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Turkey’s banks “key source of vulnerability” amid lira strife
have made significant loans in foreign currency (or FX-indexed), which could start to go bad on the back of the sharp fall in the lira [triggered by the firing of the CBRT governor]. And tighter financial conditions could weigh on banks’ lira-denominated loans.
“That said, we don’t think that a potential souring of banks’ loan books is the main reason for worry. FX loans are strictly regulated and, despite sharp falls in the lira in recent years, the share of non-performing FX loans is low at just 1.1%. More generally, we estimate that bad loans would have to rise sharply before banks’ capital ratios fell below regulatory minimums.
“Instead, the problem lies with banks’ large burden of maturing (foreign currency denominated) external debts. Banks’ short-term external debts (i.e. those maturing within
the next year) amount to $88.7bn, or 12.5% of GDP. Worryingly, there is a potential crunch point in April and May when an estimated $7.3bn in debt repayments are due.”
It’s worth noting, added Tuvey, that Turkish banks managed to secure syndicated loans at the height of the global financial market turmoil around this time last year. “But,” he added, “if borrowing costs rise to prohibitively expensive levels over the coming days and weeks, banks are in a weak position to service their debts. In order to meet external debt repayments during
the 2018 currency crisis, banks drew down their FX assets at the central
bne IntelIiNews
Turkey’s banking sector is a key source of vulnerability and arguably looks more exposed amid the country’s latest economic turmoil than it was in the run-up to the 2018 lira crisis, Capital Economics said on March 22 in the wake of the abrupt sacking
of the Turkish central bank governor.
Naci Agbal was by presidential decree relieved of his duties as Central
Bank of Republic of Turkey (CBRT) governor late on March 19, less than 48 hours after delivering a larger- than-expected rate hike in an effort to tame inflation. His successor, Sahap Kavcioglu – seen as an AKP ruling
Turkish international reserves vs external debt $bn
party loyalist who, like President Recep Tayyip Erdogan, is opposed to the use of high interest rates to curb soaring inflation, unconventionally arguing that it indirectly pushes up prices – subsequently released a statement
to try to reassure investors that the institution will “continue to use the monetary policy tools effectively in line with its main objective of achieving
a permanent fall in inflation”.
Senior emerging markets economist at Capital, Jason Tuvey, said in a note to investors: “As we’ve argued before, the country’s banking sector is a key area of vulnerability. Local banks
Banks' FX Debt Repayments ($bn)
Sources: Refinitiv, Capital Economics
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