Balance sheet turmoil

Turkey’s businesses face struggles ahead, according to JCR Eurasia Rating data

As the exchange rate crisis deepens, so far more than 30 companies have gone for credit restructuring or announced a concordato. But at a time when there are many more companies experiencing this level of difficulty, the question is: what do the balance sheets look like?

To gauge the level of financial stress, we can turn to JCR Eurasia Rating, one of the most important sources for monitoring changes that exchange rates and increased stagnation risks create on company balance sheets. JCR’s data is expansive, including non-numerical, systematic and standardized statistical data sets of a total of 11,200 enterprises and institutions, including nearly 1,000 corporations, nearly 200 banks and other financial institutions and more than 10,000 SMEs. Orhan Okmen, the President of JCR Eurasia Rating, spoke exclusively to daily DUNYA about the “final analysis” of these 11,200 companies and the effects of the exchange rate crisis on the companies’ balance sheets.

Okmen said that the currency crisis has started to have serious effects on all functions of firms and variables such as liquidity, financial structure, operating effectiveness, and profitability are negatively changing. “Of course, businesses that are different in terms of sector, activity, scale, management, financing techniques, marketing, assets and liability balancing, are affected distinctively by this crisis,” Okmen noted. Nonetheless, here are some key takeaways of JCR’s number crunching:

►Average 20 percent contraction

In general, financing costs and operating risks increased, liquidity and profitability levels and market values fell. However, we see that companies have difficulty in reflecting the increasing costs on product prices. Due to the extreme cost differences, production and capacity reductions started at around 20 percent in the import dependent manufacturing sectors.

►Collection periods are reaching a year in some sectors

The receivables collection period began to extend from the second half of 2018, reaching around 90 days on average. It has reached up to one year in the textile, chemical, electronics, machinery and construction sectors. This period is around 40 days in transportation and retail. Last year, collection periods were 20 percent lower than today.

►There is a delay in investments

In order to increase liquidity and to strengthen financial structures, the main tendency is to focus on equity capital, to shift investments or cancel them by making major changes in investment policies. However, liquidity increasing processes in corporate companies have been challenging.

►SMEs are better in liquidity

It appears SMEs are more prepared in terms of liquidity. Both pre-crisis and currently their liquidity levels are higher than large corporate firms. The reason for this is that SMEs tend to go into a cash sale strategy.

►Downsizing plans have not yet affected employment

Efforts to create long-term strategies have decreased. Tactics are being formed to shorten the period of receivables and pay suppliers with a delay. The main activities stand out, time and budget allocated for side activities are reduced. Annual budgets are being revised downward based on pessimistic assumptions. Customer limits are reviewed periodically over and over. There are discounts on the limit-risk equilibrium. However, downsizing plans have not yet spread to employment.

►Equity capital of SMEs have more quality

While the share of short-term sources in total resources in all SMEs is higher in each period, it increased even more in this period. The equity quality of SMEs is higher. Paid capital/equity ratios

are about five times higher than the ratios of big firms. More than 50 percent of the equity of the institutions can be distributed to the shareholders at any time and kept in the past year’s profit items. The protective power and quality of the equity reserves, which can be distributed at any moment, are inherently weak. SMEs are also more successful at receivables turnover rate, which has increased by 15 percent. There is a 20 percent decline in this item in the big corporations. The profitability of SME sales (Net profit/Net sales variables) is clearly above the pre-crisis level. This positive difference continues but tends to decline. The net profit/net sales variables of large corporations with no open positions have risen to a significant profit level with an absolute amount. However, those who have a risk of open positions produce significant losses.

►Sales declining

As the level of general demand begins to weaken and the cost of consumer loans increases, the level of sales of companies in nearly all sectors has begun to decline in real terms, especially since the second half of the year. However, those who use heavily imported inputs and high energy, mainly those who appeal to the domestic market and the distributors of foreign-origin companies, are more affected. If the final destination of the costs of a crisis is always thought to be households, then all sectors will be able to transfer the costs in some way. However, sudden cost transfers lead to social shock and social discomfort while gradual cost transfers lead to longterm economic stagnation. In order for the economy not to fall into this dilemma, all structural and legal barriers to access to international financing channels need to be abated without delay. The medium and long term positive outcome of the foreign exchange crisis will be building an attractive and protective effect on the industry using domestic inputs.

►Banking is good but factoring and leasing have operating losses

Food and beverage, textile, tourism, organized retail, iron and steel producers, specialty fabric manufacturers, and furniture are the least affected. Yarn manufacturers, electrical household appliances manufacturers, travel agencies, fuel oil dealers are also less affected. All the remaining sectors are at a high level of impact. Sectors such as construction and energy are particularly affected. Companies in all sectors with foreign exchange liabilities, including real estate, all sub-groups in the manufacturing sector, pharmaceuticals and the healthcare products sector, chemicals, aviation, automotive, media-press-broadcasting are effected heavily by the crisis. Banking currently maintains its health and sustainability in general. Factoring and leasing are generally in the process of shrinking. The education sector (except printing and publishing) succeeded in transferring the burden of the crisis to a significant extent.

Tactics are beign formed to shorten the period of receivables and pay suppliers with delay. The main activities stand out, time and budget allocated for side activities are reduced. Annual budgets are beign revised downward based on pessimistic assumptions. However, downsizing plans have not yet spread to employement...