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to B3 from B2. Also in the wake of the sovereign downgrade, Moody’s on June downgraded the ratings of the covered bonds issued by five Turkish banks (Akbank, Sekerbank, Turkiye Garanti Bankasi, Turkiye Vakiflar Bankasi and Yapi ve Kredi Bankasi). Additionally, Moody’s downgraded to B1 from Ba3 the long-term issuer ratings of the Metropolitan Municipalities of Istanbul and Izmir. The Aaa.tr National Scale Rating on Izmir was affirmed. The rating outlooks on both municipalities were kept on negative.
Higher risk exposure to investor sentiment, depositor behaviour. Outlining its reasons for the downgrades applied to the 18 banks, Moody’s said “the downgrades primarily reflect (1) a significant increase in external vulnerability for the country, exposing Turkish banks to a higher risk of a sudden shift in investor sentiment and depositor behaviour; (2) a higher risk of more extreme government policy measures, which could include restricted access to foreign currency for depositors, reflecting policy uncertainty and weakening central bank's net foreign currency reserves; and (3) a more prolonged deterioration of the operating environment, leading to a further weakening of banks' solvency metrics. Moody's has captured these challenges by lowering the Macro Profile it assigns to Turkey to Very Weak+ from Weak- by increasing the negative adjustment it applies for Funding Conditions score”. Moody’s said Turkish banks’ high reliance on short-term funding in foreign currency remains a structural weakness, rendering them vulnerable to shifts in investor sentiment and stress scenarios. It added: “This weakness has been a key negative driver of Turkish banks' ratings for several years. With around 30% of tangible banking assets being funded by wholesale debt, Turkey is one of the emerging countries that is most reliant on market funding. As at April 2019, a sizeable USD64 billion of this wholesale exposure was in foreign currency and maturing in the next 12 months. “A key mitigating factor is that the banks hold large amounts (USD100 billion) of liquid assets in foreign currency. Moody's notes, however, that only USD21 billion are cash or unencumbered securities, while the rest comprises receivables from the central bank (USD33 billion), receivables from financial institutions (USD30 billion), or compulsory reserves with the central bank. “Furthermore, retail depositors have also continued to convert a material portion of their local currency deposits into foreign currency (mainly US dollars) to protect their savings from depreciation. Recently, the level of foreign currency deposits reached about USD209 billion, a sizeable 54% of total deposits.”
Increasing fragility. Moody’s cautioned that against the backdrop of reliance on foreign currency funding, the government has announced a number of economic reform packages since May 2018 with most measures continuing to focus “on the near-term priority of propping up economic activity at the expense of eroding the underlying resilience of the economy and the banking system to external shocks, in part by increasing its fragility to shifts in market sentiment”. Moody's also observed that the central bank's net foreign currency reserves were limited at around $27bn, and they include an undisclosed amount of swaps with banks that lend foreign currency raised in the wholesale market and borrow lira to lend in the economy. “In the context of high policy uncertainty, the combination of structural weaknesses, potential market stress, and limited mitigating factors increase the risk of more extreme policy measures, which could include restricted access to foreign currency for depositors in a stressed scenario,” the rating agency said. Moody's also said that the deterioration of the operating environment for the banks may be more prolonged than it previously expected, leading to higher asset risk and lower profitability.
Moody’s expects Turkish real GDP to contract by 2% in 2019 and to grow only marginally in 2020, at +2%. This represents a material deterioration from previous years. In 2017, real GDP grew by 7.6% and in 2018, despite a sharp deterioration of the Turkish lira that sank into a currency crisis, real GDP expanded 2.6%. Inflation will remain very high at 18.5% in 2019 and 13% in 2020, versus 2018’s 20.3%, while the Turkish lira will remain weak, the rating agency forecast.
62 TURKEY Country Report July 2019 www.intellinews.com