Page 17 - TURKRptSep20

interest rate corridor (overnight rate of 9.75% and late liquidity window of 11.25%) before any change to the main policy rate.
Fitch forecast an increase in the policy rate to 9.25% at end-2020.
However, “the policy reaction function is unpredictable, and there is a risk that tightening will be insufficient to stabilise the external position”.
The current account balance deteriorated to a deficit of USD20bn in H1 from a surplus of USD9bn (1.1% of GDP) in 2019.
This is driven by strong credit growth and the collapse in tourism, according to Fitch.
Fitch forecast a full-year current account deficit of 3.2% of GDP in 2020.
The government's coronavirus response focused heavily on credit stimulus but the authorities have signalled a tightening partly by adjusting the asset ratio regulation on banks that incentivises lending.
The Turkish economy has a long-standing close correlation between stronger economic activity, high loan growth and an increasing current account deficit, and it is unclear how the authorities view such trade-offs, with the risk of a build-up over time of unsustainable credit levels, exacerbating external imbalances, Fitch also said.
The external financing positions of the banking and corporate sectors account for 42% and 35%, respectively, of Turkey's $190bn external financing requirement over the next 12 months, according to the agency.
Banks' external financing requirements fell to $79bn at end-June, from $102bn at end-1H18, and $35-40bn “when more stable sources of funding are excluded”.
Banks have foreign-currency liquidity of $75bn at end-June, of which Fitch estimated 54% was swaps largely undertaken with CBRT.
Orderly FX deleveraging​. Banks' orderly FX deleveraging has continued, with a 74% rollover rate in June (on a rolling three-month basis), and the average price for the eight syndicated loans since the coronavirus shock was marginally lower than in Q4 2019.
FX-adjusted foreign currency bank deposits were still growing, by 7% y/y in July, the banking sector deposit dollarisation ratio remains high, at 50% in June (51% at end-2019), compared with the 'BB' median of 25%, “representing a risk to external finances should there be a loss of depositor confidence”, Fitch said.
The corporate sector has also continued to deleverage, with the overall net FX position falling to USD165bn in May from USD187bn a year earlier.
Of the USD67bn of corporate external debt due over the next 12 months, trade credits, which carry little rollover risk, make up USD47bn.
The sharp fall in domestic borrowing costs has contributed to a recent reduction in the corporate external debt rollover rate, to 60% in June (three-month, rolling) while it has also “added to the pressure on the balance of payments and CBRT reserves”.
Fitch said it expected the Turkish economy to contract by 3.9% in 2020. “There is continued speculation about an early election”, but Fitch saw this as
17​ TURKEY Country Report​ September 2020 ​ ​www.intellinews.com