Saturday, December 15, 2018

Revisiting Turkey's Debt Problem - TOM LUONGO

It is increasingly clear the global economy is slowing down.  And a few months ago the epicenter for that slowdown was Turkey. 
The Turkish Lira melted down as fears over its massive pile of corporate debt, most of it denominated in dollars, began selling off.  And that had contagion effects into Europe since yield-starved banks went looking for some thanks to the ECB’s negative interest rate policy.
So, at the time everyone was losing their minds.  The very public tiff between Presidents Trump and Erdogan over geopolitical issues became acute. Days later Turkey’s currency is under extreme pressure.
At the time I called this a political hit to try and remove Erdogan from power.  I was right about that. I was also right that Turkey would be helped from all sides to survive this attack.  
Turkey’s real allies — Russia, China, Iran and Qatar — came to its defense.  Qatar pledged some forex support, China upped its trade.  Bilateral swap arrangements were signed, trade deals cut, etc.
All This began shifting the Turkish economy away from the U.S. dollar and reorient itself with its biggest trading partners, which also includes the European Union.
So, imagine my shock this morning when Turkey’s latest debt numbers and how they’ve changed since the Lira crisis ended suddenly with the return of Pastor Andrew Brunson and l’affair Kashoggi.

The sector’s long-term debts reached $213 billion as of October, down $9.1 billion from the end of last year, the Turkish Central Bank said in a statement.
The bank also said the sector’s short-term loans — debt that must be paid in the next 12 months — fell $2.7 billion to $15.9 billion during the same period.

Those are the important numbers.  They aren’t good, but they are significantly better.  And exactly the kind of thing that needs to occur if Turkey is going to extricate itself from the mess it is currently in.
Raising interest rates sharply induced a mass of domestic savings, up a whopping 20% year-over-year. Turkey is now in a position to issue short-term foreign currency debt to mobilize some of that savings and convert more dollar and euro corporate debt into lira debt.
It’s a shell game for sure, but it’s born of necessity while Turkey narrows its trade deficit.  Savings is re-denominated to assist the most vulnerable Turkish firms while their debt is paid off or restructured. 
The banks are somewhat recapitalized thanks to strong savings.
These firms are  seeing stronger exports thanks to the cheaper lira while domestic energy costs have attenuated over the past few months with sharply lower oil prices.

Turkey’s Balance of Trade

Remember, Turkey is a huge energy importer and who does it buy the lion’s share of its energy from?  Russia and Iran. 
Watching this play out is so similar to what I saw in Russia in 2015.  The world piled on and thought Russia would never respond to the pressure.   Russian firms were barred, because of sanctions, from rolling over their debt, they had to pay it off. 
But, they did and now they, too, are running record trade surpluses, which will fall now with lower oil prices, but domestic energy prices are low keeping profits up and the reorganization of the Russian economy on pace.
Turkey isn’t out of the woods yet.  There will be periodic funding walls which occur where large tranches of corporate debt will need to be paid off or rolled over putting upward pressure on the lira.  And any strong dollar moves will also weigh heavily, like what’s happening now.
But, the worst is past because policy has fundamentally changed domestically.  Erdogan understands his economic future lies in Asia not Europe and the U.S.