Turkey looks to write off $1.9bn as bad loans as it finds ways to boost credit

The government is seeking a write-off on loans to three energy projects

Turkish companies have borrowed around $60bn since 2003 to finance investments into new power generation and distribution. Reuters

Turkey wants its banks to write off loans to some energy projects as part of a larger plan to clear lenders’ books, an effort aimed at boosting credit in the nation’s ailing economy.

Banking regulator BDDK wants credit extended to at least three gas-fired power plants to be classified as non-performing loans, according to people with knowledge of the matter.

They are ACWA’s $1 billion plant in Kirikkale, Gama Enerji’s $900 million project near Ankara and a $1 billion facility run by Ansaldo Energia and its partners in Gebze, the people said, asking not to be identified discussing confidential talks.

Turkiye Garanti Bankasi, Turkiye Is Bankasi, Akbank, European Bank for Reconstruction and Development, Denizbank and Yapi Kredi Bankasi are among the banks that lent to those projects, according to data compiled by Bloomberg. The total original loans on these projects were nearly $1.9bn.

The BDDK wasn’t immediately available for comment after normal business hours on Thursday. An official at Turkey’s Treasury and Finance Ministry acknowledged that authorities were working on a plan to clear bank balance sheets, saying details would be announced later.

The push for those three particular projects is part of a broader blueprint that policymakers are working on, according to people familiar with the matter. Under the program, the government would also be prodding lenders to boost capital to restore buffers and create room for new credit in their balance sheets.

Its preparation shows the Turkish government is unlikely to put up with historically low levels of loan growth for much longer as President Recep Tayyip Erdogan pushes for measures to get the economy expanding at a much faster pace.

Many banks privately told policymakers that they weren’t keen on being forced to reclassify massive amounts of debt as NPLs so quickly, the people said.

Turkish companies have borrowed around $60bn since 2003 to finance investments into new power generation and distribution, according to a Boston Consulting Group report. With the lira sliding faster than most producers can raise electricity prices, some utilities aren’t earning enough to repay foreign-currency loans, posing a great risk to banks.

Last year’s currency crash amplified this mismatch. Average electricity prices are about $54 per megawatt-hour, compared with $81 in 2010 -- part of the reason why there is a surge in demand from power producers to restructure their liabilities.

About two-thirds of the loans taken out by the energy industry are yet to be repaid, according to Ebru Dildar Edin, a deputy chief executive officer at Garanti. As much as $13bn needs to be restructured, with gas plants making up a bulk of it, she said earlier this year.

Treasury and Finance Minister Berat Albayrak said in July the government won’t cover any losses incurred by banks, which have reorganized nearly half of 400 billion liras ($70bn) of troubled loans.

Mr Albayrak sees a pickup in growth once the rest of the bad loans are dealt with. Turkey came out of a recession during the first quarter but is still expected to fall far short of 2.3 per cent official growth target for the entire year. Erosion in economic confidence and rising joblessness helped Turkish opposition deal the most stinging electoral defeat to Mr Erdogan in a municipal vote this year.

Reclassifying $1.9bn of the debt would add 40 basis points to the industry’s NPL ratio, taking it to 5 per cent, lower the capital adequacy ratio of the sector by 2 percentage points to 16.22 per cent, and reduce the average return on equity by 4 percentage points to 8.6 per cent, said TEB Investment analyst Ovunc Gursoy. The 13-member Borsa Istanbul Banks Sector Index fell as much as 1.4 per cent on Friday.

“We believe that the government is working on a broader plan to bring a resolution to energy sector NPLs, which is likely to be revealed before the year end,” he said. “Admitting the problems and taking certain steps to find solutions is a constructive move in our view.”