Turkey’s short-term external debt contracts 2% m/m in May

Turkey’s short-term external debt contracts 2% m/m in May
By bne IntelliNews July 17, 2018

Turkey’s short-term external debt stock moved down by 2% m/m to $123.3bn from $125.6bn at the end of April - the highest level recorded since March 2015 - the country's central bank said on July 17.

External debt maturing within one year or less regardless of the original maturity stood at $180.6bn at the end of May, down from $183.3bn at the end of April.

The short-term external debt stock grew by 16% y/y to $118bn at the end of 2017 from $101.5bn at the end of 2016.

A trio of top Turkish banks saw their borrowing costs hit record highs on June 15 as mounting pressure on the Turkish lira (TRY) prior to the June 24 elections sparked more selling on Turkey’s bond markets, it was reported. Mass sales continued following the cabinet reshuffle announcement on late July 9.

The dizzying descent of the TRY, meanwhile, is hurting Turkish companies that have borrowed on the international markets, making it more costly in lira terms to repay their debt. Rising bond yields caused by secondary market selling will make it more expensive for Turkey and Turkish corporates when they go for fresh debt issuance.

The story of the TRY’s collapse in recent months is not for the faint-hearted. Despite central bank emergency action, the country could still go over the cliff edge and slip into a classic emerging market currency-and-debt crisis.

Turkey is heavily dependent on external borrowing due to its chronic current account deficit. Debt-financed consumption has been the prime feature of the country’s remarkable economic growth achieved during much of the past decade, while the private sector’s share in total external borrowing has been on the rise in recent years.  

Ukraine and Turkey are two of the “vulnerable three" countries most at risk to US tightening along with Argentina, Fitch said in a note on May 16.

Turkey’s current account deficit widened by 42% y/y to $47.1bn in 2017, driven by rising gold imports and energy prices.

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

Moody’s Investors Service anticipates that problem loans at Turkish banks will rise to more than 4% of loans over the next 12-18 months compared with the low of 2.9% recorded in May, the ratings agency said in a statement on July 16.