Page 6 - TURKRptAug20

The ratings agency could also lower the ratings if Turkey's still comparatively strong public finances deteriorated for other reasons, such as the budgetary impact of COVID-19 being much larger than expected or currency volatility inflating general government debt levels beyond its projections.
S&P’s baseline expectation is that the almost 24% credit expansion since the beginning of 2020 will gradually moderate in the coming months and the economy will recover in a sustainable manner and without further imbalances building up.
S&P now expects loan growth to reach 30% this year.
“However, if unchecked, continued credit stimulus could ultimately make Turkey more vulnerable to a disruptive economic adjustment, similar to the one it experienced in August 2018,” it also said.
“This is particularly relevant now, against the background of heightened global economic uncertainty and more volatile fund flows to emerging markets,” it added.
S&P’s ratings on Turkey remain constrained by what it views as the country’s weak institutions. It sees limited checks and balances between government bodies, with power concentrated in the hands of the executive branch, which renders policy responses difficult to predict.
In S&P’s view, a cumulative $17bn current account deficit over January-May adds to Turkey's existing balance of payments vulnerabilities, which stem from the large stock of external debt it accumulated in the past, predominantly within the country's banking sector.
Positively, the banks have been able to roll over their maturing foreign debt throughout 2020, with rollover rates of 80%-90%.
S&P expects them to continue to roll over debt unhindered, but risks remain elevated, particularly if fund flows to emerging markets, which have returned following massive outflows in March 2020, were to reverse again.
In parallel, the central bank’s FX reserves have trended down and deteriorated in quality as its borrowing has picked up via swap lines on the liability side in foreign currency.
S&P nets these obligations out and expects usable FX reserves to drop below $10bn this year, from around $30bn last year, before staging a gradual recovery over the medium term.
In its view, this limits the central bank’s firepower to counteract further exchange rate volatility or to meet unexpected external financing requirements.
Although fiscal leverage remains low, S&P considers that there are risks from contingent liabilities. It estimates that direct government guarantees and commitments under public-private partnership agreements remain limited, at below 10% of GDP.
That said, in an adverse scenario, it anticipates that the government may have to extend support to the financial sector, particularly the public banks.
It notes that two cases of recapitalisation have already happened over the last 18 months (0.7% of GDP in April 2019 and 0.5% of GDP in May 2020) and more support may be required, because of the rapid loan growth combined with the effects of the COVID-19 pandemic on Turkish households and the corporate sector.
6​ TURKEY Country Report​ August 2020 ​ ​www.intellinews.com