Turkish banks are being forced to look for other forms of funding to help the country’s difficult shift to investment grade. Michael Turner reports on where the biggest challenges lie.

Bankers working in the syndicated loan market will be well versed with Turkey. Over the last nine months, three of Turkey’s biggest banks have pulled in more than the equivalent of US$5.6bn in syndicated loans between them, according to Dealogic data.

Most of the money will be used to refinance the previous revolving facilities, but a fair amount will be directed into trade-related activities. The Turkish banks enjoyed an average pricing on the loans of around 100 basis points.

“It’s interesting because on the one hand you are seeing huge volatility and the cost of funding increasing, and on the other, Turkish banks are cutting down the pricing for syndicated loans,” said Erdal Atal, IsBank deputy chief executive officer in a presentation at an EBRD trade finance forum in Istanbul.

These loans are a well established source of money for the banks and one of the few external sources of funding that the country’s banks regularly tap. At a time when Libor is nudging up and banks in the nearby EU are growing increasingly worried about Southern Europe’s problems, Turkish banks are maintaining a level of borrowing at good prices that would inspire envy elsewhere. And the country’s corporates have also had wins in the international syndication market.

Turkish petroleum firm Koç Tüpras pulled in US$2.2bn to finance improvements to its Izmit refinery. Crédit Agricole was the lead arranger on the deal which saw a US$624mn guarantee from Italy’s export credit agency Sace. Spain’s ECA Cesce also joined in.

These are solid achievements for a country that is still fighting to get investment grade rating from the three major ratings agencies. Although the country enjoyed some success when Standard and Poor’s bumped up Turkey’s local currency rating to investment grade in September 2011.

Much of the problem for ratings agencies appears to stem from the very foundations of Turkish economy. Most pressing is Turkey’s deposit-based funding model, which sees bank funding come from domestic money. This money is usually only available for shorter-term lending. Banks have started looking to Eurobonds for a new source of long-term financing.
The more these bonds are issued, the more likely the country is to be upgraded.

“Turkish banks have started financing themselves through operations that are the mainstay of European banking, like Eurobonds and domestic bonds,” says Akbank economic research manager Eral Yilmaz. “The authorities are keen to encourage longer-term domestic bond issuance. The sooner Turkish banks have access to longer-term financing, the more they can lend to long-term projects like project finance and infrastructure.”

It’s not just bank access to long-term financing that is hampering the agencies’ decisions. The biggest obstacle that has to be surmounted is the current account and trade deficits. The trade deficit is something that is almost systemic in the country which needs to import the bulk of its energy. These imports topped US$38.5bn for oil alone in 2010, according to the IMF.

The country posted a trade deficit of US$8.2bn in August 2011, down from US$10.2bn in June. The deficit hugely overshadows Turkey’s export growth. The country posted an increase in exports of almost 25% year-on-year, which is a solid performance by most measures. Most measures, however, do not include Turkey’s massive import growth, which has exceeded a 40% rise and dwarfs the increase in exports. The government is attempting to rebalance the deficit with a number of monetary incentives such as tax breaks for certain export industries.

But it’s the current account deficit in particular that agencies are keeping a close eye on. Figures released on October 11, 2011 show a current account deficit of US$3.96bn for August. This brings the 12-month combined deficit to around US$75bn.
“Turkey needs external financing to promote its high growth rate,” continues Akbank’s Yilmaz.

“A higher growth rate translates into a larger current account deficit. If you have a smaller deficit, you’re not going to grow as fast but even in this case the growth rate would still be above anything in Europe.”

Deficit benefits

However, Turkey’s net importer of energy status has brought some benefits as the country enjoys a solid trading relationship with the neighbouring countries in the Middle East. Trade with Iraq surged by almost 70% year-on-year in the first quarter of 2011. Turkey’s foreign trade minister Zafer Çağlayan has said that Turkish trade volumes with its eastern neighbour could top US$12bn by the end of 2011. Trade between the two countries now makes up for around 20% of Turkey’s total trade transactions. This is compared to Turkey’s largest trade destination, the EU, which accounts for slightly less than 50% of total trade.

“Trade between Turkey and the Middle East will grow rapidly because the regions have had a solid background for centuries,” says Mert Güvenen, assistant general manager in the corporate and commercial banking business at Yapi Kredi. “While the west always has a big portion of trade volume from Turkey, the east has always had a significant importance in Turkey’s trade volume.”

Indeed, Turkey is now the largest commercial investor in Iraq, with trade volumes reaching US$7.4bn in 2010, a seven fold increase since 2003. The Iraqi government has taken the step of creating a committee to increase business relations with Turkey, while Turkey made the decision in January 2011 to show support for Iraq, joining a free trade zone alongside
Lebanon, Jordan and Syria.

More practical measures have also been taken. A trading post is under development between Turkey’s southeastern border and Iraq’s Nineveh region, 340 miles north of Baghdad. Infrastructure still remains the biggest challenge. At the moment, Habur Gate acts as the main trade port between the two countries and trucks packed with goods have been known to be held there in queue for up to two weeks.

Turkish companies are clearly looking to build on this boom in Middle East trade. It helps that Turkish corporate clients appear to be on board with the banks for the time being and while they are undoubtedly looking for the cheapest money available, for now they are not pushing too hard for conditions in debt facilities that would make banks uncomfortable.

“In this global economy; companies are becoming more aware and sensitive about the economic situations all around the world,” adds Yapi Kredi’s Güvenen. “They follow closely the recent economic data as well as the overall average interest rates and available tenors. It is very important that companies understand that trade finance products might have a little bit more favourable pricing but are still in line with the entire market.”

The Middle East market has also caught the eye of Akbank. Sinasi Haciosmanoglu, vice-president of trade finance at the bank, tells GTR: “Turkey holds a key geopolitical location at the centre of a region comprising the EU, Mena and the CIS. Although our priority is to focus on organic growth opportunities in Turkey, we closely monitor and evaluate potential investment and business prospects in the region.”

This is a trend not only seen by the biggest banks, but also by the smaller players in the trade finance market. Alper Nalbant, director at Aktif Bank, has also seen a shift in the countries that Turkish exporters are looking to capitalise on good relationships with.

“In the past we used to deal mostly with Europe and importing from Asia, as well as sometimes re-exporting to Asia and the US. Now, Turkish exporters are searching for alternatives and they are shifting to markets like the Middle East, CIS and Africa,” Nalbant says.

While Aktif Bank is a much smaller player than its bigger domestic neighbours, it claims to have initiated the local currency bond market and has closed six issuances to date, the largest of which being the milestone amount of TL1bn (US$545mn). According to Aktif Bank, their lead set a precedent for other banks to follow on the domestic bond market.

Furthermore, the bank has signed an agreement with the Export-Import Bank of Turkey for cover of short to long-term trade loans. Having the exim bank involvement implies that Aktif Bank is looking to grow its corporate banking business to provide loans of longer tenors to its customers.

The bank’s chief executive officer Önder Halisdemir said at the time: “At Aktif Bank, we will give more importance to the export credit insurance activities under project financing programmes on short, medium and long-term.”

Arab Spring

Relationships between Turkey and the Middle East are not entirely without concern, however. The Arab Spring and the violent prevention tactics used in Syria have made these once-allied states become less affable. Turkey’s prime minister Recep Erdogen imposed sanctions on the regime of Syria’s Bashar al-Assad after a series of bloody crackdowns to protests which the UN estimates to have claimed 2,700 lives. These sanctions followed China and Russia vetoing a UN embargo for Syria, much to the disappointment of many UN member countries.

The decision from Erdogen was likely helped along because bilateral trade between the two countries was making relatively small numbers before the dispute. A free trade agreement signed in Q3 2010 led to analysts’ expectations of trade between the countries to reach US$5bn sometime in the near future, says the Turkish ministry of foreign affairs without giving an exact date. At the time of the agreements being signed, Syrian trade minister Lamia Assi said that a Syrian market worth US$300bn was waiting for Turkey.

Around 20 trade and economy-based memorandums of understanding were signed between the two countries between 2009 and the end of 2010 and Turkish companies had the most projects running in Syria of all foreign firms working in the country. In 2010, Turkey’s trade volume with Syria reached more than US$2.2bn, which is just 0.4% of Turkey’s 2009 GDP, according to official data.

Compare this with Iraq’s 2010 completed trades worth 1.2% of the 2009 GDP and Syrian trade is something that Turkey can temporarily reduce without too much damage to the overall economy. However, any political leader would find it difficult to uphold sanctions should Lamia Assi’s assertion of US$300bn-worth of opportunity seem more likely.

Poised and ready

At the moment, Turkish trade appears to be doing well. The banks are well capitalised following their own financial crisis in 2001 and any incoming capital regulations aren’t a concern. Open trade with the Middle East is also a promising prospect and will leverage off of Turkey’s position as the gateway to the EU to good effect. However, there remain the issues that the ratings agencies see.

The current account deficit, which amounted to around 6% of GDP in 2010, left Turkey as a net debtor to the world to the tune of US$52.4bn for the first eight months of 2011. The deficit is up a whopping 102% from the same period in 2010 and only highlights Turkey’s struggle to balance its books. Even with well capitalised banks that are becoming increasingly regular players in the international banking market, until the numbers begin to look more reasonable, Turkey will continue to face sub-investment grade challenges. GTR