Turkey has set ambitious targets to grow its exports by 2023. But is the country’s banking sector ready for such substantial growth, asks Laura Benitez?
The Turkish government is working to increase its exports to US$500bn. If it is successful, it will have carved out a 1.5% share of global exports and become one of the 10 largest economies in the world by 2023. However, for such ambitious targets to be met, Turkey needs to review its trade finance capabilities, especially as exports will need to grow by 12% a year to meet these goals.
Standing in Turkey’s favour is its strong economy, banking sector and regulatory systems. The country’s export figures to date are looking bright too, with the ministry of economy’s figures for February showing a 17.1% year-on-year growth of US$11.79bn; a 20-month record high.
Its problematic trade deficit is also showing signs of improvement; February’s monthly deficit figure stood at US$4.2bn, a 30% drop from February 2011.
Turkey’s banking sector is also in good health, with banks benefiting from a strong liquidity and capital base. Toygun Özmen, head of trade and supply chain at HSBC, says: “Turkey’s capital ratio is 16% compared to the 8% global norm. Besides, the Turkish banking sector is quite profitable with a strong capital base and deposit base, hence a favourable asset-deposit ratio.”
Yavuz Eroğlu, general manager of plastic and packaging manufacturer SEM Plastik, agrees that Turkey’s banks are in a strong position. “Our regulations have been much stricter since the crash in 2001, so when the 2008 crisis hit we had a stronger structural banking sector and that is still the case. More and more banks want to do business in Turkey.”
Nolwenn Allano, managing partner of global risk consultant Gras Savoye, believes that Turkey is an attractive market for investors. He adds that the amount of securities in Turkey’s total assets is around 23%, which means that some of those assets could be switched to loans. Additionally, the capital adequacy ratio is 16%, way above the regulatory limit of 12%, giving banks the opportunity to increase their assets through lending.
There is no doubt that Turkey’s banks are well-placed to support the country’s current trade needs but, as solid as the sector may be, it does not have the structures in place to adequately support and fund the planned increase in exports.
Turkey’s export-import bank, Turk Exim typically only provides short-term loans and, due to global financial conditions and risk-averseness, tenors are becoming shorter – a problem that is only compounded by the 6% tax requirement on short-term financing.
Engin Geren, finance and foreign trade manager at Temsa Global, a Turkey-based automobile distributor, believes that Turk Exim must take vital steps to widen the scope on its export credit insurance and loans policies, to prepare the sector for the challenge ahead. A wider range of mid-term credit insurance and discounting programmes for insured receivables should be put into place, as well as a more dynamic approach to risk taking in developing countries by extending buyer and country loans, he says.
Burak Kurtbay, director of trade finance at Aktifbank, agrees that Turkey’s state-owned and local banks have a long way to go before the country can compete for the top spot in the global export league.
“The trade exists but relevant financing is not there yet. Turkish banks still insist on balance sheet financing when financing a simple trade. This approach will not take us to the next level. Tools like structured commodity and insured receivables financing, and Islamic models, are still not on the shelves of top Turkish banks or not being practiced at all.”
Contributing to this problem, Kurtbay says, is that many Turkish companies are unaware of these financing methods and are therefore not applying the necessary pressure on the banks to provide these services.
Kurtbay explains that Aktifbank is in the process of facilitating a structured trade finance solution to help commodity traders in exports and imports. Although details of the programme are currently under wraps, Kurtbay confirms that it will include all stages of trade cycle, from the shipment to the receivables stage.
Additionally, the bank signed Turkey’s first Islamic structured trade finance deal last year, and confirms that this year it will be focusing on commodity financing with countries in the Organisation of Islamic Cooperation (OIC) region.
The need to diversify
The Turkish banking sector will also need to help support Turkey’s exporters as they diversify their export markets towards new and potentially more risky regions.
Turkey’s share of exports to the EU reduced from 55-60% in 2000 to 48-50% in 2012 – a figure that is expected to fall further in the coming years. Meanwhile, exports to the Far East, South America, Middle East and Asia are increasing every year, and sales to African nations alone have risen by 23%.
According to HSBC’s latest trade forecast report, Turkey’s main trade growth will be with the emerging countries, namely China, India, Vietnam, Indonesia and Egypt. And trade between Turkey and the UAE is set to increase by 7.38% − a trend that could prove lucrative, according to HSBC’s Özmen.
“The relationship between these two countries will bring with it many new business opportunities, particularly in export sectors such as iron, petroleum, gold and jewellery, which are among Turkey’s top emerging trade products.”
Özmen also stresses China’s importance to Turkey’s growth plans and urges banks to view China not only from an import perspective. In fact, China is becoming a potential hotspot for Turkish exporters, particularly for luxury goods due to the rise in wealth.
As export patterns shift, this is Turkey’s prime opportunity to switch its attention to non-EU sources of funding. Turkish banks have traditionally relied heavily on the international syndicated loan market to expand their funding sources. But this will no longer be enough, especially as the US and European banks continue to curtail their lending activities.
Dogan Yilmaz, head of international business development at Akbank, believes that Turkish banks have already been able to close the gap left by European banks with financing from Gulf and Asian counterparts. “Despite the adverse global conditions, Turkish banks have been able to roll-over their syndicated loans successfully. The support from ECAs and other multinational banks in these regions has also been growing.”
Insurance and risk
Turkey’s banking sector remains strong as it continues to find ways to fill the financing gap. However, as Turkey continues to strengthen its relations with higher-risk countries, exporters will also need to consider insurance products to support potential deals.
Aktifbank’s Kurtbay remarks that banks must provide credit protection instruments to support exporters’ needs.
He confirms that Aktifbank launched its first ever credit insurance-backed financing programme in Turkey in early 2011 to help exporters trade on open accounts. Under the programme, exporters will have the opportunity to insure and support their cash flow.
He adds that Turkish companies cannot be expected to take risks without protection, or purchase goods to be used for export without financing. However, one of the challenges Turkish exporters will be facing is ensuring they can access competitive ECA-supported financing that will help them win contracts abroad.
One thing is clear: it is time for private credit insurers and Turk Exim to stand up and support Turkey’s key trading relationships.
Gras Savoye’s Allano is hopeful this will happen and believes that Turkey’s ongoing diversification will force Turkish banks, particularly Turk Exim, to reconsider their risk appetite in these regions and find ways to minimise the associated risks. He also says that it will take a joint effort from Turk Exim and private insurers to meet the needs of exporters.
“We strongly recommend that Turkish banks consider export credit and political risk insurance in order to minimise the exposures of the risks. Turkish banks are willing to take the commercial risks of foreign investments and/or trade risks abroad.
But questions arise when the country risks are taken into consideration. The world has changed, we cannot categorically claim a region risky and another safe. We need to be more diligent in our analysis and that is why risk monitoring will become more and more important.” GTR
GTR in Turkey
In late March, GTR held its sixth annual Turkey trade & export finance conference in Istanbul.
Key findings from the event:
- How Turkey’s government plans to cut the country’s current account deficit by focusing on decreasing its imports and increasing exports. Plans were discussed on how to develop and set up its own value-adding technologies and intermediary products to stop its dependency on imported technologies.
- The government is planning to reduce Turkey’s energy dependency by creating renewable and alternative energy sources. Plans are in motion to build 20,000MW capacity for wind energy, and a 600MW installed capacity for geothermal energy.
- Turkey is also aiming to use 20% less energy than in 2010 by utilising its available energy resources. There are also plans to constructthree nuclear power plants.
- Under Turkey’s foreign policy, the government is working to encourage Turkey’s export sector to look at new trading markets, particularly the Middle East and North Africa and Asia. As part of this policy, there will be a push for more dual and multilateral trade agreements to be signed with current and potential trading partners.