Turkey, along with Tunisia, is one of the countries most exposed to changing global liquidity conditions, the international credit rating agency S&P Global said in a report on emerging market banks.
Banks in Turkey seem to have enough foreign currency to withstand any severe financial pressure, but much of the money goes to the central bank or the government, which could reduce their usability in a worse case scenario, S&P Global said. in a report this week entitled “Which Emerging Markets Banking Systems Are Most Exposed to External Financing Stress and Why.”
S&P said the “broad liquid assets” of Turkish banks in foreign currency amounted to about $ 154.8 billion at the end of March, including required reserves of $ 49.9 billion, but $ 75.9 billion of that amount. data were placed in the central bank.
“Therefore, under a hypothetical extreme scenario, the central bank could restrict access to these assets of its already weak foreign exchange reserves and push banks into bankruptcy,” S&P said. “Clearly, a significant increase in foreign exchange demand from depositors would put pressure on the local currency and, subsequently, on the already low foreign exchange reserves of the central bank, increasing the risk of capital controls.”
The Central Bank of Turkey (TCMB) has spent more than $ 150 billion of its reserves to defend the pound against a monetary crisis in 2018. The emergency, triggered by a drop in investor confidence in economic policy, has pushed bank to participate in currency exchanges, which means that its net foreign currency reserves have disappeared. The pound lost 44% of its value against the dollar last year and fell more than 20% in 2022 after the government ordered the TCMB to cut interest rates despite rising inflation.
S&P noted that the central bank had passed a law this year requiring exporters and service companies to convert 40% of their foreign exchange earnings into local currency to curb the erosion of its stocks.
S&P said global liquidity was set to decline as monetary policy tightened by major central banks, increasing refinancing risks for Turkish banks. The impact on Turkey could be seen in the lower rates of conversion for the external debt of the banking system, he said.
“These risks are exacerbated by very high local inflation, unpredictable monetary policy and the potential negative impact of the Russia-Ukraine conflict on commodity imports, the tourism sector and the investor climate,” the rating agency said.
Inflation in Turkey accelerated to 73.5% year on year in May, the highest level in emerging markets and industrial economies.
On Wednesday, executives of the Turkish Business and Industrialists Association (TÜSİAD) called on the government to return to traditional economic policies and listen to experts to slow inflation and stabilize the pound. Of course, Erdogan immediately attacked them, defending his tactics.
In the best-case scenario, S&P said it did not expect a major cut in Turkish banks’ access to consortia or other major bilateral financing lines in 2022. However, Turkish banks remained extremely vulnerable to the negative market climate and risk aversion due to declining but still high external debt, amounting to about $ 143 billion at the end of March, S&P said.
“Under our baseline scenario, we do not expect a major cut in Turkish banks’ access to consortia or other large bilateral financing lines in 2022 – representing about 51% of their total short-term external debt as of March 31, 2022. assuming that local “The authorities can stabilize the Turkish lira to some extent,” S&P said.
The dollarization of deposits and eventually the withdrawal of deposits, if residents begin to lose confidence in the system, was a risk, S&P said. Foreign currency deposits account for 58% of total deposits in the system, up from 44% in 2017, he said.
“Since the serious devaluation of the currency in December 2021, local authorities have taken various measures to encourage banks and depositors to convert their foreign currency deposits into Turkish pounds, including a system of foreign currency-denominated deposits aimed at conversion of 20% of deposits by September 2022 “, said the rating agency. “Banks that do not comply with this limit will be subject to sanctions.”
While the measures helped reduce dollarization from a ceiling of 69% in December, deposits benefiting from the new regime accounted for about 13.7% of total deposits at the end of May, “so the benefit can only be temporary” , S&P said.
The pound traded at 17.30 (-0.1%) per dollar on Friday. At the beginning of 2018 it was trading at 3.78 per dollar.