Turkey to guarantee loans to struggling manufacturers

• Up to 85% of a loan guaranteed
• SMEs can borrow $770k for investment
• Banks’ interest rates 50% or more

Turkey’s government has launched a loan guarantee scheme for small and medium-sized manufacturers, aiming to ease pressure on a sector hard hit by rising interest rates.

Treasury and finance minister Mehmet Şimşek announced last week that almost $770 million of credit would be made available through the Credit Guarantee Fund (CGF), a scheme revived since the last decade that allows lenders to share credit risk with the Treasury.

It will guarantee up to 85 percent of a loan, while successful applicants will be able to borrow $385,000 for operating expenses and up to $770,000 for investment spending. 

Simsek said the government would continue to fight inflation and build macroeconomic stability but was also sensitive to the needs of industry.

“Supporting our SMEs, the cornerstone of production and employment, is among our priorities,” he said.

The CGF was used a decade ago to provide cheaper credit to businesses, helping to fuel a lending boom that boosted growth. However, it also left many companies heavily in debt as the economy slowed. That was passed on to the Treasury through the guarantees it had provided. 

The revival of the CGF scheme is an acknowledgement that manufacturing is struggling due to a relatively tight credit environment. Commercial banks charge 50 percent or more in interest on business loans. 

There was a marginal increase in the use of manufacturing capacity in May — according to data issued by state statistics agency Turkstat last week.

However, another report from the same body showed the industrial confidence index dipped into negative territory.

Both short-term and three-monthly indicators in the Turkstat confidence survey pointed to expected falls in production, new orders exports and employment over the coming three months. Costs were tipped to rise.

In a business climate where interest rates are relatively high and companies struggle to access finance, the CGF scheme may be seen as a positive. Still, challenges with it need to be addressed, economist and financial markets executive Iris Cibre told AGBI.

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“It is important this credit is given to companies that are willing to grow,” Cibre said. 

“If these loans are made to healthy companies that may be struggling now — but are willing to invest and grow, and that have a good outlook for the future — then it would not be a burden to the public.”

Among previous issues with the CGF were loans being used for purposes other than approved. Credit was also extended to companies in potentially existential difficulties, rather than those looking to build capacity.

“If these loans are made available to what we call ‘zombie companies’ [those that have ceased operations but still exist in name, or those that are no longer commercially viable], then of course it will be a burden on public resources,” Cibre said.