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Lira fall impacts GCC entities, individuals
August 14, 2018, 3:21 pm

Several commercial banks, firms and individuals in the six-nation Gulf Cooperation Council (GCC) bloc that have exposure to Turkey are likely to be impacted, both in terms of their earnings and in quality of their assets, following the sharp fall in the Turkish Lira. 

According to market analysts, among the GCC banks that could take a significant hit in earnings from the lira’s depreciation, are Burgan Bank and Kuwait Finance House (KFH) in Kuwait, as well as the Commercial Bank of Qatar (CBQ) and Qatar National Bank (QNB) in Qatar.

Financial sources reveal that KFH and Burgan Bank have sizeable lending exposure with 30 percent and 25 percent of total group loans respectively to Turkish subsidiaries, while Qatari lenders such as QNB and CBQ have 13 percent and 15 percent of loans to Turkey. On the earnings side, Turkish subsidiaries contribute 19 percent and 18 percent of earnings for KFH and Burgan respectively, and 14 percent and 8 percent of earnings for QNB and CBQ respectively.

With over 62 percent stake, KFH is the largest shareholder in Kuveyt-Turk Bank, a leading Turkish lender with 387 branches spread across the country. Kuwait’s Public Institution for Social Security also owns a 9 percent stake in Kuveyt-Turk, which in 2016 reported unconsolidated activities of over 48 billion lira. Meanwhile, Burgan Bank, which bought 99.26 percent stake in Turkish financial establishment Eurobank Tefken in 2012 and renamed it as Burgan Bank Turkey, now has 41 branches across Turkey. Burgan Bank is a subsidiary of Kuwait’s largest investment holding company, Kuwait Projects Company (KIPCO). 

Analysts believe that though there will be a negative impact on core equity capital of the parent banks driven by FX revaluation losses as a result of depreciation in the Lira, the majority of the exposed banks, with the probable exception of CBQ and Burgan Bank, are more than adequately capitalized.

In addition to banks, there were over 270 Kuwaiti companies with total investments of over $2 billion operating in Turkey in 2017, mainly in the commercial, financial, real-estate and industrial sectors. Many of these companies have had a presence in Turkey for well over a decade and some of them have been through previous upheavals in the Turkish economy.

Besides large banks and corporation, individual investors from Kuwait are also likely to feel the impact of the lira’s depreciation. A significant number of Kuwaitis possess houses, apartments and commercial properties in Turkey. According to sources, in 2016 citizens from Kuwait formed the third largest group of foreign nationals to own properties in Turkey, after the Iraqis and Saudis. More than 1,740 Kuwaitis are believed to have bought properties in Turkey in 2016.

Analysts believe that a direct effect of the weakened lira would be higher inflation, sluggish foreign direct investment, muted real GDP growth and higher unemployment, resulting in lower lending growth and weakening asset quality indicators for the Turkish banking system. Analysts fear that the contagion from Turkey’s current currency turmoil may not be limited to the exposures of banks, companies and individuals that have business and investment links in the country, but that repercussions might spread to other global economies and could persist for some time to come.

Turkey blames its current economic woes on the United States, which said last week that it would double the tariffs on aluminum and steel imported from Turkey to 20 and 50 percent respectively. The US has also imposed sanctions on the Interior and Justice ministers of Turkey over the country’s refusal to release a US pastor who has been jailed on alleged charges of attempts to overthrow the government and espionage. The deterioration in relations could see nearly $2 billion of Turkish exports to the US market losing their ‘duty-free’ status, raising concerns over vital dollar inflows to Turkey.

Turkish President Recep Tayyip Erdogan has blamed the plunge in the lira to a plot by the United States. He claimed that Turkey is under an “economic siege” and that the “economic war” by the US was a “stab in the back” by a NATO ally. He has also attempted to brush aside the currency woes as a “storm in a teacup” and that the country had a “solid and dynamic economy” and would “turn to other allies” to help tide over the current situation.

But despite the fiery rhetoric, financial pundits believe things could get a lot worse before they get better for Turkey. They point out that Turkey’s present economic situation is largely self-inflicted, as economic and financial vulnerabilities have been brewing for months on account of the government’s warped domestic economic policies. As one analyst put it, “Turkey’s financial woes are compounded by a political setup that is unconducive to proper economic management.”

President Erdogan is said to be feverishly averse to any hike in interest rates, believing instead that lowering borrowing costs would be sufficient to fuel credit growth and economic expansion. To further cement his hold on the country’s finances, the president recently appointed his son-in-law as the Minister of Finance.

The government’s excessively accommodative fiscal and monetary policies were no doubt instrumental in fueling the rapid growth witnessed in recent years, but it also resulted in a build-up of financial vulnerabilities.  A country in Turkey’s situation would normally raise interest rates to stifle inflation and stop the currency’s slide, but the central bank’s continued reluctance to hike interest rates to cool the overheated economy, probably hints at its lack of independency from the presidency.

At the core of Turkey’s current imbroglio are several financial vulnerabilities, including a persistent inflation that is currently at 15 percent; a relatively large international trade deficit, and high levels of foreign currency debt owed by the private sector. It is estimated that over 33 percent of lending by Turkish banks are in foreign currencies that could now be impacted by the weakened lira. As of May 2018, Turkish companies were said to have a total of $223 billion in long-term loans from abroad, almost all in euros or dollars.

Investors are worried that Turkish constructions firms that borrowed heavily to profit from the country’s construction boom in recent years, may find it difficult to repay loans in dollars and euros that have now become more expensive on account of the lira’s depreciation. Turkey's woes have been compounded by a stock market that has fallen 17 percent in recent weeks and government borrowing costs that have risen to 18 percent a year.

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