Turkey’s banks catch a break, but economic woes still not over

As Turkey moves quickly in an attempt to stave off its economic crisis, pressures seem to finally be easing off on local banks.

The Central Bank of Turkey on September 13 increased its benchmark interest rate to 24 percent, a hike of 625 basis points from the previous rate of 17.75 percent. The Turkish lira jumped more than 2 percent on the news, firming to around 6.1 against the dollar -- stable at the same level as of September 26.

Turkish finance minister Berat Albayrak announced a "new economic program," saying the government was aiming to "write a new success story" for its economy.

Though a sharp increase in interest rates has helped steady the lira, the worst is not yet over for the country’s beleaguered economy.

The recent series of actions by the central bank are not enough to ease negative inventor sentiment over the country’s financial woes, which continue to be exacerbated by the growing tensions between Washington and Ankara.

Turkish President Tayyip Erdogan’s on Tuesday said that a Turkish court— not politicians— will decide the fate of an American pastor detained on terrorism charges, Reuters reported. 

On the economic front, Turkey's finance minister admitted last week that his country will experience lower economic growth and higher inflation in the coming two years, with annual inflation reaching a whopping 20 percent.

With inflation at a high of nearly 18 percent (according to latest official figures of August) and a widening current account deficit, concerns are rising over the asset quality of Turkish banks and its debt-fueled growth. According to the central bank data as of May, Turkish corporates had $222.8 billion in long-term loans from abroad, mostly denominated in dollars or euros.

Turkish banks’ profits are also under severe pressure and could be severely squeezed in the long-term as non-performing loans soar. Moreover, banks will find it difficult to balance their interest rate exposures as short-term borrowing rates are higher than long-term lending rates.

The Turkish lira is down around 70 percent against the US dollar since the beginning of the year. According to Moody’s the currency’s sharp depreciation has made foreign-currency debt loads heavier for Turkish companies as repaying dollar/euro-denominated debt has become much more expensive.

“Worst hit are leveraged companies with unhedged short-term foreign-currency debt but no foreign-currency revenues or revenues indexed to foreign currency,” Moody's Investors Service noted in a recent report. 

“Turkish companies' liquidity will continue to be underpinned by hard-currency cash balances and longer-term debt maturities, as prevailing economic conditions increase the likelihood that corporate access to foreign-currency loans will drop and rollover risk may rise,” it added.

In combination with the lira’s depreciation and significant corporate foreign currency debt, this is likely to contribute to a large increase in business defaults and the proportion of non-performing bank loans, endangering Turkey’s banking sector.

“Tighter credit conditions and falling private sector confidence are likely to push Turkey’s economy into a contraction at the end of 2018. We have reduced our baseline forecast for Turkey’s GDP growth to 2.5-3.5 in 2018, followed by 1.3-2.7% GDP growth in 2019,” noted Daniel Solomon, Economist, Euromonitor International in a report published on FocusEconomics.