheet” FX position of the real sector (non-financials) amounts to USD 212.6bn as of October.

Note: All of these three items i.e. gross external financing requirement, long term external loans, and in balance sheet FX position of the real sector are different concepts from each other and should not be confused with one another. Accumulation of numbers around USD 200bn is a mere coincidence.

Key Take-aways:

80% of the “in balance sheet” FX position is carried by large-scale corporates who generate about 80% of Turkey’s export turnover.

Off balance sheet data that are utilized to hedge against currency mismatch are not publicly available – though central bank research via stock exchange quoted companies indicated that a considerable amount is indeed hedged.

Recent announcement by Deputy Minister in Charge of Macroeconomic Policies Mehmet Şimşek indicates that work is going on to collect data to generate better insight about hedging activities and “net” FX position of real sector.

Turkey is strongly integrated to global value chain (mainly Europe) which makes the gross external financing requirement an issue of roll-over and re-pricing.

Economy management well aware of the situation regarding foreign currency denominated loans, taking measures to extend the duration to a feasible point (at the end of the day it’s a trade-off between risk and pricing). Increase in long-term loans mainly due to maturity extension of loans that used to be classified as short-term previously.

Commentary:

We think that a couple of macroeconomic metrics in close vicinity of USD 200bn are the cause of confusion – a pure random coincidence. In order to tackle the issue we would like to start by definitions related to a country’s external position.

1. “In”-balance-sheet FX position of corporates (the projective of “in” is important because this statistics excludes “off”-balance-sheet items that are utilized to hedge the FX position).

2. Gross external financing requirement: This statistic assumes that in case of a sudden stop how much funding the country needs to cover her funding for a one-year horizon (=savings of foreigners in Turkish banks + trade payables + current account deficit + short term debt + short portion of long term debt).

3. Foreign borrowings.

1. Probably the most frequently used graph about FX risk in Turkey is the “in”-balance-sheet FX position of non-financials. The amount has reached USD 212.8bn as of 3Q2016. This amount does not take into account “off”-balance sheet items that are being utilized by financial managers in the real sector. Most of the burden is being carried by large conglomerates who are employing professional staff capable of universally accepted risk-management principles.

2. Regarding gross external financing requirement;

  • USD 46.8bn consists of foreigners savings in Turkish banks,
  • USD 34.5bn consists of trade payables (a function of Turkish export-import evolution),
  • USD 21.8bn consists of short-term foreign borrowing,
  • USD 51.6bn consists of short portion of long-term foreign borrowing, and
  • USD 35bn consists of assumed current account deficit,

adding up to a sum of USD 190bn. Gross external financing requirement is mainly a roll-over issue. Turkey has a good track-record in terms of rolling over her debt. We can see some adverse effects due to increased risk premium related mark-up costs. However we did not detect a sudden-stop type risk in none of the severe financial risk events in recent history (such as taper tantrum, FED’s rate hike, July 15th, Chinese devaluation, etc). At 25% of GDP this ratio may fall into risky category for some international institutions on the other hand factoring in Turkey’s reputation this amount does not seem too challenging. Turkey has an ability of fulfilling her financing requirements in a given year.

3. Total long term foreign borrowings of private sector amount to USD 207bn as of 3Q2016. This figure should not be confused with the open FX position mentioned above. Of this, non-financials owe USD 99.3bn. The rest is carried by financial companies. Non-financials have an obligation of USD 18.8bn to cover in the next 12 month period (including both short-term borrowings and the short-portion of long-term borrowings).

More importantly, authorities are well aware of FX and foreign borrowing related risks in Turkish economy. Therefore central bank implemented macro prudential policies at the end of 2014 aiming to extend the maturity of foreign borrowings. Consequently short term debt in private sector has fallen to USD 16.8bn as of 3Q2016 from its peak of USD 44.1bn at the end of 2014. Standard & Poor’s credit rating agency has upgraded Turkey’s outlook to “stable” form “negative” in its recent review in November. One of the promising arguments S&P has used was the extension of maturity of foreign borrowings. S&P has a tendency to rate Turkey lower compared to other agencies!

As a conclusion;

1.The USD 212.6bn “in”-balance-sheet FX position is being managed by professional staff.

2.USD 200bn gross external financing requirement is a roll-over issue that does not seem too challenging for Turkey with solid credentials.

3.Turkish non-financial corporates carry a total of USD 102.4bn foreign debt of which USD 18.8bn will mature in the next 12-month period.

Total short-term borrowings have diminished from a peak of USD 44.1bn to USD 16.4bn due to macro-prudential tools implemented by central bank.