Page 16 - TURKRptSep20

grade, with a negative​ outlook.
Moody’s on June 15 downgraded Turkey’s flag carrier, Turkish Airlines, to B3/Negative, six notches below investment grade​. It also ​sees Turkish lenders at six notches below investment grade with negative outlooks​.
A depletion of Turkey’s foreign exchange reserves, weak monetary policy credibility, negative real interest rates and a sizeable current account deficit partly fuelled by a strong credit stimulus have exacerbated external financing risks for Ankara, Fitch noted in its August 21 statement.
Political pressures, the limited independence of the Central Bank of the Republic of Turkey (CBRT) and a track record of being slow to respond to events, increase the risk that policy is tightened insufficiently, contributing to further external imbalances, market instability, and a more disorderly adjustment, it added.
Large interventions​. There have been large currency interventions to defend the lira, which has depreciated 16% against the USD since March on the back of net capital outflows and a worsening trade deficit, Fitch noted.
Gross FX reserves (including gold) at the CBRT fell to $88bn in mid-August from $106bn at end-2019. This was despite a $41bn boost from additional FX swaps (to end-June) as a result of regulatory limits on banks dramatically shrinking the offshore lira swap market and a $10bn increase in the swap line with Qatar, the rating agency also said.
Gross reserves minus swaps have fallen more sharply, from $87bn at end-December to $29bn, “which better highlights the underlying trend”, Fitch said.
Net reserves (net of FX claims, mainly from Turkish bank placements) minus swaps are negative at $30bn, it added.
Fitch “places more emphasis in its analysis on Turkey's gross FX reserves, which is the input to its Sovereign Rating Model and aligns with the fact that the private sector accounts for most of Turkey's large external financing requirement”.
However, “the large contribution of swaps to gross reserves creates a greater risk if they are not rolled over”.
CBRT's resulting net short FX position also exposes it to balance sheet risk, with the potential for losses due to lira depreciation to further weigh on confidence in the currency, Fitch assessed.
“FX interventions have weakened policy credibility. Turkey's prior long-standing commitment to a floating exchange rate was a supportive factor for its rating and facilitated the economic adjustment since the lira crisis in mid-2018, but this has been damaged by the scale of interventions this year,” it also said.
“The sharp fall in real interest rates, from a peak of 8.3% (ex-post, policy rate) in June 2019 to minus 3.5% (or to minus 1.5% using 12-month inflation expectations), has further weakened disinflation prospects and monetary policy credibility,” the rating agency said.
Official “inflation remains high”, at 11.8% in July, and has averaged 11.7% in 2015-2020 compared with the 'BB' median of 3.4%.
Use of rate corridor​. CBRT has started to tighten liquidity, with the average funding rate increasing to 9.4%, and Fitch anticipated further use of the
16​ TURKEY Country Report​ September 2020 ​ ​www.intellinews.com