The Kapali Carsi

An economist’s field trip for credit: Why do Turkish corporates have huge open positions?

I have been talking to banks for the past month or so about a loan for our family business, which has led to some quite interesting observations.

The intro. to my latest Hurriyet Daily News (HDN) column summarizes what the column is about rather well: I explain why it is very attractive to borrow in FX, and why FX lending has shot up as a result. This should not be a problem as long as firms hedge their risk, but I also explain why many firms who want to hedge, like your friendly neighborhood economist, can’t! Anyway, you can read the whole thing at the HDN web site.

As for an addendum, a reader’s email is the proper beginning:

I don’t believe what Turalay Bey said is correct that most firms borrowing in FX are exporters and thus have a natural, if not a financial, hedge (I don’t think you believe it either). There are a lot of construction firms and energy firms in there is well, among others. Some of these firms do have cash flows in FX (.e.g. selling houses for FX) or have other FX assets, but not entirely.

The reader is right: I don’t believe what Central Bank Deputy Governor Turalay Bey (“bey” is the Turkish equivalent of Mr. we use it as a suffix after the first name; this is mainly because surnames came to Turkey in the 1920s) said is correct. But just how much of the open position should we care about then? The reader notes that she spent a lot of time, with limited data I should add, trying to gauge to what extent the open position is a risk. She concludes that the problem is much smaller than the $129bn open position (as of Q2), but it is nowhere near zero. But I don’t blame Turalay Bey. He wouldn’t tell me he is worried about the open position, especially with the HDN badge on my neck (I caught him at Fitch’s ratings upgrade party), unless he wanted to grace the headlines of the next day’s HDN, of course:) He would probably more frank with raki & meze, but I don’t know him at all to invite him to a meyhane, and I doubt he is a drinker, anyway.

I have digressed too much again; apologies for the intro. into Turkish dining and drinking. Anyway, the reader continues:

And as long as the CBRT continues “stabilizing” the exchange rate, as you are suggesting, the more people will be tempted to take a bet on FX borrowing. I wish they would introduce more volatility into the ER precisely to remind people that ER risk is always there.

I could not go into details, but just have a look at corporate sector’s FX borrowing and open position (both graphs in the column). They both decrease in 2011 and then start rising again this year. Note that not only the Central Bank had  introduced interest rate volatility to deter hot money in 2011, they were also very vocal on currency risk. I remember very well how the Governor Basci spent a lot of time warning businessmen not to borrow in FX (if they are not earning FX) at a conference in Denizli in July 2011.

Moving on, one of the important points in the column is the difference between lira and FX lending rates, which is why FX borrowing is so attractive for corporates. Of course, the curious reader will wonder why this is the case. Elementary, my dear Watson (I just watched A Game of Shadows, so bear with the theatrics): It is all about funding. Although the Central Bank’s effective funding rate and money market rates are at historic lows (first graph in column), the Central Bank could easily bring both to 9 percent, which is the ceiling of the interest rate corridor. So the ceiling will be the determining factor in banks’ lira lending rates. As for FX rates, they depend on banks’ FX funding costs. How do banks obtain FX?: Eurobonds, syndicated loans, subordinated debt and interbank deposits, according to banking analyst Sevda Sarp. All of these cost much less than 9 percent!

So if you want it simple, it is just that banks can fund themselves much cheaper in FX than lira. Of course, this is also because inflation is much lower in the the developed world, where the FX loans are coming from, than Turkey. So it is our old friend inflation lurking in the shadows again.

Note that some people claim lira lending rates are high also because lira deposits have short maturities. There may be some truth to this, but to me it doesn’t make much sense: After all, all those deposits always roll over; banks lose some customers to rivals, but gain others.Therefore, I don’t think maturity mismatch is a big issue here.  Tanju Gorgulu, writing at Finansonline (in Turkish) has reached the same conclusion.

This doesn’t mean that long-term lira funding for banks won’t help. During my investor trip last month, one hedgie argued that if Turkey got the second investment grade, banks would be able to borrow long-term in lira, which would be a huge game-changer. She is right, I suppose…

Speaking of deposits, I’d like to conclude this post with a cute little observation, which is not directly linked to the column. Have a look at this graph and let me know if you see anything interesting.

Of course, you cannot let me know:), but I am sure you noticed the recently growing wedge between deposit and lending rates. This is because of the ceiling effect I described above. Central Bank policy, in other words, although it was an undesirable side effect rather than goal. The Central Bank would like to decrease this wedge. They could do that by lowering the ceiling of the corridor, which they have been doing for the past few months…

OK, I already said finally, which means I have to conclude, but there is no way I’ll let you go before sharing with you the Central Bank’s new method of calculating open positions, as highlighted in yesterday’s Financial Stability Report (only in Turkish for now, although the English version should appear sometime in December). Here’s today’s Erste Securities daily:

It is worth mentioning that in calculating Turkey’s net FX position, the CBT has started to include households’ gold stock, which is not registered in the financial system. Accordingly, the Bank believes that the country, as a whole, had a USD 31bn FX surplus as of September. In detail, the private sector and the non-banks private sector had USD 76bn and USD 133bn net open FX positions, which were more than offset by the USD 191bn and USD46bn FX surplus held by households and the CBT. The banking sector, on the other hand, registered a USD 2.8bn FX surplus. The CBT estimates that households have USD115bn of gold stock, which brings Turkey’s net FX position into the positive territory, unlike the previous methodology, which did not incorporate the gold stock.

Sooooo convenient, especially since Turks are hoarding a lot of unregistered gold. Hmmm, while they are at it, they could include cigarettes as part of the FX position as well. After all, cigarettes are used as hard currency during war/ in prisons. This is turning into a joke, but joking aside, such data massaging won’t help the corporates sitting on large open positions should a large depreciation occur…

One Response to “An economist’s field trip for credit: Why do Turkish corporates have huge open positions?”

BurakDecember 3rd, 2012 at 9:31 am

haha ohh god, sensational method of calculating FX positioning. PS is it just me, but is not including unregistered household gold holdings going to be based on estimations which in any case may be way off? Something tells me such estimations were by far on the optimistic side than the pessimistic. Perhaps we should start adding memorabilia, coin collections etc?
Turkish CB to Yusuf (Yusuf being an average joe) "so Yusuf got any vegetable or fruit trees growing in the back"? lets add to our soft commodities part of total FX positionging.