Risk. Reinsurance. Human Resources.

ForewordTurkey has been a key, yet volatile, export market for a number of our key clients, especially within the automotive and pulp and paper industries. Whilst clearly a market with significant opportunity for growth, the banking crisis in late 2000 highlighted certain inherent credit risk factors that go beyond the financial strength of a debtor company. Indeed, international banks suspended their interbank credit lines to vulnerable Turkish banks and foreign investment into Turkey diminished on a wide-scale.

Despite stabilisation of the financial system during the interim years, 2016 has seen bad debts and bankruptcies rising again in Turkey, squeezing banks, and exposing a fragile real economy. The recent acts of terrorism, particularly in Istanbul, are also affecting the overall risk of doing business in the Turkish market.

Foreign investors are wary and banks are increasingly reluctant to extend new credit, squeezing the most indebted firms. Trade Credit insurance is a relatively new product for firms domiciled in Turkey and, as such, product penetration is increasing at a steady, fast pace (on average, 40% market premium increase every year for the last 8 years). This growth only slowed in 2009 and 2010 with the global economic crisis negatively affecting the overall insurance market appetite.

Coface was the first insurer to enter the Turkey market in 2006, followed by Atradius in 2007, and Euler Hermes in 2010.

Purchase behaviours are maturing; clients no longer view credit insurance only as a way of protecting their account receivables but also as a critical financial tool to improve the quality of their receivables portfolio.

The increase in sophistication, combined with somewhat unpredictable politics and a clouding economic outlook is focusing more attention on trade credit as a solution to support business growth.

This report includes critical Turkey economic and payment trends to consider, as well as key highlights on how Aon Credit International helps clients manoeuvre through some of the inherent market challenges, and ultimately get claims paid.

Your Aon Credit International (ACI) Team

In this publicationForeword

Turkey market environment

Approach to insurance capacity

In practice

References

August 2016 update

Trading PerspectivesFocus on: Turkey June 2016, with August update Technical

Advice

MarketInsights

Insurance Capacity

The Turkey market environment Counterparty risk expected to rise sharply

According to the World Bank, growth is expected to cool to 3.3 percent this year, well below peaks of near double digits in the early AKP years.

After years of growth fueled by credit and domestic consumption, bad debts and bankruptcies are rising in Turkey, squeezing banks and exposing a now fragile economy. At the end of April 2016, 240 companies have requested temporary relief from creditors, almost as many as in the whole of last year.

The ruling Justice and Development (AK) Party established a new cabinet in May 2016 with the aim to reassure nervous financial markets and restore aggressive growth.

30%

10%

9%

5%

3%

0%

-10%

Russia

South Africa

USA

Spain

Turkey

Japan

Global Insolvency Index

Italy

United Kingdom

Australia

France

Germany

China

Brazil

Morocco

-6%

-6%

-5%

-2%

-2%

-2%

-2%

-1%

-10%

0% 10%20%

30%

China

Spain

Italy

France

USA

Germany

Japan

Global Insolvency Index

Russia

United Kingdom

Turkey

South Africa

Morocco

Australia

Brazil

20%

18%

10%

10%

10%

6%

-10%

-8%

-3%

-2%

-2%

0%

0%

4%

5%

-10%

0% 10%20%

The paying behaviour of domestic firms has significant margin for improvement and normal payment terms

may seem excessive, up to 180 days. In fact, as a result of a long payment duration trend, the value of unpaid

receivables has grown considerably in the last 3 years. Domestic courts are perceived to lack independence,

and the chances of obtaining debt payment through legal action are lower than through strong pre-legal

negotiation efforts.

Mark Powell | Head of Risk Analysis | Aon Credit international

=

==

=

Economic growth

(% GDP)

Public debt (% GDP)

2013 4.2 37.38

2014 2.9 35.02

2015 3 32.6

2016(f) 3.3 31.5

Insolvency in Turkey

Business insolvency variations 2015 vs 2014 (Recorded) Business insolvency variations 2016 vs 2015 (Expected)

2

2015

2014

2013

2012

2011

2010

2009

2008

2007

Insurer perspectives

Aon perspectives – Turkey market in focus

Mark Powell, ACI Head of Risk Analysis, brings our attention to the following:

Turkey’s economy is expected to miss the government’s growth forecasts this year and next following continued geopolitical risks and domestic security concerns. Inflation, which has been in a downward trend, is seen picking up again this year, hovering above government targets.

The economic outlook has also been clouded by security concerns after a spate of bomb attacks, including in Istanbul - its biggest city and traditional tourist draw - blamed on Islamic State militants. Tensions with Russia have also hit trade and tourism after Turkey shot down a Russian jet over Syria last year, prompting President Vladimir Putin to impose economic sanctions on Turkey.

Turkey’s tourist industry generated revenues of around $30 billion last year, but the number of foreign visitors coming to Turkey dropped by 10 percent in February, marking the biggest drop in a decade. A deep recession in Russia, a big supplier of energy and tourists and a market for farm exports, has also hit growth prospects. And Turkey’s recent political spat with Russia has made things worse.

Much of the slowdown could be attributed to the vagaries of the global business cycle; around 60% of Turkey’s trade is with Europe, and the EU also accounts for three-quarters of foreign direct investment in the country.

Other external events have been more helpful. Thanks to a sharp fall in the oil price, Turkey’s current-account deficit narrowed to around $35 billion in the 12 months to November 2015, the lowest in over five years. Even so, the loans piled up to fund the big external deficits of the past have left the economy vulnerable. Much of Turkey’s foreign debt, notably to its companies, is in dollars, which have become more expensive to service as the lira has steadily weakened.

Turkey continues to provide focus for the underwriting markets. Traditionally, heavily underwritten sectors such as construction, construction materials, electronics, metals and paper are experiencing poor performance and as a consequence risk appetite remains low across these sectors. Chemicals, consumer durables, engineering and steel continue to perform within expectations and warrant measured risk. Agriculture, automotive, financial services and food indicate strong performance and risk appetite within these sectors remains strong.

The insurers’ overall country analysis consistently underpins their specific client decisions around credit limits. It is therefore critical to monitor insurer’s assessment of the overall business environment, in order to pro-actively address current and future credit capacity challenges in Turkey.

Insurers are reporting to us that the Turkey macro-economic developments shown below influence their local business strategy.

Key trends identified/reported

Increasing foreign debt and substantial capital imports are needed to cover the current

account deficits

Credit risk in the corporate sector is rising, as foreign currency borrowing is high and still

increasing

Increased concerns due to political pressure on the central bank

Adequate business environment

Important geostrategic position that has historically always ensured aid when needed

Well-educated workforce and competitive economy

Increasingly important role as regional hub between Europe, MENA and Asia

Growth likely to benefit from a relative easing of internal political tensions

Solid public finances, still significant external risk

Less internal political uncertainty, but a turbulent regional environment

Public finances under control

Terrorist attacks and Russia sanctions affecting tourism sector, likely to lead to wider

account deficits

Volatile markets are expected to weigh further on Turkish Lira

Commercial risk remain elevated as the corporate debt has increased in recent years

Cover is available, subject to the individual buyers and spread of portfolio

3

Atradius

Euler Hermes

Coface

Credimundi

AIG; Atradius; Coface; Credimundi

High risk

Low risk

Euler Hermes

Country risk assessment

Mod

erat

e

HCC

Approach to credit insurance capacity Impact on insurer behaviours

From our team on the ground

Our combined analysis of the Turkey overall economic condition and the counterparty risks enables us to specifically anticipate the need for new innovative solutions to be developed and delivered for our clients.

Market trends overview

The economic condition of Turkey is expected to worsen in 2016, with an increase in bankruptcies, therefore prices are expected to increase and the capacity tends to decrease. However the market can still provide relatively good terms and conditions for some specific industries or/and transactions.

Capacity

Loss ratio - Over 100% in the overall market.

Pricing - No new entrants, prices are increasing due to current economic condition in Turkey.

Insurer market share

ContactAyşe Çiftçioğluayse.ciftcioglu@aon.com.tr+90.216.636 0700

Hilal Doğanoğlu hilal.doganoglu@aon.com.tr+90.216.636 0700

30%

34%46%

3%

Atradius

Coface

Euler Hermes

Others

4

3 Professionals

Tailor made product designQualified team

Sector specialty Textiles

TechnologyPharma

Chemistry

Managed premiums of

$7m

Sector Risk appetiteAgriculture High

Automotive High

Chemicals Average

Construction Low

Life sciences High

Consumer durables Average

Electronics Low

Financial services High

Food High

Engineering Average

Metals Low

Paper Low

Services Low

Steel Average

Textiles Low

Broking strategy

ACI adapts its broking strategy to ensure we are able to support clients in two key areas; claims and risk acceptance levels. In respect of the latter, it is essential that we are able to support our clients in ensuring that insurers do not take a broad-brush to risk assessment but evaluate each risk on its own merits. Aon’s risk analysts in conjunction with the broking team distinguish between strong/weak sectors as well as sound/vulnerable buyers’ risks.

Placement > Cover Optimisation

Cover Optimisation

Value

Future state Once Aon has optimised cover, we will help you manage your uninsured risk

Low Buyer rating High

Insured risk Uninsured risk

Provide additional capacityBespoke excess lines or syndication

Capital markets (including surety solutions)

Market benchmarking

Additional specialist insurer (typically with regional expertise or national interest)

Facultative reinsurance solutions

Managed uninsured exposuresMonitoring of key buyers and continuous review with insurers

Use diagnostic team to highlight changes in risk rating and country risk

Risk profiler reports to ensure you can make informed commercial desicions on your customers

Optimise cover with existing carrierEstablish criteria for current decision

Review trading patterns and future requirements (average vs peak exposure)

Market benchmarking

Aon’s risk analysis/data sources

Escalate to global insurer via the central strategic teams

Our cover optimisation methodology outlined above helps us to increase coverage for our clients, whether that be from the primary insurer or from alternative solutions.

5

Istanbul Bosphorus Bridge

Over the course of the many years during which ACI has been operating and designing credit solutions in the Turkish market, we have been approached to implement Turkish domestic whole turnover credit insurance policies as well as various syndicated single risk programmes for exports being shipped into Turkey.

We recognise that the acid test for the product is claim payments in a timely manner, which is why we have dedicated resources to ensure that we use our leverage and board level access to insurers where needed to ensure successful claims payment. We focus on policy training and conduct claim audits with our clients on cases which are not in default, providing an Aon view of probability of acceptance and highlighting any improvements in policy compliance.

Below are two case studies relating to programme structures implemented by Aon Credit International teams.

Case Study 1 - Syndicated deal

Obligor: Truck, bus and military vehicle manufacturer

Contract: Industrial and commercial conglomerate based in Turkey for Diesel engines, Spare parts, Technology

Sum insured: USD $60,000,000

Case Study 2 - Global programme covering Turkey operations

Insured: Media Multinational with operations in Turkey

Obligors: Whole turnover credit insurance policy

Sums insured: USD $70,000,000

In practice

6

• Aon arranged various meetings involving our client Turkey buyers, and insurance markets

• Limits varied over the years but maximum USD $60m (fully utilised) policy limit to cover a pre-buy order matching a year’s supply of engines to chassis

• An ACI central team arranged a global program whereby the Turkey subsidiary is able to i) benefit from the global premium rate and ii) leverage the global limit application process

• Our ACI Turkey team provides local service to ensure that the policy properly responds to country business and regulatory requirements

References

7

ttps://group.atradius.com/publications/global-economic-outlook-november-2015.html

https://group.atradius.com/publications/economic-research-slowdown-in-world-trade-2015.html

https://group.atradius.com/publications/country-report-turkey-2015.html

https://group.atradius.com/publications/payment-practices-barometer-turkey-2015.html

http://www.eulerhermes.com/mediacenter/Lists/mediacenter-documents/Country-Report-Turkey.pdf

http://www.coface.com/Economic-Studies-and-Country-Risks/Turkey

http://www.s-ge.com/sites/default/files/WB_1511_E_Wirtschaftsbericht-T%C3%BCrkei.pdf

http://www3.ambest.com/ratings/cr/reports/turkey.pdf

http://www.reuters.com/article/us-turkey-economy-bankruptcy-idUSKCN0XV0EF

http://www.wsj.com/articles/turkeys-new-prime-minister-signals-intent-with-cabinet-reshuffle-1464091857

https://www.focus-economics.com/country-indicator/turkey/gdp

8

August 2016 update

Over the course of a few hours on July 15th 2016, a small group within the Turkish military attempted to overthrow President Recep Tayyip Erdogan and the ruling AKP government. Although unsuccessful, the attempted coup highlights continued political and social instability in the country and creates additional challenges for businesses operating or exporting in the local market.

Firstly, the attempt had domestic consequences. During the coup, over 300 people were killed and more than 2,100 were injured. Many government buildings, including the Turkish Parliament and the Presidential Palace, were damaged. Mass arrests followed, with at least 6,000 detained, including at least 2,839 soldiers and, for reasons that remain unclear, 2,745 judges. 15,000 education staff were also suspended and the licenses of 21,000 teachers working at private institutions were revoked.

Another immediate impact due to the failed coup has been increased volatility on financial markets, currently the TRY is down by about -6% against the USD; and the ISE 100 is down by -8% as compared to pre-failed coup.

In the aftermaths of the events, the Central Bank of Turkey (CBT) quickly announced it was ready to take any measures to ensure financial stability, if needed. The CBT continues its gradual monetary easing cycle, lowering the overnight lending rate by 25bps to 8.75% while keeping the overnight borrowing rate at 7.25% and the key one-week repo rate at 7.5%, in line with expectations prior to the coup attempt. There is not expected to be a lasting, significant impact of the incident on the economy and maintains, for now, its forecast of full-year GDP growth of +3.6% in 2016. That said, country risk had already increased over the past three years and remains high, mainly reflecting (i) ongoing large current account deficits that are largely financed through short-term external debt which carries the risk of sudden reversal if investor sentiment changes; and (ii) increased political uncertainty and security risk as a result of spill-overs from the Syrian War and a series of terrorist attacks.

Following the declaration of a state of emergency, which allows the president and cabinet to bypass parliament in passing new laws and to limit or suspend rights and freedoms as they deem necessary, Erdogan expressed doubts the coup attempt was entirely over stating that “I don’t think we have come to the end of it”.

While we do not expect significant capacity restriction actions in the near term, Aon will continue to work with its clients to ensure continuity and availability of cover through our discussions with insurers at a tactical and strategic level.

So far, only Tokio Marine HCC has formally

announced that they will not be offering any

new cover or increases to existing limits while the situation continues. The

other insurers are prepared to review risks on a case by

case basis.

Technical Advice

MarketInsights

Insurance Capacity

Pieter Van Ede Managing Director Aon Credit International t + (1) 303 782 3345 m + (1) 303 597 6081 pieter.van.ede@aon.com

Barrie Watson Executive Director Aon Credit International UK t +44 (0) 207 086 0356  m +44 (0) 7730 193 350 barrie.watson1@aon.co.uk   

Mark Powell Risk Analysis Aon Credit International UK t +44 (0) 1495 225 294 m +44 (0) 7714 923 460 mark.s.powell@aon.co.uk

Key Contacts

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