Fed taper to have ‘limited’ effect on Turkey: Moody’s

LONDON

Moody’s says a range of tools introduced since 2009 have strengthened Turkey against volatility in capital flows. DAILY NEWS photo, Emrah GÜREL

A potential tapering of the U.S. government’s quantitative easing (QE) program is likely to result in higher funding costs, greater funding outflows and a reduced availability of credit across global financial markets but the impact on various sectors of Turkey’s economy will likely be limited and short-lived, Moody’s Investors Service has said.

“If and when the U.S. Federal Reserve begins QE tapering, Moody’s would expect Turkey to face medium-term challenges in meeting its current account financing needs. However, the sovereign’s balance sheet and its economy possess sufficient buffers to withstand likely medium-term challenges linked to meeting its own financing needs in a QE tapering scenario,” it said on Dec. 2. The rating agency added that a range of tools introduced since the 2009 recession have strengthened Turkey’s ability to withstand volatility in capital flows.

Turkish banks can handle tapering

Moody’s also said Turkish banks would be able to cope with challenges arising from tighter funding conditions that are likely to result from QE tapering. “Despite a somewhat greater reliance on foreign
market funding since 2009, and the resulting increase in the Turkish banking system’s vulnerability to potentially volatile wholesale market conditions, Moody’s considers the system’s likely exposure to the effects of QE tapering to be moderate and its liquidity resources to be sufficient.”

Moody’s noted that QE tapering would have “a moderately negative impact” on Turkish corporates in light of a number of vulnerabilities stemming from corporates’ dependency on bank funding, mostly with short maturities, in foreign currencies and at floating interest rates.

Turkish covered bonds will be more resilient to the effects of QE tapering than the above sectors. The sector’s legislative framework and market practice offer investors credit protection against potential increases in non-performing loans and declines in property values, it said.

Moody’s upgraded Turkey’s government bond ratings by one notch to Baa3 from Ba1, and also assigned a stable outlook to Turkey on May 16.