Page 68 - TURKRptMay19

7.1 ANALYSIS: Is the Turkish lira any less vulnerable than last year?
The current consensus suggests that the Turkish lira is not expected to depreciate this year as much as it did in 2018 when it sank into a currency crisis. The main supporting argument for this contention is the recovery in Turkey’s current account deficit. However, when the bigger picture is examined it is not possible to conclude with any real certainty that the currency will retain relative strength.
This time last year, prominent economic research institutions, including Capital Economics and the International Institute of Finance (IIF), sounded warnings about currency vulnerabilities seen in Turkey and Argentina. However, Capital Economics reiterated a view on April 16, in its latest EM Financial Risk Monitor for Q2, that “the risks of similar currency crises [to those that eventuated in 2018] occurring now is low”.
The IFF’s views are more or less similar to those of Capital Economics on these points, with its fair value for the USD/TRY rate remaining affixed to 5.50.
Pole position for banking vulnerabilities. Meanwhile, Turkey has retained pole position for banking sector vulnerabilities in Capital Economics’ EM Risk Monitor. “Banking sectors in the emerging world are generally in a healthy position. But there are lingering problems in Turkey’s banks... Turkey’s banks have suffered a rise in non-performing loans resulting from the economic downturn. This has been exacerbated by the sharp increase in credit in the preceding decade (a large share of which is denominated in FX). Moreover, the country’s banks are very dependent on foreign wholesale financing. And rollover risks have increased following the recent tightening of external financing conditions,” Capital observed.
Also, Turkey’s sovereign vulnerabilities are moving closer to the red zone in Capital Economics’ Monitor.
The Turkish lira (TRY) lost around a third of its value against the USD during the course of last year with the USD/TRY rate finishing 2018 at 5.29 compared to the 3.79 recorded at end-2017 . During the worst of the currency collapse in August it nosedived into the 7.20s—hitting an all-time low, as the row with the Trump administration over detained US Pastor Andrew Brunson deteriorated. Since last November, the Turkish central bank and public lenders have managed to put something of a brake on the lira—although the government in amateurish fashion has been setting crude horizontal barriers at the cost of burning through reserves. Its approach has been supported via external borrowing at terrible expense and has prompted nervous locals into buying FX, substantially adding to the strain on the lira.
Turkey’s overall external debt repayment obligations for the next 12-month period stood at $177.1bn at end-February, marking a distinctly limited $8.8bn retreat from the $185.9bn figure at end-February 2018, despite the economic collapse brought about by the currency crisis. The figure was previously seen at $173.9bn at end-October last year as a result of the ‘curing’ effect of the currency crunch, but since then it has once more trended upwards with the government having gone on a renewed external borrowing spree that was followed by private corporates, private banks and public lenders also issuing new debt from the beginning of 2019.
Pinkish-as-much-as-fragile. The debt was issued on pinkish as-much-as-fragile sentiment for emerging markets among international investors, which lasted until the week leading up to the March 31 local elections that became an unofficial referendum on President Recep Tayyip Erdogan.
68 TURKEY Country Report May 2019 www.intellinews.com