Ahead of the Turkish general election of November 2015, GTR gathered a group of trade finance experts to discuss the impact of political and economic volatility on the country’s trade performance.
Melodie Michel, deputy editor, GTR (chair)
Seltem Iyigün, chief economist, Coface
Cihat Takunyaci, MD and country representative, BNY Mellon
Riza Kadilar, senior country manager, Natixis
Artug Acaturk, head of cash management and trade finance sales, Yapi Kredi
Muzaffer Aksoy, chief representative Turkey, Bank ABC
Cenk Gültekin, finance and risk management assistant manager, Bozlu Group
Eylem Ekmekci, head of cash management and trade finance, Yapi Kredi
GTR: A lot of the conversation today is going to revolve around the political instability in Turkey and how that has affected business. Turkey has been very unstable since last June’s election. Coalition talks have failed. The country has been the target of several terrorist attacks too. What has been the impact of all of this on your business?
Aksoy: This has increased uncertainty in the market as well as doubts about the Turkish economy, not only within but also outside Turkey. We have started receiving many questions and reports from our head office and other sources. The main issue is volatility, which is causing many questions outside of Turkey. We expect this volatility until the election on November 1. After the election, we hope that the volatility will reduce.
Takunyaci: There are certain external and internal angles when you look at the country. Externally, we have started receiving more questions from clients on the stability of the country. They continue to take risks but everybody is looking much more closely than before. The local issues affect the normalisation process because of the expected effects on Turkey. Internally, we see a slowing down in demand.
Gültekin: We have worse issues, such as structural problems, which we need to correct. If you add these outside problems, such as terrorist attacks and the Fed decision, it is becoming riskier than ever. After the November election, nothing will happen. We need a small economic boom. Every seven years, there is some kind of financial crisis. In 2015, we will do it in our way. When the crisis happens, it will be like an earthquake.
The stress will be released and we will just get better, I guess.
Ekmekci: As already mentioned, there is volatility in the market that is definitely expected to continue until the elections. However, what we are facing, from a partially local bank point of view, is that, since there is volatility in all emerging markets, Turkey has its own position and magnitude from overseas. We have not seen any price increases or a decrease in appetite from correspondent banks, due, I am sure, to local efforts as well. Frankly speaking, there is decreasing trade business in the country. Foreign trade is decreasing, and local trade seems to be decreasing too. We are, however, in a volatile FX and interest-rate environment. Other than that, we are still maintaining our ratings and the appetite from abroad.
Kadilar: There is a market reaction to the current political situation in Turkey. Even though general emerging market volatility increased during the last few weeks and months, credit default swap (CDS) and FX rates have been affected by this volatility. But ratios are still fine. Of course, the drop in energy prices helped a lot. This devaluation was not accompanied by a higher energy price, which was certainly a big advantage for the current economic situation.
Despite FX volatility, we should also recognise that individuals are not exposed to FX; by law, they cannot borrow in hard currency. It is only the corporate sector that has been heavily affected. Some of the sectors are mainly affected; otherwise, exporters have not been complaining. Growth in the second quarter was better than expected. Most probably, the third quarter will be a difficult time.
There is a certain dynamism going on in the economy, but this is a half-year. Especially if fiscal discipline is not maintained, we may end up getting a rating action that would be very detrimental. We also agreed the summer season for the bank syndications and bilateral borrowing has been very dynamic, with no signs of stress. The non-performing loan (NPL) ratios are not increasing yet, which is also a good indication.
There is also market volatility partially fuelled by the local political situation and partially by the situation in international markets. This year will be pretty different to previous years, but we still need to see whether the government is able to keep fiscal discipline during the difficult times.
Iyigün: The political uncertainty is affecting the economy mainly through the FX channel, with the sharp depreciation of the lira that impacted corporate borrowing rates as well as their production costs. When the lira depreciates sharply and at this magnitude, we quickly start to witness a payment-delay process in the economy. We see this in small businesses in particular, which are starting to delay their payments. This is a result of political uncertainty and of the depreciation in the lira, because people are so uncertain about what is going on in the economy and in the political side of Turkey in the coming period, they prefer to keep their position and to have a ‘wait and see’ strategy.
On the other hand, the economy has so far this year done better than expected, mainly based on stronger-than-expected domestic demand. However, given the local security issues and the geostrategic problems around Turkey, we are not quite sure the economy will be able to show the same performance in the second half of the year.
In the upcoming period, of course the election results will be very important. A single-party government would be a market-friendly result. However, this time it may not be sufficient because, as Cenk said, there are a lot of structural issues that the Turkish economy needs to resolve. The new economic team that will govern economic institutions will be important. On the corporate side, the management of cashflow will represent a higher importance to keep solid financials.
Acarturk: I will give my emphasis on the structural and regulatory measures to be taken to make Turkey an economically attractive and investment-friendly country again. In Turkey, we are now seeing the effects of leaving out our focus in this respect starting with the period 2007-09 in my opinion. After the 2008 crisis, we weren’t able to see the effects of these due to the turmoil in the markets, we had some difficulty in understanding whether the downside trend was due to the crisis in the financial markets or due to country-specific issues. Now, however, after having the political instability in hand as well, we are experiencing these effects more and more every day. What we are observing in the market is that market players want to do business, but they want stability, as everyone does. Lenders and borrowers want to do business, which is why we have not seen much increase in interest rates in the Turkish market. Of course, there needs to be some positive inflow of information in terms of political stability and policies motivating the market players to think everything is on track again. In my opinion, for sure we will be waiting for stability after the elections, but measures to be taken affecting the positive belief of the market players and investors will be a must whether it is a single party or a coalition.
GTR: Turkey’s export revenue fell 8.7% year on year in the second quarter of this year. What, in your opinion, are the main reasons for this drop?
Iyigün: Our main export market is the EU, which accounts for around 40% of our exports. However, as the euro lost some of its value against the dollar so far this year, we make less money from the products that we sell to the EU. Therefore even if we were able to sell more products to Europe in terms of quantity, we would earn less money. If you check the numbers in euros, you will see that our exports to the EU are increasing. Although at a volatile pace, it is higher than last year. However, in dollar terms, we made less money.
This is the first reason why the exports dropped in USD terms.
The second reason is that there are a lot of conflicts going on in Turkey’s key export markets, such as the issues between Russia and Ukraine and the sharp depreciation of the Russian rouble, which have reduced exports to Russia in line with the decline in purchasing power of Russian people. Iraq and Syria were among our main export markets, especially in food and construction materials; however, we lost these two markets, unfortunately. The good news is that the EU is slightly recovering, although the recovery is still fragile. Next year, if the pace of growth in Europe increases, Turkish producers will be able to export more to that side of the world. Because Turkey exports mainly durable consumer goods to Europe, even a slight recovery in the economy usually has a large impact on Turkish exports. This is the only good news that we can count on for Turkish export growth in the upcoming period.
Gültekin: In the Turkish economy, if you want to make some exports, you should import. As I said before, we need some structural changes. We should produce some technologies but if we get involved in the manufacturing process, we should import. Import prices are getting higher. The Turkish lira is depreciating, so imports are more expensive. We cannot compete in the international market. We are losing our competitiveness. Another thing is finance opportunities. For example, if you want to import something from Taiwan or China, there are lots of finance opportunities such as export-import banks. In Turkey, however, we cannot create these finance opportunities for outside buyers. This is another problem on the export side.
Takunyaci: I can add the oil angle. We have a chicken-and-egg situation. Oil prices are coming down, which is good for Turkey; on the other hand, the Mena markets are losing their power to buy goods from Turkey. That is why, when you look at the figures, the biggest drop in exports is to North Africa, with a 40% drop compared to last year. The figure is 10% in the Middle East. On the other hand, the current account deficit is coming down due to low oil prices and that is helping us.
GTR: You have mentioned the depreciation of the Turkish lira a lot. Has that created any benefits for Turkish exporters?
Iyigün: It depends. If the lira depreciates that sharply, we cannot really say that it really helps exporters. So far, the lira has lost around 20% of its value against the dollar; however, our exports dropped. Apparently, there is a problem. One way to resolve the struggle would be to focus on more technological and value-added products. However, it is not very easy. It requires huge R&D budgets not only from the government but also from the corporate side. Corporates need to focus on technological products more to increase their competitiveness.
Acarturk: When we look at the figures, Turkish lira depreciated by more than 25% this year; however, our exports also decreased by almost 10%. Of course the effect of the demand volatility of our export markets are also in place but my point here will be that we need imports in order to export. When we look at the seven monthly figures, imports of intermediary raw materials also decreased by 15%. We cannot produce without importing. Besides, we import dollars – our imports are dominated by dollar currency – in order to be able to export to Europe in euros. And this brings the issue of Turkish lira, euro and US dollar currency exchange rate effects into the picture.
In terms of R&D, we need to make investments and again we need an investment-friendly environment in this respect as well. Our private sector is too indebted nowadays. The government indebtedness is at good levels compared with peer countries, but the private sector is highly indebted. They are fragile due to FX changes. Volatility in FX rates is affecting exports a lot, because they need to hedge their imports with exports, which means they need to hedge the euro-dollar routing. If they cannot see the future, they cannot determine the correct price and become unable to manage their costs in the effective way. So it can be high euro or high dollar, but it should be foreseeable in order for exports to gain momentum.
Aksoy: Growth in markets is much more important than depreciation for Turkish exports. Growth in Europe is much more important than the depreciation of the exchange rate. If there is growth in Europe, Turkey will sell anyhow. We will increase exports. We do not need too many depreciation issues.
GTR: How have banks accommodated the changes in the markets, such as the depreciation of the lira or the increased political risk? What has changed in the past six months or so in terms of structures and deals?
Ekmekci: Frankly speaking, the appetite and the number of transactions are limited. This is also a healthy reaction by local corporates to decreasing volumes and the volatile environment. The structure within most banks has not changed tremendously. What we are facing, however, is a much greater trend from the market for some secure products; for example, direct-debiting systems. There is greater demand for LCs in the market. The market is trying to be secure but we cannot see that there is a huge trend there. Local corporates are reacting very healthily to this volatile environment. Investment appetite has decreased a little but we are seeing that investments that have already started are continuing. Local corporates are waiting for the right time to invest more and to borrow more in the country.
Takunyaci: I would like to add the angle of financial institutions (FIs), the majority of which work directly with local Turkish banks. First of all, all the negative things that we are talking about will be manageable, provided that financing continues. There should be no disruption, either externally or internally. As a US-based bank, we also try to listen to the market and to our banking clients, which are also exposed to certain changes. We need to play with new formats that meet their requirements. These are all small steps at easing our clients’ needs in the market in order to continue to finance the real economy – the corporates – in a balanced way while managing the risk.
We are also heavily involved in the structuring of long-term securitisations or other types of longer-term financing needs of banks. We see new pockets; for example, the mortgage portfolio has now become securitised. The infrastructure is ready. These kinds of efforts will also continue to positively affect the continuing financing of the financial system.
Aksoy: When you look at trade finance, we are talking about short-term and smaller transactions. Normally, when the economy slows down, trade finance also decreases. We see fewer and fewer trade finance transactions, LCs or otherwise, from the Turkish market. I have been trading these assets since 1995.
Normally, when you look at it from the outside, the risk increases; on the other side, the trade finance volume is coming down. That is why we do not see a major change on the pricing side either. I am not expecting one because banks have not been able to find enough trade finance from the Turkish market, because the economy is slowing down.
GTR: How has pricing reacted to these conditions?
Aksoy: On the pricing side, we should separate it between fixed assets, Eurobonds, CDS, etc. This is a different market, and the trade finance market is a totally different market. We see a very limited effect on the trade finance market, because there are two types of banks in the Turkish market. One is prime relationship banks and the other is banks buying from the secondary market. We see an effect mainly in the secondary market, because they do not know the Turkish market. They are not in close touch with the market, which is why they are reacting according to the newspapers and so on. Also, there are many banks interacting with the market on a daily basis, and their reactions are totally different. Often, there are some minor changes in trade finance too, although they are very limited. Fixed assets are a different scenario.
Takunyaci: The euro-dollar scenario also affects the funding side of trade finance. Euro funding institutions, some of which are in a negative interest environment, are sometimes able to offer much cheaper rates. We hear of some new entrants from the US offering very cheap pricing on the trade side. These are also positive effects to the currency when talking about the financing of trade in the last six months to a year.
GTR: And what has been the impact on the insurance side?
Iyigün: As Coface, we downgraded Turkey’s currency assessment to B from A4 at the beginning of this year. We are not a credit-rating company, but A4 can be considered as investment grade, and B is just below investment grade. Of course, from an insurance point of view, we see that the risks, not only in Turkey but in all emerging markets, are increasing. Political uncertainty is one part of it. However, as long as growth remains and if the lira stabilises, we may witness a lowering of the level of risk. However, there are some differences between sectors. Some sectors are more dependent on imports which are more affected than others; for example, textiles, metals and chemicals. Yet we certainly take into account the individual corporate debt structure too.
Aksoy: We are talking mainly from the international banking perspective, which is a different market. Most probably, in terms of insuring Turkish bank risk, I would not expect a big difference in insuring Turkish bank risk.
Kadilar: There is no problem that we see in terms of availability of funding for trade finance for Turkish bank risk. Secondary-market loan trading is very active and liquid, with acceptable prices going on. There is no pressure on prices there. In this respect, from the international export finance perspective, we have not seen any major shift or reaction to Turkey.
Takunyaci: On the insurance side, because of Turkey’s popularity, in which everybody is trying to book a trade finance activity or a different type of activity, in addition to the existing country limits, we try to use other means such as insurance, that may expand the business relationship. The Turkish market is somewhat different. Again, I am talking about the bank side, not the corporate side. I do not expect any deterioration on that front. It will continue to have the same set-up on both the demand and supply side.
GTR: What is the political risk outlook in the run-up to the election? What are the most likely outcomes and what effect would they have on business in Turkey?
Iyigün: I would say that a single-party government would be the most market-friendly solution. This in itself, however, may not be sufficient because people want to see who will run the economy: who will be the economy minister in the new cabinet. However, a coalition that represents a wider part of society may be a good solution for Turkey too. The worst-case scenario may be a failure of coalition talks. Of course, at that time, we may see further volatility in the FX market, and the corporate FX debt burden may increase. We may then start to question what Turkey’s growth performance will be. Having an exit strategy of the Federal Reserve on the one hand, we may see a further depreciation of the lira. At that time, it would be very helpful for the economy to have a strong government committed to supporting the economy and implementing the much needed structural policies.
Gültekin: Since 2013, we have had lots of big projects going on in Turkey: the Third Bridge and the Third Airport in Istanbul. There are lots of public-private partnerships such as state hospitals. If you examine these projects, they have two or three-year grace periods. The majority of first principal payments start in 2016. If there is no result in the election, the FX market will affect all markets, and all principal payments will come down, leading to some difficulties in 2016.
Acarturk: Turkey knows the recipe. We know what we did well after the 2001 crisis and what results we achieved. We know that, when we are disciplined in terms of structural reforms and other regulatory improvements, we achieve good results. That is why we were not affected that harshly at the 2008 crisis. But the delayed effects are now being seen with the contributions of the political instability, and if we do not take measures including but not limited to stabilisation in politics, I am afraid we will see worse results next year.
GTR: Going around the table, what would be your best and worst outcome from the election, in your opinion?
Kadilar: My expectation for any election or government, in any country including Turkey, is policy stability. Unfortunately, while we have seen a really strong government, Turkey lost its policy stability in the last few years. In various areas, regulatory authorities and government subsequently issued different decrees regulating the markets in slightly different ways, which created some uncertainty for investors, financiers and market players. Going forward, the markets’ and business world’s real wish would be for more long-term policy stability, so that we can see long-term investments and structural changes in the economy.
Takunyaci: We need to really have a good story in order to be stable and attract investment. We need long-term policies and consistent approaches in order to manage these challenges. I expect something that creates a good story in the end in order for a prosperous Turkey to continue.
Ekmekci: I want to add two quite important points. Continuous long-term policies should also include ones around the legal and education systems. Turkey may now have a chance to restructure all of the problematic structural issues after the election.
GTR: In this context, what can Turkey do to maintain its export revenue and maybe explore other trade partnerships? You were saying that Turkey is very dependent on the European economy. Is there a desire to maybe look elsewhere or to diversify export markets?
Iyigün: We are trying to inform our clients about new markets in the Far East, as well as the United States. They represent good opportunities for Turkish exporters. Iran can represent a good opportunity, too but we need to see concrete results from the agreement between Iran and the P5+1 countries. However, since Iran is not a member of the World Trade Organisation, exporters to this market should be careful. Otherwise, we know that a lot of companies from various sectors went to Iran to close deals, which is a good thing. Turkey should not be late in terms of gaining market share in this country.
Gültekin: It is all about the product. You can produce some sort of valuable product – even shoes – a pair of Nike shoes may cost US$100. When you check the production price, it is US$15, so the question is, ‘How can I design prices for US$85?’ so that the rest of it stays in the US or in China. When you check the product line, if you just input some valuable product, you can sell it all over the world.
Acarturk: In terms of Iran, we may think about this in two ways: on a short-term basis and on a long-term basis. In my opinion, Iran represents huge potential for Turkey in the short term. We will definitely be one of the countries supplying raw and intermediary materials and investment. They may not be a member of the World Trade Organisation but Turkey will be one of the best countries which can deal with this because we have experience of Iraq,
Syria and other Mena region experience and we had a lot of good business there before the turmoil in those countries. In the long term, however, if everything goes well in terms of relations between Iran and western countries, can Iran be a threat to Turkish trade? That is my question.
Ekmekci: If you look at history, whenever Iran was powerful, Turkey or the Ottoman Empire was not. If history repeats itself, it may be an issue in the long term.
Takunyaci: This time it is a different story for Turkey. It is now sitting on an energy hub crossing all continents. Iran may continue to be an oil and gas power, but Turkey is now really in a unique position in the region. It will not compete but maybe co-operate if they accept international counterparties properly.
Second, I think Turkey needs to continue to focus on side markets and on EU markets, being the major trade partners. It should be most concerned with global partnerships like the Trans-Pacific Partnership (TPP) or EU/US partnerships that affect countries globally. Those should be of greater concern. It should continue to focus on the energy hub and pipeline projects that cement Turkey’s position on the trade side as well. It connects and creates natural business in the end.
Kadilar: In a way, history repeats itself or maybe not. Look at the EU: it is all about integration. If Iran and Turkey choose to integrate with the world economic order – standards, regulations and compliance – we may see even larger opportunities for all players in the region. I am more optimistic that things could be different in today’s world, with technology, communication and mutual understanding, and I believe that, if the policy leaders choose the right track, there will be more opportunities for the populations living in this geography.
GTR: What could the impact of trade agreements like the TPP be on Turkey’s trade? If there are any negative impacts, do you think that Turkey is doing enough to prepare for them?
Takunyaci: Turkey really needs to immediately focus on the changes or the potential impacts, as well as on lobbying for their interests. That is really key. As I said, the EU structure with the US definitely affects Turkey’s position. If we are talking about potential markets in the Far East, again that will be shaped by the TPP on that front. Really, we need a governing board to manage all these potential issues that affect our near and medium-term future. We are passing really critical stages, so I see a little slowing down in this respect.
Iyigün: Turkey really needs to take the Transatlantic Trade and Investment Partnership (TTIP) very seriously. Because Turkey is part of the EU Customs Union, any exclusion of Turkey from the agreement would result in the free entrance of US goods in Turkey, but not the reverse. Turkey is already suffering from a trade and investment deficit with the EU and the US, and we would see these deficits becoming even wider if Turkey is not included in the agreement. Such a situation would weigh on Turkey’s GDP per capita, unemployment rate etc. This is a crucial position for Turkey to get involved in this agreement.