The Counsel of Ministers has amended Article 14 of Decree 32 on the Protection of the Turkish Currency, effective July 15 2009. Before, the superseded Article 14 of Decree 32 had classified the use of foreign exchange loans into three categories that can be summarised as follows:
- Local companies that generate income on foreign exchange were permitted to use FX Loans that have a maturity of up to 18 months and foreign exchange index loans (dövize endeksli kredi) from locally licensed financial institutions;
- Local companies that generate income on local currency (Turkish lira) were permitted to use foreign exchange index loans from locally licensed financial institutions. However, they were not permitted to use FX loans from local finance institutions.
- Both FX-income generating companies and lira-income generating companies were permitted to obtain loans from financial institutions located outside of Turkey if the purpose of the loan is to finance their commercial and professional business.
- Consumers, on the other hand, were only permitted to use foreign exchange index loans from locally licensed financial institutions.
In practice, the superseded Article 14 compelled local companies to provide financing either from foreign banks or foreign branches of local banks in order to finance their operations. According to the Undersecretariat of Treasury, as of March 2009, foreign loans used by local companies amounted to $35 billion that resulted in an increase in the country risk premium of Turkey, as these debts are classified as foreign debts of Turkey.
In addition, local companies were unable to monitor the foreign currency risk they were exposed to due to heavy FX loan burden created as a result of financings obtained from foreign financial institutions.
In an effort to overcome these drawbacks, Article 14 is amended as follows:
- FX-income generating companies are now permitted to use FX loans from locally licensed financial institutions without being subject to any time limitation.
- Lira-income generating companies are permitted to use FX loans from locally licensed financial institutions provided that i) the amount of such FX loan should amount to more than $5 million; and, ii) the maturity date of such FX loans should not be less than a year.
However, if a lira-income generating company can furnish a security to a local bank either in the form of i) FX deposits held in a local bank; or, ii) securities that are issued by the central administration or central bank of a member state of the OECD, then such lira-income generating company will be entitled to use FX loan from the local bank in the amount of such security and without being subject the foregoing time limitation of five years.
- Consumers are now prohibited to use foreign exchange index loans from locally licensed financial institutions as well as from foreign financial institutions in an effort to eliminate the currency risk that they may face.
As a result of the new legislation, the government expects the domestic loan trading volume to increase and hence make a contribution to the efforts to restore the financing shortfall that the non-financial sector faces due to the recent economic turmoil. Additionally, the government is hoping to the decrease the country-risk premium through the enactment of the new FX loan regime. The new FX loan regime also aims to ease the FX loan burden originated from foreign financial institutions and thereby help local companies to monitor their currency risk.
Undoubtedly, the new FX loan regime will create an appetite for domestic companies to use FX loans from local financial institutions. However, it also raises a big question as to whether or not the local financial institutions are prepared to meet this appetite.