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Turkey’s Credit Boom Seen at Risk of Backfiring Into Bad Loans

Turkey’s Credit Boom Seen at Risk of Backfiring Into Bad Loans

Bad debts could become more of a headache for Turkish banks when credit expansion slows, which threatens to reverse a decline in the ratio of souring loans, according to European Bank for Reconstruction and Development.

“The NPL issue is an elephant-in-the-room,” Roger Kelly, EBRD’s Istanbul-based lead regional economist, said in an interview. A boom in credit extension increases the risk of taking on riskier customers, and means many of the loans are still relatively young, he said.

Turkey’s government leaned hard on banks, especially those owned by the state, to accelerate lending to support the economy, as the onset of the coronavirus pandemic worsened an already poor outlook for the nation’s finances.

To cope with an expected increase in souring credit, EBRD has proposed that an asset-management company is created to carve out bad loans. The London-based lender, which has vowed to boost loans denominated in liras and provided support of more than $13 billion in the country over the past decade, has said it would be willing to invest in a vehicle that would bolster the asset quality of banks.

Despite a currency crisis and a wave of debt restructurings to help businesses hit by measures to contain the Covid-19 outbreak, non-performing loans as a percentage of total credit declined to 4.1% at the end of August from 5.3% in January, according to data compiled by the banking regulator.

More loans may go unpaid as credit growth normalizes, interest rates increase, and the government unwinds stimulus measures, said Kelly.

Turkey’s Credit Boom Seen at Risk of Backfiring Into Bad Loans

Banks’ loan books expanded 34% this year through October, pushing up imports and worsening Turkey’s trade deficit.” That also contributed to the currency’s 25% decline this year, the worst after Brazil’s real among emerging markets.

More highlights from the interview:

  • EBRD forecasts a 3.5% contraction in Turkey in 2020 and 5% growth in 2021, as consumption, tourism and transportation normalize.
    • The lender anticipates that a reduction in Covid-19 containment measures will allow exports to pick up. “If we see a second wave or other risks are materializing, we will revise our forecasts.”
  • “Monetary policy remains too loose, the real interest rate is still negative, which is fairly unusual for a country dependent on foreign capital.”
    • The central bank has pledged to return to a single policy rate, “which has earned them some credibility.”
    • A 200 basis-points is not a “significant hike,” Kelly said “Going back to the corridor cost the central bank a certain deal of credibility. The challenge it now faces is whether they will be able to hike interest rates at a time the economy is struggling for growth.”
  • It will take time “win back investor confidence,” even though steps have been taken in the right direction.“Winning back credibility is twice as difficult in this challenging environment.”

©2020 Bloomberg L.P.