Turkey May Limit Foreign-Currency Loans to Rein in Lira Risk

  • Government will help companies to hedge their FX positions
  • Funds from compulsory saving system to be parked in banks

Turkey is growing increasingly worried about the effects of the lira’s decline and problem loans.

Days after saying it would ease rules on non-performing loans, Deputy Prime Minister Mehmet Simsek signaled the government would also be willing to help companies manage a gap in foreign-currency liabilities and assets. While the government won’t be indifferent to troubles facing businesses, it may have to limit the amount of foreign-currency debt companies can accumulate.

Mehmet Simsek

Photographer: Luke Macgregor/Bloomberg

“We may have to limit excessive risk taking in foreign currency by the companies,” he said at a conference in Istanbul on Tuesday. “The measures may include making it harder for companies without foreign-currency income to borrow in foreign currency. We are also working on better management of short positions.”

Foreign-currency short positions, or the difference between foreign-exchange assets and liabilities of Turkey’s non-finance companies, amounted to $213 billion at the end of September, according to central bank data, representing a quarter of the country’s gross domestic product. A 16 percent depreciation in the lira against the dollar this year means that debt is becoming more expensive to repay for companies with local-currency earnings.

Derivative Instruments

Turkey’s government has announced a series of measures aimed at easing stresses in the banking industry hit by the troubled loans at their highest level in seven years. The banking regulator last week eased rules on non-performing loans a day after the government agreed to help commercial banks boost lending in an effort to revive growth. Simsek predicts the economy will expand more than 2 percent this year, compared with 6.1 percent in 2015 based on revised GDP data.

Foreign-currency loans taken by companies with local lenders amounted to 53 percent of total credit extended by the nation’s banks at the end of September, when it reached a record high, according to central bank data.

“In the past, the government took measures regarding the borrowing by consumers and it worked well,” Simsek said, adding that the government hasn’t yet decided on what steps it may take for businesses. “Derivative instruments must be used by private-sector companies to hedge against foreign-currency short positions.”

The government will deposit savings from a compulsory private-pension program scheduled to start on Jan. 1 with banks, which will help to further improve their asset quality and give them more ammunition to lend, Simsek said. About 40 percent of the savings will be parked with banks in the form of 180-day reverse repos and the balance in deposits with maturities of more than one year.

“Both measures are structurally positive steps for the banking system in terms of increasing resilience, hence asset quality, and providing much-needed longer-term TL-denominated funds,” Is Investment, a brokerage in Istanbul, said in its daily e-mailed report. Placing pension funds in lenders “will allow banks to partially offset loan-to-deposit maturity mismatch and mend loan-to-deposit ratios.”

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