The upcoming constitutional referendum in Turkey may lead to early general elections, increasing the political pressure on the financial sector to keep lending rates artificially low.
On April 16 the country will vote on proposed changes that would significantly increase the executive power and judicial influence of President Recep Tayyip Erdogan. Against a backdrop of geopolitical turmoil, proponents say it will help the country take effective measures to fight terrorism and boost the economy, but others worry Turkey will slide further into authoritarianism.
Recent polls have suggested Turks will vote in favor of the changes. But either a Yes or a No vote might open the door to a general election, sources told S&P Global Market Intelligence.
A No vote would probably lead Erdogan to call early elections to consolidate his position after what would be seen as a personal referendum defeat, according to Istanbul-based financial consultant Emre Deliveli. A Yes vote could do the same because the president may want a political mandate to use his new powers straight away, risk research group Teneo Intelligence said.
Pressure to lend
In either outcome, Deliveli said in an interview, banks are set to suffer. Erdogan has put continued pressure on financial institutions in a bid to stimulate the economy. He has urged the central bank to cut interest rates in order to raise economic output, despite higher rates of inflation, and in 2016 a slew of banks slashed mortgage rates after he reportedly warned that not doing so could be considered an act of treason.
While bad loans are mounting, the pressure to lend at below-market rates and generously restructure nonperforming loans would continue if elections were called, because Erdogan will want potential voters to have access to easy credit, Deliveli said.
"The president has been using soft power to [require] banks to cut rates in order to keep the economy going," said Deliveli. "The economy is extremely important for the Turkish voter."
If there is no election, he might leave banks alone, he said.
Deliveli, who has previously worked for the World Bank and Citigroup, was fired as a columnist for English-language Turkish newspaper Hurriyet Daily News in 2015 for publishing a column critical of Turkey's elections that year in another paper.
Bad loans, dollar debt
The extension of cheap credit by banks may show up in bad loans, which are already trending up. Impaired loans as a proportion of risk-weighted assets have increased at Türkiye Is Bankasi AS, or Isbank, the largest bank by assets in the country, to 1.68% at 2016-end from 1.28% at 2012-end, S&P Global Market Intelligence data shows. At Türkiye Garanti Bankasi AS the ratio has ticked up to 2.37% from 2.02%, and at Akbank TAS to 1.73% from 0.88% . The stock of potential problem loans at all three increased markedly over that period.
S&P Global Ratings has predicted that 5% of Turkish banks' loans would be nonperforming in 2017, up from 3.3% at the end of 2016.
Turkish President Recep Tayyip Erdogan addresses supporters at a referendum rally in Izmir, Turkey, on April 9.
Source: Associated Press
Meanwhile, pressure on the Turkish lira, which has lost about a quarter of its value against the U.S. dollar since April 2016, could make it harder for banks to pay back dollar-denominated debt. A Yes vote would likely be followed by a short rally in the currency, stocks and bonds, and would also lift banks, said Deliveli, but this outcome is already largely priced in. He added that a No vote would cause a sharp selloff across stocks, bonds and the currency.
Isbank has €4.59 billion in outstanding U.S.-dollar bonds, according to data from S&P Global Market Intelligence. Other large Turkish banks have big positions too.
The banks face apparent political pressure in other ways too. The chairman of Isbank, which is part-owned by the Republican People's Party, the main opposition party, is being targeted by prosecutors for alleged involvement in fuel smuggling, aligning him with media mogul Aydin Dogan, who Erdogan has criticized, Reuters reported. The bank has denied any wrongdoing.
A country in turmoil
The referendum, which would give the president the ability to appoint ministers and judges, comes at a time of geopolitical turmoil in Turkey. Hundreds have been killed in terrorist attacks over the past 18 months, and a failed coup in July 2016 resulted in thousands of people being purged from the public sector.
A spokesman for the president, Ibrahim Kalin, told Al-Jazeera that an executive presidency would help Turkish democracy to defend itself against outside interventions.
"The proposed changes will ensure long-term political stability and, by extension, further strengthen the Turkish economy," he said. Kalin dismissed concerns of power concentration in the president's hands, saying the constitutional changes would also give parliament more authority to hold the government and the president to account.
But some market observers fear that an increasingly assertive presidency will turn Turkey into an autocracy, with harmful long-term effects on foreign investment and the local currency.
Neither referendum outcome will "provide any meaningful prospects of respite from the growing authoritarianism and confrontational populism propelled by Erdogan," Teneo Intelligence said in a report. "[His] one-man show will continue uninterrupted regardless of the referendum verdict in a country that has already passed the point of no return in terms of rule of law, democratic norms and practices."
Lorenzo Spoerry contributed to this article
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.