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Turkey's Bill for Debt-Fueled Economic Growth Starts to Fall Due

Turkey's Bill for Debt-Fueled Economic Growth Starts to Fall Due

(Bloomberg) -- The bill for Turkey’s growth boom is finally coming due.

With the lira plunging and the nation’s current account deficit ballooning, the cost of corporate Turkey’s foreign-currency debt -- equal to about 40 percent of economic output -- is climbing every day, putting the nation’s companies in a tight spot.

While the government reported the strongest growth rate in four years on Thursday, one of the week’s more pivotal economic events may come on Friday: Yildiz Holding AS, the global confectionery and cookie company owned by Turkey’s richest man, is on track to complete an agreement to refinance as much as $7 billion of debt with its lenders. That could open the door to more such workouts.

There will probably be “additional pressure on corporate profitability as the the lira continues to depreciate,” Phoenix Kalen, an emerging-markets strategist at Societe Generale in London, said on Wednesday.

The Yildiz deal is the nation’s biggest syndicated loan to have gone sour, and has become emblematic of the consequences of debt-fueled and consumption-led growth, where the promise of higher living standards has come at the expense of economic stability. While the government reported on Thursday that Turkey grew 7.3 percent in the fourth quarter, taking the annual expansion in 2017 to 7.4 percent, inflation has taken off. Consumer prices have risen by more than 10 percent for the past seven months.

The corporate foreign-currency debt pile has more than doubled since 2009 -- with about 80 percent held by domestic banks -- while the dollar and euro have more than doubled against the lira, which is buckling again under the pressure of double-digit inflation, a bigger budget deficit and a growing current-account gap.

Turkey’s Deputy Prime Minister Mehmet Simsek says the currency’s depreciation has made the economy competitive, and that the worst for the lira is now over. But a government-led credit binge designed to soften the blow from a coup attempt in 2016 stimulated domestic demand, boosting imports far more than exports.

In an attempt to mitigate the systemic risk that Turkey’s corporate debt poses, the government has decided to restrict foreign-currency borrowing for some of the economy’s smallest companies all together starting in May, and to force larger borrowers to hedge against their exposure.

The corporate sector’s foreign-exchange liabilities climbed to a record $328 billion as of the end of 2017. Even when netted against their foreign-exchange assets, the shortfall has held near an all-time high of $214 billion.

As some companies struggle to repay on time, it’s putting pressure on bank balance sheets. The biggest lenders, including Akbank TAS, Turkiye Garanti Bankasi AS and Turkiye Is Bankasi AS, have already set aside cash for expected losses from a $4.75 billion default loan held by the majority owner of Turkey’s biggest telecommunications firm.

And the outlook for the lira doesn’t look bright. The currency, which has depreciated in all but four of the Justice and Development Party’s 15 years in power, is now headed even lower. TD Securities says if the central bank doesn’t step in, or if markets don’t “turn bullish all of a sudden,” the lira could weaken to 4.10 to 4.15 against the dollar in the coming days, from 4.01.

“Corporate leverage has ballooned towards U.S. levels, and banks have little desire to further increase their lofty reliance on wholesale funding,” said Manik Narain, a strategist at UBS AG in London. “So it takes a major improvement in global credit and risk conditions for the lira to strengthen.”

To contact the reporters on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net, Asli Kandemir in Istanbul at akandemir@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, James Hertling, Benjamin Harvey

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