The Kapali Carsi

Turkey: InDebted by the Exchange Rate

Government officials have been emphasizing stock prices and bond yields to highlight the economic cost of the graft scandal, while ignoring the asset that could affect the economy the most, the exchange rate.

Here is the introduction to my latest Hurriyet Daily News column (HDN). In the previous column, I explained why it doesn’t make sense for the government to be so obsessed with stock prices and bond yields. I pick up from there and explain the importance of the exchange rate from a foreign currency (FX) debt point of view. You can read the whole thing at the HDN website, but I have a few additional points to make:

Let me start with the data. I gave some of external and domestic FX statistics in the column, but you know the famous (but not Chinese, it is supposed to be from a 19th century British short story) saying “Give a man a fish, and you feed him for a day; show him how to catch fish, and you feed him for a lifetime”, so I would like to show you the data sources where you can look up Turkish FX domestic and external debt of corporates.

There are actually three sets of data, all kept by the Central Bank, tucked neatly in the same place: Periodic Data. You can reach it by clicking “data” at the top of the web page:

Foreign Exchange Assets and Liabilities of Non-Financial Companies: If you want a quick look at the headline numbers, but just for corporates, this is the place. It has medium and long-term as well as short-term debt and FX/ FX-indexed loans from domestic commercial banks. This is also where the famous $13 billion short-term open position figure Ministers Babacan and Simsek have been referring to come from (more on that later).

Outstanding Loans Received From Abroad by Private Sector: These figures include short and long term loans as well as loans on a remaining maturity basis for the next 12 moths. There is also sectoral and currency composition, among other goodies.

Short-Term External Debt Statistics:Since the former tables also include short-term debt statistics, you may wonder why we need separate figures for that. Well, the answer is that this one has short-term external debt stock on a remaining maturity basis. To illustrate, while outstanding short-term loans of corporates from abroad with one year or less maturity are only $5 billion (excluding trade credits), short-term external debt stock maturing within 1 year or less regardless of the original maturity turns out to be $30 billion (again excluding trade credits), $7 billion of which is from branches and affiliates abroad.

So which is the right number? Well, if you are worried about whether firms will be able to make their payments or not or about rollover risk, you should look at the short-term external debt stock regardless of original maturity. I don’t see why you’d just want outstanding loans in the next 12 months. But more importantly, you should take domestic banks’ FX loans into consideration as well.  Turkish officials are always mentioning external debt, but not banks’ FX loans. I think this is deliberate, as taking domestic banks’ FX loans into consideration would make the picture much uglier. Anyway, if you don’t want to confuse things too much, just use the FX assets & liabilities of non-financial companies- it has data on everything in one place: short and long term-loans (by maturity) as well as domestic banks’ FX loans.

Since we are talking about the data, I’d also like to add a couple of words about the construction sector: In addition to the $7 billion long-term external debt I mentioned in the column, the sector also has negligible ($100 million) short-term external debt I didn’t bother to mention. But as I also mention in the column, the sector has probably (we have data on total credit to the sector, but not FX credit; that’s why I had to resort to survey data in the column) quite a bit of FX debt by domestic banks. And I don’t think firms in the sector have large FX assets because their earnings are usually not in FX. So I would expect both short and long-term open positions to be higher in the sector than other sectors.

Finally, you should note that to their (the government’s or the Central Bank’s, there isn’t much of a difference between the the two these days anyway- and yes, I am saying this despite Tuesday’s rate hike) credit (no pun intended), the short-term open position does included trade credits.

Since we dealt with the data issues, we can move on: I would like to reemphasize a point I have made several times, lastly in the previous column. I am in no way linking, as the government has been doing, the woes of the economy solely to the graft scandal. Turkey would still have grown less, the lira would still have depreciated more than most, if not all, peers, and Turkish assets would have underperformed even if Dec. 17 had not happened- just because of the effect of Fed’s tapering and the global environment on emerging markets. Turkey has wilder swings, in terms of economic variables as well as asset prices, than other EMs because of its external vulnerabilities and dependence on external financing for growth, so it is likely to underperform peers when the global environment is not positive for EMs. The graft scandal just amplified things…

Last but not the least, to interpret my closing line in the column, “And I haven’t even got to mentioning the impact of the exchange rate on inflation and business/real sector confidence“, have a look at the graph below:

The graph includes the latest real sector and consumer confidence figures, which were released Monday and Tuesday respectively. With all graft scandal Turkey is going through, it would not make sense to claim all that all the drop in the confidence indices is coming from the exchange rate. But on the other hand, I will probably have a stronger case when next month’s figures come out, as the surveys for these indices are completed in the first half of the month- before the recent lira rout that forced the Central Bank to do an emergency hike Tuesday at midnight…

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