Page 81 - TURKRptJun19

the plan have been welcomed by the private sector, particularly reforms to the insolvency process and politically difficult pension and severance pay reform.” The post-election period could be more conducive to economic reform. A start could be made on tackling long-standing structural weaknesses, although Fitch remains cautious about the prospect of meaningful progress.
“Tough operating conditions continue to put pressure on the banking sector,” it added. NPLs (loans overdue by 90+ days, solo basis) were 4.1% in April, up from 3% at end-2017; Stage 2 loans—which could migrate to NPLs in the course of the loans season—rose to 11.7% in February from 4.4% at end- 2017, albeit partly reflecting IFRS9 implementation. “Downside risks to asset quality remain significant given operating environment pressures,” the rating agency said.
Capital adequacy above requirement. Capital adequacy remains above the regulatory requirement, at 16.4% at end-March. Fitch's stress tests showed that pre-impairment profit and capital buffers provide a significant cushion against a potential marked deterioration in asset quality, a weakening in profitability and potential Turkish lira depreciation. In April, the government injected TRY24bn of euro-denominated additional Tier 1 capital (equal to around 0.5% of GDP) into the state banks. This followed fairly rapid growth at these banks—in contrast to the rest of the banking sector—in Q1. Some private banks have also raised new capital.
“Refinancing risks for Turkish banks remain high following recent heightened market volatility and given the large stock of short-term external debt on banks' balance sheets (end-2018: $90bn on a remaining maturity basis),” Fitch said.
However, it estimated banks' total external foreign currency debt due within 12 months, net of more stable sources of funding, to be $40bn- $45bn compared with available foreign currency liquidity of $75bn- USD80bn.
“Turkey is undergoing a deep economic recession, but the economy seems to have bottomed after contracting 4% (non-annualised) in the second half of 2018, with net trade the main source of sequential growth,” Fitch said.
“Election-related temporary stimulus and rapid credit growth from state- owned banks have also contributed to the nascent Q1 recovery, pointing to a likely easing of momentum in Q2, particularly if accompanied by tighter fiscal policy,” it added.
In Fitch’s eyes, base effects mean that annual growth rates in Turkey will remain negative until Q4. It forecast that the Turkish economy will contract by 1.1% y/y in 2019.
The unemployment rate has risen rapidly. Growth should revive in 2020, but at a forecast 3.1% it will be below Fitch's estimate of trend growth (4.3%, recently revised down from 4.8%).
Average 2018-2020 growth of 1.5%. Average growth for 2018-2020 of 1.5% compares with an average for 2010-2017 of 6.8%. Inflation has dipped from its peak, but remained elevated at 19.7% in March. Weak domestic demand and base effects should put inflation on a downward path, but PPI remains high (29.6%) and “the impact of unwinding temporary tax and other price control measures is unclear”, Fitch said.
Fitch forecast that inflation would average 14.2% in 2019, the highest level of any sovereign rated above the 'B' category. The policy rate was kept at 24% in April and is rising in real terms. “High dollarisation and the increased role of state bank lending and informal pressure on bank interest rates may be undermining transmission channels,” Fitch noted. In Fitch's view, monetary policy credibility is weak in Turkey and potential mis-steps are a downside
81 TURKEY Country Report June 2019 www.intellinews.com