Fitch revises Turkish banks’ outlooks to negative amid economic turmoil

Turkey’s economy contracted 9.9% in second-quarter due to the coronavirus pandemic

Skyscrapers stand on the skyline of the Levent business district in Istanbul, Turkey, on Thursday, Aug. 27, 2020. Economic activity fell faster and deeper in emerging markets than in advanced economies as the Covid-19 shock hit, and the recovery is proving slower and shallower. Photographer: Nicole Tung/Bloomberg
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Fitch Ratings revised the outlook of Turkey’s two state-owned development banks to negative, citing the risk of reduced state support to lenders as the country grapples with a slowing economy.

The ratings agency revised the outlooks on Long-Term Foreign-Currency (LTFC) and Long-Term Local Currency (LTLC) Issuer Default Ratings (IDRs) of Turkiye Kalkinma ve Yatirim Bankasi (TKYB) and Turkiye Ihracat Kredi Bankasi (Turk Eximbank) to negative from stable.

Fitch also revised the outlooks on the LTLC IDRs of 18 Turkish banks and their respective financial subsidiaries, to negative from stable.

“The outlook revisions on the Long-term IDRs of TKYB and Turk Eximbank mirror the sovereign rating action, given that the banks' IDRs are driven by state support,” Fitch said. The ratings agency  revised the outlook on Turkey's long-term IDRs to negative from stable and affirmed the IDRs at BB- last month.

The negative outlook on the two banks' LTFC IDRs “reflects increased risks to the ability of the Turkish authorities to provide support in foreign currency given the depletion in sovereign net foreign currency reserves and the risk of increased pressure on Turkey's external finances amid heightened market volatility”.

Turkey's economy contracted 9.9 per cent in the second-quarter compared to the same period last year after a lockdown to contain the coronavirus outbreak brought economic activity to a near standstill.

The financial sector stood out with 28 per cent growth in the second quarter, while the large industry and services sectors shrank 16 per cent and 25 per cent respectively.

In a note last month, Fitch Ratings highlighted a number of factors impacting Turkey’s economy.

A depletion of foreign exchange reserves, weak monetary policy credibility, negative real interest rates and a sizeable current account deficit partly fuelled by a strong credit stimulus have exacerbated external financing risks, it said.

“Political pressures, the limited independence of the Central Bank of the Republic of Turkey (CBRT), and a track record of being slow to respond to events, increase the risk that policy is tightened insufficiently, contributing to further external imbalances, market instability, and a more disorderly adjustment,” it added.

The International Monetary Fund estimates the country's economy will shrink 5 per cent this year after expanding 0.9 per cent last year.