Turkey braced for further turmoil amid signs of corporate distress - Financial Times

Sept. 3, 2018.

Turkey braced for further turmoil amid signs of corporate distress
Soaring inflation and fears over bank debt add to Ankara’s problems

Inflation is expected to top 17% in August © Reuters

Laura Pitel in Marmaris
Turkish markets are braced for greater turmoil on Monday amid growing signs of corporate distress and the release of data expected to show runaway inflation.

Soaring prices have fuelled the lira’s depreciation, triggering announcements by companies about cash flow problems and missed debt payments.

Economists surveyed by Bloomberg predicted that annual inflation would top 17 per cent in August — higher than the previous month’s figure of 15.85 per cent and far above the central bank’s official 5 per cent target.

The forthcoming inflation data are the “next major flashpoint” for the currency, said Jason Tuvey, senior emerging markets economist at Capital Economics. “This will provide the first hard evidence of the impact of the lira’s collapse this month on the wider economy,” he wrote in a note to clients.

The lira, which has lost about 40 per cent of its value this year, has suffered extreme swings in recent weeks. Investors, already unnerved by inflationary pressure and the wide current account deficit, took further fright after the eruption of a dispute between presidents Donald Trump and Recep Tayyip Erdogan.

The US president imposed sanctions on two Turkish ministers and raised tariffs on imports of Turkish steel and aluminium in an attempt to pressure Ankara to release a detained American pastor.

Mr Erdogan has refused to back down in the face of what he has called a US economic war against Turkey. He has repeated his opposition to high interest rates, which he has termed “the mother and father of all evil” and argued are a cause of high inflation rather than a potential cure.

Turkey’s central bank stunned investors by refusing to raise rates even as the lira lost nearly a quarter of its value against the dollar in August alone.

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The spiralling currency has turned the screws on Turkish companies. Some are laden with debt in dollars or euros that are becoming ever more expensive to service. Others are struggling with the rising costs of imported materials and energy or rent payments that are indexed to the dollar.

On Saturday, a Turkish shoe retailer announced that it was having cash flow problems because of exchange rate pressures. Hotic, which has 150 branches across Turkey and employs close to 900 people, said a commercial court would oversee an agreement with its creditors while debt restructuring takes place.

The previous day, Derindere, a vehicle rental company, announced that it had failed to redeem a TL50m ($7m) corporate bond that was set to mature on that day. It cited cash flow problems caused by “economic developments”.

The company, which had a fleet of 36,000 vehicles and a market share of 10 per cent at the end of 2017, said discussions with the banks were continuing to “ensure that our cash flow is returned to a healthy structure”.

Derindere was downgraded by the rating agency Fitch last month. Fitch warned that the company’s business model — with foreign currency borrowing but assets denominated and reported in lira — had “very high sensitivity” to exchange rate risk.

On Friday, the energy company Bis Enerji said it was unable to meet its payment obligations on a TL30m corporate bond. The company, which missed the TL3m principal repayment and interest, said its power station in the western city of Bursa was offline. It was expected to resume generation in October after negotiations with banks, creditors and bondholders, said Bis Enerji.

US-Turkey crisis explained

The sector underwent a big overhaul after a severe crisis in 2000 and 2001 and the banks are often described as the jewel in the crown of the economy. But their capital adequacy ratios have been eroded by the falling lira. Low domestic savings rates mean that banks are heavily reliant on foreign funding.

Last week, Moody’s rating agency downgraded 18 banks because of concerns about their continued ability to refinance.

Berat Albayrak, Turkey’s newly appointed finance minister, will visit London on Monday to meet his British counterpart, Philip Hammond.

Mr Albayrak, who is the son-in-law of Mr Erdogan, has sought the help of international allies to fend off the crisis. So far only Qatar has offered concrete support, with the promise of a $15bn investment package. Mr Albayrak has said that Turkey has no plan to seek a bailout from the IMF.

* This article has been amended since original publication to change an incorrect use of the term devaluation.