Diary of a debt crisis: How the lira sank a Turkish entrepreneur

Most of Sari’s business was on a buy-now, pay-later basis. By the time Sari got his money, it was worth much less in terms of dollars or euros

By Cagan Koc & Ercan Ersoy / BLOOMBERG

“Everybody has a bankruptcy story,” said Cem Sari, who’s just lived through his own version, in a year that turned into a national trauma.

Turkey’s economy roared into 2018 with growth rates that were the envy of the world — and vulnerabilities that had been building over years. It was like a car that could still reach high speeds, so long as the driver ignored the multiple warning lights flashing on the dashboard. And then it crashed, suffering a classic run on its currency and a brutal credit crunch.

Somewhere along the way, Sari’s textile business went under, along with hundreds of other companies. Many more, including some of the country’s biggest corporate names, are still struggling to contain the fallout. The government and banks are still figuring out how to help them. On Bloomberg’s latest scorecard of emerging-market prospects, Turkey ranks last.

For President Recep Tayyip Erdogan, it was financial nemesis. Erdogan came to power in 2002 after Turkey’s last big crisis swept away his rivals. He’s won every national and local election since, largely on the back of rising living standards. But 2018 was the year his growth model, fuelled above all by cheap money, finally ran out of road.

The Good Old Days
Sari’s company, CERM Tekstil, was founded in Erdogan’s first year in office. Based in Bursa, a prosperous northwestern city that’s long been Turkey’s textile centre, it produced fabrics for home use, like sofa covers and curtains, mostly of Sari’s own design.

CERM’s early years were good ones for Turkey’s economy. Demand was booming and foreign capital poured in. One result was a stronger lira. That helped Sari, who bought his machinery — and materials like dye and yarn — from abroad.

Another thing was helping business: Cheaper borrowing. Interest rates and inflation came down as the economy stabilised under Erdogan, and credit flowed. Keeping the taps open would later become a fixation for the president.

Heavy Borrowings
In the meantime, Turkish companies were expanding their horizons — and piling on debt. Some of them did it with a swagger.

Murat Ulker, who became the country’s richest man, went on a global spree that culminated in 2014 when he bought United Biscuits plc for US$3.1 billion (RM12.96 billion), the biggest foreign acquisition by a Turkish company.

Ulker bragged that it took him just nine days to raise the money from local and international banks.

Ferit Sahenk, another billionaire, was transitioning out of banking and into hospitality — buying swanky hotels all over Europe. As late as January this year, he opened a New York branch of the steakhouse chain fronted by stuntman chef Salt Bae.

Crucially, Turkish business did a lot of its borrowing in dollars and euros. However hard Erdogan pushed his central bank, lira rates were never going to match the historic lows on offer in the rich world after 2008. Foreigncurrency loans were cheaper — but for businesses that earned in liras, they represented a risk.

Sari borrowed some euros but he mostly avoided that trap, keeping the majority of his debt in liras. He wasn’t operating on the scale of Ulker or Sahenk, but he was thriving. By the start of 2016, CERM had about 90 employees at two factories, and annual sales of more than US$10 million.

Looking back, he said, there were already signs of trouble.

Geopolitical Turmoil
The second half of the Erdogan era has been a rockier road. Civil war broke out in neighbouring Syria, and outside powers were quickly sucked in. Turkey was on the frontline.

In late 2015, Turkish forces shot down a Russian fighter jet, sparking geopolitical turmoil and market jitters. Ties with Russia were repaired, but partly at the expense of Turkey’s longstanding alliance with the US, which began to fray, further unnerving investors. In the summer of 2016, Erdogan survived a coup attempt and responded with sweeping purges.

In the fall of that year, the lira suffered its first real downward leg.

By the end of 2016, Sari had cut his staff by one-third. Around that time, he said, Turkey’s bankers first “smelled the approaching crisis”.

“We were a highly credible firm back then,” he said. “But you’d go to a bank to ask for a loan, and they started saying stuff like ‘Oh, we need to ask our regional headquarters’.”

Whenever the lira wobbled, eyes turned to the central bank — and then to Turkey’s president, who would forcefully rule out the higher rates needed to defend the currency.

After watching his predecessors get wiped out by a fiscal crisis, Erdogan has kept government finances tight. Public debt has fallen sharply as a share of the economy. But it’s been replaced, as the driver of growth, by private debt — and that required easy money.

So anytime the central bank did get a green light to hike, it came reluctantly and usually behind the curve. The lira continued its downward drift.

Cost inflation caused by a weak currency was eroding Sari’s margins, which fluctuated around 20% in good times.

His dye, for example, came from Italy and was priced in euros. He was paying about 86 liras (RM66.99) per litre at the start of 2017 — and 109 liras by November, a 30% increase. Profits were “shrinking big-time. Some months, I had a negative margin”.

Making things worse, most of his business was on a buy-now, pay-later basis — not uncommon in Turkey. Customers would typically cough up several weeks after receiving their fabrics. By the time Sari got his money, it was worth much less in terms of dollars or euros — or imported dye. It was worth less inside Turkey too, as inflation accelerated.

Going into 2018, Sari was in crisis-fighting mode. “We kept saying, we’re going to be fine, inshallah,” he said. He moved out of his two factories into one larger building, cutting his rent bill by some 30%.

It was too little too late. By the end of February, Sari realised the game was up.

Losing money, he shut down CERM Tekstil shortly before the government introduced new procedures for bankruptcy protection in March. More than 1,000 companies have applied.

Sari said that might have postponed the death of his business — but not by much. “We’d have gone bust a few months later anyway,” he said. “It’s a shame. It wasn’t easy to build two factories. But it’s all gone now.”

Some much bigger Turkish companies are fighting to avoid a similar fate. In April, Sahenk’s Dogus Holding AS started renegotiating with creditors on US$2.5 billion of loans. From Capri to Madrid, his luxury hotels are up for sale. Ulker, the biscuit billionaire, reached a deal with banks in May to refinance US$6.5 billion of debt.

Interest-rate Increase
The worst was still to come for the lira.

Erdogan told Bloomberg in May, a month before elections, that he’d exert even more control over the central bank if he won — which he did. But the currency plummeted to new lows in August amid another row with the US, which threatened unprecedented sanctions on its North Atlantic Treaty Organisation ally.

The president finally relented and authorised the biggest interest-rate increase of his 16-year rule. It succeeded in halting the currency rout.

But the damage is still filtering through the banking system. Turkish non-financial companies had US$331 billion of foreign exchange (forex) liabilities at the end of August, almost triple their forex assets.

The government has set up a Credit Guarantee Fund to take some corporate risk onto its own balance sheet. More radical steps may be needed, with some investors calling for a bank recapitalisation programme to be financed by taxpayers and shareholders.

Optimists said Turkey’s economy will emerge leaner and fitter, and they point out some upside: The country’s longstanding external deficit has turned to a surplus, as the currency slump priced imports out of the market and made exports competitive.

It’s likely to be a painful cure, though. Many economists predict the economy will shrink next year. The International Monetary Fund is more upbeat, forecasting growth of 0.4%. But even that effectively amounts to a recession in a country like Turkey, whose population is increasing at more than three times that pace.

As for Turkish business, it’s caught in a credit vice — the opposite of the loose conditions that have prevailed in the Erdogan years. Dollar borrowers got burned, and now lira loans are prohibitively expensive too.

“I used to cry when I had to borrow at 18%,” said Sari. “Now people are borrowing at 40%.” It’s not his problem anymore. Sari is scratching a living as a consultant to other textile firms. He said he’s done with entrepreneurship. “No one’s going to persuade me to employ a single person,” he said. “Let alone a hundred.”