Turkey, the fastest growing economy after China, is being penalized in the credit markets for its failure to promote consumer savings.
While Turkey’s economy has grown at an average pace of 5.9 percent since 2002 and its bonds are showing the fastest recovery among emerging markets from last year’s rout, its credit ratings are stuck at the same level as Serbia and Guatemala, whose economies are about a twentieth its size. That’s costing the country about $8 million more for every $1 billion it borrows on international markets than Russia, where the bond market is half the size of Turkey’s, according to JPMorgan Chase & Co. EMBI indexes.
The main culprit is a savings rate estimated by the International Monetary Fund at less than 14 percent of gross domestic product, the lowest in the world for any economy larger than $100 billion except for Portugal, Ireland and Greece. An expansion in consumer lending last year of as much as 40 percent has increased indebtedness and widened the current-account deficit to $77 billion, or more than 10 percent of GDP. Goldman Sachs Group Inc. (GS) says Turkey is the most vulnerable economy in eastern Europe, the Middle East and Africa.
“Turkish households are increasingly becoming overstretched as the relationship between the pace of indebtedness and savings deteriorates,” Frank Gill, a director of sovereign ratings at Standard & Poor’s in London, said in response to e-mailed questions. “The rapid growth in consumer lending has partially contributed to the unsustainable widening of Turkey’s current-account deficit, which is a risk to overall stability.”
Debt Like Jordan
S&P rates debt for Turkey, a European Union candidate, as junk at BB, on par with Macedonia, Portugal and Jordan and one level above Mongolia and Vietnam. Russia is rated three levels above Turkey at BBB and Poland five levels above at A-.
Fewer than 45,000 people in a country of 74 million, or less than 0.1 percent, account for 47 percent of the total deposits in the banking industry, according to data from the Banking Regulation and Supervision Agency in Ankara. Some 30 percent of loans go to people making less than $575 a month, and 55 percent to those earning less than $1,200 a month. Turkey’s average income per capita is around $10,000 a year, or $833 a month.
“The savings rate is one of our most serious problems,” Yavuz Canevi, chairman of Turk Ekonomi Bankasi AS (TEBNK) and former governor of the central bank, said in an interview at his office in Istanbul yesterday. “In the last 10 years, it came down from 20 percent to 12 percent, which is very alarming for a country like Turkey.”
Yield Fall Lags
The yield on Turkey’s bonds denominated in dollars has fallen 41 basis points this year to 5.35 percent, JPMorgan’s EMBI Global index shows. The improvement trails a 44 average basis point decrease in emerging market yields to 5.6 percent.
The cost of protecting Turkish bonds using five-year credit-default swaps was little changed at 246 basis points yesterday, compared with a spread of 200 for Russia, 206 for Poland and 155 for the Philippines, which is also rated BB by S&P, on par with Turkey. The figures are provided by CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately-negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail or be unable to adhere to its debt agreements.
Fitch Ratings cut its outlook for Turkey to “stable” from “positive” in November, saying the low savings rate made Turkey prone to “macroeconomic volatility,” dependent on foreign capital inflows and that the country had yet to show it could “grow robustly without generating major imbalances.” Fitch rates Turkey BB+, one level below investment grade. Moody’s Investors Service rates it at Ba2, two steps below.
Banks, borrowing from the central bank at rates as low as 5.75 percent a year, have increased the interest they charge consumers to an average 19.5 percent from 12 percent a year ago, according to data from the central bank for Feb. 10. The cost peaked at 20.1 percent on Jan. 13. Business loan rates have jumped to 15.5 percent from 8.4 percent a year ago.
Deposit rates are between 8 percent and 9.3 percent at Turkiye Is Bankasi AS (ISCTR), the biggest bank by assets. Turkiye Garanti Bankasi AS (GARAN) offers rates ranging from 6.5 to 10.5 percent, according to its website.
Turkish small- and medium-sized businesses almost doubled their debt to an average of 105,000 liras ($59,500) from 67,774 liras two years ago, according to Gill at S&P, and are expected to “increasingly be the driver of the growth in lending going forward.”
“The numbers suggest that 0.1 percent of depositors in Turkey enjoy a healthy surplus, while 99.9 percent of individuals are heavily indebted and many companies and households are practically insolvent,” Mert Yildiz, economist for the region at Moscow-based Renaissance Capital, said in a telephone interview from London on Feb. 17.
“The probability of mass-bankruptcy would be very high if the central bank hiked aggressively, which is what they should do to contain inflation, but they’re not doing it,” Yildiz said. “Instead they’re cutting rates to keep corporate funding costs low, otherwise these guys go under.”
Turkish central bank Governor Erdem Basci, 45, cut interest rates for banks from the top end of his range to 11.5 percent from 12.5 percent on Feb. 21, saying he was taking account of monetary easing in other economies. The decision followed a move by Basci on Jan. 10 to lend more to banks at the benchmark 5.75 percent rate, the bottom of his so-called corridor.
‘Money From Money’
After the cut this week, Turkey’s bonds erased all the losses suffered in the four months since Basci started raising interest rates in October. Turkey’s local-currency government bonds have returned 13 percent in dollar terms so far this year, more than any other emerging-market debt, according to JPMorgan’s GBI-EM Index (JGENTBUU).
Yields on two-year benchmark bonds in liras fell 3 basis points to 9.02 percent at 10:24 a.m. The lira gained 0.1 percent to 1.7566 per dollar, bringing its gains this year to 7.7 percent after it was the worst currency in the world last year, dropping 18 percent.
The loosening of monetary policy comes as Prime Minister Recep Tayyip Erdogan, who criticized banks for making “money from money” before parliamentary elections last June, called for lower interest rates on Jan. 11, saying banks should lend more cheaply to businesses and consumers. Turkey will defeat a so-called high interest rates lobby that he said is trying to force the country to pay higher interest on its debt.
Savings Are Key
Basci lowered the benchmark rate by a total of 75 basis points last year. After the last reduction on Aug. 4, he started to sell dollars for liras after international banks including Societe Generale SA (GLE) criticized the lower rates policy, saying it would make the nation’s current-account deficit unsustainable and spur inflation, which surged to a three-year high of 10.6 percent in January.
The inflation rate is likely to fall to 6.5 percent by the end of the year, according to a central bank forecast on Jan. 31. The bank raised the prediction from 5.2 percent.
Deputy Prime Minister Ali Babacan said in October that increasing savings is a central policy goal to reduce reliance on foreign capital inflows to fund the current account deficit.
The central bank started to encourage longer-term savings in December 2010 by increasing the reserves banks must hold on deposits of a month or less to 11 percent from 6 percent. It also sought to slow credit growth by raising the minimum monthly repayment rates on credit cards to between 25 and 40 percent of outstanding debt from 20 percent.
Turkey’s rising debt level and growing current-account deficit make it dependent on international capital and the central bank is betting the flows will continue, according to Isik Okte, chief strategist at Halk Invest in Istanbul, the broker for state-run lender Turkiye Halk Bankasi AS. (HALKB)
“As long as global central banks are cooperative and pumping liquidity into the system we will have no problem as far as debt solvency is concerned,” Okte said in response to e- mailed questions. “Our central bank’s model is based on this liquidity continuing.”
While Turkey’s non-performing loan ratio remains low at 2.7 percent, according to a monthly report from the banking regulator, brokers including Standard Unlu and EFG Istanbul Securities say it will climb as economic growth slows.
`Beyond Our Means'
Renaissance Capital, the broker half-owned by Russian billionaire Mikhail Prokhorov, forecast the ratio of non- performing loans in Turkey will increase next year to 4.1 percent of total loans from 2.7 percent in October. The highest rate of default may be in car loans, at 8.1 percent, followed by credit cards at 8 percent, according to the report from Renaissance.
Non-performing loan ratios hit 10 percent for small- and medium-sized businesses in 2009, when Turkey’s economy contracted by 4.7 percent, while credit card defaults rose to nearly 20 percent, according to Gill at S&P.
“We are not an over-borrowed nation,” said Canevi, the former central banker. “We have just started living beyond our means.”
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