Banks’ borrowing raises Turkey’s foreign debt: Fitch

MOSCOW/LONDON

Turkish lenders’ borrowing that jumped by almost threefold has been the main driver of the eye-catching rise in the country’s external debt, rating agency Fitch has said in a report, warning this puts the banks’ ratings at risk.

“Most of the recent increase in Turkey’s external debt has been driven by bank borrowing,” read a statement released by the agency on Sept. 3.

According to figures provided by the agency, between the end of 2008 and the end of the first half of 2014, local banks’ foreign borrowing rose to $164 billion, marking nearly a threefold jump. This pushed the country’s total external debt to 38 percent from 20 percent of six-and-a-half years ago, as banks accounted for 71 percent of the increase in Turkey’s foreign debt during the period.

Fitch warned this situation “leaves them [lenders] more vulnerable to extreme stress involving an abrupt and prolonged market shutdown.”

While the short-term component of banks’ external foreign-currency liabilities increased significantly, more than quadrupling over the same period, long-term foreign currency debt doubled, Fitch said.
It added the substantial short-term component within banks’ debt raises refinancing risks.

Weight on Central Bank

As the lenders’ foreign assets have shrunk, foreign currency liquidity now mainly comprises placements with the Turkish Central Bank, according to the statement.

“A sudden and prolonged foreign market closure would put significant pressure on banks’ foreign-currency liquidity, particularly as there are potential constraints on the Central Bank’s ability to make available additional foreign currency beyond that placed under the ROM [reserve option mechanism],” the agency warned. “The Central Bank would be likely to face several other claims on its limited reserves in a stress scenario, including servicing of corporate and sovereign external debt, outflows of portfolio investments and financing of the current account deficit.”

The agency also announced a panel discussion on Turkey’s external finances will take place at the “Turkey: More Challenges Ahead” event, hosted by Fitch’s Istanbul office on Sept. 11.