Turkey extends measures keeping zombie companies afloat to end-2024

Turkey extends measures keeping zombie companies afloat to end-2024
Critics say officials in Turkey keep “zombie companies” alive as they bid to keep the wraps on the mess that is the country’s economy. / Todd, cc-by-sa 2.0
By Akin Nazli in Belgrade November 2, 2023

Turkey’s trade ministry has extended “regulatory forbearance” measures that apply to “zombie” companies until the end of 2024, according to the Official Gazette.

The move means that Turkish companies are not required to take into account exchange rate losses when calculating equity losses.

If a company’s loss is equivalent to 50% of capital or 2/3 of legal reserves, the firm is by law obliged to hold a general meeting within a year that will conclude in either liquidation or a fresh capital injection, acccording to the current applicable Turkish legislation. However, the “zombies” are now not obliged to follow the legal procedure until 2025.

On September 15, 2018, the forbearance measures were introduced by the government in response to the previous month’s Turkish lira crash. Since then, the government has continuously extended the measures.

The equity figures of companies with FX debt fell into negative territory after their lira-denominated debt figures boomed in parallel with the sinking lira.

Since 2016, Turkish corporates have felt substantial pressure from economic fluctuations and government demands. Local banks have been pushed by officials into pouring in cheap loans to keep the sinking domestic economy afloat.

In 2019, Turkey faced a rush for “concordato” status (temporary protection from creditors) as a result of the monetary tightening that was introduced following the August 2018 lira crisis.

To overcome the bankruptcy wave, the government introduced the regulatory forbearance measures, and these logically added to the growing number of “zombie” companies in the country.

As with these companies, the financials of Turkey’s banks are far from a reflection of their actual financial situations given the measures.

Thanks to the heavy forbearance, bank balance sheets can have a shine that distracts from actual critical situations.

With the COVID-19 pandemic, the forbearance "business" went totally out of control.

“Let’s be realistic. There are [sunk] loans that we keep afloat,” Huseyin Aydin, the then head of Turkey’s banking association, TBB, said in 2021 during his last interview in his post.

In July this year, the government launched a new monetary tightening cycle. The textile industry subsequently became a big casualty of the U-turn move for higher interest rates amid rampant inflation.

Turkey's banks, meanwhile, still use the central bank’s average FX buying rate across the last 252 days when calculating their capital adequacy ratios.

Given financial restructuring legislation, which became effective in July 2019, the banks do not have too many options versus confirming local companies’ loan restructuring demands.

The authorities do not provide actual data sets on problem loans, loans taken out under the state guarantee fund KGF or restructured loans.

A curious reality is that the government-run banks have boosted their loan books since 2020, yet they have the lowest non-performing loan (NPL) ratios.

Turkish banks also weigh 0% risk for FX-denominated government paper on their balance sheets when calculating their capital adequacy ratios.

Turkey currently has a B/Stable rating, five notches below investment grade, from Fitch Ratings, a B3/Stable, six notches below investment grade, from Moody’s Investors Service and a B/Stable, five notches below investment grade, from S&P.

The Turkish central bank’s net FX position is in deep negative territory at around minus $50-60bn.

The government has also delayed the implementation of hyperinflationary accounting rules in accordance with IAS 29 accounting standards.

If the domestic producer price index (PPI) is up more than 100% compared to its level three years ago and it is up more than 10% across the last year, local corporates are obliged to apply hyperinflationary accounting rules.

In 2022, the government again delayed the implementation  of the rules for local companies to end-2023.

As a result, local companies’ profit figures and valuation ratios are understated. Their real valuations are in fact not cheap.

In June, Isbank (ISCTR) and Garanti BBVA (GARAN), a unit of BBVA (Madrid/BBVA), released their inflation-adjusted figures for 2022.

Isbank’s adjusted profit for 2022 showed a decline to Turkish lira (TRY) 48bn ($2bn) from the officially-released TRY 62bn while Garanti’s adjusted profit showed a decline to TRY 15bn from TRY 59bn.

On October 31, BBVA once again reported a loss, namely €158mn for Q3, from Turkish unit Garanti. Across recent years, BBVA has been writing losses from Garanti, while Garanti has been reporting booming profits.

Isbank is the fourth largest bank in Turkey with TRY 1.9 trillion of assets at end-June, while Garanti is the fifth largest bank with TRY 1.7 trillion in assets.

On October 25, Reuters quoted unnamed officials as saying that Turkish companies' end-2023 balance sheets will be inflation-adjusted, with adjustments expected to continue until 2026 due to current inflation forecasts.

Turkish banks, which saw their profit growth slow to 50% in the first half of this year following a 366% surge in 2022, would be among those affected most negatively by the move, according to Reuters.

“Banks will report perhaps a quarter of the profits they used to report,” Soner Gokten of Baskent University told the news service.

“Manufacturers and traders finance investments largely with loans and add assets which are protected against inflation [they borrow cheap lira loans and buy FX] ... As they are highly leveraged, they are expected to report [higher] profits,” an unnamed tax auditor was cited as saying.

Under the outlined scenario, finance minister Mehmet Simsek seemed set to collect less tax from the banks and more tax from other corporates via the application of hyperinflationary accounting standards.

On October 31, Simsek, however, told a parliamentary budget and planning commission in a session on the 2024 budget that he may opt to exclude financial institutions from the planned switch to hyperinflationary accounting.

In July, Simsek introduced widespread tax hikes at unprecedented levels. He also hiked the corporate tax rate by 5pp to 25% as well as the tax rate for banks to 30%.

Simsek’s track record promises even harsher moves that will particularly hit the ordinary Turk following the upcoming local elections to be held at the end of March.