Event

In the context of a strengthening US dollar, rising US interest rates and increasing oil prices, the Turkish lira is again under severe pressure following President Erdogan’s comments stating his opposition to high interest rates. Since the beginning of the month – between 1 and 21 May – the lira was among the worst preforming EM currencies and dropped by 10.31% vis-à-vis the USD, along with the Argentinian peso (-15.76%), the Venezuelan bolivar (-12.38%) the Uruguayan peso (- 8.96%), the Brazilian real (- 4.64%) and the Mexican peso (- 4.38%).

Impact on country risk

A new slide in the Turkish lira is likely to weigh further on the inflation rate, which stood at 10.85% year-on-year in April 2018 according to the Turkish Central Bank. The double-digit inflation is well above the central bank target. Inflation was initially fuelled by the lira depreciation, but then continued to increase due to a higher domestic demand and rising cost pressures.

More worrying in terms of credit risk, is the effect the depreciation of the currency is likely to have on the repayment capacity of companies indebted in foreign currency. In this context it is worth noting that corporate debt has increased rapidly over the last years (cf. graph 2) and is mainly denominated in foreign currency and financed by the banking sector. Hence, the banking sector’s asset quality is also likely to deteriorate.

Analyst: Pascaline della Faille –p.dellaFaille@credendo.com