Erdogan’s IMF Triumph Masks Surge in Private Debt: Turkey Credit

Turkey paid its last loan installment to the International Monetary Fund after a 52-year relationship, a triumph for Prime Minister Recep Tayyip Erdogan as government debt falls even as private borrowing surges.

The Treasury completed a payment of $412 million to the IMF today, Erdogan said in televised remarks from Ankara. A decrease in government debt to about 40 percent of gross domestic product from 78 percent when he came to power a decade ago has helped drive lira borrowing costs below higher-rated countries including India, Russia, Brazil and Chile.

The decrease is countered by a surge in corporate borrowing over the period, leaving Turkey “one of the most leveraged economies in the emerging-market universe,” Goldman Sachs Group Inc. said in an e-mailed report yesterday. Net external debt of $413 billion, about 51 percent of GDP, puts Turkey in a league with other countries including the Czech Republic and Poland, and the private sector’s pace of credit accumulation is accelerating, Goldman said in a report from London by economists Ahmet Akarli and Michael Hinds.

“Turkey is a perfect example of the maturing of the emerging-market asset class,” Charles Robertson, global chief economist at Renaissance Capital in London, said by e-mail yesterday. “Once weak, vulnerable and dependent on external assistance, it’s now vibrant and a growth pole for its region.”

While the Turkish government “deserves praise” for fiscal discipline and working its way out of IMF debt, “the private sector has taken its place,” he said.

IMF Borrowing

Turkey took its first loan from the IMF in 1961, according to Deputy Prime Minister Ali Babacan in an interview with CNBC-e yesterday. It last borrowed in 2008, and today’s payment will mark the first time Turkey has no outstanding debt to the fund since 1994, Babacan said. When the current ruling party came to power in 2002, the government owed the IMF $23.5 billion, Erdogan said.

Turkey’s two-year lira debt yields were more than 23 percent as recently as 2008. They were at 5.02 percent at the close in Istanbul today, compared with 8.46 percent for local-currency debt in Brazil, 7.28 percent in India, 5.77 percent in Russia and 5.05 percent in Chile, according to data compiled by Bloomberg.

Sovereign Yields

Yields on two-year debt may fall as low as 4 percent amid global central bank easing, while longer-term yields rise, Commerzbank AG senior economist Tatha Ghose said in e-mailed comments May 3. JPMorgan Chase & Co. economist Yarkin Cebeci predicted lows of 4.5 percent on the same day, while Renaissance’s Robertson said yesterday the best of Turkey’s bond rally is probably past, with room for some “moderate compression” over the next year.

Maxim Oreshkin, chief economist for Russia and Turkey at VTB Capital in Moscow, said the current level of Turkish yields is “totally unsustainable.” He predicted in e-mailed comments yesterday that they could rise above 6 percent by year-end.

Last June, Turkey pledged $5 billion to the IMF to help with the European debt crisis, which will make the country a net lender rather than borrower to the fund. The money will be given on condition that Turkey could call it back immediately, a clause Turkey is demanding because of its high current-account deficit, Babacan said.

External Shocks

Turkey’s private-sector debt contributed to giving it the world’s biggest current-account deficit after the U.S. in 2011. At $77 billion, it was about 10 percent of GDP. The gap was the third-largest last year. The deficit will probably be about 6.8 percent of GDP this year, according to the average estimate of 21 economists surveyed by Bloomberg.

“This clearly increases Turkey’s susceptibility to external financing shocks, posing a potential threat to the exchange rate, output and in the extreme, financial stability,” according to the Goldman Sachs report. The accumulation of private sector debt could prove “unsustainable,” it said, likening it to a geological fault line.

In transforming from debtor to creditor, Turkey, whose almost $800 billion economy is the largest in the Middle East, joins South America’s biggest economy, Brazil. The Latin American nation was approved for the largest loan in IMF history in 2002, more than $30 billion at the time. Brazil paid the debt off in 2005, two years ahead of schedule. The country also pledged $10 billion to the IMF last year as the fund sought to boost its capacity amid a worsening in Europe’s debt crisis.

Changing Profile

“The customer profile of the IMF is changing,” Burak Kanli, chief economist at Finans Invest in Istanbul, said by phone yesterday. “In the decades before the crisis its customers were Turkey, Indonesia, Mexico, Brazil. Now it’s most of Europe - eastern and western. Turkey paying off its debt and becoming a creditor to the IMF is a result of this changing customer profile.”

Yields on Turkey’s benchmark two-year debt have fallen 113 basis points this year, the second-biggest drop among 19 emerging-market nations tracked by Bloomberg, trailing Romania.

The extra yield investors demand to hold Turkey’s dollar bonds rather than U.S. Treasuries rose two basis points, or 0.02 percentage points, to 187 today, according to JPMorgan’s EMBI Global Diversified index. That compared with an average of 268 for emerging markets, the index shows.

Lira Trend

The lira appreciated fell 0.1 percent to 1.8138 per dollar, extending its drop this year to 1.7 percent.

Five-year credit-default swaps were unchanged at 116, having been more than double that level a year ago. The nation’s risk premium is now on par with Brazil and Israel, and lower than South Africa, Russia or Indonesia.

Swaps pay the buyer for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements. The cost of the contracts rises as perceptions of creditworthiness worsen.

Erasing Turkey’s debt to the IMF “is very important from a symbolic point of view,” VTB Capital’s Oreshkin said. “Turkey is able to solve its problems on its own and is able to attract capital.”

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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