Page 7 - TURKRptAug20

Bank asset quality is likely to deteriorate in the coming months, with the Turkish lira under renewed strain.
The weaker exchange rate puts additional pressure on the domestic corporate sector, given that a significant proportion of its debt is still denominated in foreign currencies, despite the reduction in its short open FX position.
S&P sees Turkey's monetary policy as historically ineffective at managing inflation. The central bank has never met the 5% medium-term target introduced in 2012, while Turkey's real effective exchange rate (REER) has shown substantial swings.
The central bank has faced increasing political pressure in recent years, which S&P considers impairs its effectiveness, often by delaying timely responses to rising inflation.
Inflation soared to 25% in October 2018, but has since moderated.
Inflation “currently stands at close to 12% ​(according to official data)​ in year-on-year terms,” S&P also said, with a notable reference to “according to official data”.
Political pressure on the independence of the central bank continues. The president dismissed the central bank governor in July 2019, just weeks ahead of a key decision on interest rates.
S&P classifies Turkey's FX regime as a managed float​, with intermittent intervention in the FX market.
“Although outright FX sales to directly defend the exchange rate have generally been limited, there have been reports of public banks selling FX to support the lira at difficult junctures,” it noted.
The regulators have also introduced limits on domestic banks' allowed derivative positions with non-residents. The aim is to curb potential speculation against the exchange rate, according to S&P.
2.2​ ​Fitch sees external financing risks as Turkey’s key sovereign rating weakness
The main impact of the coronavirus (COVID-19) on Turkey's sovereign credit profile is through external financing risks, according to a non-rating action statement​ by Fitch Ratings.
7​ TURKEY Country Report​ August 2020 ​ ​www.intellinews.com