Turkey’s TRY250bn ($70.7bn) credit guarantee fund (CGF) has driven one of the best stock market rallies seen around the world this year and has helped reset an economy many analysts thought would be on the slide. But is the fuel about to run out and send much of what has been achieved into reverse?
An update issued in early August by The Banks Association of Turkey (TBB) showed that in the short nine-month life of the CGF some TRY207bn, or 80% of its credit, had already been earmarked for guaranteeing bank loans.
Writing for The Daily Sabah on August 1, Cemil Ertem, one of President Recep Tayyip Erdogan’s economic advisers, insisted that “the CGF is not a structure that has been launched as a Band-Aid solution for the Turkish economy for a certain period of time, but is a new way to finance the economy and this path will continue to deepen”.
But there are investors who are clearly anxious about the depletion of the fund. London-based Blackfriars Asset Management has, for instance, advised clients that while it is positive on Turkey it must ask the question of whether “the government has any more cards up its sleeves to keep this [bourse] rally going into 2018?”
The CGF has clearly played a key role in the stock market boom by boosting bank stocks. The bourse’s benchmark index, the BIST 100, is bank heavy, at around 50% banking.
With a gain of 40%, the Borsa Istanbul Banks Index has risen more than twice as much as the MSCI Emerging Markets Financials Index this year. According to some forecasts, the BIST 100 could grow by 21% this year, five times the rate anticipated for South African and Russian stocks.
Morgan Stanley analysts said on August 15 that bank stocks will continue to benefit, despite Turkey’s borrowing costs having risen to their highest in six years. They anticipated that the return on equity (RoE) for Turkish banks its analysts cover will climb 11-17% over the next two years. That would be 3-5 percentage points up from the 2015 trough.
Talking to bne IntelliNews, Metin Esendal, a vice president and research analyst at Renaissance Capital in London, is relatively sanguine about overall prospects for the exchange, at least for the short term, because bank stocks will remain robust.
“I don’t think the stock market will lose steam this year because the banks are still trading at below their book value,” he says. “If you look at the last five years they have tended to trade at 1 x price to book value. Right now they are trading at 0.9 x and if you look at current profits you see around a 16% RoE for the Turkish banking industry.”
It is really hard to be negative on other sectors when the banks are doing so well, added Esendal, adding: “A main thing is that if we see some disinflation in the second half of this year and the first quarter of next year, the financials will continue to perform well.”
The CGF also helped boost GDP growth to 5% in Q1 via expanded lending. Morgan Stanley estimates the CGF will add a percentage point to 2017 Turkish GDP growth.
“It is really hard to quantify it, but yes, from the banking perspective the majority of the [outperformance] surprise is related to the CGF because most of the banks were guiding for slow lending growth at the beginning of the year and also expectations were much worse than what they are right now,” says Esendal.
Esendal is not among those analysts who fear that the availability of the CGF may have lowered the quality of the banks’ lending. He points out: “When I talk to banks they always tell me they have not changed the way they are extending loans to companies because the CGF will only cover the risk while the non-performing loans ratio is below 7%. Even if it gets to 7.1% all the risk goes to the banks so they cannot use this tool to extend loans to bad companies.”
The current NPL ratio for Turkish bank lending to SMEs was around 4.5 to 5%, he said, and with banks sticking to the same lending methodology despite the access to the fund there was no reason why it should rise, he added.
Of course, with the CGF depleted to around only TRY43bn for the guaranteeing of loans, the pace of lending in Turkey is bound to slow because the fund’s programme is meant to last all the way through to 2020. The government hopes that other boosters granted the economy, such as VAT cuts and special consumer tax reductions on some key consumer products, will help to keep the relatively strong economic growth on a roll despite the rapid digestion of the CGF funds, but, like Blackfriars, many fund managers are looking for an interest rate cut to maintain GDP growth and stock market activity.
If currently sticky and high inflation running at around 9.5% does fall as anticipated, loosening of monetary policy is likely. However, there is some concern that Erdogan and impatient ministers have of late been even more aggressive than usual in their rhetoric demanding cheaper lending from the banks, and this could force the central bank to cut rates prematurely, leading to deeper macro-economic imbalances.
On July 27, Turkey's central bank left key interest rates unchanged for the second straight month, sticking to a hawkish standpoint in balancing near-double-digit inflation with Erdogan's insistent calls for cheaper credit. In a note sent to clients after the regulator’s decision, William Jackson of Capital Economics said: "The statement accompanying today's decision... once again struck a relatively hawkish note. Our sense, though, is that this hawkish stance will not last for too much longer."
Bankers have indicated that the period of soft lending is coming to an end. On August 8, TBB president Huseyin Aydin told a press conference that Turkish lenders gave “what they had” in offering loans to businesses across the first half of the year and that it was now time for them to take a rest in order to slash operational costs.
Loan growth for this year was expected at 16-18% and banks’ profitability growth at 15-20%, he said, concluding: “We ran very fast in the first six months of the year. Now it is time for us to catch our breath, but we will never stop. Stability in global markets will make a positive impact on Turkey. There might be some ups and downs due to some global uncertainties. The key point here is to manage them well.”
But the very next day after Aydin spoke, Erdogan went back on the war path against the “profiteering” banks, again calling for cheaper lending to stimulate more economic activity and declaring: “Something must be wrong if banks’ profits grew by 40% [in 2016] when the economy expanded at only 2.9% last year. I believe the central bank and lenders will take necessary steps to lower interest rates.”