Foreign Exchange Exposure of the Non- Financial Corporate Sector in Turkey

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1 Foreign Exchange Exposure of the Non- Financial Corporate Sector in Turkey April 2015 Economic Research Division

2 1 Foreign Exchange Exposure of the Non-Financial Corporate Sector in Turkey During the last decade, Turkey has been successful in putting its fiscal house in order with bringing the budget deficit under control. Nevertheless, ultra-expansionary monetary policies of major central banks in the post-crisis era have increased global liquidity and enabled private sector in Turkey to reach low-cost foreign currency funding. Thus, corporate sector raised FX funds either through directly from abroad or domestic banks. This situation has resulted in increase in short FX position of the corporate sector, specifically due to the steady rise in FX liabilities. However, rapid fluctuations in the FX markets started to raise questions over the sustainability of external debt stock of private sector. Here we will focus mainly on the Turkish case with analyzing the developments in FX debt stock, the maturity structure of its debt portfolio and fundamentals that could provide some cushion against external shocks. External Debt Stock of Turkey Gross external debt stock of Turkey rose from 269 billion USD in 2009 to 397 billion USD as of September In the same period, gross external debt stock to GDP ratio also increased by 6 points and was realized as 49.6%. This development was mostly attributable to the surge in private sector s debt stock. While public sector debt stock to GDP ratio followed a more stable pattern during the said period, private sector s debt stock to GDP ratio rose to 34.4% from 27.9%, indicating a noticeable change. Regarding the maturity composition of Turkey s external debt stock, it was seen that the share of long-term debt stock in total debt stock stood at 67% as of September Table1: Gross External Debt Stock of Turkey (bn USD) Q1 2014Q2 2014Q3 Total % of GDP Short-term Long-term Public Sector % of GDP Short-term Long-term CBRT % of GDP Short-term Long-term Private Sector % of GDP Short-term Long-term Source: Undersecretariat of Treasury

3 2 Loans Received From Abroad By Private Sector Long term total loans received from abroad by private sector reached billion USD at the end of 2014, indicating nearly 40 billion USD increase in comparison to the end of This surge wholly stemmed from the rise registered in external borrowing of financial sector. Indeed, non-financial sector s long term external loans stayed flat in this period. Table 2: Outstanding Long Term Loans Received From Abroad By Private Sector - By Borrowers (bn USD) TOTAL I- Financial i- Banks Loans Bonds Issued ii- Nonbank Financial Corporations Loans Loans Received From Parent Companies and Affiliates Bonds Issued II- Non-financial Loans Loans Received From Parent Companies and Affiliates Trade Credits Bonds Issued Short term loans raised from abroad by private sector amounted to 44.4 billion USD as of December 2014, reflecting an increase of 37.8 billion USD compared to the end of According to the classification by borrowers, it was observed that financial sector accounted for 94%, non-financial sector accounted for just 6% (only 2.8 billion USD) of total short term loans obtained from abroad by private sector. Table 3: Outstanding Short Term Loans Received From Abroad By Private Sector - By Borrowers (bn USD) Total I- Financial i- Banks Loans Bonds ii- Nonbank Financial Corporations Loans Loans Received From Parent Companies and Affiliates Bonds II- Non-financial Loans Loans Received From Parent Companies and Affiliates Bonds Net FX Position of Non-Financial Companies Turkey s non-financial firms net FX position is probably the most cited risk factor recently. It is asserted that the depreciation in TL would cause damage to balance sheets of firms which have significant exposure to FX fluctuations and even result in bankruptcies which will increase the risk of a

4 3 systemic crisis in the economy. Although it is true that depreciation of TL will adversely affect firms balance sheets to a certain extent, it is thought that the magnitude of the damage would be manageable due to several factors. The net FX position of the non-financial firms reached billion USD as of December It is worth mentioning that only 12.8 billion USD (7%) of this outstanding amount was short-term and the rest was long-term debt, mainly related to the project finance activities. In addition, it is important to note that firms started to reduce their short-term net FX position since mid In fact, as of June 2013, the short-term net FX position of non-financial firms was as high as billion USD. In addition, due to the fact that the personal FX assets of the company owners weren t taken into account in the compilation of the statistics, the announced figures may not precisely reflect the net FX position of the companies. It is also known that short-term FX liabilities of the firms include export financing loans which will generate FX revenues. Analysis of the FX liabilities of non-financial companies revealed that the majority of the FX debt was raised from banks, mainly from domestic banks. As of December 2014, funds received from financial corporations constituted 90% of the total FX liabilities of the non-financial companies and rest was import payables ,3 0,9-14,3-12,2-17,1-12,8-70,7 Graph 1: Net FX Position of the Non-financial Sector (bn USD) -73,1-93,2-92,4-108,5-127,9-122,8 Long Term Net FX Position Short Term Net FX Position Total Net FX Position -140,1-159,2-170,5-176,3-183, Graph 2: FX Liabilities of Non-financial Companies (bn USD) Import Payables External Loans Domestic Loans

5 4 68% of the total FX loans of non-financial companies were obtained from resident banks. Moreover, considering the loans raised by foreign branches and affiliates of resident banks, the share of resident banks reached as high as 78%. Composition of non-financial companies FX loans has changed in favor of resident banks since 2010 as a result of the amendments 1 made by the CBRT in Decree No.32 which made it possible for Turkish companies to acquire FX credits from domestic banks. Furthermore, it is noteworthy that FX loans extended by resident banks are subject to strict underwriting rules and most lending is secured by collateral. In this regard, the repayment of outstanding loans seems unlikely to pose significant risks to the banking sector s balance sheet. Furthermore, current legislation on foreign currency loans in Turkey does not allow small firms without foreign currency income to accumulate debt in foreign currency. Hence, firms with open short term FX position are generally large-scale firms either having a significant amount of export revenues or dealing with projects which have potential to generate FX revenues. Large corporates also have the ability to use hedging instruments in the case of high volatility in the FX market. This enhances the solidity of Turkey s real sector against exchange rate fluctuations. Table 4: Outstanding FX Liabilities of Non-Financial Sector by Lenders (bn USD) Resident Financial Corporations (I) Foreign Branches and Affiliates of Resident Banks (II) Total (I+II) Total Loans* (III) Share (%) I/III (I+II)/III (*) Trade loans excluded. Table 5 provides figures for Turkey s external financing needs in the coming 12 months, in other words it shows the amount of FX liabilities maturing within 1 year or less regardless of the original maturity of the debt. Accordingly, the short term FX liabilities of Turkey were billion USD at the end of The share of Central Bank and General Government in this amount was very low with 0.8% and 3.0%, respectively. However, banks had billion USD short-term liabilities, having a large share (64.4%) in total short-term external debt. We think that banking sector will not face any difficulty in rolling over its FX liabilities thanks to prudent FX positions, high capital adequacy ratios and sound asset quality. For example, during 2013, despite the heightened volatility in markets, banking sector s long-term foreign debt rollover ratio was high with 196%. The said ratio also kept its level at 190% as of 1 Decree No.32 (law regarding the protection of the value of Turkish currency) provides the framework of foreign exchange legislation. With amendments in March and June 2009, residents are allowed to obtain FX and FX indexed credits with at least one year maturity and a minimum amount of 5 million USD from domestic banks and the use of foreign exchange and foreign exchange indexed credits for commercial and professional purposes are permitted. Also, the use of foreign exchange indexed consumption credits and mortgages is prohibited.

6 5 December In addition, as a result of the strict regulations of the banking authority in Turkey, banks short position in FX is at negligible levels. Short term FX liabilities of other sectors were recorded as 53 billion USD with a share of 31.8% in total short term FX liabilities of Turkey. More than half of this amount was trade credits; the rest was other credits amounting to 21 billion USD. Most of this amount was the FX loans raised from domestic banks. We believe that this amount of repayment in the next 12 months is quite manageable for firms. Table 5: Short-Term External Liabilities on Remaining Maturity Basis* (By Borrower) December 2014 (bn USD) Share (%) Central Bank General Government Banks Credits FX Deposits Bank Accounts Branches and Affiliates Abroad TRY Deposits Branches and Affiliates Abroad Other Sectors Trade Credits Other Credits Public Private Total (*) External liabilities maturing within 1 year or less regardless of the original maturity. According to a research conducted by CBRT, a bulk of real sector firms was not exposed to exchange rate risk at all. In particular, 63% of real sector firms did not have FX debt as of December This ratio was at 67% in small and medium enterprises (SMEs) and at 43% in large firms. A considerable part of the firms with FX debt had export revenues that exceeded their FX debt. Hence, export revenues provided a natural hedge against exchange rate fluctuations. Those firms with FX debt that was higher than their export revenues had moderate levels of FX debt to exports ratio and this leaded to positive assessments on the issue. Those firms with FX debt that was higher than their export revenues, albeit having moderate levels of FX debt to exports ratio, were also regarded as safe in the current conjuncture. Firms that had FX debt and no export revenues accounted for only 12% of all real sector firms. Besides, they were also considered to have other type of FX revenues as most of them operated in tourism, construction and energy businesses.

7 6 Graph 3: Distribution of Firms with Different FX Loans/Exports Ratios Figures show the percentage of firms with different FX loans to Exports ratio (x). Number of firms is 9,468. Even though there is always a possibility that some relatively fragile real sector firms may be adversely affected by sharp fluctuations in the exchange rates, that most of the real sector firms have foreign currency revenues pointed out that a systemic risk would not be the case and therefore a deterioration in balance sheet and repayment performance of the firms is not anticipated. In this framework, the year of 2014 has been a good test for Turkish economy. Debt roll-over ratios and residents loan repayments did not show any sign of a worsening outlook during this period. Therefore, it is reasonable to think that banks have passed this test successfully and have the potential to weather new storms at least in short and medium term. On the other hand, although recent depreciation in TRY may not threaten the sustainability of FX liabilities, it may put pressure on the financial results of the companies which have relatively high short-positions, by limiting the profitability of the related companies. But for short-term liabilities, due to the depreciation in TRY, total burden on corporates is expected to be less than 2 billion TRY in the first 3 months of 2015.

8 7 LEGAL NOTICE This report has been prepared by Türkiye İş Bankası A.Ş. economists and analysts by using the information from publicly avail able sources believed to be reliable, solely for information purposes; and they are not intended to be construed as an offer or solicitation for the purchase or sale of any financial instrument or the provision of an offer to provide investment services. The views, opinions and analyses expressed do not represent the official standing of Türkiye İş Bankası A.Ş. and are personal views and opinions of the analysts an d economists who prepare the report. No representation or warranty, express or implied, is made as to the accuracy or completen ess of the information contained in this report. All information contained in this report is subject to change without notice, Türkiye İş Bankası A,Ş, accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is copyright-protected. Reproducing, publishing and/or distributing this report in whole or in part is therefore prohibited. All rights reserved.

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