Turkey’s ability to rollover external debt will be hampered ‘sooner or later’

Concerns regarding Turkey’s ability to rollover its external debt are mounting. One reason behind those concerns is the expectation that the global economic climate will change. Another reason is the unfavorable economic and political outlook in Turkey.

In sum, this is a period when the “public’s relatively lower external debt ratio,” which is often cited by the government, is irrelevant. This is because we are set to enter a period where the external debt of the non-financial and financial sector is at an eye-catching level.

Last week, former Treasury deputy undersecretary Hakan Özyıldız wrote an insightful article on his blog where he illustrated how the banking and private sector’s external debt transforms into public debt. Özyıldız explained, by referring to past experiences, how external debt accumulated by the private sector can turn into public debt with far reaching consequences that affects the entire system.

Moreover, the private sector’s debt, even if it does not become public debt, has the power to unsettle all macroeconomic balances. When the finance industry and non-financial sector struggle to rollover their external debt, if funds become scarce, the private sector will run into serious problems with one consequence being the sharp depreciation of the lira. But this is more: If banks and companies have difficulties, the government at this point will step in and mobilize public funds to help them. At the end, one way or another, ordinary people will bear the burden.

We have to acknowledge that this is bad economic management and that if the situation has deteriorated, it is because of big mistakes made and that sooner or later there will be a huge price to pay. Apparently, the government has started a blame game, holding others responsible for inflation and interest rates that are actually the direct outcome of the government’s management style and policy choices. This defensive attitude of the government itself is a confession of bad management.

Will Turkey’s rating be further downgraded?

In a widely expected move, Standard & Poor (S&P) last week affirmed Turkey’s sovereign rating. Since the expectations regarding the rating action materialized, little attention was paid to the comments S&P made in its accompanying report. I think S&P’s report provided some clues as to how the external debt of non-financial companies and finance sector would become a problem. The observations in the report were a sign that foreign rating companies and investors will keep a close eye on this issue.

S&P had previously suggested that if there were signs that inflation would decline permanently it could revise the country’s rating outlook to positive but it looks like the outlook would remain negative for some more time.

The following comments from the latest S&P report are striking: “The negative outlook on Turkey reflects risks that a change in external financial conditions could eventually restrict Turkey’s financial and corporate sectors’ ability to roll over their large external debt, with negative implications for the country’s leveraged economy.”

S&P also said that it could downgrade Turkey should monetary policy prove inadequate to curb inflation and currency pressures.

I would like to add my observations. Recently, in their reports, banks and brokerage houses have “buy” recommendations for currency basket investment products, changing their previous recommendation of “hold” for the same instruments.

In short, this is the current economic outlook and those are likely to happen to us.

What has created all of this is nothing but economic policies that have been implemented for a long time. Rating companies or others cannot be blamed for an outlook that is likely to further deteriorate. Those responsible for this are obvious.