On 20 September, Treasury and Finance Minister Berat Albayrak announced the New Economic Program (YEP), Turkey’s economy roadmap over the next three years
The part of the New Economic Program — which is quite realistic according to economists and representatives of the business business world — that was most relevant to all key actors in the economy was Minister Albayrak’s statement in which he said “Processes regarding our banks necessitate us to take significant steps. We are initiating an evaluation of the financial structure of all banks to identify their current state. According to the results of this study, we will implement a comprehensive set of policies that will strengthen the financial structure of banks if necessary”. After this statement, the Banking Regulation and Supervision Agency (BRSA) pushed the button immediately and initiated a financial structure evaluation and stress test program. So, what do identification of the current financial structure of banks and stress tests entail? The BRSA actually routinely conducts such research once a year to identify the overall financial structure of the banking sector. As part of this, the current balance sheet structure of the sector is examined to reveal whether there are any systemic problems. If there is no sectoral risk, the examination proceeds with reviewing the structure of each bank individually.
Stress tests
In stress tests, the current balance sheet structure of a bank is assessed to see how it would perform in an adverse situation, for example in case of increases in interest rates and the exchange rate. So why is the BRSA conducting this work? It is no secret that the liquidity need of the banking sector has increased and foreign financing costs have risen given the rises in the interest rate and the exchange rate. On the other hand, the credit stock of banks has also reached high levels. As such, it is predicted that the banking sector will be unwilling to provide loans to the real sector in the medium to long term, which is needed to ensure economic growth. The increase in the exchange rate and the interest rate is expected to lead to a rapid rise in the ratio of non-performing loans.
Economy management to take necessary measures
For these reasons, the economy management of Turkey has accelerated efforts to deal with a potential squeeze in the financial sector. According to information received from senior bankers, significant steps will be taken about problematic loans of banks after the completion of the BRSA’s work. However, this is going to be a case-by-case move, rather than systematic action.
‘Great flexibility in loans for large projects’
Many bankers say that the economy management is firstly expected to ease bank balance sheets in the financing of large projects. Many giant projects such as the construction of the New Airport, the 3rd Bridge, various highway projects, Public Private Partnerships (PPP) have borrowed greatly from Turkish banks, especially from public banks. Noting that many of these projects operate on Treasury guaranteed income models, refinancing loans through foreign banks can bring significant relief to banks’ balance sheets.
Korean and Malaysian cases
According to the bankers, another policy that will be highlighted in the policy set to be applied by the economy management will be the collection of non-performing loans of banks under a fund to improve banks’ balance sheets. Minister Albayrak had earlier referred to Turkey’s past experiences and international examples of what can be done in cases where the banking sector needs government support. The cases of South Korea and Malaysia which suffered a similar situation in 1997 are the best examples of the collection of non-performing loans. Bankers recall a collaboration that took place between the BRSA and KAMCO (Korea Asset Management Corporation) to resolve the issue of non-performing loans in 2001, underlining that Albayrak also spoke about Turkey’s own past experience. Backstage talks also suggest that the economy administration is preparing to take such a step.
According to several sources, if the economy management chooses to take this step — which is high- likely that they will — problematic loans will be removed from balance sheets after a damage assessment; strengthening the overall financial build of banks.
For example, a 40-unit value will be set for each 100 units of problem loans, half of which will be covered by the bank’s capital, while the other half would be issued as a convertible bond. Experts indicate that such a scheme could likely be arranged under the umbrella of the Savings Deposit and Insurance Fund (SDIF) or the Joint Funds Bank (TBB). Sources, who state that such Treasury bonds would definitely find buyers in the international market, note that a transparent management of all processes with all stakeholders is key, as was during the non-performing loan resolution agreement with KAMCO in 2001. Several sources in the banking sector have claimed that the economy administration has been working on this model for some time. However, experts also note that the success of KAMCO could be rated at 40 to 45 percent. Overall, analysts find the plans to relieve banks as part of the New Economic Program to be very positive and say that banks will be able to continue to fund the real sector with the help of the economy management.
