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By Tom Arnold
4 Min Read
* $80 bln in short-term FX debt maturing – Hermes analyst
* Loan rollover largely successful so far
* Analysts see risk of state intervention
* Banks yet to tap bond market post-COVID
LONDON, June 11 (Reuters) – Turkish banks’ reliance on short-term foreign currency debt is proving a concern for investors as it risks piling on pressure within the banking system and on the country’s falling reserves in the wake of the COVID-19 pandemic.
The banking sector, the largest contributor to Turkey’s external financing requirements, is heavily reliant on short-term foreign currency funding that is rolled over nearly every year.
Banks’ ability to finance that debt has taken on greater focus as Turkey’s external finances have weakened after the pandemic. Its foreign debt obligations are $168 billion and its current account is expected to record a deficit of $4.5 billion in April due to weak exports and tourism revenues.
“The issue around Turkey is not really per se the sovereign itself but it’s the impact of all the short-term loans in the banking sector (that) would potentially have on the sovereign. It is something that is concerning us,” said Uday Patnaik, head of emerging market debt, Legal & General Investment Management, which is underweight Turkey.
“In the unlikely event that Turkish banks are not able to roll over their loans, this could create pressures within the banking system and on central bank FX reserves, if there is a need to provide foreign exchange,” he said.
The Turkish central bank’s net foreign currency reserves dropped to $31.55 billion as of June 5 from $41 billion early this year, according to latest official data.
Although many lenders have refinanced substantial chunks of foreign debt, including syndicated loans, so far this year, even during the height of the market dislocation in March, they face another pile of maturing debt in coming months.
Around $80 billion in short-term FX debt is coming due between now and the first quarter of 2021, estimated Filippo Alloatti, senior analyst at Hermes Investment Management noting that the rollover process would not be easy but could eventually be done.
Still, Fitch Ratings last month flagged the growing risk of government intervention in the banking system as it seeks to shore up its external finances. Such a move could impede the ability of banks to service their foreign currency obligations.
Moody’s said that foreign exchange deposits, which made up 52% of total deposits at the end of March, were vulnerable in a stressed scenario, such as capital controls or restricted access to foreign exchange for depositors.
Fitch also highlighted Turkish domestic private sector banks Isbank and Yapi Kredi as exposed, with as much as 27% of their funding from foreign currency wholesale funding at the end of 2019.
Turkish banks’ access to the bond market may still be tricky in the pandemic’s aftermath.
Although the lira has partially recovered, investors are still nervous after it plunged in May to a record low against the dollar, below a previous level hit during a 2018 currency crisis, when banks were left holding large amounts of soured loans.
“We need some stabilisation on the FX between the Turkish lira and the dollar or some stabilisation from an economic point of view,” said Alloatti. “There also needs to be more orthodox economic policy in Turkey before they can issue.”
In the meantime, some will opt for cheaper shorter-term syndicated loans or intra-group funding to tide them over. But that option might not be available for all.
“We believe that it will be challenging for some smaller or weaker players to access wholesale funds,” Moody’s said in an emailed response to Reuters. (Additional reporting by Karin Strohecker; editing by Emelia Sithole-Matarise)
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