Lira Descent Risks Turkish Growth as $89 Billion Debt Bill Looms

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The lira’s worst slump since 2008 is driving up the debt-servicing costs of Turkish companies, complicating government efforts to spur the economy before general elections.

The currency’s 9.9 percent retreat against the dollar since Jan. 1 was bigger than any analyst surveyed by Bloomberg was projecting at the start of the year. Non-financial companies with $89 billion of debt coming due within the next 12 months have little choice than to curtail investments to service the liabilities, according to Renaissance Capital and GlobalSource Partners Inc.

“No one can convince me that several corporates are not hurting badly as they service this debt,” Murat Ucer, an economist covering Turkey at GlobalSource in Istanbul, said by e-mail on Thursday. “While a few firms have foreign-exchange revenues that help mitigate the effects of this deterioration, some firms must be experiencing serious pain.”

The spending drop is already rippling through Turkish manufacturing, which is in the midst of its biggest contraction in six years, while consumer confidence takes a hit as the falling lira cuts into household spending power. This poses a threat to government efforts to shore up the economy just two months before the ruling AK Party seeks to extend its 13-year rule.

The currency’s deterioration has squeezed profits of construction companies, Omer Faruk Celik, the chairman of Konutder, an industry body representing developers, said by e-mail on Monday. Some companies are putting off investments in large-scale projects as buyers wait for currency volatility to ease before making purchases, he said.

Weaker Lira

Net external debt of non-financial enterprises in Turkey almost doubled in the last four years to $177 billion in January, according to central bank data.

The lira, which has fallen more than any emerging-market currency save the Brazilian real and Bulgarian lev in 2015, weakened 0.8 percent to 2.5922 per dollar by 3:53 p.m. in Istanbul. Projections for price swings in the next three months are the third highest in developing Europe and Africa.

“We see no hint of any recovery in orders, employment and foreign demand,” Ozlem Derici, an economist at Deniz Yatirim in Istanbul, said by phone on Monday. Economic indicators will “continue to decline as long as the volatility in the exchange rate continues,” she said. “If we see that it stabilizes around 2.55 a dollar, we will see some revival in investments.”

Slower Growth

In the past two weeks, economists surveyed by Bloomberg have scaled backed their projections for this quarter’s expansion by 0.8 percentage point to a median of 3.1 percent.

The nation’s banks should brace for an increase in their non-performing loan ratio to as high as 4 percent in the next 12 to 18 months from less than 3 percent at the end of 2014, Moody’s Investors Service said in a report dated March 25.

Seeking to support growth in the run up to the parliamentary vote in June, Prime Minister Ahmet Davutoglu announced measures valued at 7.5 billion liras ($2.9 billion) last week. The steps, he said, will help Turkey beat last year’s 2.9 percent expansion.

Turkish companies, meanwhile, have the option to borrow in euros instead of dollars as European Central Bank stimulus pushes down loan costs in the single currency, according to Apostolos Bantis of Commerzbank AG.

Investment Cuts

“When it comes to the ability of servicing existing loans, I think that this is still manageable,” Bantis, a Dubai-based credit analyst, said by e-mail. “Perhaps some of the very few and smaller entities will experience some pressures -- especially construction companies -- but there are no concerns for the large blue-chip names.”

If economists surveyed by Bloomberg are right, Turkey will struggle to meet its 4 percent growth target for the year as investment plans are cut back. Expansion in the country of about 82 million is projected at 3.45 percent this year, compared with an average of 5 percent since 2004, according to the median estimate in a Bloomberg survey.

“Corporate Turkey’s response to sharp currency weakness is job and investment cuts,” Mike Harris, the London-based head research for Turkey at at Renaissance Capital, said by e-mail. “While individually this may allow them to stay afloat, from a top down perspective this cost-cutting reflex is recessionary.”

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