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Goldman Sees Lira Nearing Yapi Kredi Danger Zone: Turkey Credit

Turkey's Lira Currency
The lira will fall to 2.4 per dollar in 12 months, about 15 percent from yesterday’s rate, a Goldman Sachs report on Nov. 4 said. Photographer: Kerem Uzel/Bloomberg

Turkish lender Yapi & Kredi Bankasi AS says companies would struggle to repay foreign-currency debt were the lira to depreciate at least 20 percent, a level Goldman Sachs Group Inc. predicts it will approach next year.

The lira will fall to 2.4 per dollar in 12 months, about 15 percent from yesterday’s rate, a Goldman Sachs report on Nov. 4 said. Yapi Kredi Chief Financial Officer Marco Iannaccone said the same day a drop of 20 percent to 30 percent would “significantly impair corporates’ ability to service” their foreign-exchange debt. About 40 percent of business lending in Turkey is in foreign currencies, compared with 24 percent in Poland and 50 percent in Hungary.

Turkey’s current-account imbalances are unsustainable and the exchange rate is the “main adjustment channel,” Goldman Sachs said. While Yapi Kredi expects only a “slight deterioration” in asset quality next year, “this will depend very much on the evolution of the exchange ratio,” Chief Executive Officer Faik Acikalin said this week on a conference call to discuss the company’s earnings.

The lira decline next year is “not too far off from the one we saw in 2011,” Ahmet Akarli, a London-based economist at Goldman Sachs and co-author of the report, said by e-mail on Nov. 6. “If we are right, this would help rebalance the economy.”

Lira Slides

The lira depreciated 18 percent against the dollar in 2011, the worst performing currency worldwide, as Turkey’s current-account deficit swelled to about 10 percent of gross domestic product. The currency has lost 12 percent this year.

Turkey had total foreign-exchange liabilities of about $600 billion in August, about half of which was short-term debt and portfolio inflows, according to data on the central bank’s website. The current-account deficit will probably climb to 7 percent of GDP next year from 6.9 percent in 2013, according to Bloomberg surveys.

“Turkey’s imbalances are ultimately unsustainable” and “the economy will go through a significant adjustment over the next few years,” Akarli and Mark Ozerov at Goldman Sachs in London said in their report. “The macro adjustment that is needed will likely be fairly large and can potentially be very costly,” and “ultimately, the exchange rate will continue to serve as the main adjustment channel,” they said.

Lira Gains

Turkey’s currency gained for the second day against the dollar today, strengthening 0.3 percent to 2.0292 at 12:40 p.m. in Istanbul. It rose 1.1 percent per euro yesterday after the European Central Bank unexpectedly cut interest rates. In the U.S., the Federal Reserve probably won’t reduce the pace of bond purchases until March, according to a Bloomberg survey of economists conducted Oct. 17-18.

Goldman Sachs sees the lira weakening 3.2 percent to 2.1 per dollar in three months, reaching 2.2 in six months, 2.4 in 12 months and 2.5 in 2015. Analysts in Bloomberg surveys predict the currency will slip to 2.04 in the fourth quarter next year before strengthening to 1.97 in 2015.

“Lira devaluation is exaggerated,” Carlo Vivaldi, deputy CEO of Yapi Kredi Investment, said at a press conference in Istanbul yesterday. “The risk of further devaluation is lower than other emerging-market currencies. If the lira is devalued 30 percent, then we think it may be dangerous. Below that we think it’s manageable.”

Bad Loans

While non-performing foreign-currency loans doubled the last time the lira fell by 20 percent, the totals remained relatively small, suggesting that Turkish corporates can withstand some currency depreciation, according to William Jackson, an economist at Capital Economics Ltd. in London. The lira will trade at 2.05 per dollar next year, he said.

Turkish central bank Governor Erdem Basci said on Oct. 31 that companies are managing their debt well and that he foresaw no major problems with corporate borrowings. The chances were higher of the lira appreciating than depreciating, he said.

Non-performing loans in the Turkish banking system rose 22 percent in the past year to 28 billion liras ($14 billion) as lending increased 30 percent to 1 trillion liras, according to data on the banking regulator’s website as of Oct. 25.

“A corporate foreign-exchange debt problem is a risk I wouldn’t rule out,” Jackson said by e-mail yesterday. “Historically, emerging-market lending booms on the scale seen in Turkey over recent years have been followed by a deterioration in loan portfolios.”

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