Turkey’s Biggest Unpaid Loan Tells the Story of Lira’s Weakness


By Constantine Courcoulas Courcoulas

When the owner of Turkey’s biggest phone company received the nation’s largest-ever loan in 2013, it trumpeted the deal as so “hugely oversubscribed” that banks had to lend less than they wanted. Three years later, a missed payment may leave those banks grateful they were cut off.

Since the $4.75 billion package was extended to Ojer Telekom, the parent of Turk Telekom AS, the lira has lost about 40 percent against the dollar, eroding the value of dividends that Ojer depended on for repayment. Last month, the company sought an extension, missing an installment of about $290 million owed to 29 banks including Citigroup Inc., JPMorgan Chase & Co., Deutsche Bank AG, and all of Turkey’s largest lenders.

The first major sign of stress among Turkey’s largest borrowers is testament to a decade-long credit binge that’s left them more dependent on foreign capital and vulnerable to fluctuations in the lira. The net foreign-exchange shortfall among Turkish companies climbed to a record $201 billion in July, equal to about 28 percent of gross domestic product. And those challenges are being exacerbated by an economy showing few signs of returning to the years when growth rivaled China’s.

‘Warning Shot’

“It’s a warning shot for other companies,” Inan Demir, an emerging-markets economist at Nomura Plc in London, said by e-mail on Tuesday. “Even if the companies that have difficulty in repayments make those repayments, they will have to have cost-cutting measures in other areas such as redundancies and postponement of investment spending. And this is bad news for domestic demand.”

Reviving demand is what Turkish policy makers are counting on after cutting their forecast for the economy’s expansion this year to 3.2 percent from 4.5 percent. Yet loan growth is just 5 percent, suggesting a debt hangover setting in after years in which it was around 30 percent.


“Turkey has a history of boom-bust cycles due to low domestic savings and on-going foreign borrowing,” Viktor Szabo, a London-based money manager who helps oversee about $10 billion of emerging-market assets at Aberdeen Asset Management Plc, said by e-mail on Monday. “FX corporate debt is just the purest reflection of this problem,” and it’s manageable in the short term “unless the lira seriously blows up.”

While a blow-up isn’t the consensus prediction, the lira’s decline probably isn’t over yet. It will retreat a further 5 percent to 3.2559 per dollar over the next 12 months, according to the median estimate in the latest central bank survey. The lira traded at 3.1031 per dollar at 6 p.m. in Istanbul on Tuesday, extending the loss this year to 6 percent, the biggest depreciation in emerging markets after the Mexican and Argentinian pesos.

Encouraged by President Recep Tayyip Erdogan, policy makers have focused efforts to rekindle growth on driving interest rates lower, a strategy that can also make investing in liras less attractive. The central bank is expected to cut its top rate by a further 25 basis points on Thursday, continuing an easing cycle started in March, to 275 basis points in total.

Growth Matters

Whether or not the Ojer missed payment heralds a coming wave of corporate defaults will depend largely on the Turkish economy’s capacity to regain lost momentum, according to Ozgur Altug, chief economist at BGC Partners in Istanbul.

“If the lira depreciates faster and the economy slows down more than expected, that will be the biggest trigger for more defaults,” he said in an interview on Tuesday. “You can have consistent lira depreciation, as we’ve had for four years now . But if you have an economic slowdown, then your revenue-generation capacity will come down, which complicates the situation.”

Which is what happened with Ojer. Although Turk Telekom is growing — revenue is expected to increase 7.9 percent to 15.7 billion liras this year, according to the average estimate in a Bloomberg survey — in dollar terms sales will decline by 5.6 percent over last year, assuming current lira levels hold.

‘Sudden Stop’

“Ojer Telekom is a perfect example of the FX risks in Turkey,” Okan Akin, a credit analyst at money-manager AllianceBernstein Ltd. in London, said by e-mail on Monday. “We constantly monitor the Turkish FX situation and believe it will create a sudden stop-reversal problem at some point.”

For now though, the damage may be contained, according to analysts including Apostolos Bantis at Commerzbank AG in Dubai. The Turkish corporate sector’s short-term open foreign-exchange position is only a fraction of the total at $507 million, giving companies time to deal with any sudden financing troubles.

“If the lira stays above 3.10 and keeps depreciating further, we should expect more pressure on corporates to service their FX debt,” Bantis said. “This will not be on a massive scale, but clearly Turkish corporates will find it much harder to meet their FX obligations, which may lead to some restructuring before major defaults.”

That means the government will have to get a delicate balancing act right — pushing forward with measures to boost growth without undermining investor confidence in an economy already facing other pressures including a weakening currency, elevated inflation and political risks, according to BGC’s Altug.

“More companies will come, that is inevitable, because the economy is slowing,” he said. “The government has taken many actions so far to turn this to a muddle-through, but a more market-friendly approach is required to avoid a recession.”


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