NEWS ECONOMY NEWS        25/03/2020

Fitch cites deteriorating funding conditions as risk to Turkey’s credit profile

International credit ratings agency Fitch Ratings sees the deterioration in global financial conditions, caused by the coronavirus pandemic, as representing a risk to Turkey's sovereign credit profile, and also to the credit profiles of Turkish banks. On its website, Fitch presents the following analysis of the risks facing Turkey as a result of coronavirus:


“Turkey's high external financing requirement (about USD170 billion in 2020), alongside weak monetary policy credibility and geopolitical risks, make it vulnerable to deteriorations in global market sentiment. These factors weigh on the 'BB-'/Stable sovereign rating, which we affirmed on 21 February.


The largest contributor to Turkey's external financing requirement is the banking sector. Before the rapid spread of the coronavirus, banks' external borrowings had fallen since end-1H18 as foreign currency (FC) lending contracted moderately and FC deposits increased significantly, to 53% of customer funding at 16 March.


Fitch estimates that in a market shutdown banks' external debt service requirements, net of more stable sources of funding, would be about USD35 billion-USD40 billion in 2020. Available FC liquidity of about USD81 billion would be sufficient to redeem maturing market borrowings and cover about 20% of FC deposits. Based on data to 18 March, both lira and FC customer funding has been stable.


We expect the effects of the coronavirus will weaken Turkey's current account. The impact of the substantial real effective exchange adjustment since-mid 2018, which pulled the current account into a surplus of 1% of GDP, was already fading. The likely plunge in tourism revenues (USD25.7 billion in 2019, net) and foreign demand for exports will outweigh gains from lower energy imports, which were USD41 billion in 2019. A USD10/bbl decline in oil prices improves the current account by USD3.5 billion, according to the central bank.


GDP growth in early 2020 looked robust, underpinned by base effects, lower interest rates and a recovery in credit growth. However, there are now large downside risks to Fitch's GDP forecast in its most recent Global Economic Outlook, notwithstanding the launch of a TRY100 billion (2.3% of GDP) stimulus plan.


Tax holidays and spending measures are among the targeted fiscal measures that form the bulk of the plan. Turkey's public finances are a strength compared to rating peers and there is fiscal space for some counter-cyclical measures and additional funding through one-off measures. Nevertheless, the 2020 deficit will probably be the highest since 2009.


The central bank policy rate was lowered by another 100bp on 17 March, accompanied by measures to support the flow of credit and liquidity in the financial sector. This takes the real interest rate deeper into negative territory at -2.6%. Weak monetary policy credibility increases risks of renewed market volatility.


Risks for Turkish banks' financial metrics and credit profiles have increased. How far they materialise will chiefly reflect the deterioration in the operating environment. The availability of support for lenders and their already low ratings may limit the scope for negative rating actions in the near term.


Most Turkish bank ratings are on Stable Outlook, as they are driven by state or institutional support, and consequently reflect the Outlook on the sovereign. Banks with Issuer Default Ratings (IDRs) that are driven by their stand-alone profiles, as reflected in Viability Ratings, are virtually all on Negative Outlook due to pre-existing risks to asset quality and FC liquidity. Almost all bank FC IDRs are in the 'B' category.


Risks to banks' standalone creditworthiness were easing going into 2020, reflecting economic rebalancing and stabilisation. Coronavirus creates new challenges. Slower economic activity, weaker borrower performance and less favourable access to wholesale funding will significantly weaken asset quality and profitability, and could be negative for capital and liquidity. This warrants the still negative sector outlook.


Coronavirus adds to credit risks in the tourism, aviation, automotive, textiles and retail trade sectors. A prolonged economic slowdown would weaken the performance of SME and unsecured retail loan portfolios. Further lira depreciation would put more pressure on FC borrowers. Government support for affected sectors and regulatory forbearance in respect to loan classification will reduce the impact on banks' reported asset quality metrics.


Fitch expects banks' risk appetites to moderate significantly given the weaker economic outlook and expected asset quality deterioration. Lenders are likely to underperform their initial 2020 growth and profitability targets, despite strong 2M20 results driven by higher margins.


Fitch does not expect Turkish banks' capital ratios to weaken significantly in its base case scenario given still positive earnings, limited growth and manageable lira depreciation. A deeper and longer economic downturn and a weaker lira could present more material risks to solvency metrics. The sector's total capital ratio was 18.4% at end-January 2020 and largely comprised core Tier 1 capital. Non-core capital is largely in foreign currency and provides a partial hedge against lira depreciation.”

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