Global Liquidity Squeeze


Economic News

22 Jul 2010
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The world's emerging markets have so far managed to weather the global liquidity crunch and Turkey has proven no exception. While the Turkish economy may feel greater pressure in the future, bankers are coolheaded about the potential risk when assessing local banking fundamentals.

"No Turkish banks or financial institutions had any direct exposure to subprime loans in the US," Aykut Demiray, deputy chief executive of Isbank, Turkey's local heavyweight, told OBG.

Turkey's first ever mortgage system has yet to take off, with interest rates for home loans still not low enough - below the 1% monthly threshold that is - to tempt would-be buyers. "As an emerging market, Turkey was not very badly hit by the situation," said Demiray.

Memories of Turkey's 2001 crisis, caused in no small part by a fragile banking sector with non-performing loans (NPLs), have little resemblance to the banking confidence of today. After years of consolidation, tight regulation and a strong dose of foreign competition, Turkey's banking sector is in lean form. "The average capital-adequacy ratio is around 20%," said Demiray. "Turkish banks are overcapitalised."

Turkey's bankers all agree that banks can still fund their business with ample liquidity from their deposit base. Insiders also say that loans in foreign currency constitute 25% of total loans, while foreign currency accounts for 37% of total deposits. In November, Yapi Kredi bank's CEO Tayfun Bayazit told OBG the risks of a further acceleration in the sub-prime fallout were limited.

While loans seekers complain about high banking interest rates, economists and bankers point to the buffering effect these rates have against global market volatility. "In Turkey we have a relatively high real interest rate and while this is not good in general (for growth), it has offered protection," said Isbank's Demiray. The banking industry's ultimate safety net also remains strong: as of the end of November, Turkey's central bank had $72.4bn in foreign exchange (FX) reserves.

The composition of personal investments also accounts for the level of local confidence. "Turkish locals have foreign currency denominated accounts worth around $80bn. They are willing to change their position when the time is right - to sell US dollars and buy Turkish lira," said Demiray.

Nonetheless, Turkey's financial industry has felt the impact of the global liquidity crunch. Botan Berker, the general manager of Fitch Ratings for Turkey, pointed to the slowdown in banking credit expansion over the last few months. Whereas credit expansion registered at 100% for Turkish banks prior to the US's subprime woes and the consequent global liquidity squeeze, the pace has now slowed by over two thirds, hitting 30% today, according to Berker.

The implications of the slowdown are clear. "If Turkish entities - that is, banks and the corporate sector - are unable to rule over borrowings, this will adversely impact the domestic market," said central bank governor Durmus Yilmaz. "Plans will slow for credit expansion among Turkish banks. So too will interest rate deductions on the credit extended to consumers and the real sector. If the situation abroad goes from bad to worse, the credit conditions in Turkey will become tighter."

Turkey's real sector is particularly exposed, due to foreign borrowing. Deutsche Bank estimates that the non-financial sector has an open position, or exposure, of somewhere between $50bn to $60bn in Turkey.

While bankers and economists draw comfort from the strong fundamentals of Turkey's financial industry, uncertainty persists as to how much of a latent impact the US subprime crisis and global liquidity squeeze will have on markets around the world.

"The Turkish banking system seems to be strong, but no banking system can deal with a very big crisis," said Demiray. "The first wave did not hit Turkey badly in my opinion. But it is not easy to understand exactly what is going on. There are many interpretations and opinions."

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