Risk #1: Renewed BOP crisis on the horizon
Along with the recession in 2018-2019 came a sharp rebalancing in the tradable sector, as nominal imports of goods and services collapsed due to the much increased import costs after the depreciation of the TRY. At the same time, nominal exports benefited from the more competitive currency. Exports of services also benefited from rising tourism as visitors enjoyed significantly more affordable holidays in Turkey. As a result, the annual current account balance shifted into a small surplus of +1.1% of GDP in 2019, after 17 years of (mostly) large deficits.
However, the rebalancing peaked in September 2019 when the rolling 12-month current account surplus reached +USD14bn (equivalent to almost +2% of GDP). Against the backdrop of rapid monetary easing and re-surging credit growth, the monthly current account has been back into deficit since December 2019 and reached -USD5.1bn in April 2020, the highest shortfall since May 2018. Meanwhile, the cumulative current account deficit in January-April 2020 amounted to -USD13bn (an estimated -5.9% of GDP) and it was accompanied by -USD10bn (-4.7% of GDP) in net short-term capital outflows, an early warning signal of a potentially forthcoming BOP crisis. Only 11% of the January-April external deficit was covered by net foreign direct investment inflows, which have a longer term nature.
Risk #2: Worrisome decline in FX reserves as external financing needs remain high
Gross FX reserves reached a peak of USD114bn at end-2013. Ever since, they have been on a volatile downward path, mainly owing to frequent FX market interventions by the CBRT to stabilize the exchange rate of the TRY, as well as occasional capital outflows. At the end of 2019, reserves stood at USD79bn. In the first half of 2020, they dropped again by -35% to USD51bn due to capital outflows and CBRT intervention in the wake of the Covid-19 crisis. At this level, FX reserves are covering less than three months of imports or, in other terms, just around 30% of the external debt payments falling due in the next 12 months (> four months and >125% are assessed as comfortable, respectively). Even more worrisome, net FX reserves (this excludes all FX deposits parked at the CBRT by local banks) have dropped from a peak of USD70bn in 2011 to an estimated USD30bn in mid-2020. Overall, the CBRT’s FX reserves are now too low to defend the TRY for longer. Should serious financial market turbulence re-occur in the near term, the CBRT may at some point need to revert to capital controls in order to defend the TRY or release the currency into free fall.
Risk #3: Corporate debt
The total debt burden of non-financial corporations (NFCs) in Turkey has declined somewhat, thanks to the deleveraging in the wake of the 2018 financial crisis, but has remained high overall. It stood at USD479bn or 67% of GDP in Q4 2019. This was +53% higher than at end-2010 (USD300bn) or +27pp more in relation to GDP. Somewhat improved, though still worrisome, the FX-denominated debt of NFCs in Turkey fell to 27% in relation to GDP at end-2019 (from 47% in Q3 2018) and to 41% as a share of total NFC debt (from 47% in Q3 2018). Refinancing that FX-denominated debt will remain challenging as NFC balance sheets have been stressed by TRY depreciation, volatile interest rates and low growth, while investor confidence has remained weak.
Risk #4: Non-payment
There are clear signals that non-payment risk in Turkey has been on the rise. For example, the average days sales outstanding (DSO) increased from 65 days in 2007 to 82 days in 2017 before falling back slightly to 76 days in 2019. This was well above the global average (64 days in 2019, nearly unchanged over the past decade) and has put Turkey among the countries with the longest DSO. Another signal is the share of non-performing loans (NPLs) in total loans, which has increased from a recent low of 2.8% in May 2018 to 5.3% in December 2019 and is likely to rise further amid the expected deep recession in 2020. Most of those NPLs are to Turkey’s ailing energy and construction sectors.
Combined with the worrisome corporate debt position of Turkish NFCs (see above) we conclude that corporate non-payment risk will rise further in in the next two years. We forecast an increase in business insolvencies by a cumulative +31% in 2020-2021 (after +3% in 2019).