Turkish firms, government face $3.8bn bond crunch in October

The Turkish lira that has lost more than a third of its value since the start of the year. (Reuters)
Updated 17 August 2018
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Turkish firms, government face $3.8bn bond crunch in October

LONDON: Turkey and its firms face repayments of nearly $3.8 billion on foreign currency bonds in October as the country struggles with a plunging lira that has lost more than a third of its value since the start of the year.
Emerging market (EM) investors have been worried about Turkey’s external debt burden and the ability of its firms and banks to repay after a boom in hard currency issuance to help finance a rapidly growing economy.
For companies, the cost of servicing foreign debt has risen by a quarter in lira terms in the past two months alone.
“Turkey’s external financing requirements are large,” Jason Daw at Societe General wrote in a note to clients. “It has the highest FX-denominated debt in EM and short-term external debt of $180 billion and total external debt of $460 billion.”
Calculations by Societe General show that Turkish firms will face $1.8 billion of hard-currency denominated bonds maturing by the year-end while $1.25 billion of government bonds will come due. Additionally, a total of $2.3 billion in interest must be paid.
The heaviest month for repayments is October, when $3 billion in principal and $762 million interest are due.
“Principal and interest payments should be closely watched to year end – it is 25 percent more costly for the corporate sector to repay their obligations compared to June given FX depreciation,” Daw wrote.
One mitigating factor may be that much of the short-term external debt was in instruments such as bank loans and trade credits, which could be smoother to restructure or roll over than attempting to do so on bond markets, Daw added.
Data from LPC showed that about $7 billion of loans are due to mature until the end of the year, with more than 90 percent of those being bank loans.
A number of lenders such as Akbank, Turk Ekonomi Bankasi and Turk Eximbank are in the market attempting to refinance loans. However, international banks are unlikely to make any decisions before ratings agencies react, with many predicting the lending boom would grind to a sudden halt.
“Foreign financiers, whether they exist as banks or bond investors, are re-assessing the outlook and related repayment prospects,” said Jurgen Odenius, economic counsellor at PGIM Fixed Income.
“Western European banks from Spain and France are particularly exposed, with over half of the debt owed to them.”
Shares in some of Europe’s major banks have been hammered over the last week as markets fret over their exposure to Turkey.
Odenius also points to the fallout from Turkey’s financial system and the corporate sector being effectively short dollars, calculating that net foreign exchange liabilities (NFL) of the central bank and commercial banks combined amounted to $27 billion at the end of June.
“While that is undoubtedly a manageable figure, these liabilities only pertain to foreign lenders,” Odenius wrote in a note to clients. “Including the $147 billion in dollar deposits by resident households and firms, the ‘adjusted’ NFL spirals up to nearly $175 billion — an undoubtedly less manageable figure.”
With President Tayyip Erdogan’s administration shunning orthodox monetary policy and highly reluctant to raise interest rates to contain inflation at over 15 percent, markets are also closely watching how the Turkish state goes about refinancing its debts.
Erdogan’s government has adamantly rejected speculation that it may have to seek support from the International Monetary Fund (IMF). Qatar has pledged about $15 billion but details have been scant.
“Rather than sticking with the approach taken by numerous other countries – including Argentina earlier this year – by raising interest rates and seeking some form of IMF support, Turkey has shunned both in a very public manner,” wrote Mohamed El-Erian, chief economic adviser at Allianz.
“Unless it changes course, the government risks much wider damage – and not just in Turkey.”


Bank lending for ‘real economy’ key to boost China growth: central bank official

Updated 16 February 2019
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Bank lending for ‘real economy’ key to boost China growth: central bank official

  • ‘The central bank doesn’t wish to use administrative methods to require banks (to lend)’
  • Quantitative easing is neither necessary nor possible at the moment

SHANGHAI: China should encourage its banks to support smaller, private firms in the real economy, rather than forced lending or policies such as quantitative easing, a state newspaper quoted a central bank official as saying on Saturday.
“The central bank doesn’t wish to use administrative methods to require banks (to lend),” Sun Guofeng, head of the monetary policy department at the People’s Bank of China (PBOC), told the Financial News, a bank publication.
“It wants to establish positive encouragement mechanisms though monetary policy tools to encourage banks to actively increase their support for the real economy, especially toward smaller and privately-owned firms,” Sun said.
The comments come a month after Sun wrote a commentary in which he argued that problems with timely capital replenishment, bank liquidity gaps and poor rate “transmission” are three major constraints on banks’ supply of credit.
In the interview with the Financial News, Sun said monetary policy transmission had “noticeably improved,” showing that steps to enhance transmission mechanisms had been effective.
He said the central bank would increase the strength of innovation in monetary policy tools.
Perpetual bond issuance “is only one breakthrough” in reducing capital constraints on banks, Sun said, adding that “other methods” could be used in the future.
He said that quantitative easing was neither necessary nor possible at the moment, noting that under China’s financial system the significance of the central bank buying Chinese treasury bonds on the secondary market is limited, and that the PBOC is barred from buying the instruments on the primary market.
China’s banks made the most new loans on record in January following a series of moves to boost lending as authorities try to prevent a sharp slowdown in the world’s second-largest economy.