International credit ratings agency Fitch Ratings, in an insight entry on its website, has emphasized that Turkish banks have become more reliant on the Turkish Central Bank for their foreign exchange liquidity.
Fitch’s entry on its website is as follows:
“Turkish Banks' External Debt and FC Liquidity: End-3Q20
The Turkish banking sector's available foreign-currency (FC) liquid assets remain sufficient to meet more market-sensitive FC short-term (ST) external debt (XD), but banks' FC liquidity has become highly reliant on the Turkish Central Bank (CBRT), Fitch Ratings says in a new report. Turkish banks' have retained reasonable access to external funding markets amid market volatility since 1Q20 and despite significant lira depreciation.
Turkish banks' ST XD increased slightly to USD 84 billion at end-3Q20 (end-2019: USD 82 billion) while total XD (including long-term borrowings) fell by USD 8 billion in 9M20 to USD 135 billion. We estimate banks' potential 12-month FC XD service requirement, in the event of a market closure, to be lower at about USD 45 billion at end-3Q20, net of more stable sources of funding and lira obligations.
FC customer deposits (end-3Q20: 54% of total customer deposits) increased 10% (in US dollar terms) in 9M20 to USD 242 billion, supporting banks' FX liquidity positions but also creating liquidity risks in case of deposit outflows or instability.
The sector's available FC liquidity of USD 82 billion at end-3Q20 is adequate to cover a short-lived market shutdown and moderate outflows of FC deposits. However, just over half of banks' FC liquidity comprises placements at the CBRT, mainly in the form of FC swaps. This is an increase from about one quarter at end-2019.
We calculate that the CBRT's net FC reserves were negative at end-3Q20 when adjusted for banks' FC claims. This means Turkey's external finances could come under further pressure if banks were to repay significant amounts of foreign debt using their liquidity with the CBRT, since it makes up the majority of the CBRT's FC assets.”