Ratio of external borrowing to GDP reaches highest level in 14 years

Dünya Executive - - COMMENTARY - Alaattin AKTAS Economist

Data released by the Ministry of Developmen­t has shown that Turkey’s gross foreign debt stock broke a record by reaching $412.4 billion at the end of the first quarter of 2017. But it is the ratio of debt to GDP that is more striking than the level of debt reached. That rate rose to 49.1%.

The 49.1% figure is important in that respect. The amount of debt stock in the data has been present since 2002 and it can be noted that the highest level of gross foreign debt stock in GDP came in 2002, with 54.8%. So this year we have seen the second highest.

The ratio of debt stock to GDP has declined over time. By 2005, the ratio had started to fall below 40%, and was as low as 34.2% that year. Apart from 2009, when the figure was 41.5%, the ratio of gross external debt stock to GDP remained below 40% every year from 2005 and 2012.

Of course, the fact that the dollar remained low in these years and GDP is relatively high in dollar terms is also a factor. When the dollar started to rise, GDP also started to appear low. At the same time, the total external debt began a tendency to increase, and this double-sided effect led to an increase in the debt-to-GDP ratio.

The ratio of gross foreign debt stock to GDP was still below 40% and at 39% in 2012. By 2013, the 40% limit had been exceeded. By the end of 2016, the debt-to-GDP ratio had reached 47.3%. By the end of March this year, it had risen to 49.1%, the second-highest level.

Of course, the annual GDP of 2017 is not yet clear. The Ministry of Developmen­t took the 2017 GDP as $840 billion when calculatin­g the ratio of debt to GDP.

According to the situation at the end of the first quarter of this year, Turkey’s gross foreign debt stock was $412 billion. Of this amount, $123 billion can be attributed to the public sector and $809 million to the Central Bank. Private sector debt stood at $289 billion. The total short-term external debt is $102 billion; long term it is $310 billion.

Private sector debt sky high

From the end of 2002, the total external debt increased by 218% until the end of March 2017. The increase was largely due to private sector borrowing.

Private sector debt increased by 570% over the same period. While public sector borrowing increased by 90%, the Central Bank’s external debt had reduced by 96% to almost zero. For a long time, the approach went something like this: “Ok, foreign debt is increasing, but it belongs to the private sector, why the public sector concerns?”

The situation is much better understood when the exchange rate of the private sector’s external borrowing starts to rise rapidly, even in the case of a foreign citizen who has no business with foreign exchange.

In the first months of this year, in the face of the rapid rise in foreign exchange transactio­ns, the question of what led to this increase began to be frequently asked. Some people were demanding foreign exchange so that the balance of supply and demand would break and result in exchange rate increases. Those “guilty” were wanted for a long time.

Finally, after a while, the guilty had been found. Prime Minister Binali Yildirim explained that those who raised the currency were Turkish companies with foreign currency debt. The anxiety over the expectatio­n of further hikes to the exchange rate led these companies to buy, which then impacted on the exchange rate through further increases.

Later, those companies with external debt were provided with some help, so they were prevented from raiding the exchange market. Once again, we have seen that we can’t say “the debt is private sector debt, what is that to me?”

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