Fitch: Turkish Banks' External Debt Ticks Up but Liquidity Sound

Turkish banks' external debt increased in the first half of 2017 but the sector's foreign-currency (FC) liquidity remains sufficient to cover maturing short-term FC debt, Fitch Ratings says.

Banks' external debt rose USD9 billion to USD172 billion in 1H17, reflecting a pick-up in bond issuance in benign market conditions and foreign-exchange movements that resulted in upward revaluations of euro and lira obligations. More than half of this debt, USD96 billion, is short-term, as measured by remaining maturities. However, net of the most stable sources of funding, we estimate an external debt service requirement of USD50 billion-55 billion over 12 months.

Our base case is that Turkish banks will continue to have good debt market access and be largely able to roll over their foreign debt, while their available FC liquidity should mean they are reasonably placed to cope with a short-lived market closure. We estimate that banks could access between USD85 billion and USD90 billion of FC liquidity, if needed, over 12 months. This includes USD53 billion of liquid FC assets and the majority (USD35 billion) of their net long FC derivatives positions, as we believe most of these are short-term.

However, a prolonged loss of market access would bring considerable risks for banks' FC liquidity and Turkey's external finances more generally. A scenario in which banks need to pay down foreign debt carries considerable risks because of likely associated pressures on FC reserves, the exchange rate, interest rates and economic growth. Banks are Turkey's main external borrowers, making up 40% of the country's foreign debt. The banking sector's net FC position is close to zero, but banks are exposed to significant credit risk on FC loans to weakly hedged corporates.