Fitch:  Turkish banks face “government intervention risk”

Fitch rating agency warned about the risks faced by the Turkish banking system, largely arising from FX liquidity being sucked up by the Central Bank.  While Turkish banks have this far easily rolled over maturing FX liabilities, they are fragile to an EM-wide event which cuts off “junk” borrowers like Turkish companies from the global credit market. However the biggest risk is AKP government relapsing to pre-election policy path of controlling currency depreciation by placing restrictions on banks’ balance sheets via haphazard macro-prudential regulations.


While Fitch also mentions a bank run on FX deposits as a serious event risk,  there is little on the domestic horizon which could substantially reduce savers’ sentiment.

Excerpts from the report

Turkiye’s significant post-election policy shift, including the turn to  a more conventional and consistent policy mix and progress  towards normalisation of monetary policy, has reduced near-term  external funding pressures, evidenced by banks’ recent market  access. Nonetheless, Turkish banks are still vulnerable to  refinancing risks given significant exposure to external foreign-currency (FC) wholesale funding and investor sentiment.

Turkish banks’ Long-Term FC Issuer Default Ratings (IDRs) and senior debt ratings are almost entirely capped at ‘B-’, one notch  below Turkiye’s, reflecting Fitch Ratings’ view that the risk of government intervention in the banking sector is higher than that of a sovereign default.


Rising Short-Term External Debt

Turkish banks’ external debt (end-1H23: USD126 billion) remained high, and has increased slightly (+USD3 billion) in 1H23, mainly driven by customer and bank FC deposits, and loans.

The banking sector’s stock of short-term (ST) debt (maturing within 12 months) rose more substantially (end-1H23: USD90 billion; end-2022: USD84 billion), reflecting banks’ more restricted  market access to, and the prohibitive cost of, longer-term issuance,  as well as bank risk appetites becoming increasingly geared  towards short-term operations amid policy and macro uncertainty.

We estimate that Turkish banks’ ST FC debt-service requirement in the event of a market shutdown was unchanged at end-1H23 at USD50 billion–USD55 billion. This amount is net of stable funding  sources, including intragroup facilities and some foreign customer  deposits, as well as lira external debt.

However, sizeable resident FC deposits are an additional potential call on banking sector FC liquidity, despite their sharp decline since  end-2021 due to the FX-protected lira deposit mechanism.

Domestic FC deposits amounted to USD169 billion at end-1H23.



Reduction in Sector FC Liquidity

Total sector FC liquidity, broadly defined (end-1H23: USD71 billion), was sufficient to cover banks’ ST FC debt-servicing requirements (net of stable funding sources), plus about 10% of  residents’ FC deposits. However, more than half comprises  placements with the Central Bank of the Republic of Turkiye  (CBRT), mainly in the form of FX swaps, with a further 13% in unpledged sovereign Eurobonds. Banks’ ability to monetise these  assets in a stress scenario could become highly uncertain.


Liquid assets placed with Central Bank

Banks’ high-quality FC liquidity (cash and unencumbered placements at foreign banks, FX swaps with foreign counterparties) was just USD22 billion at end-1H23 (end-1H22: USD27 billion). FC liquidity could quickly come under pressure in the event of adverse market developments, increasing government intervention risk.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.