The crisis significantly dented Turkey’s trade volumes, with exports collapsing by 32.8% in the first half of 2009 over the first half of 2008. The bulk of this was due to a collapse in demand in the US and Europe for foreign goods. However, within this number there are interesting trends. While the share of trade with the West declined, the share of trade with regions such as the Middle East, North Africa and Asia Pacific has actually increased.
“There has been a contraction in global trade and Turkey’s foreign trade was affected,” says Ayse Tuna, manager of the correspondent banking unit at Isbank in Istanbul. “But Turkey’s exporters are flexible and we are close to many markets. So now we are diversifying our export markets.” Tuna points out that while exports to the EU were 55% of the total, they have now fallen to 44%. In the third quarter of 2009, total trade started to increase again, this time driven by trade to Mena countries in particular.
With Turkish companies expanding their trading activities to these new markets, the banks are following suit. “Our main strategy for the international division is to meet our customers’ needs and follow them to these new markets,” says Tuna. She reports that in 2010, Isbank will be opening a new representative office in Cairo and a branch in Baku, Azerbaijan, to complement the existing overseas offices the bank has in London, Bahrain and Shanghai.
Akbank which is the country’s largest bank by market capitalisation, recently established a US$100mn loan programme with China Export Import Bank.
Not only did the deal diversify its funding base, but also reflected the growing importance of Chinese trade for Turkish companies. “We are seeing more and more Turkish companies increase their trading with China,” says Cem Mengi at Akbank in Istanbul. “Therefore we established a credit line with China Export Import Bank and we are going to let our clients use this line to assist them with their trade finance.”
Akbank is also in the process of opening up three new representative offices, in Dubai, Moscow and Shanghai. “Turkey had neglected its relationships with North Africa, the gulf and Asia,” says Mengi. “But after the recent turbulence we realised how important these regions are and we have shifted our gaze to face them more fully.”
The foreign banks are also proving to be keen supporters of the trend, working closely with both exporters and importers in the country. “We work actively with half of the top exporters in Turkey,” says Anne Boden, head of Emea, global transaction services at RBS in London. “With the help of the Turkish government’s tax advantages in the domestic market, automotive, white and brown goods continue to be strong, although the European markets, which are very important for Turkish exporters, have not grown as much as they did in the last decade.”
The banks are being led not just by the customers: the government is also taking an active role in rebalancing Turkey’s trade with countries from the South and East. In early October on a trade mission to Egypt, Zafer Caglayan, the minister for foreign trade, announced a new initiative to promote trade with 14 target countries and 25 priority countries. Although the full details of the scheme are yet to be announced, it is widely assumed that these new targets will be the fast growing emerging economies of Asia and the Middle East. Indeed, at the briefing in Egypt, Caglayan noted that the value of Turkey’s exports to China was US$1.5bn, whereas the value of its imports was US$1.2tn.
Much of this huge imbalance comes from the fact that many of Turkey’s large conglomerates and trading companies have established wholly-owned subsidiaries in these countries, and ship goods made there back to Turkey. So while technically they do come from China, they are actually Turkish products.
However, the money that is made through this trade tends to stay in accounts abroad. The central bank governor, Durmus Yilmaz, recently estimated that Turkish companies have US$30bn kept in offshore bank accounts. With numbers such as this, it is no wonder that Turkey’s banks are seeking to open up new branches in these locations to capture much of the trade.
“We see this regional diversification trend as an opportunity and thanks to our broad correspondent network we are able to compensate the decreasing EU trade business by shifting to Mena and Asia,” says Taliye Turker, at the trade finance department of Garanti Bank. “We pay upmost importance to deepen our already existing strong relationship with these regions by creating specific customised solutions for arising needs.”
Exporting out of crisis
Much of the focus on exports comes at a time when the domestic economy is suffering badly. A first half 2009 contraction of 13.8% is coupled with an unemployment rate of over 15%. And while events have stabilised, there are tentative signs of recovery. Stephen King, the chief economist of HSBC believes that Turkey will grow 2.9% in 2010 and 4.1% in 2011. “The level of economic activity in Turkey is still quite depressed,” he says. “But there are encouraging signs of activity coming back in 2010.”
Turkey’s smaller companies are receiving government support in an attempt to help them export and shore up their businesses affected by the sharp contraction in domestic economic activity. The government has established a loan guarantee fund (LGF) which will guarantee loans offered by banks to SMEs, which will shore up their general working credit and export credit in particular. While in place before the crisis hit, it has really come into its own since the onset of the credit meltdown. According to Tuna at Isbank, demand for this scheme started off weak but grew by 400% in 2008 over 2007.
The scheme goes some way to rebalancing what is by any viewpoint a very top-heavy economy. The biggest conglomerates and holding companies control vast swathes of the economy and the 45 national banks are more than willing to extend them any support they need. “During the crisis SMEs did have trouble due to the lack of funding, but the big holding companies always had access to finance,” says Alper Nalbant, vice-president financial institutions at Bank Asya in Istanbul.
“We never stopped lending during the crisis – we might have decreased some amounts or increased pricing – but we didn’t stop lending. Now we think that things will get a lot better.”
There are some suggestions in the market that the government is putting some political pressure on banks to support lending to uneconomic trades so as to support the economy in a year leading up to a national election. “The government has instructed some banks to support companies and these banks are now being aggressive in lending and trade finance. These banks are now competing with the private sector banks,” says Yonca Sarp, chief representative of LFC in Istanbul.
But other members of the local banking community dismiss such charges and say that the government aims to support lending for economic reasons, not to direct it for political purposes.
Perhaps the real disconnect is between the overall strength of the banking system and the general weakness of the real economy. After the 2001 banking crisis, 31 of the country’s banks failed. The IMF was called and provided a US$47bn loan but demanded deep changes to the banking system. As a result, banks today have great strength, as seen by an average tier one ratio of 18% and an NPL rate of 4.6% at the end of June 2009. The banks all remain highly profitable: Akbank reported an 82% rise in net profitability for the first half of 2009 to TL1.3bn (US$900mn).
As a result of this strength, foreign banks are keen to lend to Turkish banks, especially for export finance deals. In the first nine months of the year there have been 15 Turkish bank syndicated trade-related loans, with pricing falling by 50bps over the period from around 275bps over Libor to around 225bps now. One recent deal for Yapi Kredi, which is part of the Koc Group, Turkey’s biggest holding company, saw an US$800mn deal upsized to US$985mn due to over-subscription from 44 banks which made up the syndicate. The loan will be used to pre-finance Yapi Kredi’s customers’ exports and export contracts. UniCredit Bank Austria coordinated the deal and Commerzbank acted as facility agent.
The pricing of Turkish credits is being positively affected by the strength of the banking system, but once again is being hampered by the perceived weakness of the economy in general. The main uncertainty is over a proposed IMF loan. The government is reluctant to take on a new facility with the IMF, as it would carry great costs politically, especially with an election due in a year.
Most of the banks and the corporates want a new facility, even if they know it would be damaging for the government. But most are more concerned about over-pricing their debt, and at the moment the lack of a facility is not adversely affecting their ability to raise new money.
“The markets have already priced the possibility of an IMF agreement not being signed,” says Turker. “Therefore, the pricing of Turkish risk is moderately affected by this uncertainty over the IMF loan. The announcement of the medium-term fiscal plan has helped overcome this uncertainty to an extent, and Turkey’s CDS, which was 200bp for one year in the beginning of June, is around 75bp as of October indicating that the effect is limited.”
As Turkey’s trade shifts from the West to the East, the question is whether this will have a negative effect on the price of Turkish trade finance, due to an increase in the perceived risk of the trade. International bankers say that it will not have a negative effect and is part of the natural evolution of the economy.
“Turkey is very good at navigating the crisis and can ‘do crisis’ very well,” says Boden at RBS. “Turkey is a positive example for many other countries – as a nation they know how to look for advantages and therefore benefit from the economic recession… Our clients have to produce, innovate and find new markets to sell more to new clients with larger volumes. We have observed in the last 15 years how a relatively domestic economy can adapt to international markets and increase exports in such a way, and we will continue to support our clients at international prices.”