Turkey’s private sector long-term foreign loans moved up 2.5% q/q to stand at $227bn as of end-March, the central bank said on May 17.

Turkey is heavily dependent on external loans to finance its large current account deficit, which at 6.5% of GDP is one of the widest in the world. Debt-financed consumption is regarded as one of the main drivers of the remarkable economic growth experienced by the country in much of the past decade. However, when it comes to the economic horizon, a more challenging environment for the country’s private firms is placing sustained pressure on the outlook. Turkey’s corporate sector may experience increasing difficulties in meeting liabilities.

Data from the Turkish central bank also showed that the private sector's short-term loans rose by 2% q/q to $18.6bn as of end-Q1.

Private sector long-term foreign debt moved up 9% y/y to stand at $221bn as of end-2017 from $202bn at end-2016 while the short-term debt rose by 20% y/y to $18bn as of end-2017 from $14bn a year ago.

Turkey’s gross external debt stock rose by 11% y/y to reach $453bn by the end of 2017, the Treasury said on March 30. The private sector's share in the country’s total gross external debt stood at 70% or $316bn at the end of 2017.

The corporate sector’s foreign-exchange liabilities stood at a record $328bn as of the end of 2017. When the sector’s foreign-exchange assets are subtracted, the shortfall still stood close to a record $214bn.

Turkey’s gross external debt stock corresponded to 53.3% of GDP at the end of 2017, the highest level recorded since Q1 2003.

Turkey's net external debt stock also increased by 3% q/q and 15% y/y to $291bn as of the end of 2017. The net external debt stock to GDP ratio rose to 34.2% at end of Q1, the highest level recorded since Q2 2003.

Signs of major conglomerates struggling to pay their hard currency-denominated debts have set off alarm bells.

“There is a risk of a hard landing for Turkey’s overheating, credit-fueled economy,” S&P said on May 1 when it cut Turkey’s credit rating further into junk. “This is reflected in the rising imbalances in Turkey’s economy, most notably in its widening debt-financed current account deficit and high inflation.”

On April 16, Moody’s issued a note saying that the prolonged weakness of the TRY combined with high inflation would likely increase problem loans for Turkey’s banks as the private sector would have a tougher job on its hands to repay its foreign currency-denominated debt.

Turkey's economic health, it is clear, is dangerously reliant on hot inflows of foreign external financing to enable growth. Turkey, loaded up on hard-currency debt, is badly exposed by the severe devaluation of the TRY.

The country’s overall stock of private sector debt has jumped from 33% of GDP in 2007 to 70% today, a build-up comparable to that seen in Greece before its financial crisis in 2009, according to investment bank Renaissance Capital.

Indeed, in 2017 Turkey saw the most extensive increase in its financial sector debt-to-GDP ratio of 39 developed and emerging countries tracked by the Institute of International Finance (IIF).

Turkish banks’ foreign currency-denominated debt, mostly in dollars, stands at 22.5% of GDP, a ratio only behind those of banking centres Singapore and Hong Kong and South Korea among 21 major EMs in the IIF’s database.

Hung Tran, executive director of the IIF, was reported by the Financial Times on May 14 as estimating that Turkey needs to attract foreign capital equivalent to 25% of its GDP every year in order to cover both its large current account deficit and the amortisation of its existing debt.