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July 11, 2018

Turkey’s $51bn energy loans pose continued threat to industry

The Turkish energy sector is facing an increasingly unstable situation with a rapidly declining lira making it impossible to repay billions of dollars’ worth of loans accumulated over the past 15 years.

By Scarlett Evans

The Turkish energy sector is facing an increasingly unstable situation with a rapidly declining lira making it impossible to repay billions of dollars’ worth of loans accumulated over the past 15 years.

Since 2003 $95bn has been invested into the country’s energy sector, of which $51bn remains to be paid. This figure represents 15% of the $340bn owed by non-financial companies in overseas liabilities, according to data from the nation’s central bank.

According to Ankara-based Electricity Producers’ Association, some utilities are earning less each year than what they have to repay in foreign-currency loans, making the energy sector one of the biggest risks to the country’s banks.

The lira has been in trouble for several years now, with a 69% slump against the dollar since the beginning of 2010, a decline partially blamed on President Recep Tayyip Erdogan pushing the country towards authoritarianism.

The average value of electricity prices on the government-brokered power market dipped from $81 in 2010 to $45 per megawatt-hour at the end of this May forcing some energy companies to renegotiate their borrowings with lenders.

However, the lira is now declining faster than electricity prices can be raised, with power plants needing to pay back $3bn to banks each year; almost $2.5bn more than the funds they’re capable of producing. In addition, producers with purchase guarantees or long-term agreements with the government need to make annual repayments of $4bn, as well as $2.6bn of interest on the outstanding borrowings.

At least $6.1bn worth of loans taken by energy companies is known to be in the process of being restructured or refinanced. Companies across various industries have agreed, or are currently debating, to reorganise at least $24bn worth of loans.

Turkish industry and business association Tusiad’s chief economist Zumrut Imamoglu told Bloomberg: “While costs are increasing because of the currency shock, companies can’t adjust their prices accordingly due to state regulation and price ceilings, which in turn, causes financial problems.”

A temporary measure to try and temper the situation is to be introduced later this year. It will see the government compensating certain plants if their costs exceed the market price of electricity, providing they meet certain criteria such as whether they are operating efficiently.

A cap of 1.4bn lira ($298m) has been set on the scheme by the government’s power-transmission company Turkiye Elektrik Iletim AS.

Energy follows manufacturing, wholesale and construction in terms of sectors with the most concentrated amount of bank loans.

 

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