After years of growth fuelled by credit and domestic consumption, bad debts and bankruptcies are rising in Turkey, squeezing banks and exposing a fragile real economy which risks denting support for the ruling AK Party.
In its first decade in power, the AKP, founded by President Tayyip Erdogan, built its reputation on growing Turkey’s wealth, overseeing a sharp rise in incomes and providing new roads, hospitals and airports in what was long an economic backwater.
But as he seeks support for an executive presidency to replace Turkey’s parliamentary system, a decision that could be put to a national vote later this year, Erdogan may no longer be able to count on Turkey’s rising prosperity to win him votes.
Growth is expected to cool to 3.5 per cent this year, the World Bank said last week, well below peaks of near double digits in the early AKP years. A sharp drop in tourism after a spate of bombings this year and unrest in the largely Kurdish southeast are also taking their toll.
Foreign investors are wary and banks are increasingly reluctant to extend new credit, squeezing the most indebted firms. So far in 2016, 240 companies have requested temporary relief from creditors, almost as many as in the whole of last year, according to sirketnews.com, which compiles the data.
Istanbul-based pulses producer Sezon Pirinc filed for bankruptcy postponement at the end of last year, hit by souring consumer sentiment at home and difficulties in some Middle East export markets.
“The main reason behind our bankruptcy postponement was banks calling their loans earlier than their maturities,” Mehmet Erdogan, the company’s chairman, told Reuters. “2016 will be another tough year.”
Erdogan forged the AKP as Turkey slid into financial crisis in 2001. It won a growing share of the vote in three successive parliamentary elections as incomes rose sharply, winning loyal support from a class of industrialists whose businesses thrived.
The government has vowed reforms to boost productivity and investment in industry as the economic headwinds build. But many economists say they are too slow coming.
“The decline in companies’ profits indicates we have to take new steps. It cannot only be explained by circumstantial factors but also by structural ones,” Finance Minister Naci Agbal said in a meeting with industrialists late last month.
Pressure is also likely to mount on the central bank, whose new governor was appointed last month. Erdogan has long lobbied for lower interest rates to stoke growth despite stubborn inflation, unnerving financial markets concerned about the independence of monetary policy.
Dairy firm Aynes Gida, a household name for two decades, went to court in January for bankruptcy postponement after defaulting on payment of its 50 million lira bond, it said in a stock exchange filing.
Earlier this year supermarket chain Begendik was bidding to buy 10 stores from the Turkish unit of Britain’s Tesco. It not only failed to do the deal, but later applied for bankruptcy postponement. And in April, a century-old clothing retailer, Atalar Giyim, applied for bankruptcy.
Smaller firms, long the engine of the Turkish economy, are also struggling to cope after the government hiked the minimum wage by 30 per cent this year.
In January, the number of registered workers dropped by 379,000 or 2.7 per cent, according to think tank TEPAV, with two-thirds of that decline at small and medium-sized companies.
Iron and steel companies as well as food and technology retailers are at particular risk, said Ozlem Ozuner, chief executive of credit insurance firm Euler Hermes Turkey, citing the impact of low commodity prices and recent over investment.
Ozuner believes around 14,800 companies will go bankrupt this year, an 8 per cent increase on last year.
That will take its toll on the banking system, as rising non-performing loans (NPL) erode the lending appetite required to boost growth in an economy with low savings.
The average NPL ratio rose to 3.3 per cent in the first quarter from 2.8 per cent a year ago, regulatory data showed, while the biggest jump in bad loans was those to small and medium-sized businesses, which rose to 4.4 per cent.
Fahrettin Yahsi, chief executive of Islamic lender Albaraka Turk, said he expects the sector average could rise to up to 4.8 per cent this year.
But some bankers and analysts think the actual rate of non-performing loans could be double that, as banks sell some of their bad portfolios, restructure loans and lengthen the maturities of some debt to keep the loans alive.
“My calculations show that the NPL ratio is more than 6 per cent,” said one banking analyst, who declined to be named. “That creates a profitability problem for banks and reduces their appetite for new loans.”
Hilmi Guvener, CEO of Turkasset, which buys distressed debt from banks, said he expects sales of bad loan portfolios to triple to 6 billion lira this year. Non-performing loans rose mainly in construction and tourism, he said.
While no-one is expecting a deep crisis in the financial sector, analysts say the debt problems will slow growth, as the economy has largely relied on domestic demand since 2012.
“I don’t expect a financial crisis. The economy will not get cancer but it will have to put up with an ulcer,” said Atilla Yesilada, an analyst at Global Source Partners who advises foreign investors.