Turkey's Debt Metrics Ringing Crisis Bell for GAM's McNamara
(Bloomberg) -- As Turkish policy makers pursue a growth-at-all costs agenda, some investors are turning their attention to its side effect: deteriorating foreign debt balances.
The nation’s 7.4 percent economic expansion last year, the fastest among major economies, has taken its toll on Turkey’s current-account deficit, which ballooned to $53 billion in the 12 months through February. Interest rates remain too low to rein in the gap and tame double-digit inflation, analysts say. Some of the country’s largest conglomerates are struggling to repay their debt, a problem exacerbated by an 8.5-percent plunge in the lira in the past year.
For Paul McNamara, a London-based fund manager who oversees about $11 billion in emerging-market investments at GAM UK Ltd., Turkey’s predicament is starting to ring alarm bells akin to those seen in the Asian debt crisis of 1997.
“Turkey is ticking all the boxes: large FX debt on corporates, current-account deficit, reserves shrinking," he said by email on Wednesday. “We think foreign investors are being complacent." While banks aren’t yet seeing problems rolling over their foreign loans, “if it happens, it will happen very fast and that’s very critical," he said.
The short foreign-exchange position of non-financial companies is a source of volatility in the currency, with the decline in the lira driving inflation into double digits, Deputy Prime Minister Mehmet Simsek told a group of investors and analysts in Washington D.C. on Thursday. The government’s plan to limit companies from borrowing in foreign currencies will go a long way toward fixing the problem, the government’s economy czar said.
Here are some of the metrics that McNamara and others are watching:
The cost of the corporate sector’s foreign-currency debt -- equal to about 40 percent of gross domestic product -- is climbing every day as the lira plunges, putting companies in a tight spot. Turkish businesses sat on a record $336 billion in foreign debt as of the end of January. When netted against their foreign-exchange assets, the shortfall was still at an all-time high of $222 billion.
Turkey’s gross foreign debt as a share of the economy is also rising. The ratio stood at 53.3 percent at the end of 2017, the highest since 2002, a year after Turkey suffered a devastating financial crisis.
Turkey’s net foreign-currency reserves were $26.6 billion as of April 6, the lowest since 2016. Gross foreign-currency reserves, excluding gold, were $83.1 billion. Although net reserves have dropped to a two-year low, the central bank says all of the reserves, including those it holds on behalf of commercial lenders, would be usable when needed. Some investors question that, saying that if the central bank tapped into gross reserves, it’d essentially be confiscating foreign-currency holdings of commercial banks.
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