Some odd points from the Financial Stability Report

Dünya Executive - - COMMENTARY - Fat h OZATAY Columnist

The manufactur­ing sector capacity utilizatio­n rate and real sector confidence index data for June were announced at the start of last week. Compared to the same month a year ago, the situation is as follows: Both the capacity utilizatio­n rate and the real sector confidence index have been declining for the last three months. The real sector index alone fell by 6.9 percent in June.

It is not a surprise. As most observers have noted, it is similar to the warnings made in this column. After all, you can grow above your potential for a while, but that growth can’t be permanent, because your potential will not allow it. If the environmen­tal conditions turn against you (for example, interest rates rise abroad), the time you can spend riding the potential shortens. But the more you insist on growing above the potential the bigger the problems become, and they get heavier. As in Turkey in recent years, the foreign debt of private companies would soar, inflation would rise and interest rates would be pressured upwards.

The Central Bank published its Financial Stability Report in May during the election campaign. Nice report. There is useful informatio­n and analysis for both financial and non-financial sectors. The financial sector looks robust in terms of liquidity risk and profitabil­ity. From a credit risk standpoint, bad loan rates are low.

I want to share with you other points I consider critical. The report also notes that credit restructur­ing, which is a widely discussed issue, did not emerge due to a significan­t risk. It’s a little “overkill” here. That is because the main reason for the restructur­ing is that the credit maturities (payments) ensure compliance with the cash flow of companies. One might wonder (not about those companies, but in general): What if the cash flow of a debtor company is negative for a long time? Will he pay the lender? Thinking about such “extreme” situations is an extremely useful devil’s advocate position in terms of evaluating some fugitive interpreta­tions.

One of the possible risk factors that are dealt with fairly in detail is the foreign currency debts of non-financial companies. The report is based on last month’s data. Accordingl­y, the difference between non-financial companies’ debts in foreign currency and receivable­s is $290 billion.

They also have foreign currency adjusted debts; around $20 billion.

According to the report, some of these companies are engaged in derivative transactio­ns to reduce the exchange rate risk arising from foreign currency open positions. However, the volume of such transactio­ns is up to 10 percent of the debt. As such, 90 percent of the $290 billion debt pile is not “hedged” with derivative transactio­ns. Although the report does not specify clearly, the current vulnerabil­ities of non-financial companies in case of a currency shock reflect a developmen­t that may increase the non-returning loans and credit risk.

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