Turkey Faces Ticking Bomb With Energy Loans of $51 Billion

(Bloomberg) -- Confronted with a plunging lira, Turkey’s central bank last month urged the general public to borrow in the currency in which they are paid. That warning came too late for the country’s energy companies.

Turkish power producers are emerging as one of the biggest risks to the nation’s banks after they plowed billions of dollars into new power generation, distribution projects and deals over the past 15 years. Now, with the lira depreciating faster than they can raise electricity prices, some utilities earn less per year than what they have to repay in foreign-currency loans, according to the Ankara-based Electricity Producers’ Association.

Their predicament highlights the far-reaching impact of the lira’s 69 percent slump against the dollar since the beginning of 2010 as President Recep Tayyip Erdogan moves his country toward authoritarianism. His grip on the country culminated this week with his swearing in for a five-year term as president with enhanced powers and the appointment of his son-in-law to oversee economic policy.

“The lira’s depreciation in recent years was unexpected but that is not the only factor,” said Zumrut Imamoglu, the chief economist of Turkish industry and business association Tusiad. “While costs are increasing because of the currency shock, companies can’t adjust their prices accordingly due to state regulation and price ceilings, which in turn, causes financial problems.”

Cash Injections

Of the $95 billion invested into the sector since 2003, about $51 billion is debt that still needs to be paid, according to the association’s data. That’s 15 percent of the $340 billion the nation’s central bank’s data shows that non-financial companies owe in foreign liabilities.

The currency’s decline has caused a mismatch between income and rising borrowing costs. The dollar value of average electricity prices on the government-brokered power market fell to $45 per megawatt-hour at the end of May from $81 in 2010, causing some power producers to renegotiate their borrowings with lenders.

The Turkish banking index was headed for the biggest two-day slump since 2013 on Wednesday, trading 5.5 percent lower at 4:47 p.m. The lira fell as much as 1.9 percent to a two-week low of 4.7964 against the dollar.

“Power plants without any power purchase agreements have a total liability of paying back nearly $3 billion to banks every year for their loans, which is almost $2.5 billion more than the cash they can generate,” said Cem Asik, chairman of the electricity producers’ association. “Investors need to inject cash to cover the difference or refinance.”

Producers which have purchase guarantees or long-term agreements in place with the government are also obliged to repay banks nearly $4 billion annually, according to data compiled by the industry association. A report prepared by Boston Consulting Group for Tusiad in April showed power companies need to generate $4.3 billion a year to repay the principal portion and $2.6 billion of interest for their outstanding borrowings.

The energy industry is the fourth-most concentrated sector in terms of bank loans after manufacturing, wholesale and construction, according to data compiled by the banking regulator.

As a temporary remedy put into effect this year, power plants that meet certain criteria, including whether they are operating efficiently, are compensated by the government if their costs exceed the market price of electricity, Asik said.

The government’s power-transmission company, Turkiye Elektrik Iletim AS, has set a cap of 1.4 billion liras ($298 million) for 2018 for the program, which is allocated for local coal-fired power and gas-fired power plants, he said.

The support is “financed, not by the government, but by both other electricity producers and the consumers in general,” Asik said. While it may not cover all their losses it does cut them by a significant amount, he said.

Most Exposed

Domestic banks are the most exposed to loans in foreign currencies, JPMorgan Chase & Co. said in a note in May.

The NPL ratio for the banking industry rose to just over three percent in the week ended June 29 for the first time since October, according to data from the banking watchdog.

“A realistic estimate of non-performing loans are around 7-8 percent,” said Atilla Yesilada, an economist for GlobalSource Partners in Istanbul. “There is no feasible scenario of lower loan rates through 2020 either. We can expect a default wave post-state of emergency,” Yesilada said. The state of emergency is due to expire on July 18.

At least $6.1 billion of loans taken out by energy companies are known to be in the process of being restructured or refinanced, including about $4 billion of debt owned by Bereket Enerji, which is selling power plants to cut its liabilities. Companies across various industries have agreed, or are still in talks, to reorganize at least $24 billion of loans.

“All these restructurings and the rise in loans under close watch in bank portfolios signal a bomb ticking in the hands of the banking system,” Yesilada said.

Here is a table showing investments and borrowings across Turkey’s energy industry from 2003 to 2018 in billions of dollars:


Production AssetsDistribution AssetsTotal
New investments57057
Government privatizations102838
Total investments672895
Total borrowings60
Total outstanding loans43851
Annual liabilities of plants with government incentives4
Annual liabilities of plants without government incentives2.9
Annual Ebitda of plants without government incentives0.5
Annual repayments required6.9
Deficit2.5
Source: Electricity Producers’ Association, Boston Consulting Group, Tusiad
* Note: Billion U.S. dollars

©2018 Bloomberg L.P.

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