Bad loans, bankruptcies sound the alarm for Turkey’s economy

ISTANBUL - Reuters

REUTERS photo

After years of growth fueled by credit and domestic consumption, bad debts and bankruptcies are rising in Turkey, squeezing banks and exposing a fragile real economy. 

Economic growth is expected to cool to 3.5 percent this year, the World Bank said last week, well below peaks of near double digits in the early Justice and Development Party (AKP) years. A sharp drop in tourism after a spate of bombings this year and unrest in the country’s southeast are also taking their toll.

Foreign investors are wary and banks are increasingly reluctant to extend new credit, squeezing the most indebted firms. So far in 2016, 240 companies have requested temporary relief from creditors, almost as many as in the whole of last year, according to sirketnews.com, which compiled the data.

Istanbul-based pulses producer Sezon Pirinç filed for bankruptcy postponement at the end of last year, hit by souring consumer sentiment at home and difficulties in some Middle East export markets.

“The main reason behind our bankruptcy postponement was banks calling their loans earlier than their maturities,” Mehmet Erdoğan, the company’s chairman, told Reuters. 

“2016 will be another tough year,” he added.

The government has vowed reforms to boost productivity and investment in industry as the economic headwinds build. But many economists say they are too slow coming.

“The decline in companies’ profits indicates we have to take new steps. It cannot only be explained by circumstantial factors but also by structural ones,” Finance Minister Naci Ağbal said in a meeting with industrialists late last month.

Dairy firm Aynes Gıda, a household name for two decades, went to court in January for bankruptcy postponement after defaulting on payment of its 50 million-Turkish-Lira ($18 million) bond, it said in a stock exchange filing.

Earlier this year supermarket chain Beğendik was bidding to buy 10 stores from the Turkish unit of Britain’s Tesco. It not only failed to do the deal, but later applied for bankruptcy postponement. And in April, a century-old clothing retailer, Atalar Giyim, applied for bankruptcy.

Smaller firms, long the engine of the Turkish economy, are also struggling to cope after the government hiked the minimum wage by 30 percent this year.

In January, the number of registered workers dropped by 379,000 or 2.7 percent, according to think tank TEPAV, with two-thirds of that decline at small and medium-sized companies.

Iron and steel companies as well as food and technology retailers are at particular risk, said Özlem Özüner, chief executive of credit insurance firm Euler Hermes Turkey, citing the impact of low commodity prices and recent over investment.

Özüner believes around 14,800 companies will go bankrupt this year, an 8 percent increase on last year.

That will take its toll on the banking system, as rising non-performing loans (NPLs) erode the lending appetite required to boost growth in an economy with low savings.


Bad loan boom

The average NPL ratio rose to 3.3 percent in the first quarter from 2.8 percent a year ago, regulatory data showed, while the biggest jump in bad loans was those to small and medium-sized businesses, which rose to 4.4 percent.

Fahrettin Yahşi, chief executive of Islamic lender Albaraka Turk, said he expects the sector average could rise to up to 4.8 percent this year.

But some bankers and analysts think the actual rate of NPLs could be double that, as banks sell some of their bad portfolios, restructure loans and lengthen the maturities of some debt to keep the loans alive.

“My calculations show that the NPL ratio is more than 6 percent,” said one banking analyst, who declined to be named. 

“That creates a profitability problem for banks and reduces their appetite for new loans,” the analyst added.

Hilmi Güvener, CEO of Turkasset, which buys distressed debt from banks, said he expects sales of bad loan portfolios to triple to 6 billion liras this year. NPLs rose mainly in construction and tourism, he said.

While no one is expecting a deep crisis in the financial sector, analysts said the debt problems will slow growth, as the economy has largely relied on domestic demand since 2012.

“I don’t expect a financial crisis. The economy will not get cancer but it will have to put up with an ulcer,” said Atilla Yeşilada, an analyst at Global Source Partners who advises foreign investors.