Event

Since September 2017, the Turkish Lira is again under pressure (cf. graph). End November, lira deprecation was driven by confirmation that a gold trader agreed to testify in a US sanctions trial. In October, the Turkish lira slumped amid emergence of diplomatic tension with the US.

Impact on country risk

Turkish Lira deprecation is a source of concern not only as it fuels inflation (11.9% in October according to the Central Bank) but also as corporate debt is relatively high and often denominated in foreign currency which means that any depreciation of the lira increased the cost of reimbursing the debt. Over the past few years, corporate debt has increased sharply (cf. graph). As this increase was mainly financed by domestic banks, this could put pressure on the banking sector which is exposed to foreign investor confidence. After all, its negative net foreign asset position deteriorated sharply between 2009 and 2014 (to almost 20% of GDP). Since then, it has improved in relative terms but remains above 15% of GDP mid-2017, a high level. In order to finance its widening current account deficit (expected to reach 4.6% of GDP in 2017 according to IMF World Economic Outlook October 2017 from 3.8% in 2016), Turkey relies heavily on short-term capital flows and is thus vulnerable to a change in foreign investor confidence. This means that the Turkish lira remains volatile and highly vulnerable to a change in risk aversion among investors as highlighted by the recent episode of lira depreciation. If the central bank decides to intervene in the exchange market rather than to increase interest rates to stem lira depreciation, this could lead to a further drop in foreign exchange reserves. This would incline Credendo to downgrade its short term political risk (currently in category 3). Growth is likely to slow down in 2018 after impressive recovery this year driven by various pro-growth measures adopted by the authorities (such as temporary tax cuts and credit guarantee fund). In this context, commercial risk remains high (in category C on a scale from A to C).

Analyst : Pascaline della Faille, p.dellafaille@credendo.com