Why will Turkey’s Wealth Fund get an external loan?
Bloomberg News reported last week that Turkey’s new sovereign wealth fund has been holding meetings with foreign banks to secure loans, requesting a $5 billion loan from a Chinese bank.
Is it not interesting that the sovereign wealth fund is keen to get into this debt when its strategy document, which still needs to be approved by the cabinet, has not even been finalized?
These reports have not been denied, so should we not have some clarification on the reasons why fund managers want to take on this debt from banks?
It was said that the wealth fund would make securitization in order to create value for the future - to bring out new stocks and income-sharing certificates, creating finance for infrastructure investments. There was never any talk about it taking out loans.
Asking for loans from banks means that credit is planned to be used somewhere. You need to explain to the bank where you are going to use the loan, in order to convince it to give you this loan.
But in the case of Turkey’s wealth fund it still has no apparent strategy text. So according to what criteria are they holding loan meetings with foreign banks?
Elsewhere in the world, sovereign wealth funds are established to make use of savings and transfer the income to future generations. In contrast, in Turkey we have established a sovereign wealth fund to become more indebted and to take from the incomes of future generations.
What will the government do with these heavy loans?
Personally I do not believe that the urgent loan requests are being made with the aim of financing infrastructure investments.
The government says it wants to start with the controversial “Kanal Istanbul” project to build a second Bosphorus from the Black Sea to the Marmara Sea, but it will not be possible to secure a loan for this project without a strategy document for the sovereign wealth fund.
What is the rush anyway? When we think about what an urgent loan need could be, we may think of personnel salaries or some other near-term cost that needs to be funded.
That is why I believe the reason behind the search for an urgent loan by Turkey’s sovereign wealth fund may be related to an attempt to contribute to the country’s short-term foreign currency liquidity.
The external debt total that Turkey has to pay over the coming year is over $110 billion. That means that it must acquire at least $110 billion in foreign currency liquidity. However, at the same time restrictions from the U.S. and the EU are increasing and so Turkey’s foreign currency liquidity will decrease. The U.S. Federal Reserve’s interest rate hike is also expected to take place soon.
Even more important than this is the fact that the system built for Turkish foreign currency liquidity is established based on banks taking on heavy foreign debts. Any problem that may occur here must be addressed, so if foreign currency liquidity decreases then the deficit must be closed somehow with new methods.
It is well-known that today a number of Turkish banks are having serious difficulties getting foreign credit. Many people are wondering how this deficit will be closed in the sector.
My educated guess is that the new sovereign wealth fund could already be submerging itself in foreign currency debt in order to close the foreign currency liquidity deficit in the Turkish banking system.
Will foreign banks give loans to Turkey’s sovereign wealth fund when its strategy is not even clear? Even if they do so, can foreign currency loans to the sovereign wealth fund really be a solution to the country’s liquidity deficit? We’ll have to just wait and see.