The Counsel of Ministers has amended Article 14 of the Decree No. 32 on the Protection of the Turkish Currency ("Decree No.32"), effective from 15 July 2009. As known, the superseded Article 14 of the Decree No.32 had classified the use of foreign exchange loans ("FX Loans") into three categories which can be summarized as follows:
- Local companies that generate income on foreign exchange
("F/X Income Generating Companies") were
permitted to utilize 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
(i.e. Turkish Lira) ("TRY Income Generating
Companies") were permitted to utilize foreign
exchange index loans from locally licensed financial institutions.
However, they were not permitted to use FX loans from local finance
institutions.
- Both F/X Income Generating Companies and TRY 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In practice, the superseded Article 14, as outlined above, compelled the local companies to provide financing either from foreign banks or foreign branches of local banks in order to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 USD Dollars which 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 which they were exposed to due to heavy f/x 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:
- F/X Income Generating Companies are now permitted to utilize FX
Loans from locally licensed financial institutions without being
subject to any time limitation.
- TRY Income Generating Companies are permitted to utilize F/X
Loans from locally licensed financial institutions provided that i)
the amount of such F/X Loan should amount more than 5,000,000 USD;
and, ii) the maturity date of such F/X Loans should not be less
than a year.
However, if a TRY Income Generating Company can furnish a security to a local bank either in the form of i) F/X deposits held in a local bank; or, ii) securities that are issued by the central administration or central bank of a member state of Organization for Economic Co-operation and Development ("OECD"), then such TRY Income Generating Company will be entitled to utilize F/X Loan from the local bank in the amount of such security and without being subject the foregoing time limitation of 5 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 in respect thereof.
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 which 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 F/X Loan regime. The new F/X Loan regime also aims to ease the F/X Loan burden originated from foreign financial institutions and thereby helping the local companies to monitor their currency risk.
Undoubtedly, the new F/X loan regime will create an appetite for the domestic companies to use F/X Loans from local financial institutions. However, it also raises a big question mark as to whether or not the local financial institutions are prepared to meet this appetite.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
